-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ImkDkHZRuhAk80AhaCbYm+BTO7Wb2bmZ2/deFYQbliQIEvkc+H/uNjjPZpYfYXW4 /O9D8Q8yUm92Gb/QHUSnlg== 0000950130-98-002923.txt : 19980604 0000950130-98-002923.hdr.sgml : 19980604 ACCESSION NUMBER: 0000950130-98-002923 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19980603 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEALY MATTRESS CO CENTRAL INDEX KEY: 0001057040 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 340439410 STATE OF INCORPORATION: OH FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187 FILM NUMBER: 98641560 BUSINESS ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVE CITY: CLEVELAND STATE: OH ZIP: 44115 BUSINESS PHONE: 2165221310 MAIL ADDRESS: STREET 1: 10TH FLR - HALLE BLDG STREET 2: 1228 EUCLID AVE CITY: CLEVELAND STATE: OH ZIP: 44115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEALY CORP CENTRAL INDEX KEY: 0000748015 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 363284147 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-01 FILM NUMBER: 98641561 BUSINESS ADDRESS: STREET 1: 520 PIKE ST CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 2066251233 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVE CITY: CLEVELAND STATE: OH ZIP: 44115 FORMER COMPANY: FORMER CONFORMED NAME: OHIO MATTRESS CO /DE/ DATE OF NAME CHANGE: 19900322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEALY INC /DE/ CENTRAL INDEX KEY: 0000851191 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 341439379 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-02 FILM NUMBER: 98641562 BUSINESS ADDRESS: STREET 1: 1228 EUCLID AVE STREET 2: 10TH FLOOR CITY: CLEVELAND STATE: OH ZIP: 44115 BUSINESS PHONE: 2155221310 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEARNS & FOSTER BEDDING CO CENTRAL INDEX KEY: 0000851599 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 362515193 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-03 FILM NUMBER: 98641563 BUSINESS ADDRESS: STREET 1: 1228 ECULID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 BUSINESS PHONE: 2165221310 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEARNS & FOSTER UPHOLSTERY FURNITURE CO CENTRAL INDEX KEY: 0000851601 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 341449446 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-04 FILM NUMBER: 98641564 BUSINESS ADDRESS: STREET 1: 1228 ECULID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 BUSINESS PHONE: 2165221310 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEALY MATTRESS CO OF PUERTO RICO CENTRAL INDEX KEY: 0000851608 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 366544153 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-05 FILM NUMBER: 98641565 BUSINESS ADDRESS: STREET 1: EL COMMANDANTE INDUSTRIAL CNTR STREET 2: #1 SAN MARCOS CITY: CAROLINA STATE: PR ZIP: 00982 BUSINESS PHONE: 8097690295 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHIO SEALY MATTRESS MANUFACTURING CO INC FT WORTH CENTRAL INDEX KEY: 0000851610 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 751491047 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-06 FILM NUMBER: 98641566 BUSINESS ADDRESS: STREET 1: 6550 WULIGER WAY CITY: N RICHLAND HILLS STATE: TX ZIP: 76180 BUSINESS PHONE: 8174858052 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHIO SEALY MATTRESS MANUFACTURING CO INC/MA CENTRAL INDEX KEY: 0000851612 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 042511765 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-07 FILM NUMBER: 98641567 BUSINESS ADDRESS: STREET 1: 1 POSTUREPEDIC DRIVE CITY: RANDOLPH STATE: MA ZIP: 02368 BUSINESS PHONE: 6179611100 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHIO SEALY MATTRESS MANUFACTURING CO /GA/ CENTRAL INDEX KEY: 0000851614 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 581186228 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-08 FILM NUMBER: 98641568 BUSINESS ADDRESS: STREET 1: 1705 ROCKDALE INDUSTRIAL BLVD CITY: CONYERS STATE: GA ZIP: 30207 BUSINESS PHONE: 4044833810 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEALY MATTRESS CO OF MICHIGAN INC CENTRAL INDEX KEY: 0000851626 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 381256567 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-09 FILM NUMBER: 98641569 BUSINESS ADDRESS: STREET 1: 21450 TROLLEY INDUSTRIAL DRIVE CITY: TAYLOR STATE: MI ZIP: 48180 BUSINESS PHONE: 3132920700 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEALY MATTRESS CO OF KANSAS CITY INC CENTRAL INDEX KEY: 0000851633 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 440523533 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-10 FILM NUMBER: 98641570 BUSINESS ADDRESS: STREET 1: 3100 FAIRFAX TRAFFIC WAY CITY: KANSAS CITY STATE: KS ZIP: 66115 BUSINESS PHONE: 9133213677 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEALY OF MARYLAND AND VIRGINIA INC CENTRAL INDEX KEY: 0000851634 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 521192669 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-11 FILM NUMBER: 98641571 BUSINESS ADDRESS: STREET 1: 70 81 INDUSTRIAL PARK CITY: WILLIAMSPORT STATE: MD ZIP: 21795 BUSINESS PHONE: 3012339700 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEALY MATTRESS CO OF ILLINOIS CENTRAL INDEX KEY: 0000851637 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 361853967 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-12 FILM NUMBER: 98641572 BUSINESS ADDRESS: STREET 1: 1030 FABYAN PKWY CITY: BATAVIA STATE: IL ZIP: 60510 BUSINESS PHONE: 7088798011 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRANDWEIN A & CO CENTRAL INDEX KEY: 0000851639 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 362525330 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-13 FILM NUMBER: 98641573 BUSINESS ADDRESS: STREET 1: 401 DAYTON STREET STREET 2: P O BOX 431 CITY: WATERTOWN STATE: WI ZIP: 53094 BUSINESS PHONE: 4142615525 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEALY MATTRESS CO OF ALBANY INC CENTRAL INDEX KEY: 0000851640 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 141325596 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-14 FILM NUMBER: 98641574 BUSINESS ADDRESS: STREET 1: RAILROAD AVENUE & BROWN ROAD STREET 2: P O BOX 5288 CITY: ALBANY STATE: NY ZIP: 12205 BUSINESS PHONE: 5184591651 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEALY OF MINNESOTA INC CENTRAL INDEX KEY: 0000851642 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 411227650 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-15 FILM NUMBER: 98641575 BUSINESS ADDRESS: STREET 1: 825 TRANSFER ROAD CITY: ST PAUL STATE: MN ZIP: 55114 BUSINESS PHONE: 6126458143 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEALY MATTRESS CO OF MEMPHIS CENTRAL INDEX KEY: 0000851643 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 620357534 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-16 FILM NUMBER: 98641576 BUSINESS ADDRESS: STREET 1: 4120 AIR TRANS ROAD CITY: MEMPHIS STATE: TN ZIP: 38181 BUSINESS PHONE: 9017956460 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHIO MATTRESS CO LICENSING & COMPONENTS GROUP CENTRAL INDEX KEY: 0000851644 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 361750335 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-17 FILM NUMBER: 98641577 BUSINESS ADDRESS: STREET 1: 1228 EUCLID AVE CITY: CLEVELAND STATE: OH ZIP: 44115 BUSINESS PHONE: 2165221310 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEALY MATTRESS MANUFACTURING CO INC CENTRAL INDEX KEY: 0000851645 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 363209918 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-18 FILM NUMBER: 98641578 BUSINESS ADDRESS: STREET 1: 1228 EUCLID AVENUE STREET 2: C/O SEALY INC CITY: CLEVELAND STATE: OH ZIP: 44115 BUSINESS PHONE: 2165221310 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHIO SEALY MATTRESS MANUFACTURING CO HOUSTON CENTRAL INDEX KEY: 0000851658 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 741275140 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-48187-19 FILM NUMBER: 98641579 BUSINESS ADDRESS: STREET 1: P O BOX 593 STREET 2: HIGHWAY LOOP 290 CITY: BRENHAM STATE: TX ZIP: 77833 BUSINESS PHONE: 4098366644 MAIL ADDRESS: STREET 1: HALLE BUILDING 10TH FLOOR STREET 2: 1228 EUCLID AVENUE CITY: CLEVELAND STATE: OH ZIP: 44115 S-4/A 1 AMENDMENT NO. 2 TO FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1998 REGISTRATION NO. 333-48187 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 2 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- SEALY MATTRESS COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) OHIO 2510 34-0439410 (PRIMARY STANDARD (I.R.S. EMPLOYER (STATE OR OTHER INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER) JURISDICTION CODE NUMBER) OFINCORPORATION OR ORGANIZATION) (continued on next page) HALLE BUILDING 10TH FLOOR 1228 EUCLID AVENUE CLEVELAND, OHIO 44115 TELEPHONE: (216) 522-1310 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- KENNETH L. WALKER HALLE BUILDING 10TH FLOOR 1228 EUCLID AVENUE CLEVELAND, OHIO 44115 TELEPHONE: (216) 522-1310 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPY TO: LANCE C. BALK KIRKLAND & ELLIS 153 EAST 53RD STREET NEW YORK, NEW YORK 10022-4675 TELEPHONE: (212) 446-4800 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (continued from preceding page) SEALY CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 2510 36-3284147 (PRIMARY STANDARD (I.R.S. EMPLOYER (STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER) JURISDICTION CLASSIFICATION CODE OFINCORPORATION OR NUMBER) ORGANIZATION) SEALY MATTRESS COMPANY OF PUERTO RICO (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) OHIO 2510 34-6544153 (PRIMARY STANDARD (I.R.S. EMPLOYER (STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER) JURISDICTION CLASSIFICATION CODE OFINCORPORATION OR NUMBER) ORGANIZATION) OHIO-SEALY MATTRESS MANUFACTURING CO., INC. (RANDOLPH) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 2510 04-2611765 (PRIMARY STANDARD (I.R.S. EMPLOYER (STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER) JURISDICTION CLASSIFICATION CODE OFINCORPORATION OR NUMBER) ORGANIZATION) OHIO-SEALY MATTRESS MANUFACTURING CO.--FT. WORTH (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TEXAS 2510 75-1491047 (PRIMARY STANDARD (I.R.S. EMPLOYER (STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER) JURISDICTION CLASSIFICATION CODE OFINCORPORATION OR NUMBER) ORGANIZATION) OHIO-SEALY MATTRESS MANUFACTURING CO. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) GEORGIA 2510 58-1186228 (PRIMARY STANDARD (I.R.S. EMPLOYER (STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER) JURISDICTION CLASSIFICATION CODE OFINCORPORATION OR NUMBER) ORGANIZATION) OHIO-SEALY MATTRESS MANUFACTURING CO.--HOUSTON (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TEXAS 2510 74-1275140 (PRIMARY STANDARD (I.R.S. EMPLOYER (STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER) JURISDICTION CLASSIFICATION CODE OFINCORPORATION OR NUMBER) ORGANIZATION) SEALY MATTRESS COMPANY OF MICHIGAN, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MICHIGAN 2510 38-1256567 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER) OFINCORPORATION OR CLASSIFICATION CODE ORGANIZATION) NUMBER) SEALY MATTRESS COMPANY OF KANSAS CITY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MISSOURI 2510 44-0523533 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER) OFINCORPORATION OR CLASSIFICATION CODE ORGANIZATION) NUMBER) SEALY OF MARYLAND AND VIRGINIA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND 2510 52-1192669 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER) OFINCORPORATION OR CLASSIFICATION CODE ORGANIZATION) NUMBER) SEALY MATTRESS COMPANY OF ILLINOIS (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ILLINOIS 2510 36-1853967 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER) OFINCORPORATION OR CLASSIFICATION CODE ORGANIZATION) NUMBER) (continued on next page) (continued from preceding page) A. BRANDWEIN & CO. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ILLINOIS 2510 36-2525330 (PRIMARY STANDARD (I.R.S. EMPLOYER (STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER) JURISDICTION CLASSIFICATION CODE OFINCORPORATION OR NUMBER) ORGANIZATION) SEALY MATTRESS COMPANY OF ALBANY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW YORK 2510 14-1325596 (PRIMARY STANDARD (I.R.S. EMPLOYER (STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER) JURISDICTION CLASSIFICATION CODE OFINCORPORATION OR NUMBER) ORGANIZATION) SEALY OF MINNESOTA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MINNESOTA 2510 41-1227650 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER) OFINCORPORATION OR CLASSIFICATION CODE ORGANIZATION) NUMBER) SEALY MATTRESS COMPANY OF MEMPHIS (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TENNESSEE 2510 62-0357534 (PRIMARY STANDARD (I.R.S. EMPLOYER (STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER) JURISDICTION CLASSIFICATION CODE OFINCORPORATION OR NUMBER) ORGANIZATION) THE STEARNS & FOSTER BEDDING COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 2510 36-2515193 (PRIMARY STANDARD (I.R.S. EMPLOYER (STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER) JURISDICTION CLASSIFICATION CODE OFINCORPORATION OR NUMBER) ORGANIZATION) THE STEARNS & FOSTER UPHOLSTERY FURNITURE COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) OHIO 2510 34-1449445 (PRIMARY STANDARD (I.R.S. EMPLOYER (STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER) JURISDICTION CLASSIFICATION CODE OFINCORPORATION OR NUMBER) ORGANIZATION) SEALY INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) OHIO 2510 34-1439379 (PRIMARY STANDARD (I.R.S. EMPLOYER (STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER) JURISDICTION CLASSIFICATION CODE OFINCORPORATION OR NUMBER) ORGANIZATION) THE OHIO MATTRESS COMPANY LICENSING AND COMPONENTS GROUP (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 2510 36-1750335 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER) OFINCORPORATION OR CLASSIFICATION CODE ORGANIZATION) NUMBER) SEALY MATTRESS MANUFACTURING COMPANY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 2510 36-3209918 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER) OFINCORPORATION OR CLASSIFICATION CODE ORGANIZATION) NUMBER) ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JUNE , 1998 PROSPECTUS [LOGO] SEALY MATTRESS COMPANY [LOGO] OFFER TO EXCHANGE ITS SERIES B 9 7/8% SENIOR SUBORDINATED NOTES DUE 2007 FOR ANY AND ALL OF ITS OUTSTANDING 9 7/8% SENIOR SUBORDINATED NOTES DUE 2007 AND ITS SERIES B 10 7/8% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2007 FOR ANY AND ALL OF ITS OUTSTANDING 10 7/8% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2007 ----------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED. ----------- Sealy Mattress Company, an Ohio corporation ("Sealy"), hereby offers (the "Exchange Offer"), upon the terms and conditions set forth in this Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the "Letter of Transmittal"), to exchange (i) $1,000 principal amount of its Series B 9 7/8% Senior Subordinated Notes due 2007 (the "Senior Subordinated Exchange Notes") for each $1,000 principal amount of its outstanding 9 7/8% Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes"), of which $125,000,000 principal amount is outstanding and (ii) $1,000 principal amount at maturity of its Series B 10 7/8% Senior Subordinated Discount Notes due 2007 (the "Senior Subordinated Discount Exchange Notes" and, together with the Senior Subordinated Exchange Notes, the "Exchange Notes") for each $1,000 of principal amount at maturity of its outstanding 10 7/8% Senior Subordinated Discount Notes due 2007 (the "Senior Subordinated Discount Notes" and, together with the Senior Subordinated Notes, the "Notes"), of which $128,000,000 principal amount at maturity is outstanding. The Exchange Notes will have been registered under the Securities Act of 1933, as amended (the "Securities Act") pursuant to a Registration Statement of which this Prospectus is a part. The form and terms of the Exchange Notes are the same as the form and term of the Notes (which they replace) except that the Exchange Notes will bear a Series B designation and will have been registered under the Securities Act and, therefore, will not bear legends restricting their transfer and will not contain certain provisions relating to an increase in the interest rate which were included in the terms of the Notes in certain circumstances relating to the timing of the Exchange Offer. The Exchange Notes will be fully and unconditionally guaranteed, on a joint and several basis, by Parent and certain of Sealy's subsidiaries. The Exchange Notes will evidence the same debt as the Notes (which they replace) and will be issued under and be entitled to the benefits of the Indentures dated December 18, 1997 among Sealy, the guarantors named therein (the "Guarantors") and the Bank of New York (the "Indentures") governing the Notes. See "The Exchange Offer" and "Description of Exchange Notes". Sealy has not issued, and does not have any current firm arrangements to issue, any significant indebtedness to which the Exchange Notes would rank senior or pari passu in right of payment. The Exchange Notes will be subordinated in right of payment to all Senior Debt of Sealy, including all of the obligations under the Senior Credit Agreements, and will rank pari passu with all future senior subordinated debt of the Issuer and will rank senior in right of payment to all of Issuer's future subordinated debt. As of March 1, 1998, the aggregate amount of outstanding Indebtedness to which the Notes would have been subordinated was $479.0 million, consisting of secured borrowings under the Senior Credit Agreements. Sealy will accept for exchange any and all Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on , 1998, unless extended by Sealy in its sole discretion (the "Expiration Date"). Notwithstanding the foregoing, Sealy will not extend the Expiration Date beyond , 1998. Tenders of Notes may be withdrawn at any time prior to 5:00 p.m. on the Expiration Date. The Exchange Offer is subject to certain customary conditions. The Notes were sold by Sealy on December 18, 1997 to the Initial Purchasers (as defined herein under the caption "Summary--The Offering") in a transaction not registered under the Securities Act in reliance upon an exemption under the Securities Act. The Initial Purchasers subsequently placed the Notes with qualified institutional buyers in reliance upon Rule 144A under the Securities Act and with a limited number of institutional accredited investors that agreed to comply with certain transfer restrictions and other conditions. Accordingly, the Notes may not be reoffered, resold or otherwise transferred in the United States unless registered under the Securities Act or unless an applicable exemption from the registration requirements of the Securities Act is available. The Exchange Notes are being offered hereunder in order to satisfy the obligations of Sealy under the Registration Rights Agreement entered into by Sealy in connection with the offering of the Notes. See "The Exchange Offer". Based on no-action letters issued by the staff of the Securities and Exchange Commission (the "Commission") to third parties, Sealy believes the Exchange Notes issued pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by any holder thereof (other than any such holder that is an "affiliate" of Sealy within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holder's business and such holder has no arrangement or understanding with any person to participate in the distribution of such Exchange Notes. See "The Exchange Offer--Purpose and Effect of the Exchange Offer" and "The Exchange Offer--Resale of the Exchange Notes". Each broker-dealer (a "Participating Broker-Dealer") that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of Exchange Notes received in exchange for Notes where such Notes were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities. Sealy has agreed that, for a period of 180 days after the Expiration Date, it will make this Prospectus available to any participating Broker-Dealer for use in connection with any such resale. See "Plan of Distribution". Holders of Notes not tendered and accepted in the Exchange Offer will continue to hold such Notes and will be entitled to all the rights and benefits and will be subject to the limitations applicable thereto under the Indenture and with respect to transfer under the Securities Act. Sealy will pay all the expenses incurred by it incident to the Exchange Offer. See "The Exchange Offer". SEE "RISK FACTORS" ON PAGE 16 FOR A DESCRIPTION OF CERTAIN RISKS TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR NOTES IN THE EXCHANGE OFFER. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------- The date of this Prospectus is June , 1998 There has not previously been any public market for the Notes or the Exchange Notes. Sealy does not intend to list the Exchange Notes on any securities exchange or to seek approval for quotation through any automated quotation system. There can be no assurance that an active market for the Exchange Notes will develop. See "Risk Factors--Lack of Public Market; Transfer Restrictions". Moreover, to the extent that Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Notes could be adversely affected. The Exchange Notes will be available initially only in book-entry form. Sealy expects that the Exchange Notes issued pursuant to this Exchange Offer will be issued in the form of a Global Certificate (as defined), which will be deposited with, or on behalf of, The Depository Trust Company (the "Depositary") and registered in its name or in the name of Cede & Co., its nominee. Beneficial interests in the Global Certificate representing the Exchange Notes will be shown on, and transfers thereof to qualified institutional buyers will be effected through, records maintained by the Depositary and its participants. After the initial issuance of the Global Certificate, Exchange Notes in certified form will be issued in exchange for the Global Certificate only on the terms set forth in the Indenture. See "Description of Exchange Notes--Book-Entry; Delivery and Form". AVAILABLE INFORMATION Sealy has filed with the Commission a Registration Statement on Form S-4 (the "Exchange Offer Registration Statement", which term shall encompass all amendments, exhibits, annexes and schedules thereto) pursuant to the Securities Act, and the rules and regulations promulgated thereunder, covering the Exchange Notes being offered hereby. This Prospectus does not contain all the information set forth in the Exchange Offer Registration Statement. For further information with respect to Sealy and the Exchange Offer, reference is made to the Exchange Offer Registration Statement. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Exchange Offer Registration Statement, reference is made to the exhibit for a more complete description of the document or matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Exchange Offer Registration Statement, including the exhibits thereto, can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at the Regional Offices of the commission at 75 Park Place, New York, New York 10007 and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Additionally, the Commission maintains a web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Company. As a result of the filing of the Exchange Offer Registration Statement with the Commission, Sealy will become subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith will be required to file periodic reports and other information with the Commission. The obligation of Sealy to file periodic reports and other information with the Commission will be suspended if the Exchange Notes are held of record by fewer than 300 holders as of the beginning of any fiscal year of Sealy other than the fiscal year in which the Exchange Offer Registration Statement is declared effective. Sealy will nevertheless be required to continue to file reports with the Commission if the Exchange Notes are listed on a national securities exchange. In the event Sealy ceases to be subject to the informational requirements of the Exchange Act, Sealy will be required under the Indentures to continue to file with the Commission the annual and quarterly reports, information, documents or other reports, including, without limitation, reports on Forms 10-K, 10-Q and 8-K, which would be required pursuant to the informational requirements of the i Exchange Act. Under the Indentures, Sealy shall file with the Trustee annual, quarterly and other reports within fifteen days after it files such reports with the Commission. Further, to the extent that annual or quarterly reports are furnished by Sealy to stockholders generally it will mail such reports to holders of Exchange Notes. Sealy will furnish annual and quarterly financial reports to stockholders of Sealy and will mail such reports to holders of Exchange Notes pursuant to the Indenture, thus holders of Exchange Notes will receive financial reports every quarter. Annual reports delivered to the Trustee and the holders of Exchange Notes will contain financial information that has been examined and reported upon, with an opinion expressed by an independent public or certified public accountant. Sealy will also furnish such other reports as may be required by law. FORWARD LOOKING STATEMENTS THE PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY, INCLUDING STATEMENTS UNDER THE CAPTIONS "SUMMARY", "UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION", "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS". ALL OF THESE FORWARD LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY THE MANAGEMENT OF THE COMPANY WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES WILL BE REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE: (1) INCREASED COMPETITION; (2) INCREASED COSTS; (3) LOSS OR RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (4) INCREASES IN THE COMPANY'S COST OF BORROWING OR INABILITY OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL; (5) ADVERSE STATE OR FEDERAL LEGISLATION OR REGULATION OR ADVERSE DETERMINATIONS IN PENDING LITIGATION; AND (6) CHANGES IN GENERAL ECONOMIC CONDITIONS AND/OR IN THE MARKETS IN WHICH THE COMPANY MAY, FROM TIME TO TIME, COMPETE. MANY OF SUCH FACTORS ARE BEYOND THE CONTROL OF THE COMPANY AND ITS MANAGEMENT. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF THE COMPANY AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK FACTORS". ---------------- TRADEMARKS AND TRADENAMES THE FOLLOWING ITEMS REFERRED TO IN THIS DOCUMENT ARE TRADEMARKS WHICH ARE FEDERALLY REGISTERED IN THE UNITED STATES PURSUANT TO APPLICABLE INTELLECTUAL PROPERTY LAWS AND ARE THE PROPERTY OF SEALY CORPORATION OR ITS SUBSIDIARIES: SEALY, POSTUREPEDIC, STEARNS & FOSTER, CROWN JEWEL, CORRECT COMFORT (STYLIZED), BACK SAVER, ORTHO-ZONE (STYLIZED), POSTURE PREMIER, EVEREDGE, EDGEGUARD, MIRACLE EDGE, POSTURETECH, SENSE & RESPOND, STEELSPAN, TRU-LOK, ULTRAEDGE, ULTRASTEEL, AND UNIVERSITY OF SLEEP. THE FOLLOWING ITEMS REFERRED TO IN THIS DOCUMENT ARE TRADEMARKS OWNED BY SEALY CORPORATION, OR ITS SUBSIDIARIES, FOR WHICH APPLICATIONS FOR REGISTRATION ARE PENDING IN THE UNITED STATES PURSUANT TO APPLICABLE INTELLECTUAL PROPERTY LAWS. SEALY POSTUREPEDIC, SEALY POSTUREPEDIC CROWN JEWEL, INFINILUX, AND POSTURESTEEL. ii SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes therein, appearing elsewhere in this Prospectus. Unless the context otherwise requires, references in this Prospectus to the "Issuer" refer to Sealy Mattress Company and references to "Sealy" or the "Company" (other than in the presentation of financial data) refer collectively to Sealy Mattress Company, its wholly-owned subsidiaries, and its sole shareholder, Sealy Corporation ("Parent"), after giving effect to the Transactions (as defined herein under the caption "The Transactions"). For purposes of the presentation of all financial data herein, the "Company" refers to Parent and its consolidated subsidiaries with respect to historical information and to the Issuer and its consolidated subsidiaries with respect to pro forma information. All references to the Company's domestic operations include its operations in Puerto Rico. All references in this Prospectus to "fiscal year" for years prior to 1996 refer to the year ended on November 30 of that calendar year and for subsequent years refer to the year ended on the Sunday closest to November 30 of that calendar year. For example, fiscal 1997 and 1996 refer to the years ended November 30, 1997 and December 1, 1996, respectively. OVERVIEW THE COMPANY Sealy Mattress Company, headquartered in Cleveland, Ohio, has been the leading conventional bedding manufacturer in North America for over two decades and the Sealy brand name has been in existence for over 100 years. The Company manufactures, distributes and sells a broad line of conventional bedding products, including mattresses and foundations, under the Sealy, Sealy Posturepedic, Stearns & Foster and recently introduced Sealy Correct Comfort and Sealy Posturepedic Crown Jewel brand names. The Company's branded merchandise accounted for approximately 99% of total net sales for the fiscal year ended November 30, 1997. Based on market growth estimates by the International Sleep Products Association ("ISPA"), the Company estimates that it held a 22% share of the U.S. bedding market for 1997. The Company offers a complete line of conventional bedding options in the promotional, premium, ultra-premium and luxury categories, which sell at retail price points from under $200 to approximately $3,000 per queen-size set. For the fiscal year ended November 30, 1997, on a pro forma basis, the Company generated net sales and Adjusted EBITDA (as defined herein) of $799.5 million and $103.1 million, respectively. The Company has a diversified customer base and serves all major bedding distribution channels. The Company manufactures and supplies conventional bedding to over 7,000 retail outlets, representing approximately 3,200 customers, including furniture stores, department stores, specialty sleep shops and warehouse clubs. The Company operates 21 domestic bedding manufacturing facilities and four international bedding manufacturing facilities, strategically located to reduce transportation costs and facilitate just-in- time deliveries. The Company also operates three component manufacturing facilities which produce substantially all of the Company's mattress innersprings and approximately 50% of its foundation component parts. The Company believes that because it is vertically integrated and operates its own manufacturing facilities, it possesses numerous advantages over certain of its national, brand-name competitors that operate as a group of independent licensees. These benefits include: (i) production of consistent, high-quality products, (ii) centralized decision-making, (iii) consistent local marketing and servicing of national accounts and (iv) effective and balanced utilization of manufacturing facilities. INDUSTRY The U.S. conventional bedding industry is mature and stable. For the year ended December 31, 1996, manufacturers and retailers generated revenue of $3.3 billion and $6.2 billion, respectively, 1 according to ISPA. Over the last 20 years, sales have declined only once (1.9% in 1982), and the industry has grown an average of 6.4% per year. Industry growth is driven primarily by: (i) population expansion, (ii) demographic shifts and (iii) manufacturer and retailer advertising and education emphasizing larger-size, higher quality beds. Because consumers shop for bedding infrequently and often have limited specific product knowledge, they typically rely on the retail salesperson in the purchase decision process. Management believes that those manufacturers best able to meet the retailers' needs--including differentiated, brand name products, retail salesforce training in product specifications and merchandising and logistics support-- should continue to gain market share. From 1989 to 1996, the combined market share of the top four manufacturers has steadily increased from 48% to 59%. COMPANY STRENGTHS AND BUSINESS STRATEGY The Company's main objective is to grow sales and market share by maximizing its share of the retailers' floor space while managing costs. The key elements of the Company's strategy are as follows: LEVERAGE MARKET LEADERSHIP POSITION AND HIGH BRAND AWARENESS. The Company is the largest manufacturer of conventional bedding products in the United States, a position it has held for more than two decades. Based on 1997 industry growth estimated by the ISPA, management estimates that the Company held a 22% share of the U.S. market, approximately 1.3 times that of its next largest competitor. Strong relative market share, coupled with numerous strong brands, including Sealy, Sealy Posturepedic and Stearns & Foster, provide the Company with significant marketing strength relative to its competitors, who primarily offer only one brand to retailers. Brand recognition is critical in the bedding industry, where strong brand names help define consumer preference and drive retail floor space allocation. ENHANCE POSITION AS LEADING SUPPLIER TO THE BEDDING INDUSTRY. The Company is uniquely positioned to benefit from current industry trends, including the consolidation of manufacturers and the increase in sole-source vendor arrangements. Management believes that its: (i) broad product offering, (ii) product design leadership, (iii) national manufacturing and distribution and (iv) commitment to retailer education and training provide support to its existing dealer network while helping to attract new accounts. Such strong dealer relationships should result in sales growth through increased floor space allocation, superior product positioning and enhanced commitment by retail salesforces. . BROAD PRODUCT OFFERING. Management believes that the Company currently offers the most complete line of conventional bedding products in the industry, enabling retailers to offer consumers a full range of bedding alternatives from a single source. The Company's product line ranges from higher-margin, higher-priced mattresses, sold under the Sealy Posturepedic, Sealy Posturepedic Crown Jewel, Sealy Correct Comfort and Stearns & Foster names, to lower-priced promotional, private label and contract bedding products. The consistently advertised, lower-priced product line is instrumental in attracting customers, thereby offering retailers the in-store opportunity to promote higher-priced products with incrementally higher margins. In addition, the Company's broad product line has enabled it to secure sole-source, multi-year arrangements with several retailers, including a significant number of those in the high- growth, specialty channel, such as Mattress Discounters, Mattress Firm and Bedding Experts. . PRODUCT DESIGN LEADERSHIP. Since December 1, 1994 the Company has, on average, invested approximately 0.75% of its net sales in research and development, a rate which management believes to be in excess of twice that of its next largest competitor, to create and commercialize innovative products that broaden the Company's product lines and differentiate its products from those of its competitors. Management believes that this investment in product 2 enhancements and new products, such as Sealy Correct Comfort, the Company's recently introduced, individually-wrapped coil product, allows the Company to claim additional floor space and compete effectively for sole-source vendor positions. A majority of the Company's net sales for the fiscal year ended November 30, 1997 were from products introduced or reengineered in the prior two years. . NATIONAL MANUFACTURING AND DISTRIBUTION. In surveys, retailers have stated that delivery times and product quality are among the most important criteria used to evaluate manufacturers. The Company believes that its current structure and operating strategy directly address these needs. The Company is one of only two national manufacturers operating as a single company rather than as a group of independent licensees. Because it owns 21 manufacturing and distribution facilities strategically located throughout the United States, the Company can quickly respond to retailers' logistical and product design requirements. Such just-in-time deliveries enable retailers to minimize inventory carrying costs and meet the growing demand of consumers for product variety and shortened delivery times. Additionally, the Company is the only national manufacturer to have taken advantage of vertical integration in a majority of its product lines. Vertically integrated manufacturing permits the Company to safeguard proprietary technology and new product design while better controlling costs. . COMMITMENT TO RETAILER EDUCATION AND SUPPORT. The Company assists its retailers in re-merchandising their showrooms and actively marketing more profitable lines of bedding through ongoing investment in retailer relationships. The Company supports its retailers by providing: (i) cooperative advertising dollars and creative assistance, (ii) ongoing retail sales force training focused on product education and merchandising instruction, (iii) customized product lines which allow retailers to differentiate their products from those of their competitors and (iv) direct mail campaigns. Management believes that retail support serves to educate consumers about the benefits of higher-end models and therefore encourages additional sales at higher price points. INCREASE OPERATIONAL EFFICIENCIES AND LEVERAGE INFORMATION TECHNOLOGY. By virtue of its size and leadership position in the bedding industry, the Company benefits from significant operational efficiencies. The Company is able to capture economies of scale in research and development, advertising and raw material purchases. Management believes that several opportunities remain to leverage the current infrastructure to realize meaningful cost reductions, including greater utilization of existing facilities, improved scrap management and improved distribution and transportation. Additionally, the Company is in the process of upgrading its management information systems ("MIS") to improve manufacturing operations and profitability analysis. LEVERAGE THE SEALY NAME THROUGH LICENSEES. Significant opportunities exist to leverage the strong Sealy brand names in bedding-related product categories through strategic licensing agreements rather than through direct manufacturing. In the past year, the Company has entered into a number of licensing arrangements with various manufacturers, including: (i) Klaussner Furniture Industries, one of the largest upholstered furniture manufacturers in the United States, for the manufacture of upholstered furniture under the Sealy Furniture brand name; (ii) Pacific Coast Feather Company for the manufacture and sale of pillows, comforters and mattress pads under the Sealy brand name; and (iii) Dorel Industries for the manufacture and sale of futons under the Sealy Furniture brand name. Management believes that these licensing agreements broaden consumer recognition of the Sealy name while generating significant income for the Company. CAPITALIZE ON STRONG MANAGEMENT TEAM. Led by Chief Executive Officer Ron Jones, who joined the Company in early 1996, the Company has assembled one of the strongest management 3 teams in the bedding industry. The Company's senior management team has approximately 150 years of experience in the bedding and home furnishings industries and has made a significant equity investment in Sealy Corporation at the close of the Transactions. This management team has instituted a number of strategic initiatives, including: (i) divestiture of non-core operations and renewed focus on the Company's core bedding business, (ii) improved long-term strategic and product planning which has resulted in a new product rollout schedule through 1999, (iii) increased focus on retailer relationships, (iv) a shift to a more balanced marketing program that includes significant cooperative and focused national advertising and (v) the implementation of a disciplined international strategy. The execution of these and other initiatives has resulted in significant improvements in the financial and market position of the Company. Since December 1995, the Company has increased its market share from 18% to an estimated 22% in 1997. Additionally, on a pro forma basis, net sales and Adjusted EBITDA have increased 26.7% and 18.7%, respectively, for the fiscal year ended November 30, 1997 versus fiscal 1996. THE SPONSOR Bain Capital, Inc. ("Bain") manages capital in excess of $2.0 billion and has invested in more than 100 companies. Bain is one of the most experienced and successful private equity investors in the United States and the firm's principals have extensive experience working with companies on a wide range of operational challenges. Bain's investment strategy is to acquire companies in partnership with exceptional management teams and to improve the long-term value of businesses. The firm typically identifies companies with strong strategic positions and significant opportunities for growth. Bain's investment in the Company is among its largest to date. THE TRANSACTIONS On December 18, 1997, the Company consummated (i) the Merger whereby, among other things, funds managed by Bain (the "Bain Funds"), together with other equity investors, including the Company's Chief Executive Officer and other members of senior management (the "Management Investors" and collectively with the other investors, the "Investors"), acquired an approximate 90% equity stake (85.3% voting stake) in Parent, (ii) the Tender Offer (as defined herein under the caption "The Transactions") to purchase for cash all of the Parent Notes (as defined herein under the caption "The Transactions") and the related Consent Solicitation (as defined herein under the caption "The Transactions") to modify certain terms of the Parent Note Indenture (as defined herein), (iii) a refinancing (the "Refinancing") whereby the Company entered into and borrowed under the Senior Credit Agreements (as defined herein under the caption "The Transactions") and repaid Parent indebtedness outstanding under the Old Credit Agreement (as defined herein under the caption "The Transactions") and the offerings of the Notes (the "Offerings"). The Merger has been accounted for as a recapitalization (the "Recapitalization"). The Offerings, the Merger and Recapitalization, the Tender Offer and related Consent Solicitation and the Refinancing are collectively referred to herein as the "Transactions". See "The Transactions" and "Security Ownership." 4 THE OFFERING NOTES....................... The Notes were sold by the Company on December 18, 1997 to Goldman, Sachs & Co., J.P. Morgan Securities Inc. and BT Alex. Brown Incorporated (the "Initial Purchasers") pursuant to a Purchase Agreement dated December 11, 1997 (the "Purchase Agreement"). The Initial Purchasers subsequently resold the Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to a limited number of institutional accredited investors that agreed to comply with certain transfer restrictions and other conditions. REGISTRATION RIGHTS Pursuant to the Purchase Agreement, the Company AGREEMENT................... and the Initial Purchasers entered into a Registration Rights Agreement dated December 11, 1997, which grants the holder of the Notes certain exchange and registration rights. The Exchange Offer is intended to satisfy such exchange rights which terminate upon the consummation of the Exchange Offer. THE EXCHANGE OFFER SECURITIES OFFERED.......... $125.0 million in aggregate principal amount of Series B 9 7/8% Senior Subordinated Notes due December 15, 2007 (the "Senior Subordinated Exchange Notes") and $128.0 million in aggregate principal amount at maturity of Series B 10 7/8% Senior Subordinated Discount Notes due December 15, 2007 (the "Senior Subordinated Discount Exchange Notes" and, together with the Senior Subordinated Exchange Notes, the "Exchange Notes"). THE EXCHANGE OFFER.......... $1,000 principal amount of the Senior Subordinated Exchange Notes in exchange for each $1,000 principal amount of Senior Subordinated Notes and $1,000 principal amount of the Senior Subordinated Discount Exchange Notes in exchange for each $1,000 principal amount of Senior Subordinated Discount Notes. As of the date hereof, $125.0 million in aggregate principal amount of Senior Subordinated Notes and $128.0 million in aggregate principal amount at maturity of Senior Subordinated Discount Notes are outstanding. The Company will issue the Exchange Notes to holders on or promptly after the Expiration Date. Based on an interpretation by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that Exchange Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered for resale, resold and otherwise transferred by any holder thereof (other than any such holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holder's business and that such holder does not intend to 5 participate and has no arrangement or understanding with any person to participate in the distribution of such Exchange Notes. Each Participating Broker-Dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of Exchange Notes received in exchange for Notes where such Notes were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date, it will make this Prospectus available to any Participating Broker-Dealer for use in connection with any such resale. See "Plan of Distribution". Any holder who tenders in the Exchange Offer with the intention to participate, or for the purpose of participating, in a distribution of the Exchange Notes could not rely on the position of the staff of the Commission enunciated in no- action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Failure to comply with such requirements in such instance may result in such holder incurring liability under the Securities Act for which the holder is not indemnified by the Company. EXPIRATION DATE............. 5:00 p.m., New York City time, on , 1998 unless the Exchange Offer is extended, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. The Company has no current plans to extend the Exchange Offer. In order to extend the Exchange Offer, the Company will notify the Exchange Agent (as defined) of any extension by oral or written notice and will mail to the registered holders an arrangement thereof prior to the next business day after the previously announced expiration date. ACCRUED INTEREST ON THE EXCHANGE NOTES AND THE Each Senior Subordinated Exchange Note will bear NOTES...................... interest from its issuance date. No interest will accrue or be payable on the Senior Subordinated Discount Exchange Notes prior to December 15, 2002. Holders of Senior Subordinated Notes that are accepted for exchange will receive, in cash, accrued interest thereon to, but not including, the issuance date of the Senior Subordinated Exchange Notes. Such interest will be 6 paid with the first interest payment on the Senior Subordinated Exchange Notes. Interest on the Senior Subordinated Notes accepted for exchange will cease to accrue upon issuance of the Senior Subordinated Exchange Notes. CONDITIONS TO THE EXCHANGE OFFER...................... The Exchange Offer is subject to certain customary conditions, which may be waived by the Company. See "The Exchange Offer--Conditions". PROCEDURES FOR TENDERING Each holder of Notes wishing to accept the NOTES...................... Exchange Offer must complete, sign and date the accompanying Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with the Notes and any other required documentation to the Exchange Agent (as defined under the caption "The Exchange Offer") at the address set forth herein. Delivery of the Notes may also be made by book- entry transfer in accordance with the procedures described below. Confirmation of such book-entry transfer must be received by the Exchange Agent prior to the Expiration Date. By executing the Letter of Transmittal or effecting delivery by book-entry transfer, each holder will represent to the Company that, among other things, the Exchange Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such Exchange Notes, whether or not such person is the holder, that neither the holder nor any such other person has any arrangement or understanding with any person to participate in the distribution of such Exchange Notes and that neither the holder nor any such other person is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company. See "The Exchange Offer--Purpose and Effect of the Exchange Offer" and "--Procedures for Tendering". UNTENDERED NOTES............ Following the consummation of the Exchange Offer, holders of Notes eligible to participate but who do not tender their Notes will not have any further exchange rights and such Notes will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the market for such Notes could be adversely affected. CONSEQUENCES OF FAILURE TO EXCHANGE................... The Notes that are not exchanged pursuant to the Exchange Offer will remain restricted securities. Accordingly, such Notes may be resold only (i) to the Company, (ii) pursuant to Rule 144A or Rule 144 under the Securities Act or pursuant to some other exemption under the Securities Act, (iii) outside the United States to a foreign person pursuant to the requirements of Rule 904 under the Securities Act, or (iv) pursuant to an effective registration statement under the 7 Securities Act. See "The Exchange Offer-- Consequences of Failure to Exchange". SHELF REGISTRATION If any holder of the Notes (other than any such STATEMENT.................. holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) is not eligible under applicable securities laws to participate in the Exchange Offer, and such holder has provided information regarding such holder and the distribution of such holder's Notes to the Company for use therein, the Company has agreed to register the Notes on a shelf registration statement (the "Shelf Registration Statement") and use its best efforts to cause it to be declared effective by the Commission as promptly as practical on or after the consummation of the Exchange Offer. The Company has agreed to maintain the effectiveness of the Shelf Registration Statement for, under certain circumstances, a period of at least 2 years, to cover resales of the Notes held by any such holders. See "The Exchange Offer--Purpose and Effect of the Exchange Offer." SPECIAL PROCEDURES FOR BENEFICIAL OWNERS.......... Any beneficial owner whose Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering its Notes, either make appropriate arrangements to register ownership of the Notes in such owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. The Company will keep the Exchange Offer open for not less than twenty days in order to provide for the transfer of registered ownership. GUARANTEED DELIVERY Holders of Notes who wish to tender their Notes PROCEDURES................. and whose Notes are not immediately available or who cannot deliver their Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent (or comply with the procedures for book-entry transfer) prior to the Expiration Date must tender their Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures". WITHDRAWAL RIGHTS........... Tenders may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. ACCEPTANCE OF NOTES AND DELIVERY OF EXCHANGE The Company will accept for exchange any and all NOTES...................... Notes which are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Notes issued pursuant to the Exchange Offer will 8 be delivered promptly following the Expiration Date. See "The Exchange Offer--Terms of the Exchange Offer". USE OF PROCEEDS............. There will be no cash proceeds to the Company from the exchange pursuant to the Exchange Offer. EXCHANGE AGENT.............. The Bank of New York. THE EXCHANGE NOTES GENERAL..................... The form and terms of each class of Exchange Notes are the same as the form and terms of the relevant class of Notes (which they replace) except that (i) the Exchange Notes bear a Series B designation, (ii) the Exchange Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof, and (iii) the holders of Exchange Notes will not be entitled to certain rights under the Exchange and Registration Rights Agreement, including the provisions providing for an increase in the interest rate on the Notes in certain circumstances relating to the timing of the Exchange Offer, which rights will terminate when the Exchange Offer is consummated. See "The Exchange Offer--Purpose and Effect of the Exchange Offer". Each class of Exchange Notes will evidence the same debt as the relevant class of Notes and will be entitled to the benefits of the Indentures. See "Description of Exchange Notes". The Notes and the Exchange Notes are referred to herein collectively as the "Senior Subordinated Notes". GUARANTEES.................. The Issuer's payment obligations under the Exchange Notes will be fully and unconditionally guaranteed on a senior subordinated and joint and several basis (the "Note Guarantees") by Parent and certain of the Issuer's current and all of the Issuer's future U.S. Subsidiaries (the "Subsidiary Guarantors" and, together with Parent, the "Guarantors"). The Exchange Notes will not be guaranteed by certain other of the Issuer's U.S. Subsidiaries or by any of its current or future foreign Subsidiaries. For the years ended November 30, 1995, December 1, 1996 and November 30, 1997, the Non-Guarantor Subsidiaries (as defined herein under the caption "Description of Exchange Notes") accounted for 14.7%, 17.2% and 9.3% of net sales, respectively, and generated Adjusted EBITDA of $6.9 million, $12.7 million and $10.0 million, respectively. For additional information relating to the Non- Guarantor Subsidiaries, see Note 19 of the Consolidated Financial Statements. The Guarantees will be subordinated to the guarantees of Senior Debt issued by the Guarantors under the Senior Credit Agreements. See "Description of Exchange Notes--Note Guarantees". CERTAIN COVENANTS........... The indenture governing the Senior Subordinated Notes (the "Senior Subordinated Note Indenture") and the indenture governing the Senior Subordinated Discount Notes (the 9 "Senior Subordinated Discount Note Indenture" and, together with the Senior Subordinated Note Indenture, the "Indentures") contain certain covenants that, among other things, limit the ability of the Issuer and its Restricted Subsidiaries (as defined herein under the caption "Description of Exchange Notes") to incur additional indebtedness and issue Disqualified Stock (as defined herein under the caption "Description of Exchange Notes"), pay dividends or distributions or make investments or make certain other Restricted Payments (as defined herein under the caption "Description of Exchange Notes"), enter into certain transactions with affiliates, dispose of certain assets, incur liens and engage in mergers and consolidations. See "Description of Exchange Notes". SENIOR SUBORDINATED EXCHANGE NOTES MATURITY DATE............... December 15, 2007. INTEREST PAYMENT DATES...... Interest accrues from the date of issuance at an annual rate of 9 7/8% and will be payable in cash semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 1998. OPTIONAL REDEMPTION......... Except as described below, the Senior Subordinated Exchange Notes are not redeemable at the Issuer's option prior to December 15, 2002. From and after December 15, 2002, the Senior Subordinated Exchange Notes will be subject to redemption at the option of the Issuer, in whole or in part, at the redemption prices set forth in the Senior Subordinated Note Indenture, plus accrued and unpaid interest, if any, thereon to the applicable redemption date. See "Description of Exchange Notes--Optional Redemption". In addition, prior to December 15, 2000, up to 35% of the aggregate principal amount of Senior Subordinated Exchange Notes will be redeemable at the option of the Issuer, in whole or in part, on one or more occasions, from the net proceeds of any Equity Offerings (as defined herein under the caption "Description of Exchange Notes"), at a price of 109.875% of the principal amount of the Senior Subordinated Exchange Notes, together with accrued and unpaid interest, if any, to the date of the redemption; provided that at least $80.0 million in aggregate principal amount of Senior Subordinated Exchange Notes remains outstanding immediately after the occurrence of such redemption. See "Description of Exchange Notes-- Optional Redemption". CHANGE OF CONTROL........... In the event of a Change of Control, Holders of the Senior Subordinated Exchange Notes will have the right to require the Issuer to repurchase their Senior Subordinated Notes, in whole or in part, at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. The Senior Subordinated Note Indenture will require that prior to such a repurchase, the 10 Issuer must either repay all outstanding indebtedness under the Senior Credit Agreements or obtain any required consent to such repurchase. At any time on or prior to December 15, 2002, the Senior Subordinated Exchange Notes may also be redeemed in whole, but not in part, at the option of the Company, upon the occurrence of a Change of Control (but in no event more than 90 days after the occurrence of such Change of Control), at a redemption price equal to 100% of the principal amount thereof plus the Senior Subordinated Note Applicable Premium as of the Senior Subordinated Note Redemption Date (subject to the right of holders on the relevant record date to receive interest due on the relevant interest payment date). See "Description of Exchange Notes--Optional Redemption". SENIOR SUBORDINATED DISCOUNT EXCHANGE NOTES MATURITY DATE............... December 15, 2007. EFFECTIVE YIELD............. 10 7/8% per annum (computed on a semi-annual bond equivalent basis). INTEREST PAYMENT DATES...... The Senior Subordinated Discount Exchange Notes will be sold at a substantial discount to their face amount. See "Certain Federal Income Tax Considerations". No interest will accrue or be payable on the Senior Subordinated Discount Exchange Notes prior to December 15, 2002 (the "Full Accretion Date"). Interest on the Senior Subordinated Discount Exchange Notes will accrue and will be payable in cash semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 2003. OPTIONAL REDEMPTION......... Except as described below, the Senior Subordinated Discount Exchange Notes are not redeemable at the Issuer's option prior to December 15, 2002. From and after December 15, 2002, the Senior Subordinated Discount Exchange Notes will be subject to redemption at the option of the Issuer, in whole or in part, at the redemption prices set forth in the Senior Subordinated Discount Note Indenture, plus accrued and unpaid interest thereon to the applicable redemption date. See "Description of Notes--Optional Redemption". In addition, prior to December 15, 2000, up to 35% of the Accreted Value of the Senior Subordinated Discount Exchange Notes will be redeemable at the option of the Issuer, in whole or in part, on one or more occasions, from the net proceeds of any Equity Offerings, at a price of 110.875% of the Accreted Value of the Senior Subordinated Discount Exchange Notes plus accrued and unpaid interest, if any; provided, that at least $50.0 million in aggregate Accreted Value of Senior Subordinated Discount Exchange Notes 11 remains outstanding immediately after the occurrence of such redemption. See "Description of Exchange Notes--Optional Redemption". CHANGE OF CONTROL........... In the event of a Change of Control, Holders of the Senior Subordinated Discount Exchange Notes will have the right to require the Issuer to repurchase their Senior Subordinated Discount Exchange Notes, in whole or in part, at a price equal to 101% of the Accreted Value thereof (or, if after the Full Accretion Date, 101% of the principal amount thereof plus accrued and unpaid interest, including Liquidated Damages, if any, to the date of repurchase). The Senior Subordinated Discount Note Indenture will require that prior to such a repurchase, the Issuer must either repay all outstanding indebtedness under the Senior Credit Agreements or obtain any required consent to such repurchase. At any time on or prior to December 15, 2002, the Senior Subordinated Discount Exchange Notes may also be redeemed in whole, but not in part, at the option of the Company, upon the occurrence of a Change of Control (but in no event more than 90 days after the occurrence of such Change of Control), at a redemption price equal to 100% of the Accreted Value thereof plus the Senior Subordinated Discount Note Applicable Premium as of, and Liquidated Damages, if any, to the Senior Subordinated Discount Note Redemption Date. See "Description of Exchange Notes--Optional Redemption". ORIGINAL ISSUE DISCOUNT..... For Federal income tax purposes, each Senior Subordinated Discount Exchange Note will be deemed to be issued with "original issue discount" equal to the difference between the issue price thereof and the sum of all cash payments (whether denominated as principal or interest) to be made thereon. Each Holder of a Senior Subordinated Discount Exchange Note must include in gross income for Federal income tax purposes the sum of the daily portions of such original issue discount for each day during each taxable year in which the Senior Subordinated Discount Exchange Note is held, even though no interest payments will be received prior to December 15, 2002. RISK FACTORS Holders of the Notes should consider carefully all of the information set forth in this Prospectus and, in particular, the information set forth under "Risk Factors" before tendering any Notes. ADDITIONAL INFORMATION For additional information regarding the Exchange Notes, see "Notice to Investors", "Description of Exchange Notes" and "Certain Federal Income Tax Considerations". 12 SUMMARY HISTORICAL CONSOLIDATED AND PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA Set forth below are (i) summary historical consolidated financial data of Parent, as of and for the fiscal years ended November 30, 1995, December 1, 1996 and November 30, 1997 and as of and for the three months ended March 2, 1997 and March 1, 1998, and (ii) pro forma condensed consolidated financial data for the Issuer for the year ended November 30, 1997 and for the three months ended March 1, 1998. The summary historical financial data as of November 30, 1995, December 1, 1996, November 30, 1997, March 2, 1997 and March 1, 1998 were derived from the Consolidated Financial Statements and Condensed Consolidated Financial Statements of Parent. Consolidated information of Parent is presented for historical periods and dates and consolidated information of the Issuer is presented for the pro forma periods. For a discussion of pro forma adjustments, see "Unaudited Pro Forma Condensed Consolidated Financial Data". The information contained in this table should be read in conjunction with "Selected Historical Consolidated Financial and Other Data", "Unaudited Pro Forma Condensed Consolidated Financial Data", "Management's Discussion and Analysis of Financial Condition and Results of Operations", the Consolidated Financial Statements and the Condensed Consolidated Financial Statements and accompanying notes thereto appearing elsewhere in this Prospectus. 13 SUMMARY HISTORICAL CONSOLIDATED AND PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
THREE MONTHS FISCAL YEAR ENDED PRO FORMA(1) PRO FORMA(1) ------------------------ ----------------- ------------ ------------ THREE MONTHS MARCH 2, MARCH 1, FISCAL YEAR ENDED 1995 1996 1997 1997 1998 1997 3/1/98 ------ ------ ------ -------- -------- ------------ ------------ (DOLLARS IN MILLIONS) STATEMENT OF OPERATIONS DATA: Net sales............... $653.9 $697.6 $804.8 $168.9 $209.3 $799.5 $209.3 Costs and expenses...... 610.9 672.8 764.2 162.5 227.8 793.0 209.9 Income (loss) before income tax, extraordinary item and cumulative effect of change in accounting principle.............. 43.0 24.8 40.6 6.4 (18.5) 6.5 0.6 Extraordinary loss, net of taxes(2)............ -- -- 2.0 2.0 14.5 Cumulative effect of change in accounting principle, net of taxes(3)............... -- -- 4.3 -- -- Net income (loss)....... $ 19.5 $ (0.5)(4) $ 11.7 $ 1.2 $(32.2) OTHER DATA: Operating income (loss)(5).............. $ 74.0 $ 53.6 $ 72.0 $ 13.2 $ (3.0) $ 70.5 $ 15.8 Depreciation and amortization of intangibles............ 24.2 26.6 24.1 6.6 5.9 24.0 5.9 Capital expenditures.... 11.8 12.0 29.1 4.0 5.4 29.1 5.4 Interest expense, net... 31.0 28.8 31.4 6.8 15.5 64.0 16.4 Ratio of pro forma earnings to fixed charges(6).................................................... 1.1x 1.0x Adjusted EBITDA(7)...... $ 85.0 $ 86.8 $103.1 $ 20.4 $ 22.7 $103.1 $ 22.7 Ratio of pro forma Adjusted EBITDA to cash interest expense.... 2.0x 1.7x Ratio of pro forma Adjusted EBITDA to total interest expense, net........................................................... 1.6x 1.4x
AS OF ----------------------------------------- NOV. 30, DEC. 1, NOV. 30, MAR. 2, MAR. 1, 1995 1996 1997 1997 1998 -------- ------- -------- ------- ------- BALANCE SHEET DATA: Total assets........................ $776.2 $739.9 $721.1 $715.5 $ 750.7 Long-term obligations............... 269.4 269.5 330.0 356.4 705.3 Total debt.......................... 286.9 288.1 330.0 356.5 709.0 Stockholder's equity (deficit)...... 330.9 293.0 205.1 194.3 (127.8)
14 NOTES TO SUMMARY HISTORICAL CONSOLIDATED AND PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA (1) Amounts represent the pro forma condensed statement of income data and other financial data of the Issuer after giving effect to the Transactions, the Samuel Lawrence Divestiture (as defined in note 4 below) and the divestiture of the Company's South Brunswick, New Jersey mattress pad manufacturing plant (together with the Samuel Lawrence Divestiture, the "Divestitures") in the manner described under "Unaudited Pro Forma Condensed Consolidated Financial Data". (2) During February 1997, the Company recorded an extraordinary loss of $2.0 million, net of an income tax benefit of $1.4 million representing the remaining unamortized debt issuance costs related to long-term obligations repaid as a result of a refinancing transaction. During December 1997, the Company recorded an extraordinary loss of $14.5 million, net of an income tax benefit of $9.6 million representing the Tender Offer premium and consent fees and the write-off of unamortized debt issuance costs related to the Transactions. (3) On November 20, 1997 the Emerging Issues Task Force ("EITF") reached a final consensus that business process reengineering costs incurred in connection with an overall information technology transformation project should be expensed as incurred ("EITF 97-13"). Previously capitalized business process reengineering costs were required to be identified and written-off as a cumulative effect of a change in accounting principle. The Company adopted EITF-97-13 which resulted in the Company recording a loss of $4.3 million, net of income tax benefits of $2.9 million during the fourth quarter of fiscal 1997. (4) On January 15, 1997, the Company completed the sale of Woodstuff Manufacturing, Inc., a wholly-owned subsidiary that manufactured and marketed solid wood bedroom furniture under the "Samuel Lawrence" brand name (the "Samuel Lawrence Divestiture"). The Samuel Lawrence Divestiture resulted in an aggregate book loss of $17.6 million, which was recorded in the fiscal year ended December 1, 1996. The loss is comprised of a loss on net assets held for sale of $11.8 million and income tax expense of $5.8 million arising from the tax gain on the transaction. (5) Operating income is calculated by adding interest expense, net to net sales less costs and expenses. (6) For purposes of calculating the ratio of earnings to fixed charges, earnings represent income (loss) before income tax, extraordinary items and cumulative effect of change in accounting principle, plus fixed charges. Fixed charges consist of interest expense, net, including amortization of discount and financing costs and the portion of operating rental expense which management believes is representative of the interest component of rent expense. (7) Adjusted EBITDA is calculated by adding to or deducting from EBITDA (as described below) certain items of income and expense consisting of: (i) discontinued stock-based compensation plans, (ii) executive severance and transition costs, (iii) loss on write-off of Montgomery Ward accounts receivable and related factoring expense incurred in connection with bankruptcy of Montgomery Ward, (iv) annual Bain management fee of $2.0 million, (v) operating results of the divested South Brunswick pad manufacturing plant for the year ended November 30, 1997 and three months ended March 2, 1997, (vi) any expenses related to addressing the Company's "Year 2000" information systems issue and EITF 97-13 reengineering efforts and (vii) non-recurring expenses related to the Company's Recapitalization. EBITDA is calculated by adding interest expense, net and depreciation and amortization of intangibles to income (loss) before income tax, extraordinary items and cumulative effect of change in accounting principle. EBITDA is a widely accepted financial indicator of a company's ability to service and incur debt. EBITDA does not represent net income or cash flows from operations as those terms are defined by generally accepted accounting principles ("GAAP") and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. Adjusted EBITDA is presented because it conforms to the definition of "Consolidated EBITDA" in the Notes Indenture except for the exclusion of the Bain management fee for the three months ended March 1, 1998, the Pro Forma year ended November 30, 1997 and the Pro Forma three months ended March 1, 1998 and the exclusion of the operating results of the divested South Brunswick pad manufacturing plant for the year ended November 30, 1997 and the three months ended March 2, 1997 (see "'Description of Exchange Notes" and "Certain Definitions" within such section). These two items are not included in the Indenture definition of "Consolidated EBITDA"; however, the Company believes that the adjustment for these items in "Adjusted EBITDA" is appropriate for such periods in order to provide an appropriate analysis of recent historical results. The Company's measure of EBITDA and Adjusted EBITDA may not be comparable to those reported by other companies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". The following is a summary of the historical adjustments to EBITDA:
THREE MONTHS FISCAL YEAR ENDED PRO FORMA ----------------- -------------- ------------------- MAR. 2, MAR 1, FISCAL THREE MONTHS 1995 1996 1997 1997 1998 1997 ENDED 3/1/98 ------ ---- ---- ------- ------ ------ ------------ (DOLLARS IN MILLIONS) Adjustments: South Brunswick pad manufacturing plant... $ -- $-- $0.4 $0.3 $ -- $-- $ -- Stock-based compensation.......... (13.3) 4.7 1.6 0.3 -- 1.6 -- Executive severance and transition............ -- 1.9 -- -- -- -- -- Recapitalization non- recurring expenses.... -- -- -- -- 18.8 -- 18.8 Bain management fee.... -- -- -- -- 0.4 2.0 0.4 Montgomery Ward bad debt and factoring losses................ -- -- 4.0 -- -- 4.0 -- EITF 97-13 reengineering efforts............... -- -- 1.0 -- 0.6 1.0 0.6 ------ ---- ---- ---- ----- ---- ----- Total adjustments..... $(13.3) $6.6 $7.0 $0.6 $19.8 $8.6 $19.8 ====== ==== ==== ==== ===== ==== =====
15 RISK FACTORS Holders of the Notes should consider carefully the following factors as well as the other information and data included in this Prospectus prior to tendering their Notes in the Exchange Offer. SUBSTANTIAL LEVERAGE The Issuer has incurred significant debt in connection with the Transactions. As of March 1, 1998 the Issuer had outstanding indebtedness of $681.2 million and its stockholders' deficit was $92.1 million. In addition, the Issuer would have available borrowings of up to $59.0 million under the Senior Credit Agreements with Letters of Credit issued totaling $12.0 million. In addition, subject to restrictions in the Senior Credit Agreements and the Indentures, the Issuer may incur additional indebtedness from time to time to finance acquisitions or capital expenditures. For the fiscal year ended November 30, 1997, after giving pro forma effect to the Transactions and the Divestitures, the Company's ratio of earnings to fixed charges would have been 1.1 to 1.0 (1.0 to 1.0 for the three months ended March 1, 1998). The Company's ability to make scheduled payments of principal of, or to pay the interest or Liquidated Damages, if any, on, or to refinance, its indebtedness (including the Exchange Notes), or to fund planned capital expenditures will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. Based upon the current level of operations, management believes that cash flow from operations and available cash, together with available borrowings under the Senior Credit Agreements, will be adequate to meet the Company's future liquidity needs for at least the next several years. The Company, however, will need to refinance all or a portion of the principal of the Exchange Notes on or prior to maturity. There can be no assurance that the Company will be able to effect any such refinancing on commercially reasonable terms or at all. In addition, there can be no assurance that the Company's business will generate sufficient cash flow from operations, that anticipated revenue growth and operating improvements will be realized or that future borrowings will be available under the Senior Credit Agreements in an amount sufficient to enable the Company to service its indebtedness, including the Exchange Notes, or to fund its other liquidity needs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources". The degree to which the Company will be leveraged following the Transactions could have important consequences to holders of the Exchange Notes, including, but not limited to: (i) making it more difficult for the Company to satisfy its obligations with respect to the Exchange Notes, (ii) increasing the Company's vulnerability to general adverse economic and industry conditions, (iii) limiting the Company's ability to obtain additional financing to fund future working capital, capital expenditures, research and development and other general corporate requirements, (iv) requiring the dedication of a substantial portion of the Company's cash flow from operations to the payment of principal of, and interest on, its indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures, research and development or other general corporate purposes, (v) limiting the Company's flexibility in planning for, or reacting to, changes in its business and the industry and (vi) placing the Company at a competitive disadvantage relative to less leveraged competitors. In addition, the Parent Indenture, the Indentures and the Senior Credit Agreements contain financial and other restrictive covenants that will limit the ability of the Company to, among other things, borrow additional funds. Failure by the Company to comply with such covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on the Company's financial condition or results of operations. In addition, the degree to which the Company is leveraged could prevent it from repurchasing all of the Exchange Notes tendered to it upon the occurrence of a Change of Control. See "Description of Exchange Notes--Repurchase at Option of Holders--Change of Control" and "Description of Senior Credit Agreements". 16 SUBORDINATION OF EXCHANGE NOTES; GUARANTEES The Exchange Notes will be contractually subordinated to all Senior Debt including all obligations under the Senior Credit Agreements. Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, the holders of Senior Debt will be entitled to be paid in full in cash before any payment may be made with respect to the Exchange Notes. In addition, the subordination provisions of the Indentures provide that payments with respect to the Exchange Notes will be blocked in the event of a payment default on Senior Debt. In the event of a bankruptcy, liquidation or reorganization of the Company, holders of the Exchange Notes will participate ratably with all holders of subordinated indebtedness of the Company that is deemed to be of the same class as the Exchange Notes, and potentially with all other general creditors of the Company, based upon the respective amounts owed to each holder or creditor, in the remaining assets of the Company. In any of the foregoing events, there can be no assurance that there would be sufficient assets to pay amounts due on the Notes. As a result, holders of Exchange Notes may receive less, ratably, than the holders of Senior Debt. As of March 1, 1998, the aggregate amount of consolidated indebtedness and other liabilities to which the Exchange Notes are subordinated was approximately $479.0 million, consisting of secured borrowings under the Senior Credit Agreements. In addition, the Company will have available additional borrowings of up to $59.0 million under the Senior Credit Agreements, (with Letters of Credit issued totaling $12.0 million) all of which would constitute Senior Debt. Subject to certain limitations, the Indentures will permit the Company to incur additional indebtedness. See "The Transactions" and "Description of Exchange Notes". Substantially all of the assets of the Company will or may in the future be pledged to secure other indebtedness of the Issuer or its subsidiaries. See "Description of Senior Credit Agreements". The Exchange Notes will be guaranteed on a senior subordinated basis by certain of the Issuer's current and all of the Issuer's future U.S. Subsidiaries. The Exchange Notes will not be guaranteed by certain other of the Issuer's U.S. Subsidiaries or by any of foreign Subsidiaries of the Issuer. For the fiscal years ended November 30, 1995, December 1, 1996 and November 30, 1997, the Non-Guarantor Subsidiaries accounted for 14.7%, 17.2% and 9.3% of net sales, respectively, and generated Adjusted EBITDA of $6.9 million, $12.7 million and $10.0 million, respectively. The claims of creditors (including trade creditors) of any Non-Guarantor Subsidiary will generally have priority as to the assets of such subsidiaries over the claims of the holders of the Exchange Notes. As of March 1, 1998, the amount of liabilities of such Non-Guarantor Subsidiaries was approximately $43.6 million (of which $29.6 million represent intercompany liabilities). For additional information relating to Non-Guarantor Subsidiaries, see Note I of the Condensed Consolidated Financial Statements. RECENT LOSSES The Company has experienced a pro forma loss for the year ended November 30, 1997 and historical and pro forma losses for the three months ended March 1, 1998. These losses were chiefly attributable to the incurrence of expenses related to the Recapitalization. The Company expects to incur a significant additional charge (estimated to be approximately $8.5 million on a pre-tax basis) in connection with the relocation of its corporate headquarters, such charge is expected to be recognized primarily in fiscal 1998 with the balance in fiscal 1999. If the Company continues to experience losses, the Company will be required to find additional sources of financing to fund its debt service, working capital requirements and anticipated capital expenditures. There can be no assurance that such financing will be available on terms and conditions acceptable to the Company in such circumstances or that, if debt financing is required, such financing would be permitted under the terms of the Company's indebtedness. If the Company experiences operating losses in the future, that fact, combined with the absence of additional financing, could impair the Company's ability to pay principal and interest on the Exchange Notes. See "Unaudited Pro Forma Condensed Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 17 RESTRICTIONS IMPOSED BY THE SENIOR CREDIT AGREEMENTS AND THE INDENTURES The Senior Credit Agreements require the Issuer to maintain specified financial ratios and tests, among other obligations, including a minimum interest coverage ratio, a maximum leverage ratio, and a minimum EBITDA requirement. In addition, the Senior Credit Agreements restrict, among other things, the Issuer's ability to incur additional indebtedness and to make acquisitions and capital expenditures beyond a certain level. A failure to comply with the restrictions contained in the Senior Credit Agreements could lead to an event of default thereunder which could result in an acceleration of such indebtedness. Such an acceleration would constitute an event of default under the Indentures relating to the Exchange Notes. In addition, the Indentures restrict, among other things, the Issuer's ability to incur additional indebtedness, sell assets, make certain payments and dividends or merge or consolidate. A failure to comply with the restrictions in the Indentures could result in an event of default under the Indentures. See "Description of Senior Credit Agreements" and "Description of Exchange Notes". ORIGINAL ISSUE DISCOUNT CONSEQUENCES The Senior Subordinated Discount Exchange Notes will be issued at a substantial discount from their principal amount. Consequently, the purchasers of the Senior Subordinated Discount Exchange Notes generally will be required to include amounts in gross income for Federal income tax purposes in advance of receipt of any cash payment on the Senior Subordinated Discount Exchange Notes to which the income is attributable. See "Certain Federal Income Tax Considerations" for a more detailed discussion of the Federal income tax consequences to the holders of the Senior Subordinated Discount Exchange Notes of the purchase, ownership and disposition of the Senior Subordinated Discount Exchange Notes. If a bankruptcy case is commenced by or against the Company under the U.S. Bankruptcy Code (the "Bankruptcy Code") after the issuance of the Senior Subordinated Discount Exchange Notes, the claim of a holder of Senior Subordinated Discount Exchange Notes with respect to the principal amount thereof will likely be limited to an amount equal to the sum of (i) the Accreted Value of the Senior Subordinated Discount Exchange Notes as of the date of issuance of the Senior Subordinated Discount Exchange Notes and (ii) the original issue discount that is not deemed to constitute "unmatured interest" for the purposes of the Bankruptcy Code. Any original issue discount that was not amortized as of any such bankruptcy filing would most likely constitute "unmatured interest". COMPETITION The bedding industry is highly competitive, and the Company encounters competition from several manufacturers in both domestic and foreign markets. Certain of the Company's principal competitors are less highly-leveraged than the Company and may be better able to withstand market conditions within the bedding industry. Additionally, there can be no assurance that the Company will not encounter increased future competition, which could have a material adverse effect on the Company's financial condition or results of operations. See "Business--Competition". YEAR 2000 ISSUE; COMPUTER SYSTEM UPGRADE The Company believes that the new Business Systems, including appropriate software, being installed both alongside and as part of an upgrade of its existing computer system will address the dating system flaw inherent in most operating systems (the "Year 2000 Issue"). There can be no assurance, however, that the new Business Systems will be installed and fully operational at all locations and for all applications prior to the turn of the century, and management has therefore deemed it necessary to convert its current system to be Year 2000 compliant. The Company has conducted a comprehensive impact analysis to determine what computing platforms and date-aware functions with respect to its existing computer operating systems will be disrupted by the Year 2000 18 Issue. In January, 1998, the Company completed a prioritization of the impacted areas identified to date and commenced the detailed program code changes through a contracted third party vendor which has experience in Year 2000 conversions for the Company's existing system including the same release of such system. The Company is in the preliminary stages of assessment of its vendors and customers status with respect to the Year 2000 Issue. The required code changes, testing and implementation necessary to address the Year 2000 Issue is projected to be completed by May, 1999, and is expected to cost approximately $4.0 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Issue" and "Business--Manufacturing and Facilities". DEPENDENCE ON KEY PERSONNEL The Company is dependent on the continued services of its senior management team. Although the Company believes it could replace key employees in an orderly fashion should the need arise, the loss of such key personnel could have a material adverse effect on the Company's financial condition or results of operations. The Company does not maintain key-man life insurance on any of its employees. See "Management--Directors and Executive Officers". DEPENDENCE UPON SIGNIFICANT CUSTOMERS The Company's top five conventional bedding customers accounted for approximately 21% of the Company's net sales for the fiscal year ended November 30, 1997 and no single customer represented more than 6% of the Company's net sales for such period. While the Company believes its relationships with such customers are stable, most arrangements are by purchase order and are terminable at will at the option of either party. In addition, the Company's business depends upon the financial viability of its customers, which operate largely within the retail industry. The bankruptcy of Montgomery Ward in 1997 resulted in increased bad debt reserves of $2.7 million and related factoring expense of $1.3 million by the Issuer. A significant decrease or interruption in business from the Company's significant customers could result in write-offs or in the loss of future business, and could have a material adverse effect on the Company's financial condition or results of operations. See "Business--Customers, Sales and Marketing". POSSIBLE FLUCTUATIONS IN THE COST OF RAW MATERIALS; POSSIBLE LOSS OF SUPPLIERS The major raw materials that the Company purchases for production are cotton, insulator pads, innersprings, fabrics and roll goods consisting of foam, fiber and non-wovens. The price and availability of these raw materials are subject to market conditions affecting supply and demand. The Company's financial condition or results of operations may be materially and adversely affected by increases in raw material costs to the extent the Company is unable to pass on such higher costs to customers. The Company purchases its raw materials and certain components from a variety of vendors, including Hoover Wire Products, a division of Leggett & Platt, Inc. ("Hoover"), Foamex International and other national raw material and component suppliers. The Company purchases substantially all of its Stearns & Foster foundation parts and approximately 50% of its Sealy foundation parts from Hoover, which has patents on various interlocking wire configurations. While the Company attempts to reduce the risks of dependence on a single external source, there can be no assurance that there would not be an interruption of production if Hoover or any other supplier were to discontinue supplying the Company for any reason. See "Business--Manufacturing and Facilities". DEPENDENCE ON COMPONENTS DIVISION The Company currently purchases substantially all of its mattress innerspring unit requirements, including 100% of the proprietary innersprings for the Posturepedic and Stearns & Foster lines, from 19 its components division (the "Components Division"), which operates three manufacturing facilities. There are limited alternative suppliers for these classes of components. Although several months of supplies of such components are currently available from the Company's inventories, any reductions or interruptions in future supply or limitations in the Company's manufacturing capacity could cause the Company to suffer disruptions or delays in the operation of its business or incur higher than expected costs, which could have a material adverse effect on the Company's financial condition or results of operations. See "Business--Manufacturing and Facilities". RELIANCE ON TRADEMARKS AND OTHER INTELLECTUAL PROPERTY The Company holds over 200 trademarks, which management believes have significant value and are important to the marketing of its products to retailers. The Company owns numerous U.S. and foreign patents and has patent applications pending domestically and abroad. In addition, the Company owns U.S. and foreign registered trade names and service marks and has applications for the registration of trade names and service marks pending domestically and abroad. The Company also owns several U.S. copyright registrations. In addition, the Company owns a wide array of unpatented proprietary technology and know-how. Further, the Company licenses certain intellectual property rights from third parties. The Company's ability to compete effectively with other companies depends, to a significant extent, on its ability to maintain the proprietary nature of its owned and licensed intellectual property. Although the Company's trademarks are currently registered in all 50 states and registered or pending in 87 foreign countries, there can be no assurance that the Company's trademarks cannot and will not be circumvented, do not or will not violate the proprietary rights of others, or that the Company would not be prevented from using its trademarks if challenged. Any challenge to the Company for its use of its trademarks could have a material adverse effect on the Company's financial condition or results of operations, through either a negative ruling with regard to the Company's use, validity or enforceability of its trademarks, or through the time consumed and the legal costs of defending against such a claim. In addition, there can be no assurance that the Company will have the financial resources necessary to enforce or defend its trademarks. In addition, there can be no assurance as to the degree of protection offered by the various patents, the likelihood that patents will be issued for pending patent applications or, with regard to the licensed intellectual property, that the licenses will not be terminated. If the Company were unable to maintain the proprietary nature of its intellectual property and its significant current or proposed products, the Company's financial condition or results of operations could be materially adversely affected. See "Business--Proprietary Technology; Trademarks and Patents". LABOR RELATIONS As of November 30, 1997, the Company had 5,456 full-time employees. Approximately 66% of the Company's employees at its 28 North American facilities are represented by various labor unions with separate collective bargaining agreements. Due to the large number of collective bargaining agreements, the Company is periodically in negotiations with certain of the unions representing its employees. The Company considers its overall relations with its work force to be satisfactory. Although the Company believes that its relations with its union employees are generally satisfactory, there can be no assurance that the Company will not at some point be subject to work stoppages by some of its employees and, if such events were to occur, that there would not be a material adverse effect on the Company's financial condition or results of operations. See "Business--Employees". RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS The Company conducts significant international operations. Such operations are subject to the customary risks of operating in an international environment, including the potential imposition of trade 20 or foreign exchange restrictions, tariff and other tax increases, fluctuations in exchange rates, inflation and unstable political situations. Fluctuations in the rate of exchange between the U.S. dollar and other currencies may affect stockholders' equity and the results of operations. The Company does not currently engage in any material hedging activities, but continues to evaluate the possibility of doing so. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Foreign Operations and Export Sales". CONTROLLING SHAREHOLDERS As a result of the Transactions, the Bain Funds and related investors and certain other institutional investors, the Management Investors and Zell (as herein defined), beneficially own all of the outstanding common stock of Parent, and through collective majority voting rights, can effectively control the affairs and policies of the Company. Circumstances may occur in which the interests of these shareholders conflict with the interests of the holders of the Exchange Notes. In addition, these shareholders may have an interest in pursuing acquisitions, divestitures or other transactions that, in their judgment, enhance their equity investment, even though such transactions might involve risks to the holders of the Exchange Notes. See "Security Ownership". LIMITATIONS ON CHANGE OF CONTROL In the event of a Change of Control, the Company will be required to make an offer for cash to repurchase the Exchange Notes at 101% of the principal amount thereof (or Accreted Value, as the case may be), plus accrued and unpaid interest, if any, thereon to the repurchase date. A Change of Control will result in an event of default under the Senior Credit Agreements and may result in a default under other indebtedness of the Company that may be incurred in the future. The Senior Credit Agreements will prohibit the purchase of outstanding Exchange Notes prior to repayment of the borrowings under the Senior Credit Agreements and any exercise by the holders of the Notes of their right to require the Company to repurchase the Exchange Notes will cause an event of default under the Senior Credit Agreements. Finally, there can be no assurance that the Company will have the financial resources necessary to repurchase the Exchange Notes upon a Change of Control. See "Description of Exchange Notes--Repurchase at the Option of Holders--Change of Control". RISK OF FRAUDULENT TRANSFER A significant portion of the net proceeds of the Offerings were paid as a dividend to Parent and used to consummate the Merger and to repay the Parent Notes. Under applicable provisions of the U.S. Bankruptcy Code or comparable provisions of state fraudulent transfer or conveyance laws, if the Company, at the time it issued the Notes, (i) incurred such indebtedness with intent to hinder, delay or defraud creditors, or (ii)(a) received less than reasonably equivalent value or fair consideration for incurring such indebtedness and (b)(1) was insolvent at the time of incurrence, (2) was rendered insolvent by reason of such incurrence (and the application of the proceeds thereof), (3) was engaged or was about to engage in a business or transaction for which the assets remaining with the Company constituted unreasonably small capital to carry on its businesses, or (4) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature, then, in each case, a court of competent jurisdiction could void, in whole or in part, the Notes and/or the Exchange Notes, or, in the alternative, subordinate the Notes and/or the Exchange Notes to existing and future indebtedness of the Company. The measure of insolvency for purposes of the foregoing will vary depending upon the law applied in such case. Generally, however, the Company would be considered insolvent if the sum of its debts, including contingent liabilities, was greater than all of its assets at fair valuation or if the present fair saleable value of its assets was less than the amount that would be required to pay the probable liability on its existing debts, including contingent liabilities, as they become absolute and matured. Management believes that, for purposes of all such insolvency, bankruptcy and fraudulent transfer or conveyance laws, the Notes were issued and the Exchange 21 Notes are being issued without the intent to hinder, delay or defraud creditors and for proper purposes and in good faith and that the Company, after the issuance of the Notes and the application of the proceeds thereof, was solvent and, after the issuance of the Exchange Notes, will be solvent, will have sufficient capital for carrying on its business and will be able to pay its debts as they mature. There can be no assurance, however, that a court passing on such questions would agree with management's view. ENVIRONMENTAL, HEALTH AND SAFETY REQUIREMENTS The Company is subject to Federal, state and local laws and regulations relating to pollution, environmental protection and occupational health and safety. There can be no assurance that the Company is at all times in complete compliance with all such requirements. The Company has made and will continue to make capital and other expenditures to comply with environmental requirements. As is the case with manufacturers in general, if a release of hazardous substances occurs on or from the Company's properties or any associated offsite disposal location, or if contamination from prior activities is discovered at any of the Company's properties, the Company may be held liable and the amount of such liability could be material. The Company is conducting environmental cleanups at a formerly owned facility in South Brunswick, New Jersey and at an inactive facility in Oakville, Connecticut. The Company has recorded accruals to reflect future costs associated with these cleanups. However, because of the uncertainties associated with environmental remediation, it is possible that the costs incurred with respect to the cleanups could exceed the recorded accruals. See "Business-- Environmental, Health and Safety Matters". LACK OF PUBLIC MARKET; TRANSFER RESTRICTIONS Prior to the Exchange Offer, there has not been any public market for the Notes. The Notes have not been registered under the Securities Act and will be subject to restrictions on transferability to the extent that they are not exchanged for Exchange Notes by holders who are entitled to participate in this Exchange Offer. The holders of Notes (other than any such holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) who are not eligible to participate in the Exchange Offer are entitled to certain registration rights, and the Company is required to file a Shelf Registration Statement with respect to such Notes. See "The Exchange Offer--Purpose and Effect of the Exchange Offer." The Exchange Notes are a new issue of securities for which there is currently no trading market. Because the Exchange Notes are being sold pursuant to an exemption from registration under the applicable securities laws and, therefore, may not be publicly offered, sold or otherwise transferred in any jurisdiction where such registration may be required, no public market for the Exchange Notes will develop. The Exchange Notes are eligible for trading by qualified buyers in the Private Offering, Resales and Trading through Automated Linkages ("PORTAL") market. The Issuer has been advised by the Initial Purchasers that following the completion of the Exchange Offer, the Initial Purchasers currently intend to make a market in the Exchange Notes. However, they are not obligated to do so and any market-making activities with respect to the Exchange Notes may be discontinued at any time without notice. In addition, such market-making activity will be subject to the limits imposed by the Securities Act and the Exchange Act, and may be limited during the Exchange Offer pendency of any Shelf Registration Statement. Although under the Registration Rights Agreement, the Issuer is required to consummate an offer to exchange the Notes for equivalent registered securities, or to register the Notes under the Securities Act, there can be no assurance that an active trading market for the Notes or the Exchange Notes will develop. If a market were to exist, the Exchange Notes could trade at prices that may be lower than the initial offering price thereof depending on many factors, including prevailing interest rates and the markets for similar securities, general economic conditions and the financial condition and performance of, and prospects for, the Company. See "The Exchange Offer." 22 EXCHANGE OFFER PROCEDURES Issuance of the Exchange Notes in exchange for the Notes pursuant to the Exchange Offer will be made only after a timely receipt by the Company of such Notes, a properly completed and duly executed Letter of Transmittal and all other required documents. Therefore, holders of the Notes desiring to tender such Notes in exchange for Exchange Notes should allow sufficient time to ensure timely delivery. The Company is under no duty to give notification of defects or irregularities with respect to the tenders of Notes for exchange. Notes that are not tendered or are tendered but not accepted will, following the consummation of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof and, upon consummation of the Exchange Offer, certain registration rights under the Registration Rights Agreement will terminate. In addition, any holder of Notes who tenders in the Exchange Offer for the purpose of participating in a distribution of the Exchange Notes may be deemed to have received restricted securities and, if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transactions. Each Participating Broker-Dealer that receives Exchange Notes for its own account in exchange for Notes, where such Notes were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "Plan of Distribution". To the extent that Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Notes could be adversely affected. See "The Exchange Offer". 23 THE TRANSACTIONS OVERVIEW On December 18, 1997, Parent consummated a merger (the "Merger") pursuant to an agreement and plan of merger, dated as of October 30, 1997, as amended, (the "Merger Agreement"), with Sandman Merger Corporation, a transitory Delaware merger corporation ("Sandman"), and Zell/Chilmark Fund, L.P., a Delaware limited partnership ("Zell"). Prior to the Merger, Zell beneficially owned approximately 87% of the voting securities of Parent. Pursuant to the Merger Agreement, Sandman was merged with and into Parent with Parent being the surviving corporation. Prior to the Merger, Parent converted certain of the existing common stock held by Zell into shares of Parent's voting preferred stock (the "Preference Stock"). In connection with the Merger (i) the Preference Stock was converted into $25.0 million in aggregate principal amount of junior subordinated notes of Parent (the "Parent Junior Subordinated Notes") and the Zell Equity (as defined below) and (ii) the aggregate issued and outstanding shares of the existing common stock at the time of the Merger were converted into the right to receive an aggregate amount of cash equal to (x) $419.3 million minus (y) certain fees and expenses of the Merger minus (z) certain costs in connection with the extinguishment of certain outstanding options and warrants of Parent. The transactions contemplated by the Merger Agreement, including the Merger, the Tender Offer and related Consent Solicitation (each as defined below) and the refinancing of Parent's existing indebtedness were funded by: (i) $450.0 million of term loan borrowings by the Company pursuant to the Senior Credit Agreements (as defined below); (ii) $10.0 million of revolving borrowings under the Senior Credit Agreements; (iii) the Offerings, with aggregate gross proceeds of $200.4 million; (iv) the issuance of the Junior Subordinated Notes to Zell; (v) an equity investment in Parent by funds managed by Bain, its related investors, including members of management, and other institutional investors (collectively, the "New Investors") of approximately $130.4 million and (vi) a retained equity investment in Parent by Zell with fair value of approximately $14.3 million (such equity investment, the "Zell Equity"). As a result of the Merger and Recapitalization, the New Investors beneficially own approximately 85.3% of the voting securities of Parent. STRUCTURE OF THE RECAPITALIZATION Immediately prior to the closing of the Transactions (the "Closing"), Parent contributed (the "Capital Contribution") all of the issued and outstanding capital stock of Sealy, Inc., an Ohio corporation, The Stearns & Foster Bedding Company, a Delaware corporation, Advanced Sleep Products, a California corporation, Sealy Components-Pads, Inc., a Delaware corporation, and Sealy Mattress Company of San Diego, a California corporation, to the capital of the Issuer. As a result of the Capital Contribution, the Issuer is the only direct subsidiary of Parent and owns 100% of the operations of Parent. TENDER OFFER AND CONSENT SOLICITATION On November 18, 1997, Parent commenced an offer (the "Tender Offer") to purchase for cash up to all (but not less than a majority in principal amount outstanding) of its 10 1/4% Senior Subordinated Notes due 2003 (the "Old Notes") and a related solicitation (the "Consent Solicitation") of consents to modify certain terms of the indenture under which the Old Notes were issued. The purchase price paid in respect of validly tendered Old Notes was $1,057.03 per $1,000 of principal amount tendered and the payment with respect to the Consent Solicitation was $20 per $1,000 of principal amount tendered prior to the consent expiration date therefor. Old Notes in the aggregate principal amount of $197.8 million were tendered and accepted for payment and the related consents received. The Tender Offer was consummated concurrently with the Merger and a supplemental indenture with respect to the Old Notes took effect at such time. 24 SENIOR CREDIT AGREEMENTS Upon consummation of the Merger, the Issuer entered into the AXELs* credit agreement (the "Senior AXELs Credit Agreement") and a credit agreement providing for Tranche A term Loans and revolving borrowings (the "Senior Revolving Credit Agreement" and, together with the Senior AXELs Credit Agreement, the "Senior Credit Agreements") with Goldman Sachs Credit Partners L.P., as arranger and syndication agent, Morgan Guaranty Trust Company of New York, as administrative agent, and Bankers Trust Company, as documentation agent; and other institutions party thereto. The Senior Credit Agreements provide for loans of up to $550.0 million, consisting of a $450.0 million term loan facility (the "Term Loan Facility") and a $100.0 million revolving credit facility (the "Revolving Credit Facility"). The Issuer distributed the proceeds of the Term Loan Facility and its initial borrowings under the Revolving Credit Facility to Parent to provide a portion of the funds necessary to consummate the Merger and related Recapitalization transactions. Indebtedness of the Issuer under the Senior Credit Agreements is secured and guaranteed by Parent and certain of the Issuer's current and all of the Issuer's future U.S. subsidiaries and will bear interest at a floating rate. The Senior Credit Agreements require the Company to meet certain financial tests, including minimum levels of EBITDA, minimum interest coverage and maximum leverage ratio. The Senior Credit Agreements also contain covenants which, among other things, limit capital expenditures, indebtedness and/or the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset sales, mergers and consolidations, prepayments of other indebtedness (including the Notes and the Exchange Notes), liens and encumbrances and other matters customarily restricted in such agreements. See "Description of Senior Credit Agreements". - -------- * "AXELs" is a registered servicemark of Goldman, Sachs & Co. 25 USE OF PROCEEDS The Exchange Offers are intended to satisfy certain of the Company's obligations under the Registration Rights Agreement. The Company will not receive any cash proceeds from the issuance of the Exchange Notes in the Exchange Offer. The aggregate gross proceeds from the issuance of the Notes, together with borrowings under the Senior Credit Agreements and proceeds from the equity infusion by the Investors, were used to consummate the Merger, refinance existing debt, repurchase the Parent Notes pursuant to the Tender Offer and pay the related fees and expenses. See "The Transactions". The following table illustrates the total sources and uses of funds for the Transactions, on a pro forma basis, assuming the Transactions occurred as of November 30, 1997.
AMOUNT --------------------- (DOLLARS IN MILLIONS) SOURCES OF FUNDS: Existing cash(1)................................... $ 9.0 Senior Credit Agreements: Revolving Credit Facility(2)..................... 10.0 Term Loans....................................... 450.0 Senior Subordinated Notes.......................... 125.0 Senior Subordinated Discount Notes................. 75.4 Parent Junior Subordinated Notes(3)................ -- Zell Equity(3)..................................... -- Equity proceeds to Parent(5)....................... 121.3 ------ Total sources.................................. $790.7 ====== USES OF FUNDS: Merger consideration(4)............................ $411.0 Repurchase of Parent Notes(6)...................... 215.7 Repayment of borrowings under the Old Credit Agreement(1)...................................... 130.0 Accrued interest................................... 0.6 Estimated fees and expenses(7)..................... 33.4 ------ Total uses..................................... $790.7 ======
- -------- (1) Funding requirements as of the Closing were less than pro forma requirements as of November 30, 1997 due to positive operating cash flows from post-November 30, 1997 results and certain expenses not being paid at Closing. (2) The Revolving Credit Facility has a total availability of $100.0 million, with $10.0 million drawn at Closing. (3) The Parent Junior Subordinated Notes of $25.0 million, together with the Zell Equity, with an implied fair value of $14.3 million, represent non- cash Merger consideration paid to Zell. Payment of cash interest to Parent to service this debt will be limited by the Senior Credit Agreements and the Indentures. The Parent Junior Subordinated Notes are scheduled to mature after the Notes. (4) Includes cash payments to Zell, warrant and option holders and for Seller Expenses of $411.0 million. Excludes non-cash Merger consideration of $25.0 million of Parent Junior Subordinated Notes, the retained Zell Equity (fair value of $14.3 million) and the converted management equity and deferred compensation ($8.3 million). (5) Excludes approximately $8.3 million of equity held by current management of the Company that was converted at Closing into deferred compensation accounts and options to acquire common stock. (6) Includes the tender premium and consent payment of 107.703% or $15.2 million and the accrued interest on the tendered Parent Notes of approximately $2.7 million for the period from November 2, 1997 through the Tender Offer closing date of December 18, 1997. Parent Notes in the aggregate principal amount of approximately $197.8 million were tendered and the related consents received. (7) Reflects fees and expenses associated with issuance of the Notes and borrowings under the Senior Credit Agreements and estimated fees and expenses of approximately $13.8 million of Attorneys, Accountants, Bain, Printers and other professionals related to the Transactions. See "Certain Transactions". 26 CAPITALIZATION The following table sets forth the actual cash and cash equivalents and the capitalization of the Parent and of the Issuer as of March 1, 1998. The information in this table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the Consolidated Financial Statements and the Condensed Consolidated Financial Statements and accompanying notes thereto appearing elsewhere in this Prospectus.
UNAUDITED --------------------------- PARENT ISSUER MARCH 1, 1998 MARCH 1, 1998 (ACTUAL) (ACTUAL) ------------- ------------- (DOLLARS IN MILLIONS) Cash and cash equivalents...................... $ -- $ -- ======= ====== Long-term debt obligations, including current portion: Senior Credit Agreements: Revolving Credit Facility(1)............... $ -- $ 29.0 Term Loans................................. -- 450.0 Senior Subordinated Notes.................... -- 125.0 Senior Subordinated Discount Notes(2)........ -- 77.2 Junior Subordinated Notes(2)................. 25.6 -- Untendered Parent Notes(3)................... 2.2 -- ------- ------ Total long-term debt..................... 27.8 681.2 ------- ------ Stockholders' equity (deficit)(4).............. (127.8) (92.1) ------- ------ Total capitalization..................... $(100.0) $589.1 ======= ======
- -------- (1) The Revolving Credit Facility has total availability of $100.0 million, with $29.0 million drawn at March 1, 1998 and Letters of Credit issued totaling $12.0 million. (2) Includes accretion of interest on the Senior Subordinated Discount Notes of approximately $1.8 million and accrued interest on the Junior Subordinated Notes of $0.6 million. (3) On March 30, 1998, the Company announced a call for redemption of all of its outstanding Parent Notes. The redemption price of 106.33%, plus accrued interest, of approximately $2.5 million was paid on May 1, 1998, after which time interest will cease to accrue on the Notes. The redemption was funded with the Revolving Credit Facility. (4) Parent's stockholders' deficit is larger than the Issuer's deficit primarily due to Parent's distribution of the $25.0 million Parent Junior Subordinated Notes and $2.2 million of Parent Notes not tendered. 27 SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA Set forth below are selected historical consolidated financial and other data of the Parent (some periods of which are less than one year due to accounting requirements for acquisition transactions) for the years ended November 30, 1997, December 1, 1996, November 30, 1995 and 1994, for the ten months ended November 30, 1993 and for the two months ended January 31, 1993, as well as the three months ended March 1, 1998 and March 2, 1997. During the period from December 1, 1991 through December 1, 1996, the Parent's capital structure changed significantly, in large part as a result of the purchase of the Parent in February, 1993 by an investor group led by Zell (the "1993 Acquisition"). Due to required purchase accounting adjustments relating to such transactions, and the resultant changes in control, the selected historical consolidated financial and other data reflected in the following table during this period are not comparable to such data for the other such periods. The selected historical consolidated financial and other data set forth in the following tables have been derived from the Parent's audited consolidated financial statements and unaudited financial statements as of and for the three months ended March 2, 1997 and March 1, 1998. The report of KPMG Peat Marwick LLP, independent auditors, covering the Parent's Consolidated Financial Statements for the years ended November 30, 1997, December 1, 1996 and November 30, 1995 is included elsewhere herein. The information contained in this table and accompanying notes should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the audited Consolidated Financial Statements and the Condensed Consolidated Financial Statements and accompanying notes thereto appearing elsewhere in this Prospectus.
TWO TEN THREE MONTHS MONTHS MONTHS FISCAL YEAR ENDED ENDED ENDED -------------------------------------- ---------------- JAN. 31, NOV. 30, MAR. 2, MAR. 1, 1993 1993 1994 1995 1996 1997 1997 1998 -------- -------- -------- -------- ------- -------- ------- ------- (DOLLARS IN MILLIONS) STATEMENT OF OPERATIONS DATA: Net sales............... $103.5 $579.7 $697.7 $653.9 $697.6 $804.8 $168.9 $209.3 Costs and expenses...... 100.9 531.0 641.6 610.9 672.8 764.2 162.5 227.8 Income (loss) before income tax, extraordinary item and cumulative effect of change in accounting principle.............. 2.6 48.7 56.1 43.0 24.8 40.6 6.4 (18.5) Extraordinary loss, net of taxes(1)............ -- 2.9 -- -- -- 2.0 2.0 14.5 Cumulative effect of change in accounting principle, net of taxes(2)............... -- -- -- -- -- 4.3 -- -- Net income (loss)....... $ 1.0 $ 24.7 $ 29.2 $ 19.5 $ (0.5)(3) $ 11.7 $ 1.2 $(32.2) OTHER DATA: Operating income (loss)(4).............. $ 9.3 $ 79.9 $ 89.5 $ 74.0 $ 53.6 $ 72.0 $ 13.2 $ (3.0) Net cash provided by (used in) operating activities............. (1.3) 82.7 69.0 63.3 44.4 42.0 -- (23.3) Depreciation and amortization of intangibles............ 4.3 19.1 23.6 24.2 26.6 24.1 6.6 5.9 Capital expenditures.... 3.3 10.4 12.8 11.8 12.0 29.1 4.0 5.4 Interest expense, net... 6.7 31.2 33.4 31.0 28.8 31.4 6.8 15.5 Ratio of earnings to fixed charges(5)....... 1.4x 2.4x 2.5x 2.3x 1.8x 2.2x 1.8x -- EBITDA(6)............... $ 13.7 $ 99.0 $113.1 $ 98.3 $ 80.2 $ 96.1 $ 19.8 $ 2.9 Adjusted EBITDA(7)...... 14.6 101.2 122.8 85.0 86.8 103.1 20.4 22.7 AS OF ---------------------------------------------------------------- NOV. 30, NOV. 30, NOV. 30, DEC. 1, NOV. 30, MAR. 2, MAR. 1, 1993 1994 1995 1996 1997 1997 1998 -------- -------- -------- ------- -------- ------- ------- BALANCE SHEET DATA: Total assets..................... $823.1 $810.6 $776.2 $739.9 $721.1 $715.5 $750.7 Long-term obligations............ 384.5 329.5 269.4 269.5 330.0 356.4 705.3 Total debt....................... 406.2 349.9 286.9 288.1 330.0 356.5 709.0 Stockholders' equity............. 284.3 322.2 330.9 293.0 205.1 194.3 (127.8)
28 NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA (1) During 1993 and in February 1997, Parent recorded an extraordinary loss of $2.9 million and $2.0 million, respectively, net of an income tax benefit of $1.5 million and $1.4 million, respectively, representing the remaining unamortized debt issuance costs related to long-term obligations repaid as a result of refinancing transactions in such years. In December 1997, the Parent recorded an extraordinary loss of $14.5 million, net of an income tax benefit of $9.6 million, related to the Tender Offer premium and consent fees and the write-off of unamortized debt issuance costs arising from the Transactions. (2) On November 20, 1997 the EITF reached a final consensus that business process reengineering costs incurred in connection with an overall information technology transformation project should be expensed as incurred (EITF-97-13). Previously capitalized business process reengineering costs were required to be identified and written-off as a cumulative effect of a change in accounting principle. The Company adopted EITF-97-13 which resulted in the Company recording a loss of $4.3 million, net of income tax benefits of $2.9 million during the fourth quarter of fiscal 1997. (3) On January 15, 1997, Parent completed the Samuel Lawrence Divestiture, which resulted in an aggregate book loss of $17.6 million, which was recorded in the fiscal year ended December 1, 1996. The loss is comprised of a loss on net assets held for sale of $11.8 million and income tax expense of $5.8 million arising from the tax gain on the transaction. (4) Operating income is calculated by adding interest expense, net to net sales less costs and expenses. (5) For purposes of calculating the ratio of earnings to fixed charges, earnings represent income (loss) before income tax, extraordinary items and cumulative effect of change in accounting principle, plus fixed charges. Fixed charges consist of interest expense, net, including amortization of discount and financing costs and the portion of operating rental expense which management believes is representative of the interest component of rent expense. Earnings for the quarter ended March 1, 1998 were insufficient to cover fixed charges by $18.5 million. (6) EBITDA is calculated as described in footnote (6) below. (7) Adjusted EBITDA is calculated by adding to or deducting from EBITDA (as described below) certain items of income and expense consisting of: (i) discontinued stock-based compensation plans, (ii) executive severance and transition costs, (iii) loss on write-off of Montgomery Ward accounts receivable and related factoring expense incurred in connection with bankruptcy of Montgomery Ward, (iv) operating results of the divested South Brunswick pad manufacturing plant for the year ended November 30, 1997 and three months ended March 2, 1997, (v) any expenses related to addressing the Company's "Year 2000" information systems issue and EITF 97-13 reengineering efforts and (vi) non-recurring expenses related to the Company's Recapitalization. EBITDA is calculated by adding interest expense, net and depreciation and amortization of intangibles to income (loss) before income tax, extraordinary items and cumulative effect of change in accounting principle. EBITDA is a widely accepted financial indicator of a company's ability to service and incur debt. EBITDA does not represent net income or cash flows from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. Adjusted EBITDA is presented because it conforms to the definition of "Consolidated EBITDA" in the Notes Indenture except for the exclusion of the Bain management fee for the three months ended March 1, 1998 and the divested South Brunswick pad manufacturing plant operating results for the year ended November 30, 1997 and the three months ended March 2, 1997 (see "Description of Exchange Notes" and "Certain Definitions" within such section). These two items are not included in the Indenture definition of "Consolidated EBITDA"; however, the Company believes that the adjustment for these items in "Adjusted EBITDA" is appropriate for such periods in order to provide an appropriate analysis of recent historical results. Parent's measure of EBITDA and Adjusted EBITDA may not be comparable to those reported by other companies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". The following is a reconciliation of EBITDA to Adjusted EBITDA:
TWO TEN THREE MONTHS MONTHS MONTHS FISCAL YEAR ENDED ENDED ENDED --------------------------- ------------- JAN. 31, NOV. 30, MAR 2, MAR 1, 1993 1993 1994 1995 1996 1997 1997 1998 -------- -------- ------ ------ ----- ------ ------ ------ (DOLLARS IN MILLIONS) EBITDA.................. $13.7 $ 99.0 $113.1 $ 98.3 $80.2 $ 96.1 $19.8 $ 2.9 ----- ------ ------ ------ ----- ------ ----- ----- Adjustments: South Brunswick pad manufacturing plant... -- -- -- -- -- 0.4 0.3 -- Stock-based compensation.......... 0.9 2.2 9.7 (13.3) 4.7 1.6 0.3 -- Executive severance and transition............ -- -- -- -- 1.9 -- -- -- Recapitalization non- recurring expenses.... -- -- -- -- -- -- -- 18.8 Bain management fee.... -- -- -- -- -- -- -- 0.4 Montgomery Ward bad debt and factoring losses................ -- -- -- -- -- 4.0 -- -- EITF 97-13 reengineering efforts............... -- -- -- -- -- 1.0 -- 0.6 ----- ------ ------ ------ ----- ------ ----- ----- Total adjustments..... 0.9 2.2 9.7 (13.3) 6.6 7.0 0.6 19.8 ----- ------ ------ ------ ----- ------ ----- ----- Adjusted EBITDA......... $14.6 $101.2 $122.8 $ 85.0 $86.8 $103.1 $20.4 $22.7 ===== ====== ====== ====== ===== ====== ===== =====
29 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA The Unaudited Pro Forma Condensed Consolidated Financial Data are based on the historical financial statements of Parent and the adjustments described in the accompanying notes. Since Parent is a holding company with no operations other than those of Issuer, and its subsidiaries, the consolidated financial statements represent the results of operations of Issuer. However, interest expense on approximately $27.2 million of Parent debt is excluded from Issuer's pro forma and historical results of operations. The following Unaudited Pro Forma Condensed Consolidated Statements of Income for the year ended November 30, 1997 and the three months ended March 1, 1998 give effect to the Divestitures and the Transactions as if they each had occurred on December 2, 1996. The Unaudited Pro Forma Condensed Consolidated Statements of Income do not (a) purport to represent what the Issuer's results of operations actually would have been if the Divestitures and the Transactions had occurred as of the date indicated or what such results will be for any future periods or (b) reflect the non-recurring charges, which were recorded during the three months ended March 1, 1998, of approximately: (i) $3.4 million related to a special bonus to certain members of the Issuer's management in connection with the Transactions of which $3.2 million was paid at Closing; (ii) $14.9 million related to deferred compensation agreements and accelerated vesting and cash out of stock options and restricted stock as a result of the Transactions; (iii) $0.5 million of Seller Expenses of Parent or (iv) the $14.5 million after-tax extraordinary loss of Parent related to the refinancing of the Old Credit Agreement and the redemption of the Parent Notes in connection with the Tender Offer and Consent Solicitation. The Unaudited Pro Forma Condensed Consolidated Financial Data are based upon assumptions that the Issuer believes are reasonable and should be read in conjunction with the Consolidated Financial Statements and the Condensed Consolidated Financial Statements of Parent and the accompanying notes thereto included elsewhere in this Prospectus. 30 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME YEAR ENDED NOVEMBER 30, 1997 (DOLLARS IN THOUSANDS)
ADJUSTMENTS PARENT DIVESTITURES ADJUSTED FOR THE ISSUER HISTORICAL ADJUSTMENTS HISTORICAL TRANSACTIONS PRO FORMA ---------- ------------ ---------- ------------ --------- Net sales............... $804,834 $(5,331)(1) $799,503 $ -- $799,503 -------- ------- -------- -------- -------- Costs and expenses: Cost of goods sold..... 455,905 (5,221)(1)(2) 450,684 -- 450,684 Selling, general and administrative........ 262,023 (574)(1) 261,449 2,000 (3) 263,449 Stock based compensation.......... 1,635 -- 1,635 -- 1,635 Amortization of intangibles........... 13,264 -- 13,264 -- 13,264 Interest expense, net.. 31,396 -- 31,396 32,580 (5) 63,976 -------- ------- -------- -------- -------- Total costs and expenses.............. 764,223 (5,795) 758,428 34,580 793,008 Income (loss) before income taxes, extraordinary item and cumulative effect of change in accounting principle............. 40,611 464 41,075 (34,580) 6,495 Income tax (benefit) expense............... 22,509 260 (1) 22,769 (14,865)(6) 7,904 -------- ------- -------- -------- -------- Income (loss) before extraordinary item and cumulative effect of change in accounting principle............. $ 18,102 $ 204 $ 18,306 $(19,715) $ (1,409) ======== ======= ======== ======== ======== OTHER DATA: Ratio of earnings to fixed charges(7).................................. 1.1x Adjusted EBITDA(8)..................................................... $103,095 Depreciation........................................................... 10,731 Capital expenditures................................................... 29,124 Ratio of Adjusted EBITDA to cash interest expense...................................................... 2.0x Ratio of Adjusted EBITDA to total interest expense, net................................................. 1.6x
31 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME THREE MONTHS ENDED MARCH 1, 1998 (DOLLARS IN THOUSANDS)
ADJUSTMENTS PARENT DIVESTITURE ADJUSTED FOR THE ISSUER HISTORICAL ADJUSTMENTS HISTORICAL TRANSACTIONS PRO FORMA ---------- ----------- ---------- ------------ --------- Net sales............... $209,259 $ -- $209,259 $ -- $209,259 -------- ----- -------- ------- -------- Costs and expenses: Cost of goods sold..... 121,484 -- 121,484 -- 121,484 Selling, general and administrative........ 87,597 -- 87,597 55 (3) 68,825 (18,827)(4) Amortization of intangibles........... 3,162 -- 3,162 -- 3,162 Interest expense, net.. 15,528 -- 15,528 912 (5) 16,440 -------- ----- -------- ------- -------- Total costs and expenses.............. 227,771 -- 227,771 (17,860) 209,911 Income (loss) before income taxes and extraordinary item.... (18,512) -- (18,512) 17,860 (652) Income tax (benefit) expense............... (747) -- (747) 1,751(6) 1,004 -------- ----- -------- ------- -------- Income (loss) before extraordinary item.... $(17,765) $ -- $(17,765) $16,109 $ (1,656) ======== ===== ======== ======= ======== OTHER DATA: Ratio of earnings to fixed charges(7)................................. 1.0x Adjusted EBITDA(8).................................................... $ 22,748 Depreciation.......................................................... 2,711 Capital expenditures.................................................. 5,400 Ratio of Adjusted EBITDA to cash interest expense..................................................... 1.7x Ratio of Adjusted EBITDA to total interest expense, net................................................ 1.4x
32 NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME YEAR ENDED NOVEMBER 30, 1997 AND THREE MONTHS ENDED MARCH 1, 1998 (DOLLARS IN THOUSANDS) (1) Reflects exclusion of net sales, cost of goods sold, selling, general and administrative expenses and income tax expense related to the Samuel Lawrence Divestiture in January 1997. (2) Reflects the net reduction in cost of goods sold of $464 as a result of the Company divesting the operations of the South Brunswick, New Jersey mattress pad plant (the "Brunswick Plant") in March 1997 and entering into a mattress pad supply agreement with the buyer of the Brunswick Plant. While in operation, the Brunswick Plant had no sales to third parties as it was a vertically integrated supply plant. Management has determined the net reduction in costs of goods sold for the periods presented by computing the difference between the costs incurred by the Brunswick Plant to make mattress pads at actual, historical production levels and the price the Issuer is now paying under terms of the long-term supply agreement entered into with the buyer. (3) Represents $2,000 annual management fee ($500 per quarter, of which only $445 was recorded during the three months ended March 1, 1998) to be paid to an affiliated party for consulting and financial services to be provided to the Issuer. See "Certain Relationship and Related Transactions--Management Services Agreement". (4) Represents reduction in selling, general and administrative expense for the three months ended March 1, 1998 as a result of the following non- recurring charges recorded in connection with the Transactions: (a) $3.4 million of a special bonus to certain members of the Issuer's management as compensation for completing the Transactions of which $3.2 was paid at Closing; (b) $13.3 million of accelerated vesting and cash out of stock options and restricted stock; (c) $1.6 million related to deferred compensation agreements entered into as non-recurring signing bonuses in connection with the Transactions and (d) $0.5 million of Seller Expenses. An additional $0.6 million of special bonus will be earned over the balance of fiscal 1998 and will be paid in early fiscal 1999. (5) The increase in pro forma interest expense as a result of the Transactions is as follows:
YEAR ENDED THREE MONTHS ENDED NOVEMBER 30, MARCH 1, 1997 1998(D) ------------ ------------------ Elimination of historical interest expense.. $(31,396) $(1,542)(d) -------- ------- Interest on new borrowings: Senior Credit Agreements(a)............... 39,749 1,960 Senior Subordinated Notes (9.875% rate)... 12,344 609 -------- ------- Cash interest expense................... 52,093 2,569 Senior Subordinated Discount Notes(b)....... 8,205 405 Amortization of deferred financing fees(c).. 3,678 181 -------- ------- Total interest from the debt requirements of the Transactions....... 63,976 3,155 -------- ------- Less: Interest expense on the Parent Junior Subordinated Notes and untendered Parent Notes(e)................................... -- (701) -------- ------- Net increase in interest expense........ $ 32,580 $ 912 ======== =======
-------- (a) Represents interest on each tranche of bank debt at the LIBOR rate option (5.94%) plus: (i) 2.25% for the Revolving Credit Facility ($10,000) and Term A tranche ($120,000); (ii) 2.50% for AXELs Series B ($125,000); (iii) 2.75% for AXELs Series C ($90,000); and (iv) 3.00% for AXELs Series D ($115,000), as well as an unused commitment fee of 0.50% on the unused portion of the Revolving Credit Facility ($90,000). (b) Senior Subordinated Discount Notes will be accreting at an annual rate of 10.875% for the first five years after date of issuance and will be cash pay thereafter. (c) Represents amortization expense utilizing a weighted average maturity on all borrowings of 8.32 years. (d) As the Transactions were effected on December 18, 1997, the pro forma interest expense calculation for the three months ended March 1, 1998 reflects the period from December 1, 1997 through December 18, 1997. Consequently, the $1,542 represents the reversal of actual historical interest expense during this period. (e) Historical interest expense relative to Parent's Junior Subordinated Notes and untendered Parent Notes has been excluded from pro forma interest expense of Issuer for the three months ended March 1, 1998 as such debt represents obligations of the Parent and not of the Issuer. 33 NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME YEAR ENDED NOVEMBER 30, 1997 AND THREE MONTHS ENDED MARCH 1, 1998 (DOLLARS IN THOUSANDS) (6) Represents the income tax adjustment required to result in a pro forma income tax provision based on: (a) the Issuer's pro forma pretax income plus nondeductible amortization of intangibles; and (b) the direct tax effects at an estimated effective tax rate of 40%. (7) For purposes of computing this ratio, earnings consist of income (loss) before income taxes, extraordinary item and cumulative effect of change in accounting principle, plus fixed charges. Fixed charges consist of total interest expense and the estimated interest portion of rent expense. (8) Adjusted EBITDA is defined herein as income (loss) before provision for income taxes, extraordinary item and cumulative effect of change in accounting principle, plus depreciation, amortization of intangibles and interest expense, net, adjusted for certain items of income and expense consisting of: (a) stock-based compensation related to Parent's Performance Share Plan and Restricted Stock Plan (both of which will not continue post-Closing) in the aggregate of $1,635 for the year ended November 30, 1997; (b) loss on write-off of Montgomery Ward accounts receivable and related factoring expense incurred in connection with bankruptcy of Montgomery Ward of $4,027 for the year ended November 30, 1997; (c) Bain management fee of $2,000 for the year ended November 30, 1997 and $500 for the three months ended March 1, 1998; (d) operating results and closure costs associated with the Divestitures for the year ended November 30, 1997; (e) non-recurring expenses incurred in connection with the Transactions (see Note (4) above) and (f) $967 and $587 of expenses for the year ended November 30, 1997 and three months ended March 1, 1998, respectively, related to business process reengineering costs as defined by EITF 97-13. See further explanation of these items in "Management's Discussion and Analysis of Financial Condition and Results of Operations". Adjusted EBITDA is presented because it conforms to the definition of "Consolidated EBITDA" in the Notes Indenture except for the exclusion of the Bain management fee and the operating results and closure costs associated with the Divestitures which are not included in the Indenture definition of "Consolidated EBITDA"; however, the Company believes that the adjustment for these items in "Adjusted EBITDA" is appropriate in the most recent periods shown in order to provide an appropriate analysis of recent historical results (see "Description of Exchange Notes" and "Certain Definitions" within such section) and the Issuer believes it is frequently used by security analysts in the evaluation of companies. However, Adjusted EBITDA should not be considered as an alternative to net income as a measure of operating results or to cash flows from operations as a measure of liquidity in accordance with GAAP. 34 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion should be read in conjunction with the "Selected Historical Consolidated Financial and Other Data", the Consolidated Financial Statements and accompanying notes thereto included elsewhere in this Prospectus. RESULTS OF OPERATIONS QUARTER ENDED MARCH 1, 1998 COMPARED WITH QUARTER ENDED MARCH 2, 1997 NET SALES. Net sales increased $40.4 million, or 23.9% for the quarter ended March 1, 1998, when compared to the quarter ended March 2, 1997. The increase is attributable to a $45.7 million increase in conventional bedding sales offset by a $5.3 million decrease in sales of wood bedroom furniture. Conventional bedding sales increased 27.9% over the prior year, driven by a 25.0% or $40.9 million increase in conventional bedding unit shipments and a 2.3% or $4.8 million increase in average unit selling price. These increases were due to sales growth in Posturepedic, Stearns & Foster and promotional product lines, in addition to continued positive results from successful strategic distribution initiatives that included sole-source, multi-year arrangements of varying lengths with several retailers. The increase in average unit selling price is primarily attributable to the introduction of new or re-engineered higher-end products. The decrease in sales of wood bedroom furniture, sold under the Samuel Lawrence brand, is due to the sale of this business on January 15, 1997. A description of the disposition of this business unit is provided in Note 14 to the consolidated financial statements contained in the Company's Form 10-K for the year ended November 30, 1997. COST OF GOODS SOLD. Cost of goods sold for the quarter, as a percentage of net sales, increased 0.8 percentage point to 58.1%. This increase is primarily attributable to the introduction of lower price point Posturepedic products, along with selective pricing initiatives partially offset by economies of scale from increased volume and the impact of lower sales of the lower margin wood bedroom furniture. SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general, and administrative expenses increased $32.0 million due to increased operating expenses of $13.5 million and compensation related costs associated with the Recapitalization of $18.5 million. Increased operating costs were primarily due to increases in marketing spending, $8.9 million, and delivery expenses, $2.5 million, as a result of increased sales volume. Marketing spending also was impacted by an increased spending rate for cooperative advertising and promotions partially offset by lower national advertising. Recapitalization costs of $18.5 million were primarily comprised of accelerated vesting of stock options and restricted stock and other incentive based compensation payments to employees in connection with the transaction. OPERATING INCOME. Operating income was a loss of $3.0 million for the quarter ended March 1, 1998, a decrease of $16.2 million, as compared to income of $13.2 million for the quarter ended March 2, 1997. EBITDA. EBITDA decreased $16.9 million or 85.4% to $2.9 million, or 1.4% of net sales, for the quarter ended March 1, 1998 versus $19.8 million, or 11.7% of net sales, for the quarter ended March 2, 1997. ADJUSTED EBITDA. Adjusted EBITDA increased $2.3 million or 11.3% to $22.7 million, or 10.8% of net sales, for the quarter ended March 1, 1998 versus $20.4 million, or 12.1% of net sales, for the quarter ended March 2, 1997. INTEREST EXPENSE. Interest expense, net of interest income, increased $8.7 million primarily as a result of significantly higher debt levels due to the Recapitalization and a higher interest rate spread. 35 INCOME TAX. The Company"s provision for income taxes decreased $3.9 million to a benefit of $0.7 million, due to an $18.5 million pretax loss as compared to $6.4 million pretax income, respectively for the quarter ended March 1, 1998 and March 2, 1997, partially offset by a lower effective tax rate. The effective income tax rate for 1998 is approximately 4.0% as compared to 49.8% in 1997. The relatively low effective tax rate is due to low full year projected pretax income resulting from increased leverage and compensation charges associated with the Recapitalization. EXTRAORDINARY ITEM. The Company recorded a $14.5 million charge, net of income tax benefit of $9.6 million, representing the writeoff of the remaining unamortized debt issue costs related to long-term obligations repaid in connection with the Recapitalization as well as consent fees and premiums paid related to the Tender Offer of the Parent Notes in connection with the Recapitalization. NET (LOSS) INCOME. For the reasons set forth above, the Company recorded a net loss of $32.2 million for the quarter ended March 1, 1998 versus net income of $1.2 million for the quarter ended March 2, 1997. NET CASH USED IN OPERATING ACTIVITIES. Net cash used in operating activities was $23.3 million for the quarter ended March 1, 1998, a decrease of $23.3 million as compared to the quarter ended March 2, 1997 of $0.0. The significant increase in net cash used is directly attributed to the Recapitalization. FISCAL 1997 COMPARED TO FISCAL 1996 NET SALES. Net sales for the fiscal 1997 were $804.8 million, an increase of $107.2 million, or 15.4% from fiscal 1996. This increase is attributable to a $168.3 million increase in conventional bedding sales offset by a $61.1 million decrease in sales of wood bedroom furniture. Conventional bedding sales increased 26.7% over the prior year, driven by a 24.1% increase in conventional bedding unit shipments and a 2.1% increase in average unit selling price. These increases were due to sales growth in the Posturepedic, Stearns & Foster and promotional product lines, in addition to successful strategic distribution initiatives that included sole-source, multi-year arrangements of varying lengths with several retailers. The increase in average unit selling price is primarily attributable to the introduction of new or reengineered higher-end products. The decrease in sales of wood bedroom furniture, sold under the Samuel Lawrence brand, is due to the sale of this business on January 15, 1997. A description of this business unit is provided in Note 14 to the Consolidated Financial Statements. COST OF GOODS SOLD. Cost of goods sold as a percentage of net sales decreased 0.3% to 56.6%. This improvement is primarily attributable to the impact of lower sales of the lower margin wood bedroom furniture, partially offset by an increase in bedding cost of goods sold. The increase in bedding cost of goods sold as a percentage of net sales is primarily attributable to the introduction of lower price point Posturepedic products, along with selective pricing initiatives, partially offset by economies of scale from increased sales volume. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by $45.3 million, and increased as a percent of net sales from 31.1% to 32.6%. This increase was primarily attributable to increases in bedding marketing spending of $35.1 million, delivery expenses of $5.7 million and incentive compensation of $3.5 million. Increased marketing spending was due to increased sales volume, along with an increased spending rate for cooperative advertising and promotions. The increase in delivery expense was due to the increase in sales volume. The Company also experienced a $4.9 million increase in bad debt and other financing expenses, of which $4.0 million related to the bankruptcy filing of Montgomery Ward. OPERATING INCOME. Operating income was $72.0 million for fiscal 1997, an increase of $18.4 million or 34.4% over fiscal 1996. EBITDA. EBITDA increased $15.9 million or 19.9%, to $96.1 million, or 11.9% of net sales, for fiscal 1997 versus $80.2 million, or 11.5% of net sales, for fiscal 1996. 36 ADJUSTED EBITDA. Adjusted EBITDA increased $16.3 million or 18.7% to $103.1 million, or 12.8% of net sales, for fiscal 1997 versus $86.8 million, or 12.4% of net sales, for fiscal 1996. INTEREST EXPENSE. Interest expense, net for fiscal 1997 increased $2.6 million primarily as a result of increased average debt levels resulting from the February 1997 dividend and increased rate related to the February 1997 restructuring of the Parent Notes. INCOME TAXES. The Company's effective income tax rates for fiscal 1997 and 1996 differ from the Federal statutory rate because of the application of purchase accounting, the effect of certain foreign tax rate differentials and state and local income taxes. The Company's effective tax rate for fiscal 1997 was approximately 55.4% compared to 102.0% for fiscal 1996. The higher effective tax rate for fiscal 1996 was due primarily to taxes arising from the Samuel Lawrence Divestiture and the impact of the permanent differences related to the 1993 Acquisition. See Note 6 to the Consolidated Financial Statements. EXTRAORDINARY ITEM. The Company recorded a $2.0 million charge, net of income tax benefit of $1.4 million, representing the write-off of the remaining unamortized debt issuance costs related to long-term obligations repaid as a result of the February 25, 1997 refinancing. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY. During the fourth quarter of fiscal 1997, the Company changed its accounting policy to comply with EITF 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reengineering and Information Technology Transformation," which resulted in a loss of $4.3 million, net of income tax of $2.9 million, representing the write-off of previously capitalized costs primarily related to the Company's new Business Systems project. All business process reengineering costs subsequent to August 31, 1997 have been expensed and totaled $1.0 million for the fourth quarter of fiscal 1997. NET INCOME (LOSS). For the reasons set forth above, net income was $11.7 million for fiscal 1997 versus a loss of $0.5 million for fiscal 1996. NET CASH PROVIDED BY OPERATING ACTIVITIES. Net cash provided by operating activities was $42.0 million for fiscal 1997, a decrease of $2.4 million, or 5.4% versus fiscal 1996. FISCAL 1996 COMPARED WITH FISCAL 1995 NET SALES. Net sales for fiscal 1996 were $697.6 million, an increase of $43.7 million, or 6.7%, from fiscal 1995. This increase was primarily attributable to a $37.0 million increase in conventional bedding sales and a $10.0 million increase in wood bedroom furniture sales. These increases were partially offset by the elimination of sleep sofa sales as a result of the closing of this business unit in March 1995. The strong bedding sales performance represents an 8.2%, or $48.6 million, increase in conventional bedding unit shipments, offset partially by a 1.8%, or $11.6 million, decrease in the average unit selling price. Increased unit volume was attributable to increased distribution and same store sales of Stearns & Foster luxury bedding, along with incremental placements of new Sealy Posturepedic products. The decrease in average unit selling price was primarily attributable to pricing initiatives and increased volume of lower priced Sealy Posturepedic products. Sales of wood bedroom furniture increased due to increased product distribution and same store sales, primarily due to favorable results from new furniture collections. COST OF GOODS SOLD. Cost of goods sold was $397.3 million for fiscal 1996, compared to $362.4 million for fiscal 1995, and increased from 55.4% to 56.9% of net sales. This increase was primarily attributable to the previously mentioned decrease in average unit selling price, the start-up costs associated with the insulator pad facility that was subsequently sold and inflationary bedding raw material increases. 37 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were flat versus the prior year, but decreased as a percent of net sales from 33.1% to 31.1%. Increased operating expenses of $16.8 million were offset by a decrease in marketing spending of $14.1 million and a prior year $2.7 million charge associated with closing the sleep sofa business. The increase in operating expenses was due primarily to increases in incentive bonuses and administrative and sales salaries. Additionally, the Company incurred executive severance and transition expenses of $1.9 million. Marketing spending declined from $117.8 million in fiscal 1995 to $103.7 million in fiscal 1996 as a result of adjustments in the Company's marketing strategies. LOSS ON NET ASSETS HELD FOR SALE. Loss on net assets held for sale of $11.8 million relates to the Samuel Lawrence Divestiture, and is comprised of excess of net assets sold over the proceeds received, as well as transaction costs related to the sale. See Note 14 to Consolidated Financial Statements. STOCK BASED COMPENSATION. The Company recorded a non-cash charge of $4.5 million, representing final year vesting in the Company's Performance Share Plan (the "Plan"). During fiscal 1995, the Company recorded a non-cash credit of $13.3 million for the estimated reduction in the value of the benefits issuable under the Plan. See Note 10 to Consolidated Financial Statements. OPERATING INCOME. Operating income was $53.6 million for fiscal 1996, a decrease of $20.4 million, or 27.6%, versus fiscal 1995. EBITDA. EBITDA decreased $18.0 million, or 18.4%, to $80.2 million, or 11.5% of net sales, for fiscal 1996 versus $98.2 million, or 15.0% of net sales, for fiscal 1995. ADJUSTED EBITDA. Adjusted EBITDA increased $1.8 million, or 2.1%, to $86.8 million, or 12.4% of net sales, for fiscal 1996 versus $85.0 million, or 13.0% of net sales, for fiscal 1995. INTEREST EXPENSE. Interest expense, net for fiscal 1996 decreased $2.2 million primarily due to a $27.8 million decrease in average outstanding debt, along with lower debt issuance cost amortization. INCOME TAXES. The Company's effective income tax rates for fiscal 1996 and 1995 differ from the Federal statutory rate because of the application of purchase accounting, the effect of certain foreign tax rate differentials and state and local income taxes. The Company's effective tax rate for fiscal 1996 was approximately 102.0% compared to 54.8% for fiscal 1995. The higher effective tax rate for fiscal 1996 was due primarily to taxes arising from the Samuel Lawrence Divestiture and the impact of permanent differences related to the 1993 Acquisition. See Note 6 to the Consolidated Financial Statements. NET INCOME (LOSS). For the reasons set forth above, net income for fiscal 1996 declined $20.0 million to a loss of $0.5 million. NET CASH PROVIDED BY OPERATING ACTIVITIES. Net cash provided by operating activities was $44.4 million for fiscal 1996, a decrease of $18.9 million, or 29.9%, versus fiscal 1995. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of funds are cash flows from operations and borrowings under its Revolving Credit Facility. The Company's principal use of funds consists of payments of principal and interest on its Senior Credit Agreements, capital expenditures and interest payments on its outstanding Notes. Capital expenditures totaled $5.4 million for the quarter ended March 1, 1998 as compared to $4.0 million for the quarter ended March 2, 1997. Capital expenditures totaled $29.1 million and $12.0 million during fiscal 1997 and 1996, respectively. The increase in capital spending in fiscal 1997 versus fiscal 1996 and for the quarter ended March 1, 1998 versus the quarter ended March 2, 1997 was primarily attributed to the Company's upgrade of its computer system. Management believes that annual capital expenditure limitations in its current debt agreements will not significantly inhibit the Company from meeting its ongoing capital needs. However, the Company is currently reviewing financing alternatives with respect to its property purchase and corporate 38 headquarters construction in connection with its relocation to Archdale, North Carolina and the ultimate financing may require an amendment to current year capital expenditure limitations. See "'Business--Properties." The projected full year capital expenditures for fiscal 1998 are $35.0 million. Additionally, the Company estimates total costs associated with this relocation will result in a pretax charge of approximately $8.5 million which will be recognized primarily in fiscal 1998 with the balance in fiscal 1999. At March 1, 1998, the Company had approximately $59.0 million available under its Revolving Credit Facility with Letters of Credit issued totaling approximately $12.0 million. The Company's net weighted average borrowing cost was 8.7% for the quarter ended March 1, 1998 and 9.0% for fiscal 1997 and fiscal 1996, respectively. The Old Credit Agreement, the Parent Note Indentures, the Senior Credit Agreements and the Indentures contain certain negative and affirmative covenants including, but not limited to, requirements and restrictions relating to capital expenditures, dividends, working capital, net worth and other financial ratios. At November 30, 1997, the Company was in compliance with the financial covenants contained in the Old Credit Agreement and the Parent Note Indenture. See "Description of Exchange Notes" and "Description of Senior Credit Agreements". The Parent Notes are unsecured, subordinated obligations of Parent. Interest on the Parent Notes is payable in semi-annual installments, currently at the rate of 10 1/4% per annum (see below). The outstanding principal amount of the Parent Notes is payable on May 1, 2003. The Parent Notes may be redeemed at the option of the Company on or after May 1, 1998, under the conditions and at the redemption prices specified in the Parent Note Indenture. In March 1997, the Company divested the assets of its mattress insulator pad manufacturing operation in South Brunswick, New Jersey for approximately net book value. On February 25, 1997, the Company entered into the Old Credit Agreement with a majority of its then current group of senior lenders, which modified the terms of the prior credit agreement by increasing the amounts available under the revolving credit portion of the facility from $125.0 million to $275.0 million, and eliminating the term loan portion of such agreement, amending the pricing terms, certain covenants and other provisions and revising the composition of the lending group. The Old Credit Agreement was terminated upon consummation of the Transactions. On February 6, 1997, the board of directors of the Company authorized the payment of a dividend to all stockholders and holders of certain warrants of record as of February 27, 1997. The dividend, which was paid on February 28, 1997, amounted to approximately $99.8 million, or $3.31 per share, and was financed through borrowings under the Old Credit Agreement. On January 15, 1997, the Company sold its subsidiary that manufactured wood bedroom furniture under the Samuel Lawrence brand name. Gross proceeds from the Samuel Lawrence Divestiture amounted to $35.0 million, and the Company recorded a loss of $17.6 million in connection with such transaction. The loss is comprised of a loss on net assets held for sale of $11.8 million and income tax expense of $5.8 million arising from the tax gain on the transaction. See Note 14 of Notes to Consolidated Financial Statements. On November 18, 1997, Parent commenced an offer (the "Tender Offer") to purchase for cash up to all (but not less than a majority in principal amount outstanding) of its 10 1/4% Senior Subordinated Notes due 2003 (the "Old Notes") and a related solicitation (the "Consent Solicitation") of consents to modify certain terms of the indenture under which the Old Notes were issued. The purchase price paid in respect of validly tendered Old Notes was $1,057.03 per $1,000 of principal amount tendered and the payment with respect to the Consent Solicitation was $20 per $1,000 of principal amount tendered prior to the consent expiration date therefor. Old Notes in the aggregate principal amount of $197.8 million were tendered and accepted for payment and the related consents received. The Tender Offer was consummated concurrently with the Merger and a supplemental indenture with respect to the Old Notes took effect at such time. 39 On March 30, 1998, the Company announced a call for redemption of all of its remaining outstanding Parent Notes. The redemption price of 106.33%, plus accrued interest, or approximately $2.5 million, was paid on May 1, 1998 and interest ceased to accrue on the Notes. The Company financed the Merger, the Tender Offer and related Consent Solicitation and repaid borrowings under the Old Credit Agreement with the net proceeds of the Offerings, borrowings under the Senior Credit Agreements and the equity infusion of approximately $128.7 million from the New Investors. As a result of the Transactions, interest payments on the Notes and the Exchange Notes and interest and principal payments under the Senior Credit Agreements are one of the Company's primary uses of cash. The Notes and the Exchange Notes require semi-annual cash interest payments of approximately $6.2 million (at an interest rate on the Senior Subordinated Notes and Senior Subordinated Exchange Notes of 9.875%). Borrowings under the Senior Credit Agreements bear interest at floating rates and require interest payments on varying dates depending on the interest option selected by the Company. The Senior Credit Agreements consist of a $120.0 million Tranche A Term Facility, a $125.0 million AXELs Series B Facility, an $90.0 million AXELs Series C Facility, a $115.0 million AXELs Series D Facility and a $100.0 million Revolving Credit Facility. Such facilities will require aggregate annual principal amortization payments of $1.5 million, $11.5 million and $28.5 million over the first three years. Interest rates are variable and, based on current interest rates, pro forma annual interest expense under the Senior Credit Agreements is estimated to be $39.7 million. See "Description of Senior Credit Agreements". Management believes that the Company will have the necessary liquidity through cash flow from operations, and availability under the Revolving Credit Facility for the next several years to fund its expected capital expenditures, the estimated $8.5 million of headquarters relocation costs, obligations under its Senior Credit Agreement and subordinated note indentures, environmental liabilities, and for other needs required to manage and operate its business. The Company's ability to make scheduled payments of principal of, or to pay the interest or Liquidated Damages, if any, on, or to refinance, its indebtedness (including the Notes), or to fund planned capital expenditures will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. Based upon the current level of operations, management believes that cash flow from operations and available cash, together with available borrowings under the Senior Credit Agreements, will be adequate to meet the Company's future liquidity needs for at least the next several years. The Company will, however, need to refinance all or a portion of the principal of the Notes on or prior to maturity. There can be no assurance that the Company will be able to effect any such refinancing on commercially reasonable terms or at all. In addition, there can be no assurance that the Company's business will generate sufficient cash flow from operations, that anticipated revenue growth and operating improvements will be realized or that future borrowings will be available under the Senior Credit Agreements in an amount sufficient to enable the Company to service its indebtedness, including the Notes, or to fund its other liquidity needs. See "Risk Factors--Substantial Leverage". FOREIGN OPERATIONS AND EXPORT SALES The Company has three manufacturing facilities in Canada and one in Mexico. The Company's licensee for Mexico agreed to terminate its license, permitting Sealy to enter the market directly and commence production in May, 1996. The Company began marketing its Sealy brand in South Korea during 1995 upon expiration of its Korean license agreement. In addition, the Company has licensing agreements in Thailand, Japan, the United Kingdom, Australia, New Zealand, southern Africa, Israel and Jamaica. The Company is exploring additional international opportunities in the Pacific Rim, Latin America and Western Europe with test markets currently operating in Spain and Brazil. The Company does not derive a material portion of its sales or revenues from its foreign-owned operations or from customers in any other foreign country. See "Risk Factors--Risks Associated with International Operations". 40 INFLATION The Company maintains operations in Mexico which has experienced high inflation levels. Neither the operations of Mexico nor the effects of the inflation are material to the results of operations of the Company. NEW ACCOUNTING PRONOUNCEMENTS On November 20, 1997 the Emerging Issues Task Force (EITF) reached a final consensus that business process reengineering costs incurred in connection with an overall information technology transformation project should be expensed as incurred (EITF 97-13). The transition provisions require companies that had previously capitalized such business process reengineering costs to identify these costs and quantify the unamortized amounts remaining on the balance sheet as of the beginning of the quarter which includes November 20, 1997. These unamortized amounts are required to be written off as a cumulative effect of a change in accounting principle in such quarter. The Company has adopted EITF 97-13 resulting in a loss of $4.3 million, net of income tax benefit of $2.9 million, representing the cumulative write-off of previously capitalized costs as of August 31, 1997 primarily relating to the Company's new Business Systems project. All business process reengineering costs subsequent to August 31, 1997 have been expensed and totaled $1.0 million for the fourth quarter of fiscal 1997. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share. SFAS No. 128 supersedes APB Opinion No. 15, Earnings per Share ("Opinion No. 15"), and requires the calculation and dual presentation of basic and diluted earnings per share ("EPS"), replacing the measures of primary and fully- diluted EPS as reported under Opinion No. 15. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, earlier application is not permitted. Accordingly, EPS presented on the accompanying statements of income are calculated under the guidance of Opinion 15. Under SFAS No. 128, the basic and diluted EPS on net income for fiscal 1997 would have been $0.39 and $0.38, respectively. In June 1997, SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information", were issued. The Company plans to adopt these standards when required in fiscal 1999. SEASONALITY The Company has experienced in the past and will experience in the future quarterly variations in net sales and net income as a result of many factors, including product cycles of suppliers that are not controlled or influenced by the Company, product availability, supplier relationships, customer relationships, the level of selling, general and administrative expenses and the condition of the bedding industry in general. In the bedding supply industry, seasonality generally affects quarterly sales performance. Historically, the Company's quarterly sales are lowest in the first fiscal quarter and highest in the third fiscal quarter. CHANGE IN FISCAL YEAR A Form 8-K was filed October 11, 1995 reporting that the Board of Directors of Parent approved the change of the Company's fiscal year from one ending on November 30 in each year to a 52-53 week fiscal year. The first such fiscal year commenced on Friday, December 1, 1995 and ended on the 53rd Sunday thereafter or Sunday, December 1, 1996. Subsequent fiscal years will end on the Sunday nearest the last day of November. YEAR 2000 ISSUE The Company believes that the new Business Systems, including appropriate software, being installed both alongside and as part of an upgrade of its existing computer system will address the 41 dating system flaw inherent in most operating systems (the "Year 2000 Issue"). There can be no assurance, however, that the new Business Systems will be installed and fully operational at all locations and for all applications prior to the turn of the century, and management has therefore deemed it necessary to convert its current system to be Year 2000 compliant. The Company has conducted a comprehensive impact analysis to determine what computing platforms and date-aware functions with respect to its existing computer operating systems will be disrupted by the Year 2000 Issue. In January, 1998, the Company completed a prioritization of the impacted areas identified to date and commenced the detailed program code changes through a contracted third party vendor which has experience in Year 2000 conversions for the Company's existing system including the same release of such system. The Company is in the preliminary stages of assessment of its vendors and customers status with respect to the Year 2000 Issue. The required code changes, testing and implementation necessary to address the Year 2000 Issue is projected to be completed by May, 1999, and is expected to cost approximately $4.0 million. FORWARD LOOKING STATEMENTS This document contains forward-looking statements. Although the Company believes its plans are based upon reasonable assumptions as of the current date, it can give no assurances that such expectations can be attained. Factors that could cause actual results to differ materially from the Company's expectations include: general business and economic conditions, competitive factors, raw materials pricing, and fluctuations in demand. 42 BUSINESS Sealy Mattress Company, headquartered in Cleveland, Ohio, has been the leading conventional bedding manufacturer in North America for over two decades and the Sealy brand name has been in existence for over 100 years. The Company manufactures, distributes and sells a broad line of conventional bedding products, including mattresses and foundations, under the Sealy, Sealy Posturepedic, Stearns & Foster and recently introduced Sealy Correct Comfort and Sealy Posturepedic Crown Jewel brand names. The Company's branded merchandise accounted for approximately 99% of total net sales for the fiscal year ended November 30, 1997. Based on market growth estimates by the ISPA, the Company estimates it held a 22% share of the U.S. bedding market for 1997. The Company offers a complete line of conventional bedding options in the promotional, premium, ultra-premium and luxury categories, which sell at retail price points from under $200 to approximately $3,000 per queen-size set. For the fiscal year ended November 30, 1997, on a pro forma basis, the Company generated net sales and Adjusted EBITDA of $799.5 million and $103.1 million, respectively. INDUSTRY OVERVIEW The U.S. conventional bedding industry is mature and stable. For the year ended December 31, 1996, manufacturers and retailers generated revenue of $3.3 billion and $6.2 billion, respectively, according to ISPA. Over the last 20 years, sales have declined only once (1.9% in 1982) and the industry has grown on average 6.4% per year. Industry growth is driven primarily by: (i) population expansion, (ii) demographic shifts and (iii) manufacturer and retailer advertising and education emphasizing larger-size, higher quality beds. Because consumers shop for bedding infrequently and often have limited specific product knowledge, they typically rely on the retail salesperson in the purchase decision process. Management believes that those manufacturers best able to meet the retailers' needs--including differentiated, brand name products, retail salesforce training in product specifications and merchandising and logistics support--should continue to gain market share. From 1989 to 1996, the combined market share of the top four manufacturers has steadily increased from 48% to 59%. INDUSTRY GROWTH. The market for conventional bedding is growing, both in sales and in average unit selling price ("AUSP"). The industry's revenue growth rate has averaged approximately 6.4% per year since 1976. The growth in unit sales is due to population growth, as well as trends toward more beds per home and more frequent replacement of bedding products. The growth in AUSP is a result of a demographic shift to older consumers who spend more per unit on average than younger consumers, an increase in the level of education among retailers relating to product quality and merchandising and continued growth in industry advertising relating to the health benefits of more supportive bedding. INDUSTRY STABILITY. The bedding industry has been relatively insulated from cyclical swings, experiencing only a single year of sales decline in the past 20 years, when, in 1982, sales declined approximately 1.9%. The industry has remained stable largely as a result of the following characteristics: (i) low manufacturer and retail inventory levels mitigate the swings experienced by the furniture and appliance industries, since mattresses are largely manufactured to order; (ii) a significant portion of costs, especially cost of goods sold expenses, are variable, which limits the impact of an economic downturn on margins and, accordingly, allows industry participants to continue to invest in necessary sales promotion and research and development; (iii) major raw materials costs for the Company's mattresses have historically cycled with the economy, thereby limiting potential margin contraction; (iv) replacement sales, which account for approximately 70% of conventional bedding sales, contribute to the market's relative stability as the average household purchases a new mattress set every seven to eight years; and (v) bedding manufacturers fund a substantial portion of consumer promotional expenses ("cooperative advertising") which invites retailers to continue to advertise bedding products 43 even in a weak economic environment. The conventional bedding industry's stability is evidenced by its average annual 2% to 3% growth throughout the 1989-1992 recession during which the home furnishings industry as a whole experienced a decline in sales. RETAILERS INCREASINGLY DEMAND BRANDED, BROAD, AND DIFFERENTIATED PRODUCT LINE. Retailers have recognized that a broad product line with identifiable value gradations is an effective way to market bedding to consumers. According to market surveys, most consumer bedding purchases are made within one month of the customer's initial decision to buy a new mattress and customers are most likely to buy at the first or second store shopped. As such, a strong brand name and favorable opinion of the product's quality by the retail floor sales staff are crucial to the sales process. As a result, manufacturers and retailers typically focus on popular price points with most major manufacturers producing a flagship mattress at a retail price of $399 per queen-size set (which includes both the mattress and the foundation) in an effort to generate store traffic. However, once consumers are in the store, retailers are often able to motivate consumers to make purchases at retail price points of $599, $699, $799 and above for a queen-size set. This strategy requires a manufacturer to supply retailers with a broad product line which in turn results in increased sales of incrementally higher margin products for retailers and increased market share for the manufacturer. COMPANY STRENGTHS AND BUSINESS STRATEGY The Company's main objective is to grow sales and market share by maximizing its share of the retailers' floor space while managing costs. The key elements of the Company's strategy are as follows: LEVERAGE MARKET LEADERSHIP POSITION AND HIGH BRAND AWARENESS. The Company is the largest manufacturer of conventional bedding products in the United States, a position it has held for more than two decades. Based on 1997 industry growth estimated by the ISPA, management estimates that the Company held a 22% share of the U.S. market, approximately 1.3 times that of its next largest competitor. Strong relative market share, coupled with numerous strong brands, including Sealy, Sealy Posturepedic and Stearns & Foster, provide the Company with significant marketing strength relative to its competitors, who primarily offer only one brand to retailers. Brand recognition is critical in the bedding industry, where strong brand names help define consumer preference and drive retail floor space allocations. ENHANCE POSITION AS LEADING SUPPLIER TO THE BEDDING INDUSTRY. The Company is uniquely positioned to benefit from current industry trends, including the consolidation of manufacturers and the increase in sole-source vendor arrangements. Management believes that its: (i) broad product offering, (ii) product design leadership, (iii) national manufacturing and distribution and (iv) commitment to retailer education and training all provide support to its existing dealer network while helping to attract new accounts. Such strong dealer relationships should result in sales growth through increased floor space allocation, superior product positioning and enhanced commitment by retail salesforces. . BROAD PRODUCT OFFERING. Management believes that the Company currently offers the most complete line of conventional bedding products in the industry, enabling retailers to offer consumers a full range of bedding alternatives from a single source. The Company's product line ranges from higher-margin, higher-priced mattresses, sold under the Sealy Posturepedic, Sealy Posturepedic Crown Jewel, Sealy Correct Comfort and Stearns & Foster names, to lower-priced promotional, private label and contract bedding products. The consistently advertised, lower-priced product line is instrumental in attracting customers, thereby offering retailers the in-store opportunity to promote higher-priced products with incrementally higher margins. In addition, the Company's broad product line has enabled it to secure sole-source, multi-year arrangements with several retailers, including a significant number of those in the high- growth, specialty channel, such as Mattress Discounters, Mattress Firm and Bedding Experts. 44 . PRODUCT DESIGN LEADERSHIP. Since December 1, 1994 the Company has, on average, invested approximately 0.75% of its net sales in research and development, a rate which management believes to be in excess of twice that of its next largest competitor, to create and commercialize innovative products that broaden the Company's product lines and differentiate its products from those of its competitors. Management believes that this investment in product enhancements and new products, such as Sealy Correct Comfort, the Company's recently introduced, individually-wrapped coil product, allows the Company to claim additional floor space and compete effectively for sole-source vendor positions. A majority of the Company's net sales for the fiscal year ended November 30, 1997 were from products introduced or reengineered in the prior two years. . NATIONAL MANUFACTURING AND DISTRIBUTION. In surveys, retailers have stated that delivery times and product quality are among the most important criteria used to evaluate manufacturers. The Company believes that its current structure and operating strategy directly address these needs. The Company is one of only two national manufacturers operating as a single company rather than as a group of independent licensees. Because it owns 21 manufacturing and distribution facilities strategically located throughout the United States, the Company can quickly respond to retailers' logistical and product design requirements. Such just-in-time deliveries enable retailers to minimize inventory carrying costs and meet the growing demand of consumers for product variety and shortened delivery times. Additionally, the Company is the only national manufacturer to have taken advantage of vertical integration in a majority of its product lines. Vertically integrated manufacturing permits the Company to safeguard proprietary technology and new product design while better controlling costs. . COMMITMENT TO RETAILER EDUCATION AND SUPPORT. The Company assists its retailers in re-merchandising their showrooms and actively marketing more profitable lines of bedding through ongoing investment in retailer relationships. The Company supports its retailers by providing: (i) cooperative advertising dollars and creative assistance, (ii) ongoing retail sales force training focused on product education and merchandising instruction, (iii) customized product lines which allow retailers to differentiate their products from those of their competitors and (iv) direct mail campaigns. Management believes that retail support serves to educate consumers about the benefits of higher-end models and therefore encourages additional sales at higher price points. INCREASE OPERATIONAL EFFICIENCIES AND LEVERAGE INFORMATION TECHNOLOGY. By virtue of its size and leadership position in the bedding industry, the Company benefits from significant operational efficiencies. The Company is able to capture economies of scale in research and development, advertising and raw material purchases. Management believes that several opportunities remain to leverage the current infrastructure to realize meaningful cost reductions, including greater utilization of existing facilities, improved scrap management and improved distribution and transportation. Additionally, the Company is in the process of an MIS upgrade to improve manufacturing operations and profitability analysis. LEVERAGE THE SEALY NAME THROUGH LICENSEES. Significant opportunities exist to leverage the strong Sealy brand names in bedding-related product categories through strategic licensing agreements rather than through direct manufacturing. In the past year, the Company has entered into a number of licensing arrangements with various manufacturers, including: (i) Klaussner Furniture Industries, one of the largest upholstered furniture manufacturers in the United States, for the manufacture of upholstered furniture under the Sealy Furniture brand name; (ii) Pacific Coast Feather Company for the manufacture and sale of pillows, comforters and mattress pads under the Sealy brand name; and (iii) Dorel Industries for the manufacture and sale of futons under the Sealy Furniture brand name. Management believes that these licensing agreements broaden consumer recognition of the Sealy name while generating significant income for the Company. 45 MAINTAIN CORE FOCUS ON CONVENTIONAL BEDDING. The Company's management team is committed to focusing on the core bedding business, which includes manufacturing, distributing and selling a broad line of mattresses and foundations, while continuing to leverage the Sealy name through licensing arrangements. To this end, the Company completed the sale of its Woodstuff Manufacturing, Inc. subsidiary which manufactured wood bedroom furniture under the Samuel Lawrence brand name in January 1997. Management believes that maintaining its manufacturing focus on conventional bedding is the best way to maximize profitability. PURSUE INTERNATIONAL GROWTH OPPORTUNITIES. The Company is currently implementing a disciplined and focused international strategy based on leveraging its strong reputation and brand recognition in the United States to build solid international franchises. The Company currently manufactures products in Canada and Mexico, distributes products directly in Korea and has licensing agreements in Thailand, Japan, the United Kingdom, Australia, New Zealand, southern Africa, Israel and Jamaica. The Company is exploring additional international opportunities in the Pacific Rim, Latin America and Western Europe, with test markets currently operating in Spain and Brazil. The Company plans to continue to operate via licensing and/or distribution agreements in new international markets until sales reach a level that warrants the building or purchase of a Company-operated facility. PURSUE ATTRACTIVE ACQUISITION OPPORTUNITIES. The Company will evaluate potential acquisition and joint venture opportunities that should help to support and strengthen its core business. Such acquisitions should allow the Company to capitalize on its existing marketing, manufacturing and distribution capabilities and to expand its presence in selected geographical regions. From time to time the Company reviews potential acquisition candidates, but it is not currently in discussions with respect to any material acquisition. CAPITALIZE ON STRONG MANAGEMENT TEAM. Led by Chief Executive Officer Ron Jones, who joined the Company in early 1996, the Company has assembled one of the strongest management teams in the bedding industry. The Company's senior management team has approximately 150 years of experience in the bedding and home furnishings industries and has made a significant equity interest in Sealy Corporation at the close of the Transactions. This management team has instituted a number of strategic initiatives, including: (i) divestiture of non-core operations and renewed focus on the Company's core bedding business, (ii) improved long-term strategic and product planning which has resulted in a new product rollout schedule through 1999, (iii) increased focus on retailer relationships, (iv) a shift to a more balanced marketing program that includes significant cooperative and focused national advertising and (v) the implementation of a disciplined international strategy. The execution of these and other initiatives has resulted in significant improvements in the financial and market position of the Company. Since December 1995, the Company has increased its market share from 18% to an estimated 22% in 1997. Additionally, on a pro forma basis, net sales and Adjusted EBITDA have increased 26.7% and 18.7%, respectively, for the fiscal year ended November 30, 1997 versus fiscal 1996. PRODUCT OFFERINGS The Company's broad proprietary product line allows retailers to streamline purchasing and provide consumers with a range of brand names, gradations of quality and corresponding price points. As a result, the Company has been able to expand its overall market share and to increase its penetration with sole- source or Sealy-predominant accounts. The Company's major branded product lines include Sealy Posturepedic, Sealy Posturepedic Crown Jewel, Stearns & Foster, Sealy Correct Comfort and Sealy, which collectively represented approximately 99% of the Company's sales for the fiscal year ended November 30, 1997. Together with its private label products, these brands allow the Company to offer a full range of products to retailers and provide retail sales associates with a platform from which to upgrade consumer purchasing decisions within the Company's product lines. The Company's queen-size sets range in price from under $200 for promotional bedding to approximately $3,000 for the highest priced Stearns & Foster product. 46 Sealy, Sealy Posturepedic and Stearns & Foster are among the strongest brand names of any bedding manufacturer in North America. According to a consumer attitude and brand perception study performed by Kaplan MRD, Inc., Sealy Posturepedic ranked first in value, construction, quality, durability, and popularity. In addition, according to a consumer survey performed by Home Furnishings News, Sealy, Sealy Posturepedic and Stearns & Foster ranked first, fourth and eighth, respectively, in brand recognition within the bedding category. Moreover, according to Home Furnishing Executive, the Stearns & Foster brand is recognized by consumers and retailers for industry excellence in overall product, dealer support and product delivery. The Company continually reaffirms its strong brand names through both national and regional advertising campaigns, point-of-sale promotional materials and sales associate training programs. The Company believes that in the competitive bedding industry, a strong brand name is paramount in the selling process, where the retail sales associate is an integral part of the sale and where consumers most often make purchases in the first or second store visited. SEALY POSTUREPEDIC. Sealy Posturepedic, the Company's flagship brand for over 40 years, is the largest selling mattress brand in North America and enjoys unaided brand awareness of 41%, nearly twice that of any other flagship brand. Perceived as the number one mattress for proper back support, the Sealy Posturepedic is offered at various retail price points from $399 to $1,299 per queen-size set. The Sealy Posturepedic features numerous proprietary components, including the PostureTech innerspring with the Sense & Respond system, the EdgeGuard and EverEdge edge support systems, and the PostureSteel and SteelSpan foundations. The EverEdge support system, a rigid foam frame that completely embraces and locks into the perimeter coils, provides a firmer seating edge and a more usable sleep surface. Management believes that the proprietary components provide the Sealy Posturepedic product line with a variety of advantages over competing products, including the Simmons BeautyRest(R). These advantages include: (i) coils that automatically adjust firmness to provide correct support, (ii) edge support systems that increase sleep surfaces by an average of 10% and (iii) foundations that are more durable. SEALY POSTUREPEDIC CROWN JEWEL. Sealy Posturepedic Crown Jewel, an extension of the Company's successful Sealy Posturepedic line, was introduced in January 1997. The Sealy Posturepedic Crown Jewel utilizes the PostureTech coil, SteelSpan foundation, EverEdge support system and Resilium cushioning material, which differentiate the Sealy Posturepedic Crown Jewel from competing products. The PostureTech coil with the patented Sense & Respond support system and the SteelSpan II foundation with specially engineered steel crossbeams combine to provide superior back support. Resilium cushioning material, a cotton-soft breathable synthetic fiber, retains its plumpness, shape and support far longer than traditional cushioning material. The Sealy Posturepedic Crown Jewel is offered at several retail price points from $1,199 to $1,999 per queen-size set. STEARNS & FOSTER. Known in the bedding industry for over 150 years and acquired by the Company in 1983, the Stearns & Foster product line consists of high quality, luxury mattresses. The Company realized that a significant market gap existed in the high-end product segment and therefore relaunched the brand in 1995 as a premium priced product line. Stearns & Foster net sales have grown in excess of 40% annually since the repositioning. Stearns & Foster products feature proprietary components, including the UltraEdge border and UltraSteel foundation, for superior comfort and back support. In addition, Stearns & Foster products are made with premium bedding upholstery; matching cloth handles, edge closures and foundation surface upholstery; brass-plated vents and corner guards; and all-steel foundation supports. In 1998, the Company plans to introduce new styles for its Stearns & Foster products to enhance further the product's aesthetics and to continue to differentiate the Stearns & Foster products from competing products. Stearns & Foster mattresses are offered at a wide variety of retail price points from $719 to approximately $3,000 per queen-size set. Management believes that Stearns & Foster products are among the most profitable mattress products offered by retailers. 47 SEALY CORRECT COMFORT. The Sealy Correct Comfort line was introduced in June 1997 as part of a bid to secure a single source contract with Mattress Discounters, one of the largest sleep shop chains in the United States. The Sealy Correct Comfort uses an individually wrapped coil and provides retailers and consumers with a direct Sealy alternative to the Simmons BeautyRest(R). In addition, the product line offers: (i) the Tru-Lok Stabilizer, a non-woven fabric that provides a more stable spring unit and prevents pinching of upholstery between the rows of coils, (ii) the Miracle Edge, which provides demonstrable edge support on all four sides and increases the sleep surface and (iii) a steel center rail in the foundation for increased durability, all of which differentiate the Sealy Correct Comfort from the Simmons BeautyRest(R). The Sealy Correct Comfort is a premium product with various retail price points ranging from $699 to $999 per queen-size set. SEALY PROMOTIONAL. Sealy promotional lines are value oriented introductory products that are offered at retail price points ranging from under $200 to $599 per queen-size set. In 1997, the Company repositioned its promotional products by creating three different promotional brands: Backsaver, Orthozone and Posture Premier, which replaced a number of discontinued promotional products. The new lines feature Sealy's 312 Bonnell innerspring at lower price points and its new high profile 336 Bonnell innerspring at higher price points. In addition, the Posture Premier utilizes the 520 PostureTech innerspring at its highest price point and is positioned as a "high-tech" promotional mattress. SEALY CONTRACT. The Sealy Contract division sells a wide range of quality bedding products to institutions in the hospitality, health care and military markets. Contract products are sold under both Posturepedic and non- Posturepedic labels, as well as some non-Sealy private labels. Contract products are sold through a network of independent, commissioned sales representatives who sell within a defined geographic region. While the largest segment of the contract business is hospitality, the fastest growing segment is the military, where the Company sells to military bases for use in sleeping quarters and for resale to military personnel. The Company's largest hospitality customers include Hyatt Hotels, Sheraton Hotels, Omni Hotels and Four Seasons Hotels. PRIVATE LABEL. Private label products are lower priced, private-branded products that are offered at a variety of price points as alternatives to branded merchandise. Sealy's private label products help position the Company as an ideal vendor for retailers looking to consolidate vendor structures. CUSTOMERS, SALES AND MARKETING CUSTOMERS. The Company's broad and stable customer base consists of over 7,000 retail outlets representing approximately 3,200 companies across all major distribution channels. The Company's key customers are: (i) major bedding chains including Mattress Discounters, Mattress Firm, and Bedding Experts; (ii) national furniture retailers including Haverty's; (iii) regional furniture stores including Art Van in Michigan, Kittle's in Indiana and Ohio, Louis Shanks and Finger's in Texas, Raymour/Flanigan in upstate New York, and Rooms To Go in the Southeast; (iv) national chains including Sears and J.C. Penney; (v) wholesale buying clubs including Costco; (vi) major department stores including Bloomingdale's, Macy's and Dillards; (vii) and contract hospitality customers including Sheraton Hotels and Four Seasons Hotels. The majority of the Company's sales are made to furniture stores, specialty sleep shops and department stores, which collectively represented 82% of the Company's 1997 domestic sales. Because of its strong brand names, national manufacturing and distribution and broad product line, the Company has been very successful in capitalizing on the trend of retailers to move toward sole-source vendors. Since the management transition in early 1996, the Company has secured sole-source supplier roles with several retailers, including Mattress Discounters, Mattress Firm and Bedding Experts. As one of only two companies that has national, company operated manufacturing and distribution capabilities, the Company is in a strong position to capture additional market share as a sole- source supplier to high-growth national chains. 48 The Company's sales, including recent market share gains, have been widely diversified across a broad customer base. The Company's five largest conventional bedding customers accounted for approximately 21% of the Company's net sales for the fiscal year ended November 30, 1997 and no single customer represented more than 6% of the Company's net sales for such period. While the composition of the five largest customers has varied over time, their percentage of net sales has remained relatively constant over the last several years. The Company also has an active customer base of smaller customers. These customers, composed primarily of family-owned furniture stores, provide Sealy's products exposure to smaller markets and local communities. SALES. Sealy employs a sales organization of approximately 200 people who sell the Company's products exclusively to authorized dealers of Sealy products. The Company's major points of distribution are furniture stores, specialty sleep shops and department stores. The Company's sales force is aided by a balanced advertising and marketing strategy that focuses both on retail relationships through the use of cooperative advertising programs and on brand awareness through focused national advertising campaigns. The Company believes that it provides the most extensive sales training program in the bedding industry through its internal program, the University of Sleep. Every member of the sales team, from Sales Representative to Vice President of Sales, attends the seven-course program created and facilitated by the Company. In addition to this program, the Company offers specific courses on product display, retail sales training, retail advertising and sales management. The Company's sales force emphasizes follow-up services to retail stores and provides retailers with promotional and merchandising assistance as well as extensive specialized professional training and instructional materials. Training for retail sales personnel focuses on several programs, designed to assist retailers in maximizing the effectiveness of their own sales personnel, store operations and advertising and promotional programs, thereby creating loyalty to, and enhanced sales of, the Company's products. ADVERTISING AND MARKETING. The Company's advertising and marketing strategy emphasizes retail relationships through the use of cooperative advertising programs, in-store product demonstrations, and promotional incentives to retail sales associates, balanced with a focused national advertising campaign to support the Company's strong brand names. Stearns & Foster has developed a targeted marketing program that allows retailers to identify groups of potential consumers based on known demographic profiles. This profiling allows retailers to mail an advertisement to a small group of consumers whose incidence of purchase is expected to generate more sales than would have been generated through a mass mailing. COMPETITION The Company is the largest conventional bedding manufacturer in North America and primarily competes with three national companies: Simmons Company, Serta, Inc. and Spring Air Company. Of the top four manufacturers, only the Company and Simmons have national, company operated manufacturing and distribution capabilities. Moreover, the Company is the only national manufacturer to have taken advantage of vertical integration in a majority of its product lines, thereby providing it with significant product development and cost advantages. Additionally, the Company believes that it is the only such company with international, company operated manufacturing and distribution capabilities. For the year ended December 31, 1996 the Company and its three primary competitors accounted for approximately 59% of the domestic market. The remaining 41% of the market is highly fragmented and consists of six second tier companies--King Koil, Restonic, Springwall, Ther- a-Pedic, Bassett and Englander--which collectively represented 15% of the market, and approximately 700 independent local and regional manufacturers, which mainly manufacture lower quality products for sale at lower price points than the products sold by the Company and its primary competitors. While the Company primarily manufactures higher margin, differentiated bedding products, it also 49 manufactures lower priced, lower margin promotional, private label and contract bedding in order to compete with smaller manufacturers and provide retailers with a platform from which to upgrade consumer purchases. INTERNATIONAL OPERATIONS The Company's international division is separated into six business segments: Sealy-Canada, Sealy-Mexico, expansion markets, distribution direct countries, off-shore importers, and licensees. The Company is currently implementing a disciplined and focused international strategy based on leveraging its strong reputation and brand recognition in the United States to build solid international franchises. The Company currently manufactures products in Canada and Mexico, distributes products directly in Korea and has licensing agreements in Thailand, Japan, the United Kingdom, Australia, New Zealand, southern Africa, Israel and Jamaica. The Company is exploring additional international opportunities in the Pacific Rim, Latin America and Western Europe and is currently operating test markets in Spain and Brazil. The Company plans to continue to operate via licensing and/or distribution agreements in new international markets until sales reach a level that warrants the building or purchase of a Sealy-operated facility. PROPRIETARY TECHNOLOGY; TRADEMARKS AND PATENTS The Company's research and development division has developed numerous proprietary innovations that the Company uses in select products. Over the past two years, the Company has introduced the SteelSpan II foundation, EverEdge edge systems, Infinilux foam and Resilium fiber, and has developed an advanced technology innerspring and composite foundation system, all of which have been patented or have patents pending. Since December 1, 1994 the Company has, on average, invested approximately 0.75% of its net sales in research and development, a rate which management believes to be in excess of twice that of its largest competitor. In addition, the Company has increased attention on cross-functional input into product development. As a result, the Company believes that it is able to build a more meaningful and differentiated product pipeline than its primary competitors. The Company holds over 200 trademarks, which management believes have significant value and are important to the marketing of its products to retailers. The Company owns numerous U.S. and foreign patents and has patent applications pending domestically and abroad. In addition, the Company owns U.S. and foreign registered trade names and service marks and has applications for the registration of trade names and service marks pending domestically and abroad. The Company also owns several U.S. copyright registrations and a wide array of unpatented proprietary technology and know-how. Further, the Company licenses certain intellectual property rights from third parties. As of November 30, 1997, the Company held 25 U.S. patents and more than 52 international patents. Over the last two years, the Company has patented seven innovations developed by the Company's research and development division. Currently, nine domestic patents are pending, two domestic patents are in process and four domestic patents are in the queue for other product innovations. In addition, the Company owns numerous trademarks, trade names and logos, including those related to Sealy, Stearns & Foster, Sealy Posturepedic, Sealy Posturepedic Crown Jewel, Sealy Correct Comfort, and the University of Sleep. WARRANTIES The Company offers a 10-year, non-prorated warranty for all manufactured Sealy Posturepedic models, Stearns & Foster bedding and other selected Sealy brand products. According to an independent survey of 1,698 consumers performed by NPD Group, Inc. in September 1995, Sealy ranked first in the warranty category among the top three domestic brands. Over the past ten years, less than 1% of all products sold have been returned to the Company on warranty. 50 LICENSES The Company currently has 14 separate licensing arrangements in effect, covering both mattress manufacturing (primarily internationally) and related products. Of the Company's six North American licensees, Sealy-New Jersey is the sole North American licensee for adult mattress manufacturing, which is a result of an historical license arrangement. Sales volume of Sealy-New Jersey represented approximately 3% of Sealy and Stearns & Foster branded sales in 1997. To maintain quality and control margins, the Company has made a strategic decision not to further license conventional core bedding products in North America. The Company has eight international licensees, five of which are perpetual licensees which manufacture Sealy bedding products in their respective countries. The Company's current licensees are in Thailand, Japan, the United Kingdom, Australia, New Zealand, southern Africa, Israel and Jamaica. In addition, the Company continually explores additional international licensing opportunities, with test markets currently operating in Spain and Brazil. Sealy has licensed its name for use to five manufacturers of furniture and/or bedding-related products, including Klaussner Furniture Industries, Sealy Furniture of Maryland, Kolcraft Enterprises, Pacific Coast Feather Company and Dorel Industries. Klaussner is licensed to manufacture and market sofas, sleep sofas, and other upholstered furniture products in North America, primarily under the Sealy Furniture logo. Sealy Furniture of Maryland is currently producing sleep sofas under the Sealy brand name and Kolcraft Enterprises is licensed to manufacture and market crib mattresses under the Sealy name. In October 1997, the Company entered into licenses which will commence in April 1998 with Pacific Coast Feather Company for the manufacture and sale of pillows, comforters and mattress pads under the Sealy brand name and Dorel Industries for the manufacture and sale of futons under the Sealy Furniture name. The Company believes that additional opportunities exist to leverage the strong Sealy brand name through licensing of affiliated products. The Company believes that such licensing should increase sales and strengthen consumer awareness without diverting manufacturing attention from the core bedding business. MANUFACTURING AND FACILITIES The Company manufactures most conventional bedding to order and has adopted "just-in-time" inventory techniques in its manufacturing process to more efficiently serve its dealers' needs and to minimize their inventory carrying costs. Most bedding orders are scheduled, produced and shipped within 72 hours of receipt. This rapid delivery capability allows the Company to minimize its inventory of finished products and better satisfy customer demand for prompt shipments. The Company operates 25 bedding manufacturing facilities and three component manufacturing facilities in 19 states, three Canadian provinces, Puerto Rico and Mexico. Management believes that through the utilization of extra shifts, it will be able to continue to meet growing demand for its products without a significant investment in facilities. See Item 2, "Properties," herein. The Company also operates a research and development center in Cleveland, Ohio with a staff which tests new materials and machinery, trains personnel, compares the quality of the Company's products with those of its competitors and develops new processes. The Company has developed and patented a computerized model of an adult person, known as Dataman(R), which is used in testing the support level of its mattresses. MATTRESS MANUFACTURING. The typical Sealy bedding manufacturing facility assembles a complete line of conventional bedding and is strategically located to service one or more major metropolitan areas. The average facility contains approximately 140,000 square feet of manufacturing space, most of which is devoted to production. Raw material inventory is minimized through just-in- time delivery from the Company's major suppliers. Finished stock inventory, which is typically stored at the manufacturing facility until shipped, is also minimized through made-to-order production. The Company has found that made- to-order production most efficiently serves the needs of its retailers as well as 51 minimizes their inventory carrying costs. As such, the majority of bedding orders are scheduled, produced and shipped within 72 hours of receipt. Because the Company adjusts production levels to meet customer order demand, the Company has no material backlog of orders. All of the Company's plants use 12 basic units of operation, with customized layouts based on individual plant geometry and available square footage to produce mattresses and foundations. The manufacturing process begins with the receipt of raw materials and component parts such as cotton, insulator pads, innersprings, fabrics and roll goods consisting of foam, fiber and non-wovens. The price of the Company's raw materials tends to decline during recessions, historically insulating the Company's margins in economic downturns. The manufacturing process takes place simultaneously for both parts of a bedding set (mattress and foundation) and involves several operations that are common in the construction of both a mattress and a foundation. In general, both processes involve the creation of subassemblies from raw materials and then the assembly of these subassembles into the finished mattress and foundation. COMPONENTS MANUFACTURING. The Components Division, headquartered in Rensselaer, Indiana, operates three innerspring manufacturing facilities, two of which run three shifts, five days a week and one that continuously operates. The division sells its component parts at current market prices exclusively to the Company's bedding plants and licensees. The division provides substantially all of the Company's mattress innerspring unit requirements, including 100% of the proprietary innersprings for the Sealy Posturepedic and Stearns & Foster lines. In addition, the division manufactures approximately 50% of the Company's foundation parts as a licensee of Hoover. Over the last eight years, the Company has made substantial commitments to ensure that the coil-making equipment at its component plants remains state- of-the-art. Since 1989, the Company has installed 30 automated coil-producing machines. This equipment has resulted in higher capacity at lower per-unit costs and has increased self-production capacity for the Company's innerspring requirements over that time period from approximately 60% to nearly 100%. The Company believes the vertical integration resulting from its component manufacturing capability provides it with a significant competitive advantage in both cost and technology. Moreover, the Company is the only conventional bedding manufacturer in the United States with substantial innerspring and form wire component-making capacity. INDEPENDENT SUPPLIERS. The Company purchases raw materials and certain components from a variety of vendors, including Hoover, Foamex International and other national raw material and component suppliers. The Company purchases substantially all of its Stearns & Foster foundation parts and approximately 50% of its Sealy foundation parts from Hoover which has patents on various interlocking wire configurations. To increase profitability and reduce the risks of dependence on a single external supply source, the Company licenses these wire patents from Hoover and manufactures the remaining 50% of Sealy foundation parts through its components division. RESEARCH AND DEVELOPMENT. The Company's proprietary product pipeline is driven by its extensive research and development effort focused on developing new technologies to differentiate its products from those of its competitors. Since December 1, 1994 the Company has, on average, invested approximately 0.75% of its net sales in research and development, a rate which management believes to be in excess of twice that of its next largest competitor. In addition, the Company has increased attention on cross-functional input into product development. Sealy's research and development efforts allow the Company to build a strong product pipeline. As a result, the Company currently has in place plans for new proprietary products through 1999. The Company operates a research and development facility in Cleveland, Ohio with a 15 person staff that is well-educated in a wide range of physical sciences, including mechanical and chemical engineering, physics, chemistry, polymer science and biophysics. Management believes that the Company's research and development 52 efforts are critical to maintaining the Company's profitability and are important to retailers. By keeping the product line fresh and continually generating new product enhancements that are both visible and meaningful to the consumer, the Company is able to increase retail floor space allocation and provide retail salespeople with tools to generate higher AUSP's and higher overall sales. In 1997, a majority of the Company's net sales were generated from products developed or reengineered in the prior two years. The Company's research and development operation has developed numerous proprietary innovations that the Company uses in select products. Over the past two years, the Company has introduced the SteelSpan II foundation, Hi- Performance torsion modules, EdgeGuard and EverEdge edge systems, Infinilux foam and Resilium fiber, and has developed an advanced innerspring and composite foundation system, all of which have been patented or have patents pending. EFFICIENCY IMPROVEMENTS. The Company is in the process of implementing an MIS upgrade, which will provide the Company with a platform for further MIS enhancements to enable it to improve manufacturing operations and profitability analysis. The MIS upgrade is expected to address the Year 2000 Issue and link the Company's plants, operations and functional departments into a cohesive network, increasing the Company's corporate agility and decision-making capabilities. There can be no assurance, however, that the new Business Systems will be installed and fully operational at all locations and for all applications prior to the turn of the century, and management has therefore deemed it necessary to convert its current system to be Year 2000 compliant. 53 PROPERTIES The offices of Parent are located at 520 Pike Street, Seattle, Washington 98101 and the offices of the Issuer are located at Halle Building, 10th Floor, 1228 Euclid Avenue, Cleveland, Ohio 44115. Corporate, licensing and marketing services are provided to Issuer and Parent by Sealy, Inc. (a wholly owned subsidiary), located in Cleveland, Ohio. The Company services certain national account customers from offices located in Chicago, Illinois, and also administers component operations at its Rensselaer, Indiana facility. The Company leases a research and development facility in Cleveland, Ohio. The Company's leased facilities are occupied under leases which expire from 1997 to 2015, including renewal options. On March 10, 1998, the Company announced its plans to relocate its Corporate headquarters and Research & Development Center from Cleveland, Ohio to Archdale, North Carolina. The Company will also relocate its Lexington, North Carolina manufacturing plant to Archdale, North Carolina. The Company consummated the purchase on April 13, 1998 of a property which currently includes an office building and a manufacturing facility. The initial purchase price of $8.4 million was financed with a draw from the Revolving Credit Facility and paid at closing. The Company will construct an additional office building on this property to house its Corporate headquarters. The Company is currently reviewing long-term financing alternatives with respect to the property purchase and construction project which it expects to finalize in the second quarter of fiscal 1998. The Company estimates total costs associated with this relocation will result in a pretax charge of approximately $8.5 million which will be recognized primarily in fiscal 1998 with the balance in fiscal 1999. The following table sets forth certain information regarding manufacturing facilities operated by the Company as of February 23, 1998:
APPROXIMATE LOCATION SQUARE FOOTAGE TITLE ----------------------------------------- -------------- ----- UNITED STATES Arizona Phoenix 76,000 Owned California Richmond 238,000 Owned South Gate 185,000 Owned Colorado Colorado Springs(1) 70,000 Owned Denver 92,900 Owned Florida Orlando 97,600 Owned Georgia Atlanta 292,500 Owned Illinois Batavia 212,700 Leased(2) Indiana Rensselaer(1) 131,000 Owned Rensselaer(1) 124,000 Owned Kansas Kansas City 102,600 Leased Maryland Williamsport 144,000 Leased Massachusetts Randolph 187,000 Owned Michigan Taylor 156,000 Leased Minnesota St. Paul 93,600 Owned New York Albany 102,300 Owned North Carolina Lexington 97,400 Owned Ohio Medina 140,000 Owned Oregon Portland 140,000 Owned Pennsylvania Clarion 85,000 Owned Delano(1) 143,000 Owned Tennessee Memphis 225,000 Owned Texas Brenham 220,000 Owned North Richland Hills 124,500 Owned CANADA Alberta Edmonton 144,500 Owned Quebec Saint Narcisse 76,000 Owned Ontario Toronto 80,200 Leased Puerto Rico Carolina 58,600 Owned Mexico Toluca 95,200 Owned --------- 3,934,600 =========
- -------- (1) Component manufacturing facility. (2) The Company has subleased 76,000 square feet to an unaffiliated tenant. 54 The Company considers its present facilities to be generally well maintained, in sound operating condition and adequate for its needs. The Company has excess capacity available in its facilities and the necessary equipment (as owner or lessee) to carry on its business. LEGAL PROCEEDINGS The Company is conducting environmental cleanups at a formerly owned property in South Brunswick, New Jersey and at an inactive property in Oakville, Connecticut. The South Brunswick cleanup is being conducted pursuant to an Administrative Consent Order issued by the New Jersey Department of the Environment. In 1994, the Company filed a claim in U.S. District Court against former owners of the South Brunswick site and their lenders under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") seeking contributions for site cleanup costs. In March 1997, the Company received $1.7 million in final settlement of this litigation. In January 1997, the Company filed a claim in the U.S. District Court of New Jersey against former insurance companies for the Company under the Comprehensive Environmental Response, Compensation and Liability Act seeking contribution for site investigation and remedial costs. A parallel case seeking a judgment of non-liability was filed by some (but not all) of these insurance companies in the U.S. District Court for the Northern District of Ohio. The Company is awaiting a ruling by the District Courts involved. In 1994, the Company filed a cost recovery action in U.S. District Court against former operators of the Oakville facility to require them to complete the remediation and reimburse the Company for its cleanup costs. This litigation is pending. See "Business--Environmental, Health and Safety Matters". On May 22, 1997 the Company filed in the United States District Court for the Northern District of Illinois a motion to terminate certain antitrust final judgments (the "Judgments") entered on December 30, 1964 and December 26, 1967. These Judgments, among other things, prohibited the Company from suggesting resale prices to its dealers. During the pendency of the Company's motion to terminate the Judgments, and based upon allegations received by the Department of Justice (the "Department") concerning a possible resale price maintenance agreement with a Stearns & Foster dealer, the Department, on September 8, 1997, issued to the Company a Civil Investigative Demand seeking documents relating to, among other things, communications between the Company and dealers concerning the retail prices of mattresses. In response to the Civil Investigative Demand, the Company produced certain documents and the deposition of a Company executive was taken. Immediately following such document production and deposition, the Department consented to the termination of the Judgments and an order terminating the Judgments was entered by the Court on September 19, 1997. After the Court terminated the Judgments, the Department notified the Company on September 29, 1997 that it was limiting the Civil Investigative Demand to certain narrow specifications. In October 1997, the Company produced additional documents in response to the Civil Investigative Demand. On November 24, 1997 the Company received a request from the Department for clarification and additional information. The Company has responded to that request. On April 17, 1998 the Company formally responded to the Civil Investigative Demand. From time to time, the Company is involved in various legal proceedings arising in the ordinary course of business. The Company does not expect that these matters will have a material adverse effect on the Company's financial position or future operations. ENVIRONMENTAL, HEALTH AND SAFETY MATTERS The Company is subject to Federal, state, and local laws and regulations relating to pollution, environmental protection, and occupational health and safety. In addition, the Company's conventional bedding and other product lines are subject to various Federal and state laws and regulations relating to flammability, sanitation and consumer protection standards. The Company believes that it is in material compliance with these requirements. The Company is not aware of any pending Federal environmental legislation which it expects to have a material impact on the Company. The Company does not expect to make any material capital expenditures for environmental control facilities during the next two fiscal years. 55 The Company's principal wastes are nonhazardous materials such as wood, cardboard, and packaging materials. Nonetheless, as is the case with manufacturers in general, if a release of hazardous substances occurs on or from the Company's properties or any associated offsite disposal location, or if contamination from prior activities is discovered at any of the Company's properties, the Company may be held liable and the amount of such liability could be material. The Company is currently conducting an environmental cleanup at a formerly owned facility in South Brunswick, New Jersey pursuant to the New Jersey Industrial Site Recovery Act. The Company and one of its subsidiaries are parties to an Administrative Consent Order ("ACO") issued by the New Jersey Department of Environmental Protection ("DEP"). Pursuant to the ACO, the Company and its subsidiary agreed to conduct soil and groundwater remediation at the property. The Company does not believe that its manufacturing processes were a source of the contamination. The Company sold the property in 1997, but the Company and its subsidiary retained primary responsibility for the required remediation. The Company has completed essentially all soil remediation with DEP approval, and has concluded a pilot test of a groundwater remediation system. In 1994, the Company filed a claim in U.S. District Court against former owners of the site and their lenders under CERCLA seeking contribution for site investigation and remedial costs. In 1997, the Company received $1.7 million from a former owner of the site and one of the lenders to the former owner in final settlement of this litigation. The Company is currently pursuing a cost recovery action in U.S. District Court against several of its past insurers. The Company also has begun to remediate soil and groundwater contamination at an inactive facility located in Oakville, Connecticut. Although the Company is conducting the remediation voluntarily, it obtained Connecticut Department of Environmental Protection approval of remediation plan. The Company believes the contamination is attributable to the manufacturing operations of previous unaffiliated occupants of the facility. In 1994, the Company filed a cost recovery action in U.S. District Court to require these entities to complete the remediation and reimburse the Company for its cleanup costs. This litigation is pending. While the Company cannot predict the ultimate timing or cost with respect to South Brunswick and Oakville remediation, based on facts currently known, management believes that the accruals are adequate and does not believe the resolution of these matters will have a material adverse effect on the Company's financial position or future operations. However, because of the uncertainties associated with environmental remediation, it is possible that the costs incurred with respect to these matters could exceed the recorded accruals. The Company has been identified as a potentially responsible party pursuant to CERCLA with regard to two waste disposal sites and under analogous state law with regard to a third. Although liability under CERCLA and state statutes is generally joint and several, as a practical matter, liability is usually allocated among all financially responsible parties. Based on the nature and quantity of the Company's wastes, the Company believes that its liability at each of these sites is unlikely to be material. EMPLOYEES As of November 30, 1997, the Company had 5,456 full-time employees. Approximately 66% of the Company's employees at its 28 North American facilities are represented by various labor unions with separate collective bargaining agreements. The Company is not a party to any master labor agreement covering production employees at more than a single manufacturing facility. The Company has only experienced one day of lost work in one plant in the last six years due to a labor dispute. In addition, the Company has not encountered any significant organizing activity at its non-union facilities in that time frame. The Company believes that its employee relations are satisfactory. 56 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the names, ages as of March 1998, and a brief account of the business experience of each person who is a director or executive officer of Parent and the Issuer.
NAME AGE POSITION ---- --- -------- Ronald L. Jones................. 55 Chief Executive Officer, President and Director Bruce G. Barman................. 52 Vice President Research and Development John G. Bartik.................. 46 Vice President Tax and Assistant Treasurer Jeffrey C. Claypool............. 50 Vice President Human Resources Gary T. Fazio................... 47 Vice President Sales Douglas E. Fellmy............... 48 Vice President Operations James Goughenour................ 60 Vice President Technology and Strategic Planning David J. Mcllquham.............. 43 Vice President Marketing Sharon J. Petrella.............. 41 Vice President Information Technology Lawrence J. Rogers.............. 49 Vice President International Richard F. Sowerby.............. 43 Vice President Controller Ronald H. Stolle................ 49 Vice President Treasurer Kenneth L. Walker............... 49 Vice President, General Counsel and Secretary Josh Bekenstein................. 39 Director Paul Edgerley................... 42 Director James W. Johnston............... 51 Director Michael Krupka.................. 32 Director John M. Sallay.................. 42 Director Jonas Steinman.................. 32 Director
RONALD L. JONES Mr. Jones, age 55, since March 1996 has been President and Chief Executive Officer of the Company. From October, 1988 until joining the Company, Mr. Jones served as President of Masco Home Furnishings. From 1983 to 1988, Mr. Jones was President of HON Industries. BRUCE G. BARMAN Dr. Barman, age 52, since January 1995 has been Vice President Research and Development of the Company. From 1991 until he joined the Company, Dr. Barman was Vice President-Research and Development of Griffith Laboratories N.A., a custom food products producer for a customer base of major North American food service and food processing companies. JOHN G. BARTIK Mr. Bartik, age 46, since March 1995 has been Vice President Tax and Assistant Treasurer of the Company. From 1990 to 1995, he was Treasurer of the Company and from 1985 has served as the Company's Director of Taxation. JEFFREY C. CLAYPOOL Mr. Claypool, age 50, since September 1991 has been Vice President Human Resources of the Company. 57 GARY T. FAZIO Mr. Fazio, age 47, since 1990 has been Vice President Sales of the Company. Mr. Fazio joined the Company as a general manager in 1981. From 1987 to 1990, he was Regional Vice President of the Company. DOUGLAS E. FELLMY Mr. Fellmy, age 48, since July 1992 has been Vice President Operations of the Company. Previously, Mr. Fellmy served as Regional Vice President- Operations since April 1990 and also as President of the Components Division since December 1989. Mr. Fellmy has served, since 1971, in numerous other capacities with the Company's Components Division. JAMES F. GOUGHENOUR Mr. Goughenour, age 60, since June 1997 has been Vice President Technology and Strategic Planning of the Company. From 1979 until he joined the Company, Mr. Goughenour had been with the HON Company, serving as Vice President. DAVID J. MCILQUHAM Mr. McIlquham, age 43, since April 1990 has been Vice President Marketing of the Company. SHARON J. PETRELLA Ms. Petrella, age 41, since January 1995 has been Vice President Information Technology of the Company. From 1983 until she joined the Company, Ms. Petrella had been with The Little Tikes Toy Company, Division of Rubbermaid, in various positions. LAWRENCE J. ROGERS Mr. Rogers, age 49, since February 1994 has been Vice President International of the Company. Previously, Mr. Rogers has served, since 1979, in numerous other capacities within the Company's operations, including President-Sealy Canada. RICHARD F. SOWERBY Mr. Sowerby, age 43, since April 1995 has been Vice President Controller of the Company. Previously, from 1991, Mr. Sowerby served as Corporate Controller of Elliott Company, a manufacturer and servicer of turbo machinery equipment. RONALD H. STOLLE Mr. Stolle, age 49, since March 1995 has been Vice President Treasurer of the Company. Previously, from 1987, Mr. Stolle served as Director, Treasury Operations for Reliance Electric Company, a manufacturer of industrial and telecommunication products. KENNETH L. WALKER Mr. Walker, age 49, since May 1997 has been Vice President, General Counsel and Secretary of the Company. Previously, from 1991, Mr. Walker served as Vice President, General Counsel and Secretary of Varity Corporation, a manufacturer of automotive components, diesel engines, and farm machinery. 58 JOSH BEKENSTEIN Mr. Bekenstein, age 39, is a Managing Director of Bain. Mr. Bekenstein helped start Bain in 1984 and has been involved in numerous venture capital and leveraged acquisitions over the past thirteen years. Mr. Bekenstein presently serves on the Board of Directors of a number of public and private companies, including Waters Corporation, Bright Horizons Childrens Centers, Inc. and Small Fry Snack Foods. Prior to Bain, Mr. Bekenstein was a consultant at Bain & Company, where he worked on strategy consulting projects for a number of Fortune 500 clients. PAUL EDGERLEY Mr. Edgerley, age 42, has been Managing Director of Bain since 1993. From 1990 to 1993 he was a General Partner of Bain Venture Capital, and from 1988 to 1990 he was a Principal of Bain Capital Partners. He serves on the Boards of Directors of Steel Dynamics, Inc., GS Industries, Inc. and AMF Group Inc. JAMES W. JOHNSTON Mr. Johnston, age 51, is President and Chief Executive Officer of Stonemarker Enterprises, Inc., a consulting and investment company. He has been a director of Sealy, Inc. since March 4, 1993. Mr. Johnston was Vice Chairman RJR Nabisco, Inc. from 1995 to 1996. He also served as Chairman and CEO of R. J. Reynolds Tobacco Co. from 1989 to 1995, Chairman R. J. Reynolds Tobacco Co. from 1995 to 1996 and Chairman R. J. Reynolds Tobacco International from 1993 to 1996. Mr. Johnston served on the board of RJR Nabisco, Inc. and RJR Nabisco Holdings Corp. from 1992 to 1996. From 1984 until joining Reynolds, Mr. Johnston was Division Executive, Northeast Division, of Citibank, N.A., a subsidiary of Citicorp, where he was responsible for Citibank's New York Banking Division, its banking activities in upstate New York, Maine and Mid-Atlantic regions, and its national student loan business. Mr. Johnston is also a director of The Wachovia Corporation. MICHAEL KRUPKA Mr. Krupka, age 32, joined Bain in 1991 and became a Managing Director in 1997. Prior to joining Bain, Mr. Krupka spent several years as a consultant at Bain & Company where he focused on technology and technology-related companies. In addition, he has served in several senior operating roles at Bain portfolio companies. He serves on the Board of Directors of Jostens Learning Corp. and J Tech, Inc. JOHN M. SALLAY Mr. Sallay, age 42, is a Managing Director of Harvard Private Capital Group, Inc. ("HPC"), which manages the private equity and real estate portfolios of the Harvard University endowment fund. Prior to joining HPC in 1990, Mr. Sallay was a consultant with McKinsey & Company, Inc. of New York. Mr. Sallay serves on the Board of Directors of E-Z Serve Corporation and United Auto Group, Inc. JONAS STEINMAN Mr. Steinman, age 32, since June, 1995 has been a Principal at Chase Capital Partners. Previously he was employed as an Associate by Chase Capital Partners and its predecessor, Chemical Venture Partners. COMPENSATION OF DIRECTORS Mr. Johnston is being compensated on the same basis as he was for being a Company director prior to December 18, 1997. For his services as a director he receives a retainer at the rate of $30,000 on an annual basis, reduced by $1,000 for each Board meeting not attended, plus $1,000 ($1,250 if he is Committee Chairman) for each Board of Directors Committee meeting attended if such meeting is on a date other than a Board meeting date. The Company reimburses all directors for any out-of-pocket expenses incurred by them in connection with services provided in such capacity. In addition, the Company may in the future compensate directors for services provided in such capacity. 59 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Since December 18, 1997, the Company's Board of Directors has not had any standing committees. The two compensation matters considered by the Company's Board of Directors since December 18, 1997 were handled by a temporary compensation committee made up of all the Company's directors other than Mr. Jones. In Fiscal 1997 and through December 18, 1997, the Human Resources Committee (which functioned as the Compensation Committee) of the Board of Directors consisted of Mr. Johnston and former directors Mr. Rod Dammeyer (an officer of Zell/Chilmark) and Mr. Rolf H. Towe. Pursuant to a stock purchase agreement, Zell/Chilmark, MBLP and the Company in 1993 entered into a registration rights agreement relating to the Acquired Shares, including the 27,630 Shares purchased by Mr. Towe. Pursuant to the Stock Purchase Agreement, prior to December 18, 1997, the holder of a majority of such Acquired Shares had the right to demand, up to five times but no more than once every six months, registration of their Acquired Shares under the Securities Act of 1933 as amended. In addition, under certain conditions, the holders of the Acquired Shares had a right to include some or all of their Acquired Shares in any subsequent registration statement filed by the Company with respect to the sale of Shares. The Company agreed to bear all expenses associated with any registration statement relating to the Acquired Shares other than any underwriting discounts or commissions, brokerage commissions and fees. COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth information concerning the annual and long- term compensation for services in all capacities to the Company for each of the years ended November 30, 1997, December 1, 1996, and November 30, 1995, of those persons who served as (i) the chief executive officer during Fiscal 1996 and 1997, and (ii) the other four most highly compensated executive officers of the Company for Fiscal 1997 (collectively, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------------------ ----------------------------------------------------- RESTRICTED SECURITIES NAME AND PRINCIPAL OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER POSITION YEAR SALARY BONUS COMPENSATION AWARD($) OPTIONS/SARS PAYOUTS(A) COMPENSATION(B) ------------------ ---- -------- -------- ------------ ---------- ------------ ---------- --------------- Ronald L. Jones(c)...... 1997 $527,516 $633,052 $ 1,168 -- 75,000(d) -- $ 21,583 Chief Executive 1996 381,262 423,584 456,168(c) $637,800(e) 400,000(f) -- 2,476 Officer and President 1995 -- -- -- -- -- -- -- Lyman M. Beggs(g)....... 1997 -- -- -- -- -- -- 1,495,821(g) Chairman, Chief 1996 153,318 91,988 -- -- -- -- 3,059,545(g) Executive Officer and 1995 525,336 -- 75,914(h) 107,000(i) -- -- 21,262 President Gary T. Fazio........... 1997 203,833 182,289 248 203,978(j) 32,000(d) -- 16,524 Vice President-- 1996 196,226 86,559 -- -- -- 426,030 15,864 Sales 1995 187,765 -- -- -- -- -- 15,151 Douglas Fellmy.......... 1997 197,333 177,739 -- 203,978(j) 32,000(d) -- 16,016 Vice President-- 1996 188,134 83,135 -- -- -- 426,030 15,237 Operations 1995 171,052 -- -- -- -- -- 13,434 David J. McIlquham...... 1997 199,167 179,023 242 203,978(j) 32,000(d) -- 16,165 Vice President-- 1996 188,505 83,302 -- -- -- 426,030 15,268 Marketing 1995 171,052 -- -- -- -- -- 13,794 Lawrence J. Rogers...... 1997 180,305 158,953 -- 203,978(j) 32,000(d) -- 14,271 Vice President-- 1996 175,812 100,385 -- -- -- 395,046 13,884 International 1995 164,551 15,503 -- -- -- -- 13,049
- -------- (a) Such amount reflects the value of Shares earned under the Performance Share Plan which concluded on December 1, 1996. 60 (b) Represents amounts paid on behalf of each of the Named Executive Officers for the following three respective categories of compensation: (i) Company premiums for life and accidental death and dismemberment insurance (ii) Company premiums for long-term disability benefits, and (iii) Company contributions to the Company's defined contribution plans. Amounts for each of the Named Executive Officers for each of the three respective preceding categories is as follows: Mr. Jones: (1997-$3,083, $1,000, $17,500; 1996-$1,943, $533, $0); Mr. Beggs: (1997-$3,083, $0, $0; 1996- $3,525, $267, $0; 1995-$3,501, $800, $16,960); Mr. Fazio: (1997-$1,257, $999, $14,268; 1996-$1,305, $849, $13,710; 1995-$1,254, $753, $13,144); Mr. McIlquham: (1997-$1,227, $996, $13,942; 1996-$1,255, $817, $13,195; 1995-$1,137, $683, $11,974); Mr. Fellmy: (1997-$1,216, $987, $13,813; 1996-$1,252, $816, $13,169; 1995-$1,106, $665, $11,623); Mr. Rogers (1997- $622, $1,027, $12,621; 1996-$747, $763, $12,374; 1995-$947, $583, $11,519). (c) Pursuant to his Employment Agreement, Mr. Jones commenced employment with the Company as of February 27, 1996. The terms of the Employment Agreement are described more fully in "Compensation Pursuant to Plans and Other Arrangements--Executive Employment Agreements." Such amount primarily consists of a $250,000 payment upon commencement of employment and $205,000 in relocation and other transitional matters. (d) On May 31, 1997, the Company issued ten-year non-qualified stock options at an exercise price of $9.60, pursuant to the Company's 1997 Stock Option Plan to, among others, certain Named Executive Officers as follows: Ronald L. Jones: 75,000 shares; Gary T. Fazio: 32,000 shares; David J. McIlquham: 32,000 shares; Douglas Fellmy: 32,000 shares; and Lawrence J. Rogers: 32,000 shares. (e) Such amount reflects the Company's determination of the fair value at the date of grant of 67,635 shares issued to Mr. Jones, pursuant to his Employment Agreement. Although the 1997 Credit Agreement and Note Indenture contain restrictions on the Company's ability to pay dividends, if declared and paid on the Company's Shares, such dividends would be paid on such Shares issued to Mr. Jones. The February 28,1997 Dividend was paid on such shares. As of November 30,1997, the value of Mr. Jones' restricted stock holdings was $967,363. (f) Pursuant to his Employment Agreement, the Company granted Mr. Jones ten- year options to acquire up to 400,000 Shares at an exercise price of $10.63 per Share as further described in "Compensation Pursuant to Plans and Other Arrangements--Executive Employment Agreements." (g) Mr. Beggs' employment with the Company terminated on March 15, 1996. Mr. Beggs was awarded $2,578,902 in 1996 and $844,475 in 1997 in connection with his withdrawal from the Performance Share Plan and settlement of all related claims. In addition, he received $394,236 in 1996 and $525,648 in 1997 in salary continuation. Mr. Beggs' remaining equity loan balance (see footnote (h) below) was forgiven in addition to a gross up payment to cover his tax liability, together totaling $80,890. He was also reimbursed $1,725 in 1997 for professional fees incurred relating to the preceding transactions. His Employment Agreement and the terms of his termination and certain payments made in connection therewith are described more fully in "Compensation Pursuant to Plans and Other Arrangements--Executive Employment Agreements." (h) Mr. Beggs commenced employment with the Company as of August 24, 1992. Under the terms of his Employment Agreement, Mr. Beggs received $75,914 in 1995 as the result of: (i) the forgiveness of a portion of an equity loan from the Company to Mr. Beggs, reflecting the loss of equity in his previous residence of $45,383; (ii) professional fees, personal use of auto, travel and entertainment expenses; and (iii) payments to cover Mr. Beggs' tax liabilities on the foregoing items. (i) Such amount reflects the Company's determination of the fair value at the date of grant of 10,000 shares issued to Mr. Beggs as of November 30, 1995 pursuant to his Employment Agreement. These Shares were repurchased by the Company in connection with Mr. Beggs' termination of employment. The Employment Agreement also provided for the issuance to Mr. Beggs of an additional 90,000 Shares, which were forfeited upon his termination. See "Compensation Pursuant to Plans and Other Arrangements--Executive Employment Agreements." Hence, Mr. Beggs no longer had any restricted stock holdings at the end of Fiscal 1996. (j) Such amount reflects the Company's determination of the fair value at the date of grant of restricted stock issued, on January 6, 1997, pursuant to the Company's 1996 Transitional Restricted Stock Plan to, among others, certain Named Executive Officers as follows: Gary T. Fazio: 15,800 shares; David J. McIlquham: 15,800 shares; Douglas Fellmy: 15,800 shares; and Lawrence J. Rogers: 15,800 shares. As of November 30, 1997 the value of each of the above noted Named Executive Officers holdings pursuant to this plan was $225,983. 61 OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM (A) - -------------------------------------------------------------------------- --------------------------- NUMBER OF % OF TOTAL SECURITIES OPTIONS/SARS UNDERLYING GRANTED TO EXERCISE OR OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($) ---- ------------ ------------ ----------- ---------- --------------------------- Ronald L. Jones......... 75,000 8.0% $9.60 6/1/2007 $ 453,000 $ 1,147,500 Chief Executive Officer and President Gary T. Fazio........... 32,000 3.5% $9.60 6/1/2007 $ 193,280 $ 489,600 Vice President--Sales Douglas Fellmy.......... 32,000 3.5% $9.60 6/1/2007 $ 193,280 $ 489,600 Vice President--Opera- tions David McIlquham......... 32,000 3.5% $9.60 6/1/2007 $ 193,280 $ 489,600 Vice President--Market- ing Lawrence J. Rogers...... 32,000 3.5% $9.60 6/1/2007 $ 193,280 $ 489,600 Vice President--Interna- tional
- -------- (a) Potential Realizable Value is based on certain assumed rates of appreciation pursuant to rules prescribed by the Securities and Exchange Commission and are not intended to be a forecast of the Company's stock price. Actual gains, if any, on stock option exercises are dependent on the future performance of the stock. There can be no assurance that the amounts reflected in this table will be achieved. In accordance with rules promulgated by the Securities and Exchange Commission, Potential Realizable Value is based upon the exercise price of the options. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED SHARES UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS ACQUIRED AT FY-END (#) AT FY-END ($) ON EXERCISE VALUE EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE NAME (#) REALIZED (A) (B) (C) ---- ----------- -------- ------------------------------- ------------------------- Ronald L. Jones......... -- -- 146,836/515,506 $1,038,527/$3,468,270 Chief Executive Officer and President Gary T. Fazio........... -- -- --/ 32,000 --/ $150,486 Vice President--Sales Douglas Fellmy.......... -- -- --/ 32,000 --/ $150,486 Vice President-- Operations David McIlquham......... -- -- --/ 32,000 --/ $150,486 Vice President--Market- ing Lawrence J. Rogers...... -- -- --/ 32,000 --/ $150,486 Vice President-- International
- -------- (a) Includes options exercisable within 60 days after November 30, 1997. (b) Options are in-the-money if the fair market value of the Common Stock exceeds the exercise price. (c) Represents the total gain which would be realized if all in-the-money options beneficially held at November 30, 1997 were exercised, determined by multiplying the number of Shares underlying the options by the difference between the per share option exercise price and the estimated fair market value as of November 30, 1997. 62 EMPLOYMENT AGREEMENTS Ronald Jones has entered into an employment agreement with Parent providing for his employment as Chief Executive Officer and President. The agreement has an initial term of three years and a perpetual two-year term thereafter. The agreement currently provides for an annual base salary of US$530,000, subject to annual increase by Parent's Board of Directors, plus a performance bonus and grants Mr. Jones the right to require Parent to repurchase certain securities of Parent held by Mr. Jones. In addition, six employees of the Company, including Gary T. Fazio, Douglas Fellmy, Lawrence J. Rogers and David J. McIlquham, have entered into employment agreements that provide, among other things, for an initial employment term of two years and a perpetual one- year employment term thereafter, during which such employees will receive base salary (respectively at least US$204,500, US$198,000, Canadian$249,500, and US$200,000) and a performance bonus between zero and seventy percent of their base salary and substantially the same benefits as they received as of the date of such agreements. For the fiscal year ending November 30, 1998, the temporary compensation committee of the Company's Board of Directors has determined that the bonuses to be paid pursuant to those employment agreements shall be based 75% on the Company's achievement of an Adjusted EBITDA target and 25% on the Company's achievement of a Return on Net Tangible Assets target. Each such target represents an improvement over the Company's prior year performance. Several members of management are parties to agreements that provide, for a period of one year following consummation of the Transactions, that their annual base salary and benefits cannot be reduced. DEFERRED COMPENSATION AGREEMENTS On December 18, 1997, Mr. Jones entered into a deferred compensation agreement with Parent pursuant to which Mr. Jones elected to defer $1,114,538 of compensation until either December 18, 2007 or, in certain instances, such earlier date as provided in such deferred compensation agreement. In addition, on December 18, 1997, six employees, including Gary T. Fazio, Douglas Fellmy and Lawrence J. Rogers, entered into deferred compensation agreements with Parent pursuant to which such employees elected to defer an aggregate $522,518 of compensation, in each case, until either December 18, 2007 or, in certain instances, such earlier date as provided in such deferred compensation agreements. SEVERANCE BENEFIT PLANS In addition, certain executives and other employees are eligible for benefits under the Company's severance benefit plans and certain other agreements, which provide for cash severance payments equal to their base salary and, in some instances, bonuses (for periods ranging from two weeks to two years) and for the continuation of certain benefits. MANAGEMENT INCENTIVE PLAN The Company provides performance-based compensation awards to executive officers and key employees for achievement each year as part of a bonus plan. Such compensation awards are a function of individual performance and corporate results. The qualitative and quantitative criteria will be determined from time to time by Parent's Board of Directors. MANAGEMENT EQUITY PARTICIPATION IN THE TRANSACTIONS In connection with the Transactions, in order to provide financial incentives for certain of the Company's employees, the Management Investors acquired common stock of Parent and/or fully vested options to acquire common stock of Parent in exchange for either (i) cash or (ii) preferred stock and/or options held by such Management Investors prior to the Merger. Upon a Management Investor's termination of employment with the Company, the exercise period of such options held by such Management Investor will be reduced to a period ending no later than six months after such Management Investor's termination. If such termination occurs prior to a qualified initial public offering of Parent's common stock, then Parent shall have the right to repurchase the common stock of Parent held by such Management Investor and, in certain instances, such Management Investor shall have the right to require Parent to repurchase the common stock of Parent held by such Management Investor. See "Security Ownership." 63 SEALY CORPORATION 1998 STOCK OPTION PLAN In order to provide additional financial incentives for certain of the Company's employees, subsequent to the consummation of the Transactions the Management Investors and certain other employees of the Company were granted and are expected to periodically be granted options to purchase additional common stock of Parent pursuant to the Sealy Corporation 1998 Stock Option Plan. Such options vest and become exercisable upon (i) certain threshold dates or (ii) a change of control or sale of Parent. Upon an employee's termination of employment with the Company, all of such employee's unvested options will expire, the exercise period of all such employee's vested options will be reduced to a period ending no later than six months after such employee's termination, and if such termination occurs prior to a qualified initial public offering of the Parent's common stock, then Parent shall have the right to repurchase the common stock of Parent held by such employee. 64 SECURITY OWNERSHIP The Issuer is a wholly owned subsidiary of Parent. The issued and outstanding capital stock of Parent consists of 19,518,953 shares of Class A common stock, par value $0.01 per share ("Class A Common"), 7,791,327.6440 shares of Class B common stock, par value $0.01 per share ("Class B Common"), 2,168,772.5555 shares of Class L common stock, par value $0.01 per share ("Class L Common"), and 865,703.0716 shares of Class M common stock, par value $0.01 per share ("Class M Common" and collectively with the Class A Common, Class B Common and Class L Common, "Common Stock"). The shares of Class A Common and Class L Common each entitle the holder thereof to one vote per share on all matters to be voted upon by the stockholders of the Company, including the election of directors, and are otherwise identical, except that the shares of Class L Common are entitled to a preference over Class A Common with respect to any distribution by the Company to holders of its capital stock equal to the original cost of such share ($40.50) plus an amount which accrues on a daily basis at a rate of 10% per annum, compounded annually. The Class B Common is identical to the Class A Common and the Class M Common is identical to the Class L Common except that the Class B Common and the Class M Common are nonvoting. The Class B Common and the Class M Common are convertible into Class A Common and Class L Common, respectively, automatically upon consummation of an initial public offering by the Company. The Board of Directors of the Company is authorized to issue preferred stock, par value $0.01 per share, with such designations and other terms as may be stated in the resolutions providing for the issue of any such preferred stock adopted from time to time by the Board of Directors. The following table sets forth certain information regarding the beneficial ownership of (i) each class of common stock held by each person (other than directors and executive officers of the Company) known to the Company to own more than 5% of the outstanding voting common stock of Parent, (ii) the Management Investors and (iii) each class of common stock held by each director of the Company, each Named Executive Officer and all of the Company's directors and executive officers as group. To the knowledge of the Company, each of such stockholders has sole voting and investment power as to the shares shown unless otherwise noted. Beneficial ownership of the securities listed in the table has been determined in accordance with the applicable rules and regulations promulgated under the Exchange Act. 65
SHARES BENEFICIALLY OWNED ----------------------------------------------------------------------------------------------- CLASS A COMMON CLASS B COMMON CLASS L COMMON CLASS M COMMON --------------------- ----------------------- ------------------------- ----------------------- NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE OF SHARES OF CLASS OF SHARES OF CLASS OF SHARES OF CLASS OF SHARES OF CLASS ---------- ---------- ------------ ---------- -------------- ---------- ------------ ---------- PRINCIPAL STOCKHOLDERS: Bain Funds (1)(2)....... 9,450,000 48.4% 612,284.54 7.9% 1,050,000 48.4% 68,031.62 7.9% c/o Bain Capital, Inc. Two Copley Place Boston, MA 02116 Harvard Private Capital Holdings, Inc. ........ 4,000,000 20.5 -- -- 444,444.4444 20.5 -- -- c/o Harvard Management Company, Inc. 600 Atlantic Avenue Boston, MA 02210 Sealy Investors 1, 973,989 5.0 5,086,617.06 65.3 108,221 5.0 565,179.6733 65.3 LLC (2)................ c/o Bain Capital, Inc. Two Copley Avenue Boston, MA 02116 Sealy Investors 2, LLC 973,989 5.0 2,056,314.03 26.4 108,221 5.0 228,479.3367 26.4 (2).................... c/o Bain Capital, Inc. Two Copley Place Boston, MA 02116 Sealy Investors 3, LLC 973,989 5.0 36,112.01 * 108,221 5.0 4,012.4456 * (2).................... c/o Bain Capital, Inc. Two Copley Place Boston, MA 02116 Zell/Chilmark Fund, 2,862,000 14.7 -- -- 318,000 14.7 -- -- L.P. .................. Two North Riverside Plaza Suite 1500 Chicago, IL 60606 DIRECTORS AND EXECUTIVE OFFICERS: Josh Bekenstein (1)(3).. 9,450,000 48.4 -- -- 1,050,000 48.4 -- -- c/o Bain Capital, Inc. Two Copley Place Boston, MA 02116 Paul Edgerley (1)(3).... 9,450,000 48.4 -- -- 1,050,000 48.4 -- -- c/o Bain Capital, Inc. Two Copley Place Boston, MA 02116 Michael Krupka (1)(3)... 9,450,000 48.4 -- -- 1,050,000 48.4 -- -- c/o Bain Capital, Inc. Two Copley Place Boston, MA 02116 John M. Sallay (4)...... 4,000,000 20.5 -- -- 444,444.4444 20.5 -- -- c/o Harvard Management Company, Inc. 600 Atlantic Avenue Boston, MA 02210 Ronald Jones (5)........ 939,996 4.6 -- -- 104,444 4.6 -- -- c/o Sealy Corporation 1228 Euclid Avenue Cleveland, OH 44115 Gary T. Fazio (6)....... 75,285 * -- -- 8,365 * -- -- c/o Sealy Corporation 1228 Euclid Avenue Cleveland, OH 44115 Douglas Fellmy (6)...... 75,285 * -- -- 8,365 * -- -- c/o Sealy Corporation 1228 Euclid Avenue Cleveland, OH 44115 David McIlquham......... 41,994 * -- -- 4,666 * -- -- c/o Sealy Corporation 1228 Euclid Avenue Cleveland, OH 44115 Lawrence J. Rogers (6).. 75,285 * -- -- 8,365 * -- -- c/o Sealy Corporation 1228 Euclid Avenue Cleveland, OH 44115 Management Investors as 1,494,630 7.2 -- -- 166,070 7.2 -- -- a group (11 persons) (7).................... All directors and executive officers as a group (15 persons)........... 14,944,630 71.8% -- -- 1,660,514.4444 71.8%
66 - -------- *Less than one percent (1) Amounts shown reflect the aggregate number of shares of Class A Common and Class L Common held by Bain Capital Fund V, L.P. ("Fund V"), Bain Capital Fund V-B, L.P., BCIP Trust Associates, L.P. ("BCIP Trust") and BCIP Associates ("BCIP") (collectively, the "Bain Funds"), for the Bain Funds and Messrs. Bekenstein, Edgerley and Krupka. (2) The members of Sealy Investors 1, LLC ("SI1") are Chase Equity Associates, L.P. and Bain Capital Partners V, L.P. ("BCPV"). The members of Sealy Investors 2, LLC ("SI2") are CIBC WG Argosy Merchant Fund 2, L.L.C. and BCPV. The members of Sealy Investors 3, LLC ("SI3" and, collectively with SI1 and SI2, the "LLCs") are BancBoston Capital Inc. and BCPV. BCPV is the administrative member of each LLC and beneficially owns 1% of the equity of each LLC. Accordingly, BCPV may be deemed to be beneficially own certain shares owned by the LLCs, although BCPV disclaims such beneficial ownership. (3) Messrs. Bekenstein, Edgerley and Krupka are each Managing Directors of Bain Capital Investors V, Inc., the sole general partner of BCPV, and are limited partners of BCPV, the sole general partner of Fund V and Fund V-B. Accordingly, Messrs. Bekenstein, Edgerley and Krupka may be deemed to beneficially own shares owned by Fund V and Fund V-B. In addition, Messrs. Bekenstein, Edgerley and Krupka are each general partners of BCIP and BCIP Trust and, accordingly, may be deemed to beneficially own shares owned by such funds. Each such person disclaims beneficial ownership of any such shares in which he does not have a pecuniary interest. (4) Mr. Sallay is a Managing Director of HPC, an affiliate of Harvard Private Capital Holdings, Inc. ("Harvard"). Accordingly, Mr. Sallay may be deemed to beneficially own shares owned by Harvard. Mr. Sallay disclaims beneficial ownership of any such shares in which he does not have a pecuniary interest. (5) Includes 891,630 shares of Class A Common and 99,070 shares of Class L Common issuable upon exercise of outstanding and currently exercisable options. (6) Amounts shown reflect shares issuable upon exercise of outstanding and currently exercisable options. (7) The Management Investors consist of Messrs. Jones, Fazio, Fellmy, McIlquham and Rogers and Bruce Barman, John Bartik, Jeffrey Claypool, James Goughenour, Richard Sowerby and Kenneth Walker. Includes 1,309,644 shares of Class A Common and 145,516 shares of Class L Common issuable upon exercise of currently exercisable options. 67 CERTAIN TRANSACTIONS STOCKHOLDERS AGREEMENT Upon the consummation of the Merger, Parent, and certain of its stockholders, including the Bain Funds, Harvard, the LLCs and Zell (collectively, the "Stockholders") entered into a stockholders agreement (the "Stockholders Agreement"). The Stockholders Agreement: (i) requires that each of the parties thereto vote all of its voting securities of Parent and take all other necessary or desirable actions to cause the size of the Board of Directors of Parent to be established at seven members and to cause three designees of the Bain Funds and one designee of Harvard to be elected to the Board of Directors; (ii) grants Parent and the Bain Funds a right of first offer on any proposed transfer of shares of capital stock of Parent held by Zell, Harvard or the LLCs; (iii) grants Harvard a right of first offer on any proposed transfer of shares of capital stock of Parent held by the Bain Funds; (iv) grants tag-along rights (rights to participate on a pro rata basis in sales of stock by other shareholders) on certain transfers of shares of capital stock of Parent; (v) requires the Stockholders to consent to a sale of Parent to an independent third party if such sale is approved by holders constituting a majority of the then outstanding shares of voting common stock of Parent; and (vi) except in certain instances, prohibits Zell from transferring any shares of capital stock of Parent until the tenth anniversary of the date of the consummation of the Merger. Certain of the foregoing provisions of the Stockholders Agreement will terminate upon the consummation of an initial Public Offering or an Approved Sale (as each is defined in the Stockholders Agreement). Certain of the Stockholders, including Bain, received one-time transaction fees aggregating $8.9 million upon consummation of the Transactions. MANAGEMENT SERVICES AGREEMENT In connection with the Transactions, Parent and the Issuer entered into a Management Services Agreement with Bain pursuant to which Bain has agreed to provide: (i) general management services; (ii) identification, support, negotiation and analysis of acquisitions and dispositions; (iii) support, negotiation and analysis of financial alternatives; and (iv) other services agreed upon by Parent and Bain. In exchange for such services, Bain will receive: (i) an annual management fee of $2.0 million, plus reasonable out-of- pocket expenses (payable quarterly); and (ii) a transaction fee in an amount equal to 1.0% of the aggregate transaction value in connection with the consummation of any additional acquisition or divestiture by the Company and of each financing or refinancing. The Management Services Agreement has an initial term of five years, subject to automatic one-year extensions unless Parent or Bain provides written notice of termination. PARENT REGISTRATION RIGHTS AGREEMENT Upon the consummation of the Merger, Parent, and certain of its stockholders, including the Bain Funds, Harvard, the LLCs and Zell entered into a registration rights agreement (the "Parent Registration Rights Agreement"). Under the Parent Registration Rights Agreement, the holders of a majority of the Registrable Securities (as defined in the Parent Registration Rights Agreement) owned by the Bain Funds have the right, subject to certain conditions, to require Parent to register any or all of their shares of common stock of Parent under the Securities Act at Parent's expense. In addition, all holders of Registrable Securities are entitled to request the inclusion of any shares of common stock of Parent subject to the Parent Registration Rights Agreement in any registration statement at Parent's expense whenever Parent proposes to register any of its common stock under the Securities Act. In connection with all such registrations, Parent has agreed to indemnify all holders of Registrable Securities against certain liabilities, including liabilities under the Securities Act. 68 DESCRIPTION OF SENIOR CREDIT AGREEMENTS Upon consummation of the Transactions, the Issuer entered into the Senior Credit Agreements with Goldman Sachs Credit Partners L.P., as arranger and syndication agent, Morgan Guaranty Trust Company of New York, as administrative agent, Bankers Trust Company, as documentation agent (collectively, Goldman Sachs Credit Partners L.P., Morgan Guaranty Trust Company of New York and Bankers Trust Company are, in such capacity, the "Agents"), and other institutions party thereto (the "Banks"), which provides loans of up to $550.0 million. Loans under the Senior Credit Agreements consist of $120.0 million in aggregate principal amount of Tranche A Term Loans, $125.0 million in aggregate principal amount of amortization extended term loans ("AXELsSM")* Series B, $90.0 million in aggregate principal amount of AXELs Series C and $115.0 million in aggregate principal amount of AXELs Series D (the "Tranche A Term Loans", the "AXELs Series B", the "AXELs Series C", and the "AXELs Series D" are referred to collectively as the "Term Loans"), which were used by the Issuer to provide a portion of the funds necessary to consummate the Transactions and the $100.0 million Revolving Credit Facility, which will permit the Issuer to finance working capital, letters of credit, acquisitions (up to a limit of $50.0 million) and other general corporate needs. This information relating to the Senior Credit Agreements is qualified in its entirety by reference to the complete text of the documents entered into in connection therewith. The following is a description of the general terms of the Senior Credit Agreements. Indebtedness of the Issuer under the Senior Credit Agreements is guaranteed by Parent, certain current and all future U.S. subsidiaries of the Issuer and is secured by (i) a first priority security interest in all, subject to certain customary exceptions, of the material tangible and intangible assets of the Issuer and certain of its current and all of its future U.S. subsidiaries, including all of the capital stock of certain of its current and all of its future U.S. subsidiaries, and (ii) a first priority perfected pledge of 65% of the capital stock of each first-tier foreign subsidiary. Indebtedness under the Senior Credit Agreements bears interest at a floating rate. Indebtedness under the Revolving Credit Facility and the Term Loans initially (subject to reduction based on attainment of certain leverage ratio levels) bears interest at a rate based upon (i) the Base Rate (defined as the highest of (x) the rate of interest announced publically by Morgan Guaranty Trust Company of New York from time to time, as its base rate and (y) the Federal funds effective rate from time to time plus 0.50%) plus 1.25% in respect of the Tranche A Term Loans and the loans under the Revolving Credit Facility (the "Revolving Loans"), 1.50% in respect of the AXELs Series B, 1.75% in respect of the AXELs Series C and 2.00% in respect of the AXELs Series D, or (ii) the Adjusted Eurodollar Rate (as defined in the Senior Credit Agreements) for one, two, three or six months (or, subject to general availability, two weeks or twelve months), in each case plus 2.25% in respect of Tranche A Term Loans and Revolving Loans, 2.50% in respect of AXELs Series B, 2.75% in respect of AXELs Series C and 3.00% in respect of AXELs Series D. The Tranche A Term Loans will mature in December 2002. The AXELs Series B will mature in December 2004. The AXELs Series C will mature in December 2005. The AXELs Series D will mature in December 2006. The Tranche A Term Loans will be subject to quarterly amortization payments commencing in March 1999, the AXELs Series B, the AXELs Series C and the AXELs Series D will be subject to quarterly amortization payments commencing in March 1998 with the AXELs Series B amortizing in nominal amounts until the maturity of the Tranche A Term Loans, the AXELs Series C amortizing in nominal amounts until the maturity of the AXELs Series B and the AXELs Series D amortizing in nominal amounts until the maturity of the AXELs Series C. The Revolving Credit Facility will mature in December 2002. In addition, the Senior Credit Agreements provide for mandatory repayments, subject to certain exceptions, of the Term Loans, and reductions in the Revolving Credit - -------- *"AXELs" is a registered servicemark of Goldman, Sachs & Co. 69 Facility, based on the net proceeds of certain asset sales outside the ordinary course of business of the Issuer and its subsidiaries, the net proceeds of insurance, the net proceeds of certain debt and equity issuances, and excess cash flow. The Revolving Loans (other than amounts up to $50.0 million used to make permitted acquisitions) may be repaid and reborrowed. The Issuer will be required to pay to the Banks participating in the Revolving Credit Facility a commitment fee initially (subject to reduction based on attainment of certain leverage ratio levels) equal to 0.50% per annum, on the average unused portion of the Revolving Credit Facility during each quarter. The Issuer also will be required to pay to the Banks participating in the Revolving Credit Facility letter of credit fees initially (subject to reduction based on attainment of certain leverage ratio levels) equal to 2.25% per annum on the average daily stated amount of each letter of credit outstanding and to the Bank issuing a letter of credit a fronting fee of 1/8 of 1% on the average daily stated amount of each outstanding letter of credit issued by such Bank, in each case payable in arrears on a quarterly basis. The Agents and the Banks will receive and continue to receive such other fees as have been separately agreed upon with the Agents. The Senior Revolving Credit Agreement requires the Company to meet certain financial tests, including minimum levels of EBITDA (initially $92.5 million and increasing over time to $120 million), minimum interest coverage ratio (initially 1.5 to 1 and increasing over time to 1.9 to 1) and maximum leverage ratio (initially 7.4 to 1 and decreasing over time to 5.1 to 1). The Senior Credit Agreements also contain covenants which, among other things, limit indebtedness and/or the incurrence of additional indebtedness, investments, contingent obligations, dividends, transactions with affiliates, asset sales, mergers and consolidations, prepayments of other indebtedness (including the Notes), liens and encumbrances and other matters customarily restricted in such agreements. The Senior Credit Agreements contain customary events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain other indebtedness, certain events of bankruptcy and insolvency, events relating to ERISA plans, judgment defaults, failure of any guaranty or security document supporting the Senior Credit Agreements to be in full force and effect and change of control of the Issuer and Parent. DESCRIPTION OF EXCHANGE NOTES GENERAL The Senior Subordinated Exchange Notes will be issued pursuant to an Indenture (the "Senior Subordinated Note Indenture") among the Company, the Guarantors and The Bank of New York, as trustee (the "Senior Subordinated Note Trustee"). The Senior Subordinated Discount Exchange Notes will be issued pursuant to an Indenture (the "Senior Subordinated Discount Note Indenture" and, together with the Senior Subordinated Note Indenture, the "Indentures") among the Company, the Guarantors and The Bank of New York, as trustee (the "Senior Subordinated Discount Note Trustee" and, together with the Senior Subordinated Note Trustee, the "Trustees"). Each of the Senior Subordinated Exchange Notes and the Senior Subordinated Discount Exchange Notes is referred to herein as a "class" of Exchange Notes and each of the Senior Subordinated Notes and the Senior Subordinated Discount Notes is referred to herein as a "class" of Notes. The terms of the Notes include those stated in the Indentures and those made part of the Indentures by reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The Exchange Notes are subject to all such terms, and Holders of Notes are referred to the Indentures and the Trust Indenture Act for a statement thereof. The following summary of the material provisions of the Indentures and the Registration Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the Indentures and the Registration Rights Agreement, including the definitions therein of certain terms used below. Copies of the proposed form of Indentures and Registration Rights Agreement are available as set forth below under "--Additional Information". The definitions of certain terms used in 70 the following summary are set forth below under "--Certain Definitions". For purposes of this summary, the term "Company" refers only to Sealy Mattress Company and not to any of its Subsidiaries. Initially, the Trustee will act as paying agent and registrar for the Exchange Notes. The form and terms of the Exchange Notes are the same as the form and terms of the Notes (which they replace) except that (i) the Exchange Notes bear a Series B designation, (ii) the Exchange Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof, and (iii) the holders of Exchange Notes will not be entitled to certain rights under the Registration Rights Agreement, including the provisions providing for an increase in the interest rate on the Notes in certain circumstances relating to the timing of the Exchange Offer, which rights will terminate when the Exchange Offer is consummated. The Exchange Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all current and future Senior Debt. The Senior Subordinated Exchange Notes and the Senior Subordinated Discount Exchange Notes will be pari passu with each other. As of March 1, 1998, the Issuer had Senior Debt of approximately $479.0 million and, through its Subsidiaries, had additional liabilities (including trade payables and lease obligations) aggregating approximately $169.5 million. The Indentures will permit the incurrence of additional Senior Debt in the future. The operations of the Company are primarily conducted through its Subsidiaries and, therefore, the Company is primarily dependent upon the cash flow of its Subsidiaries to meet its obligations, including its obligations under the Exchange Notes. As a result, the Exchange Notes will be effectively subordinated to all Indebtedness and other liabilities and commitments (including trade payables and lease obligations) of the Company's Subsidiaries except to the extent of the Note Guarantees. Only certain of the Company's U.S. Subsidiaries will be Subsidiary Guarantors of the Notes. Any right of the Company to receive assets of any of its Non-Guarantor Subsidiaries upon the latter's liquidation or reorganization (and the consequent right of the Holders of the Exchange Notes to participate in those assets) will be effectively subordinated to the claims of that Subsidiary's creditors (including trade creditors), except to the extent that the Company is itself recognized as a creditor of such Subsidiary, in which case the claims of the Company would still be subordinate to any security in the assets of such Subsidiary and any Indebtedness of such Subsidiary senior to that held by the Company. As of March 1, 1998, the Company's Non-Guarantor Subsidiaries had, in the aggregate, approximately $43.6 million of liabilities (of which $29.6 million represent intercompany liabilities). See "Risk Factors--Subordination of Notes; Guarantees". As of the date of the Indentures, all of the Company's Subsidiaries were Restricted Subsidiaries. However, under certain circumstances, the Company will be able to designate current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the restrictive covenants set forth in the Indentures. See "--Certain Covenants-- Restricted Payments". SUBORDINATION The payment of the Company's Obligations with respect to each class of Exchange Notes will be subordinated in right of payment, as set forth in the Indentures, to the prior payment in full in cash or Cash Equivalents of all Senior Debt, whether outstanding on the date of the Indentures or thereafter incurred. Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, an assignment for the benefit of creditors or any marshalling of the Company's assets and liabilities, the holders of Senior Debt will be entitled to receive payment in full 71 in cash or Cash Equivalents of all Obligations due in respect of such Senior Debt (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Debt) before the Holders of Exchange Notes will be entitled to receive any payment with respect to the Exchange Notes, and until all Obligations with respect to Senior Debt are paid in full in cash or Cash Equivalents, any distribution to which the Holders of Exchange Notes would be entitled shall be made to the holders of Senior Debt (except that Holders of Exchange Notes may receive and retain Permitted Junior Securities and payments made from the trust described under "--Legal Defeasance and Covenant Defeasance"). The Company also may not make any payment upon or in respect of the Exchange Notes (except in Permitted Junior Securities or from the trust described under "--Legal Defeasance and Covenant Defeasance") if (i) a default in the payment of the principal of, premium, if any, interest or Liquidated Damages, if any, on Designated Senior Debt occurs and is continuing beyond any applicable period of grace or (ii) any other default occurs and is continuing with respect to Designated Senior Debt that permits holders of the Designated Senior Debt as to which such default relates to accelerate its maturity and the applicable Trustee receives a notice of such default (a "Payment Blockage Notice") from the Company or the holders of any Designated Senior Debt. Payments on the Exchange Notes may and shall be resumed (a) in the case of a payment default, upon the date on which such default is cured or waived and (b) in case of a nonpayment default, the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received, unless the maturity of any Designated Senior Debt has been accelerated. No new period of payment blockage may be commenced unless and until (i) 360 days have elapsed since the effectiveness of the immediately prior Payment Blockage Notice and (ii) all scheduled payments of principal, premium, if any, interest and Liquidated Damages on the Notes that have come due have been paid in full in cash. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the applicable Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice unless such default shall have been waived for a period of not less than 180 days. The Indentures further require that the Company promptly notify holders of Senior Debt if payment of the Notes is accelerated because of an Event of Default. "Designated Senior Debt" means (i) any Indebtedness outstanding under the Senior Credit Agreements and (ii) after payment in full of all Indebtedness outstanding under the Senior Credit Agreements, any other Senior Debt permitted under the Indentures, the principal amount of which is $25.0 million or more, and that has been designated by the Company as "Designated Senior Debt". "Permitted Junior Securities" means Equity Interests in the Company or any Guarantor or debt securities that are unsecured and are subordinated to all Senior Debt (and any debt securities issued in exchange for Senior Debt) to substantially the same extent as, or to a greater extent than, the Notes are subordinated to Senior Debt pursuant to Article 10 of each of the Indentures (without limiting the foregoing, such securities shall have no required principal payments until after the final maturity of all Senior Debt). "Senior Debt" means (i) all Indebtedness of the Company or any of the Guarantors outstanding under Credit Facilities and all Hedging Obligations with respect thereto, (ii) any other Indebtedness permitted to be incurred by the Company under the terms of the Indentures, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Exchange Notes and (iii) all Obligations with respect to the foregoing. Notwithstanding anything to the contrary in the foregoing, Senior Debt will not include (w) any liability for Federal, state, local or other taxes owed or owing by the Company, (x) any Indebtedness of the Company to any of its Subsidiaries or other Affiliates, (y) any trade payables or (z) any Indebtedness that is incurred in violation of the Indentures. 72 NOTE GUARANTEES The Company's payment obligations under each class of Exchange Notes will be fully and unconditionally guaranteed (the "Note Guarantees"), on a joint and several basis, by the Subsidiary Guarantors and Parent (together with the Subsidiary Guarantors, the "Guarantors"). Note Guarantees will not be provided by the Non-Guarantor Subsidiaries. The Note Guarantee of each Guarantor will be subordinated to the prior payment in full in cash or cash equivalents of all Senior Debt of such Guarantor, which would include approximately $460.0 million of Senior Debt outstanding on a pro forma basis as of November 30, 1997, and the amounts for which the Guarantors will be liable under the Guarantees issued from time to time with respect to Senior Debt. The obligations of each Guarantor under its Note Guarantees will be limited so as not to constitute a fraudulent conveyance under applicable law. See, however, "Risk Factors--Risk of Fraudulent Transfer". Subject to the provisions of the following paragraph, the Indentures provide that no Subsidiary Guarantor may consolidate with or merge with or into (whether or not such Subsidiary Guarantor is the surviving Person), another corporation, Person or entity whether or not affiliated with such Subsidiary Guarantor unless (i) subject to the provisions of the following paragraph, the Person formed by or surviving any such consolidation or merger (if other than such Subsidiary Guarantor) assumes all the obligations of such Subsidiary Guarantor pursuant to a supplemental indenture in form and substance reasonably satisfactory to the applicable Trustee, under the Exchange Notes, the applicable Indenture and the Registration Rights Agreement; (ii) immediately after giving effect to such transaction, no Default or Event of Default exists; and (iii) the Company would be permitted by virtue of the Company's pro forma Consolidated Fixed Charge Coverage Ratio, immediately after giving effect to such transaction, to incur at least $1.00 of additional Indebtedness pursuant to the Consolidated Fixed Charge Coverage Ratio test set forth in the covenant described below under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock". Except as set forth in this paragraph, the Indentures do not prohibit the merger of two of the Company's Restricted Subsidiaries or the merger of a Restricted Subsidiary into the Company. The Indentures provide that in the event of a sale or other disposition of all of the assets of any Subsidiary Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of any Subsidiary Guarantor, then such Subsidiary Guarantor (in the event of a sale or other disposition, by way of such a merger, consolidation or otherwise, of all of the capital stock of such Subsidiary Guarantor) or the corporation acquiring the property (in the event of a sale or other disposition of all of the assets of such Subsidiary Guarantor) will be released and relieved of any obligations under its Note Guarantees; provided that the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the applicable Indenture. See "Redemption or Repurchase at Option of Holders--Asset Sales". The limitations and restrictions in the Indentures do not apply to, limit or restrict the operations of Parent. PRINCIPAL, MATURITY AND INTEREST SENIOR SUBORDINATED EXCHANGE NOTES. The Senior Subordinated Exchange Notes will be limited in aggregate principal amount to $300.0 million, of which $125.0 million are expected to be issued in the Exchange Offer, and will mature on December 15, 2007. Interest on the Senior Subordinated Exchange Notes will accrue at the rate of 9 7/8% per annum and will be payable semi- annually in arrears on June 15 and December 15 of each year, commencing on June 15, 1998, to Holders of record on the immediately preceding June 1 and December 1. Additional Senior Subordinated Exchange Notes may be issued from time to time after the date of the Senior Subordinated Note Indenture, subject to the provisions of the Senior Subordinated Note Indenture, including those described below under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock". Interest on the Senior Subordinated Exchange Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance. Interest will be computed on the basis of a 360-day year comprised of twelve 73 30-day months. Principal, premium, if any, interest and Liquidated Damages, if any, on the Senior Subordinated Exchange Notes will be payable at the office or agency of the Company maintained for such purpose within the City and State of New York or, at the option of the Company, payment of interest and Liquidated Damages, if any, may be made by check mailed to the Holders of the Senior Subordinated Exchange Notes at their respective addresses set forth in the register of Holders of Senior Subordinated Exchange Notes; provided that all payments of principal, premium, interest and Liquidated Damages with respect to Senior Subordinated Exchange Notes the Holders of which have given wire transfer instructions to the Company will be required to be made by wire transfer of immediately available funds to the accounts specified by the Holders thereof. Until otherwise designated by the Company, the Company's office or agency in New York will be the office of the applicable Trustee maintained for such purpose. The Senior Subordinated Exchange Notes will be issued in denominations of $1,000 and integral multiples thereof. SENIOR SUBORDINATED DISCOUNT EXCHANGE NOTES. The Senior Subordinated Discount Exchange Notes will be limited in aggregate principal amount at maturity to $275.0 million, of which $128.0 million are expected to be issued in the Offering, and will mature on December 15, 2007. The Senior Subordinated Discount Exchange Notes are being offered at a substantial discount from their principal amount at maturity. Until December 15, 2002 (the "Full Accretion Date"), no interest (other than Liquidated Damages, if applicable) will accrue or be paid in cash on the Senior Subordinated Discount Exchange Notes, but the Accreted Value will accrete (representing the amortization of original issue discount) between the Issuance Date and the Full Accretion Date, on a semi- annual bond equivalent basis using a 360-day year comprised of twelve 30-day months such that the Accreted Value shall be equal to the full principal amount at maturity of the Senior Subordinated Discount Exchange Notes on the Full Accretion Date. Beginning on the Full Accretion Date, interest on the Senior Subordinated Discount Exchange Notes will accrue at the rate of 10 7/8% per annum and will be payable in cash semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 2003, to Holders of record on the immediately preceding June 1 and December 1. Additional Senior Subordinated Discount Exchange Notes may be issued from time to time after the date of the Senior Subordinated Discount Note Indenture, subject to the provisions of the Senior Subordinated Discount Note Indenture, including those described below under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock". Interest on the Senior Subordinated Discount Exchange Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Full Accretion Date. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Principal, premium, if any, interest and Liquidated Damages, if any, on the Senior Subordinated Discount Exchange Notes will be payable at the office or agency of the Company maintained for such purpose within the City and State of New York or, at the option of the Company, payment of interest and Liquidated Damages, if any, may be made by check mailed to the Holders of the Senior Subordinated Discount Exchange Notes at their respective addresses set forth in the register of Holders of Senior Subordinated Discount Exchange Notes; provided that all payments of principal, premium, interest and Liquidated Damages, if any, with respect to Senior Subordinated Discount Exchange Notes the Holders of which have given wire transfer instructions to the Company will be required to be made by wire transfer of immediately available funds to the accounts specified by the Holders thereof. Until otherwise designated by the Company, the Company's office or agency in New York will be the office of the applicable Trustee maintained for such purpose. The Senior Subordinated Discount Exchange Notes will be issued in denominations of $1,000 and integral multiples thereof. OPTIONAL REDEMPTION SENIOR SUBORDINATED EXCHANGE NOTES. Except as provided below, the Senior Subordinated Exchange Notes will not be redeemable at the Company's option prior to December 15, 2002. Thereafter, the Senior Subordinated Exchange Notes will be subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at 74 the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on December 15 of the years indicated below:
PERCENTAGE OF PRINCIPAL YEAR AMOUNT ---- ------------- 2002..................................... 104.937% 2003..................................... 103.292% 2004..................................... 101.646% 2005 and thereafter...................... 100.000%
Notwithstanding the foregoing, during the first 36 months after December 11, 1997, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of Senior Subordinated Exchange Notes originally issued under the Senior Subordinated Note Indenture at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the redemption date, with the net cash proceeds of any Equity Offerings; provided that at least $80.0 million in aggregate principal amount of Senior Subordinated Exchange Notes remain outstanding immediately after the occurrence of such redemption (excluding Senior Subordinated Exchange Notes held by the Company and its Subsidiaries); and provided further that such redemption shall occur within 120 days of the date of the closing of any such Equity Offering. At any time prior to December 15, 2002, the Senior Subordinated Exchange Notes may also be redeemed, as a whole but not in part, at the option of the Company upon the occurrence of a Change of Control, upon not less than 30 nor more than 60 days prior notice (but in no event may any such redemption occur more than 90 days after the occurrence of such Change of Control) mailed by first-class mail to each Holder's registered address, at a redemption price equal to 100% of the principal amount thereof plus the Senior Subordinated Note Applicable Premium as of, and accrued and unpaid interest and Liquidated Damages, if any, to, the date of redemption (the "Senior Subordinated Note Redemption Date"). "Senior Subordinated Note Applicable Premium" means, with respect to any Senior Subordinated Exchange Note on any Senior Subordinated Note Redemption Date, the greater of (i) 1.0% of the principal amount of such Senior Subordinated Note or (ii) the excess of (A) the present value at such Senior Subordinated Note Redemption Date of (1) the redemption price of such Senior Subordinated Exchange Note at December 15, 2002 (such redemption price being set forth in the table above) plus (2) all required interest payments due on such Senior Subordinated Exchange Note through December 15, 2002 (excluding accrued but unpaid interest), computed using a discount rate equal to the Treasury Rate at such Senior Subordinated Note Redemption Date plus 75 basis points over (B) the principal amount of such Senior Subordinated Exchange Note, if greater. SENIOR SUBORDINATED DISCOUNT EXCHANGE NOTES. Except as provided below, the Senior Subordinated Discount Exchange Notes will not be redeemable at the Company's option prior to December 15, 2002. Thereafter, the Senior Subordinated Discount Exchange Notes will be subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on December 15 of the years indicated below:
PERCENTAGE OF PRINCIPAL YEAR AMOUNT ---- ------------- 2002..................................... 105.437% 2003..................................... 103.625% 2004..................................... 101.812% 2005 and thereafter...................... 100.000%
75 Notwithstanding the foregoing, during the first 36 months after December 11, 1997, the Company may on any one or more occasions redeem up to 35% of the Accreted Value of Senior Subordinated Discount Exchange Notes originally issued under the Senior Subordinated Discount Note Indenture at a redemption price of 110.875% of the Accreted Value, plus accrued and unpaid Liquidated Damages thereon, if any, to the redemption date, with the net cash proceeds of any Equity Offerings; provided that at least $50.0 million in aggregate Accreted Value of Senior Subordinated Discount Exchange Notes remain outstanding immediately after the occurrence of such redemption (excluding Senior Subordinated Discount Exchange Notes held by the Company and its Subsidiaries); and provided, further, that such redemption shall occur within 120 days of the date of the closing of any such Equity Offering. At any time prior to December 15, 2002, the Senior Subordinated Discount Exchange Notes may also be redeemed, as a whole but not in part, at the option of the Company upon the occurrence of a Change of Control, upon not less than 30 nor more than 60 days prior notice (but in no event may any such redemption occur more than 90 days after the occurrence of such Change of Control) mailed by first-class mail to each Holder's registered address, at a redemption price equal to 100% of the Accreted Value thereof plus the Senior Subordinated Discount Note Applicable Premium as of, and accrued and unpaid Liquidated Damages, if any, to, the date of redemption (the "Senior Subordinated Discount Note Redemption Date" and, together with the Senior Subordinated Note Redemption Date, the "Redemption Dates"). "Senior Subordinated Discount Note Applicable Premium" means, with respect to any Senior Subordinated Discount Exchange Note on any Senior Subordinated Discount Note Redemption Date, the greater of (i) 1.0% of the Accreted Value of such Senior Subordinated Discount Exchange Note or (ii) the excess of (A) the present value at such Senior Subordinated Discount Note Redemption Date of (1) the redemption price of such Senior Subordinated Discount Exchange Note at December 15, 2002 (such redemption price being set forth in the table above) plus (2) all Accreted Value on such Senior Subordinated Discount Exchange Note through December 15, 2002, computed using a discount rate equal to the Treasury Rate at such Senior Subordinated Discount Note Redemption Date plus 75 basis points over (B) the Accreted Value of such Senior Subordinated Discount Exchange Note as of the Senior Subordinated Discount Note Redemption Date, if greater. SELECTION AND NOTICE. If less than all of the Notes of either series are to be redeemed at any time, selection of Exchange Notes for redemption will be made by the applicable Trustee from among the Exchange Notes of such series that are then outstanding in compliance with the requirements of the principal national securities exchange, if any, on which the Exchange Notes are listed, or, if the Exchange Notes are not so listed, on a pro rata basis, by lot or by such method as the applicable Trustee shall deem fair and appropriate; provided that no Exchange Notes of $1,000 or less shall be redeemed in part. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder of Exchange Notes to be redeemed at its registered address. Notices of redemption may not be conditional. If any Exchange Note is to be redeemed in part only, the notice of redemption that relates to such Exchange Note shall state the portion of the principal amount thereof to be redeemed. A new Exchange Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Exchange Note. Exchange Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on Exchange Notes or portions of them called for redemption. MANDATORY REDEMPTION The Company is not required to make mandatory redemption or sinking fund payments with respect to the Exchange Notes. 76 REPURCHASE AT THE OPTION OF HOLDERS CHANGE OF CONTROL Upon the occurrence of a Change of Control, each Holder of Exchange Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Exchange Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash (the "Change of Control Payment") equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase (or, with respect to the Senior Subordinated Discount Exchange Notes, if such Change of Control Offer is prior to the Full Accretion Date, 101% of the Accreted Value thereof on the date of repurchase, plus accrued and unpaid Liquidated Damages, if any, thereon to the date of repurchase). Within ten days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Exchange Notes on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"), pursuant to the procedures required by the applicable Indenture and described in such notice. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Exchange Notes as a result of a Change of Control. On the Change of Control Payment Date, the Company will, to the extent lawful, (1) accept for payment all Exchange Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Exchange Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the applicable Trustee the Exchange Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Exchange Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each Holder of Exchange Notes so tendered the Change of Control Payment for such Exchange Notes, and the applicable Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Exchange Note equal in principal amount to any unpurchased portion of the Exchange Notes surrendered, if any; provided that each such new Exchange Note will be in a principal amount of $1,000 or an integral multiple thereof. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. The Indentures provide that, prior to the mailing of any notice required by the applicable Indenture, but in any event within 30 days following any Change of Control, the Company will (i) repay in full in cash and terminate all commitments under Indebtedness under the Senior Credit Agreements and all other Senior Debt the terms of which require repayment upon a Change of Control or offer to repay in full in cash and terminate all commitments under all Indebtedness under the Senior Credit Agreements and all other such Senior Debt and to repay the Indebtedness owed to each lender under the Senior Credit Agreements that has accepted such offer or (ii) obtain the requisite consents under the Senior Credit Agreements and all such other Senior Debt to permit the repurchase of the Notes as provided above. The Company shall first comply with this covenant before it shall be required to repurchase Exchange Notes pursuant to the provisions described in the applicable Indenture. The Company's failure to comply with the immediately preceding sentence shall constitute an Event of Default described in clause (iii) and not in clause (ii) under "Events of Default" below. The Senior Credit Agreements restrict the Company's ability to prepay debt, including the Exchange Notes, and also provide that certain change of control events with respect to the Company would constitute a default thereunder. Any future credit agreements or other agreements relating to Senior Debt to which the Company becomes a party may contain similar restrictions and provisions. In the event a Change of Control occurs at a time when the Company is prohibited from purchasing 77 Exchange Notes, the Company could seek the consent of its lenders to the purchase of Exchange Notes or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or repay such borrowings, the Company will remain prohibited from purchasing Exchange Notes. In such case, the Company's failure to purchase tendered Exchange Notes would constitute an Event of Default under the Indentures which would, in turn, constitute a default under the Senior Credit Agreements. In such circumstances, the subordination provisions in the Indentures would likely restrict payments to the Holders of Exchange Notes. The Change of Control provisions described above will be applicable whether or not any other provisions of the applicable Indenture are applicable. Except as described above with respect to a Change of Control, the applicable Indenture does not contain provisions that permit the Holders of the Notes to require that the Company repurchase or redeem the Exchange Notes in the event of a takeover, recapitalization or similar transaction. The Company will not be required to make a Change of Control Offer upon a Change of Control (i) if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the applicable Indenture applicable to a Change of Control Offer made by the Company and purchases all Exchange Notes validly tendered and not withdrawn under such Change of Control Offer or (ii) the Company exercises its option to purchase all the Exchange Notes upon a Change of Control as described above under the caption "Optional Redemption". "Change of Control" means the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company to any Person or group of related Persons, as defined in Section 13(d) of the Exchange Act (a "Group"), whether or not otherwise in compliance with the provisions of the applicable Indenture, other than Bain Capital, Inc. and its Related Parties; (ii) the approval by the holders of Capital Stock of the Company of any plan or proposal for the liquidation or dissolution of the Company (whether or not otherwise in compliance with the provisions of the applicable Indenture); (iii) any Person or Group (other than Bain Capital, Inc. and its Related Parties) shall become the owner, directly or indirectly, beneficially or of record, of shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding Voting Stock of Parent or any successor to all or substantially all of its assets; (iv) the first day on which a majority of the members of the Board of Directors of the Company or Parent are not Continuing Directors; or (v) the first day on which Parent ceases to hold 100% of the outstanding Equity Interests of the Company (other than as a result of a Merger of the Company and Parent permitted by the applicable Indenture). The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of the Company and its Subsidiaries taken as a whole. Although there is a developing body of case law interpreting the phrase "substantially all", there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a Holder of Exchange Notes to require the Company to repurchase such Exchange Notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Company and its Subsidiaries taken as a whole to another Person or group may be uncertain. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on the date of the Indentures or (ii) was nominated for election or elected to such Board of Directors by any of the Principals or with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. 78 "Principals" means the Parent, Bain Capital, Inc. and any other stockholder of Parent that owns at least 10% of the outstanding Equity Interests of Parent as of the date of issuance of the Exchange Notes. "Related Party" with respect to any Principal means (A) any controlling stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family member (in the case of an individual) of such Principal or (B) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of such Principal and/or such other Persons referred to in the immediately preceding clause (A). ASSET SALES The Indentures provide that the Company will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company or the applicable Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed of (as determined in good faith by the Company's Board of Directors), (ii) at least 75% of the consideration received by the Company or the Restricted Subsidiary, as the case may be, from such Asset Sale shall be cash or Cash Equivalents; provided that the amount of (a) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet) of the Company or any such Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Exchange Notes) that are assumed by the transferee of any such assets, (b) any notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are immediately converted by the Company or such Restricted Subsidiary into cash (to the extent of the cash received) and (c) any Designated Noncash Consideration received by the Company or any of its Restricted Subsidiaries in such Asset Sale having an aggregate fair market value, taken together with all other Designated Noncash Consideration received pursuant to this clause (c) that is at that time outstanding, not to exceed 10% of Total Assets at the time of the receipt of such Designated Noncash Consideration (with the fair market value of each item of Designated Noncash Consideration being measured at the time received and without giving effect to subsequent changes in value), shall be deemed to be cash for the purposes of this provision, and (iii) upon the consummation of an Asset Sale, the Company shall apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds relating to such Asset Sale within 365 days of receipt thereof either (A) to repay any Senior Debt and, in the case of any Senior Debt under any revolving credit facility, effect a commitment reduction under such revolving credit facility, (B) to reinvest in Productive Assets, or (C) a combination of prepayment, repurchase and investment permitted by the foregoing clauses (iii)(A) and (iii)(B). Pending the final application of any such Net Cash Proceeds, the Company or such Restricted Subsidiary may temporarily reduce Indebtedness under a revolving credit facility, if any, or otherwise invest such Net Cash Proceeds in Cash Equivalents. On the 366th day after an Asset Sale or such earlier date, if any, as the Board of Directors of the Company or of such Restricted Subsidiary determines not to apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses (iii)(A), (iii)(B) or (iii)(C) of the next preceding sentence (each, a "Net Proceeds Offer Trigger Date"), the aggregate amount of Net Cash Proceeds that have not been applied on or before such Net Proceeds Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each a "Net Proceeds Offer Amount") shall be applied by the Company or such Restricted Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45 days following the applicable Net Proceeds Offer Trigger Date, from all Holders on a pro rata basis that amount of Exchange Notes equal to the Net Proceeds Offer Amount at a price equal to 100% of the principal amount of the Exchange Notes to be purchased, plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase (or, if such Net Proceeds Offer is to be consummated prior to the Full Accretion Date, 100% of the Accreted Value of Senior Subordinated Discount Exchange Notes, plus accrued and unpaid liquidated damages thereon, if any, to the date of purchase); provided, however, that if at any time any non-cash consideration (including any Designated Noncash Consideration) 79 received by the Company or any Restricted Subsidiary of the Company, as the case may be, in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash (other than interest received with respect to any such non-cash consideration), then such conversion or disposition shall be deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be applied in accordance with this covenant. Notwithstanding the foregoing, if a Net Proceeds Offer Amount is less than $10.0 million, the application of the Net Cash Proceeds constituting such Net Proceeds Offer Amount to a Net Proceeds Offer may be deferred until such time as such Net Proceeds Offer Amount plus the aggregate amount of all Net Proceeds Offer Amounts arising subsequent to the Net Proceeds Offer Trigger Date relating to such initial Net Proceeds Offer Amount from all Asset Sales by the Company and its Restricted Subsidiaries aggregates at least $10.0 million, at which time the Company or such Restricted Subsidiary shall apply all Net Cash Proceeds constituting all Net Proceeds Offer Amounts that have been so deferred to make a Net Proceeds Offer (the first date the aggregate of all such deferred Net Proceeds Offer Amounts is equal to $10.0 million or more shall be deemed to be a "Net Proceeds Offer Trigger Date"). Notwithstanding the two immediately preceding paragraphs, the Company and its Restricted Subsidiaries will be permitted to consummate an Asset Sale without complying with such paragraphs to the extent (i) at least 75% of the consideration for such Asset Sale constitutes Productive Assets, cash, Cash Equivalents and/or Marketable Securities and (ii) such Asset Sale is for fair market value (as determined in good faith by the Company's Board of Directors); provided that any consideration not constituting Productive Assets received by the Company or any of its Restricted Subsidiaries in connection with any Asset Sale permitted to be consummated under this paragraph shall be subject to the provisions of the two preceding paragraphs. Each Net Proceeds Offer will be mailed to the record Holders as shown on the register of Holders within 25 days following the Net Proceeds Offer Trigger Date, with a copy to the applicable Trustee, and shall comply with the procedures set forth in the applicable Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may elect to tender their Exchange Notes in whole or in part in integral multiples of $1,000 in exchange for cash. To the extent Holders properly tender Exchange Notes in an amount exceeding the Net Proceeds Offer Amount, Exchange Notes of tendering Holders will be purchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer shall remain open for a period of 20 business days or such longer period as may be required by law. To the extent that the aggregate amount of Exchange Notes tendered pursuant to a Net Proceeds Offer is less than the Net Proceeds Offer Amount, the Company may use any remaining Net Proceeds Offer Amount for general corporate purposes. Upon completion of any such Net Proceeds Offer, the Net Proceeds Offer Amount shall be reset at zero. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Exchange Notes pursuant to a Net Proceeds Offer. To the extent that the provisions of any securities laws or regulations conflict with the Asset Sale provisions of the applicable Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the Asset Sale provisions of the applicable Indenture by virtue thereof. CERTAIN COVENANTS RESTRICTED PAYMENTS The Indentures provide that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of the Company's Equity Interests (including, without limitation, any payment in 80 connection with any merger or consolidation involving the Company) or to the direct or indirect holders of the Company's Equity Interests in their capacity as such (other than dividends or distributions payable in Qualified Capital Stock of the Company); (ii) purchase, redeem or otherwise acquire or retire for value (including, without limitation, in connection with any merger or consolidation involving the Company) any Equity Interests of the Company or any direct or indirect parent of the Company; or (iii) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iii) above being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (a) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; and (b) the Company would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable Four-Quarter Period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Consolidated Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described below under caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"; and (c) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the date of the Indentures (excluding Restricted Payments permitted by clauses (3), (5), (6), (8) and (9) of the next succeeding paragraph), is less than the sum, without duplication, of (i) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date of the Indentures to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds (including the fair market value of property other than cash that would constitute Marketable Securities or a Permitted Business) received by the Company since the date of the Indentures as a contribution to its common equity capital (other than from a Subsidiary or that were financed with loans from the Company or any Restricted Subsidiary) or from the issue or sale of Qualified Capital Stock (including Capital Stock issued upon the conversion of convertible Indebtedness or in exchange for outstanding Indebtedness) of the Company (excluding any net proceeds from an Equity Offering or capital contribution to the extent used to redeem Exchange Notes in accordance with the optional redemption provisions of the Exchange Notes) or from the issue or sale of Disqualified Stock or debt securities of the Company that have been converted into Qualified Capital Stock (other than Qualified Capital Stock (or Disqualified Stock or convertible debt securities) sold to a Subsidiary of the Company), plus (iii) 100% of the aggregate net proceeds (including the fair market value of property other than cash that would constitute Marketable Securities or a Permitted Business) of any (A) sale or other disposition of Restricted Investments made by the Company and its Restricted Subsidiaries or (B) dividend from, or the sale of the stock of, an Unrestricted Subsidiary. Notwithstanding the foregoing, the provisions set forth in the immediately preceding paragraph do not prohibit (1) the payment of any dividend or the consummation of any irrevocable redemption within 60 days after the date of declaration of such dividend or notice of such redemption if the dividend or payment of the redemption price, as the case may be, would have been permitted on the date of declaration or notice; (2) if no Event of Default shall have occurred and be continuing or shall occur as a consequence thereof, the acquisition of any shares of Capital Stock of the Company (the "Retired Capital Stock"), either (i) solely in exchange for shares of Qualified Capital Stock of the Company (the "Refunding Capital Stock"), or (ii) through the application of the net proceeds of a substantially concurrent sale for cash (other than to a Subsidiary of the Company) of shares of Qualified Capital Stock of the Company, and, in the case of subclause (i) of this clause (2), if immediately prior to the 81 retirement of the Retired Capital Stock the declaration and payment of dividends thereon was permitted under clause (3) of this paragraph, the declaration and payment of dividends on the Refunding Capital Stock in an aggregate amount per year no greater than the aggregate amount of dividends per annum that was declarable and payable on such Retired Capital Stock immediately prior to such retirement; provided that at the time of the declaration of any such dividends on the Refunding Capital Stock, no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; (3) if no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof, the declaration and payment of dividends to holders of any class or series of Designated Preferred Stock (other than Disqualified Stock) issued after the date of the Indentures (including, without limitation, the declaration and payment of dividends on Refunding Capital Stock in excess of the dividends declarable and payable thereon pursuant to clause (2) of this paragraph); provided that, at the time of such issuance, the Company, after giving effect to such issuance on a pro forma basis, would have had a Consolidated Fixed Charge Coverage Ratio of at least 2.0 to 1.0 for the most recent Four-Quarter Period; (4) payments to Parent for the purpose of permitting, and in an amount equal to the amount required to permit, Parent to redeem or repurchase Parent's common equity or options in respect thereof, in each case in connection with the repurchase provisions of employee stock option or stock purchase agreements or other agreements to compensate management employees; provided that all such redemptions or repurchases pursuant to this clause (4) shall not exceed $12.5 million (which amount shall be increased by the amount of any net cash proceeds received from the sale since the date of the Indentures of Equity Interests (other than Disqualified Stock) to members of the Company's management team that have not otherwise been applied to the payment of Restricted Payments pursuant to the terms of the preceding paragraph (c) and by the cash proceeds of any "key-man" life insurance policies which are used to make such redemptions or repurchases) in the aggregate since the date of the Indentures; provided, further, that the cancellation of Indebtedness owing to the Company from members of management of the Company or any of its Restricted Subsidiaries in connection with such a repurchase of Capital Stock of Parent will not be deemed to constitute a Restricted Payment under the Indentures; (5) the making of distributions, loans or advances to Parent in an amount not to exceed $1.5 million per annum in order to permit Parent to pay the ordinary operating expenses of Parent (including, without limitation, directors' fees, indemnification obligations, professional fees and expenses, but excluding any payments on or repurchases of the Seller Note); (6) payments to Parent in respect of taxes pursuant to the terms of the Tax Allocation Agreement as in effect on the date of the Indenture and as amended from time to time pursuant to amendments that do not increase the amounts payable by the Company or any of its Restricted Subsidiaries thereunder; (7) if no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof and the Company would be permitted to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with the covenant described below under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock", other Restricted Payments in an aggregate amount not to exceed $12.5 million since the date of the Indentures; (8) repurchases of Capital Stock deemed to occur upon the exercise of stock options if such Capital Stock represents a portion of the exercise price thereof; and (9) distributions to Parent to fund the Transactions (as described under "Use of Proceeds") and payments with respect to Parent Notes whether made at or subsequent to the Closing. In determining the aggregate amount of Restricted Payments made subsequent to the date of the Indentures in accordance with clause (c) of the immediately preceding paragraph, (a) amounts expended pursuant to clauses (1), (2), (4), and (7) shall be included in such calculation; provided such expenditures pursuant to clause (4) shall not be included to the extent of the cash proceeds received by the Company from any "key man" life insurance policies and (b) amounts expended pursuant to clauses (3), (5), (6), (8) or (9) shall be excluded from such calculation. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default. For purposes of making such determination, all 82 outstanding Investments by the Company and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments will be deemed to constitute Investments in an amount equal to the fair market value of such Investments at the time of such designation. Such designation will only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK The Indentures provide that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness and that the Company will not issue any Disqualified Stock and will not permit any of its Restricted Subsidiaries to issue any shares of preferred stock; provided, however, that the Company may incur Indebtedness or issue shares of Disqualified Stock if (i) no Default or Event of Default shall have occurred and be continuing at the time or as a consequence of the incurrence of any such Indebtedness or the issuance of any such Disqualified Stock and (ii) the Consolidated Fixed Charge Coverage Ratio for the Company's most recently ended Four-Quarter Period would have been at least 2.0 to 1.0, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock had been issued, at the beginning of such Four-Quarter Period. The provisions of the first paragraph of this covenant do not apply to the incurrence of any of the following items of Indebtedness (collectively, "Permitted Indebtedness"): (i) the Exchange Notes and the Note Guarantees thereof; (ii) Indebtedness incurred pursuant to one or more Credit Facilities in an aggregate principal amount at any time outstanding (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of the Company and its Subsidiaries thereunder) not to exceed $550.0 million less (A) the aggregate amount of Indebtedness of Securitization Entities at the time outstanding less (B) the amount of all optional or mandatory principal payments actually made by the Company or any of its Restricted Subsidiaries since the date of the Indentures in respect of term loans under Credit Facilities (excluding any such payments to the extent refinanced at the time of payment under a Credit Facility) and (C) further reduced by any repayments of revolving credit borrowings under Credit Facilities that are accompanied by a corresponding commitment reduction thereunder; provided that the amount of Indebtedness permitted to be incurred pursuant to the Senior Credit Agreements in accordance with this clause (ii) shall be in addition to any Indebtedness permitted to be incurred pursuant to the Senior Credit Agreements in reliance on, and in accordance with, clauses (x) and (xvi) below; (iii) the incurrence of Indebtedness and/or the issuance of Permitted Foreign Subsidiary Preferred Stock by Foreign Subsidiaries of the Company, which together with the aggregate principal amount of Indebtedness incurred pursuant to this clause (iii) and the aggregate liquidation value of all Permitted Foreign Subsidiary Preferred Stock issued pursuant to this clause (iii), does not exceed $15.0 million at any one time outstanding; provided that such amount shall increase to $30.0 million upon the consummation of an Initial Public Offering; (iv) other Indebtedness of the Company and its Subsidiaries outstanding on the date of the Indentures for so long as such Indebtedness remains outstanding; 83 (v) Interest Swap Obligations of the Company covering Indebtedness of the Company; provided that any Indebtedness to which any such Interest Swap Obligations correspond is otherwise permitted to be incurred under the applicable Indenture; and provided, further, that such Interest Swap Obligations are entered into, in the judgment of the Company, to protect the Company from fluctuation in interest rates on its outstanding Indebtedness; (vi) Indebtedness of the Company under Currency Agreements; (vii) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Company and any of its Restricted Subsidiaries; provided, however, that (i) if the Company is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all Obligations with respect to the Notes and (ii)(A) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Company or a Subsidiary thereof and (B) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Restricted Subsidiary thereof shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be, that was not permitted by this clause (vii); (viii) the incurrence of Acquired Indebtedness of Restricted Subsidiaries of the Company to the extent the Company could have incurred such Indebtedness in accordance with the first paragraph of this covenant on the date such Indebtedness became Acquired Indebtedness; (ix) Guarantees by the Company and the Guarantors of each other's Indebtedness; provided that such Indebtedness is permitted to be incurred under the applicable Indenture; (x) Indebtedness (including Capitalized Lease Obligations) incurred by the Company or any of its Restricted Subsidiaries to finance the purchase, lease or improvement of property (real or personal) or equipment (whether through the direct purchase of assets or the Capital Stock of any Person owning such assets) in an aggregate principal amount outstanding not to exceed 5% of Total Assets at the time of any incurrence thereof (including any Refinancing Indebtedness with respect thereto) (which amount may, but need not, be incurred in whole or in part under the Senior Credit Agreements); (xi) Indebtedness incurred by the Company or any of its Restricted Subsidiaries constituting reimbursement obligations with respect to letters of credit issued in the ordinary course of business, including, without limitation, letters of credit in respect of workers' compensation claims or self-insurance, or other Indebtedness with respect to reimbursement type obligations regarding workers' compensation claims; (xii) Indebtedness arising from agreements of the Company or a Restricted Subsidiary of the Company providing for indemnification, adjustment of purchase price, earn out or other similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or a Restricted Subsidiary of the Company, other than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or Restricted Subsidiary for the purpose of financing such acquisition; provided that the maximum assumable liability in respect of all such Indebtedness shall at no time exceed the gross proceeds actually received by the Company and its Restricted Subsidiaries in connection with such disposition; (xiii) obligations in respect of performance and surety bonds and completion guarantees provided by the Company or any Restricted Subsidiary of the Company in the ordinary course of business; (xiv) any refinancing, modification, replacement, renewal, restatement, refunding, deferral, extension, substitution, supplement, reissuance or resale of existing or future Indebtedness (other than intercompany Indebtedness), including any additional Indebtedness incurred to pay interest or premiums required by the instruments governing such existing or future Indebtedness as in 84 effect at the time of issuance thereof ("Required Premiums") and fees in connection therewith ("Refinancing Indebtedness"); provided that any such event shall not (1) directly or indirectly result in an increase in the aggregate principal amount of Permitted Indebtedness (except to the extent such increase is a result of a simultaneous incurrence of additional Indebtedness (A) to pay Required Premiums and related fees or (B) otherwise permitted to be incurred under the applicable Indenture) of the Company and its Restricted Subsidiaries and (2) create Indebtedness with a Weighted Average Life to Maturity at the time such Indebtedness is incurred that is less than the Weighted Average Life to Maturity at such time of the Indebtedness being refinanced, modified, replaced, renewed, restated, refunded, deferred, extended, substituted, supplemented, reissued or resold (except that this subclause (2) will not apply in the event the Indebtedness being refinanced, modified, replaced, renewed, restated, refunded, deferred, extended, sub- stituted, supplemented, reissued or resold was originally incurred in reliance upon clause (xvi) of this paragraph); (xv) the incurrence by a Securitization Entity of Indebtedness in a Qualified Securitization Transaction that is Non-Recourse Debt with respect to the Company and its other Restricted Subsidiaries (except for Standard Securitization Undertakings); (xvi) the incurrence of additional Indebtedness by the Company or any of its Restricted Subsidiaries and/or the issuance of Permitted Domestic Subsidiary Preferred Stock by the Company's U.S. Subsidiaries, which together with the aggregate principal amount of other Indebtedness incurred pursuant to this clause (xvi) and the aggregate liquidation value of all other Permitted Domestic Subsidiary Preferred Stock issued pursuant to this clause (xvi), does not exceed $30.0 million at any one time outstanding (which amount, in the case of Indebtedness, may, but need not, be incurred in whole or in part under the Senior Credit Agreements); provided that such amount shall increase to $50.0 million upon the consummation of an Initial Public Offering. For purposes of determining compliance with this covenant, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Indebtedness described in clauses (i) through (xvi) above or is entitled to be incurred pursuant to the first paragraph of this covenant, the Company shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this covenant. Accrual of interest, accretion or amortization of original issue discount, the payment of interest on any Indebtedness in the form of additional Indebtedness with the same terms, and the payment of dividends on Disqualified Stock in the form of additional shares of the same class of Disqualified Stock will not be deemed to be an incurrence of Indebtedness or an issuance of Disqualified Stock for purposes of this covenant; provided, in each such case, that the amount thereof is included in Consolidated Fixed Charges of the Company as accrued. NO SENIOR SUBORDINATED DEBT The Indentures provide that (i) the Company will not incur, create, issue, assume, Guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to any Senior Debt and senior in any respect in right of payment to the Notes, and (ii) no Subsidiary Guarantor will incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to any Senior Debt of any Subsidiary Guarantor and senior in any respect in right of payment to the Note Guarantees. LIENS The Company will not, and will not permit any of its Restricted Subsidiaries to, create, incur, assume or suffer to exist any Liens of any kind against or upon any of its property or assets, or any proceeds therefrom, unless (i) in the case of Liens securing Indebtedness that is expressly subordinate or junior in right of payment to the Exchange Notes, the Exchange Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens and (ii) in all other cases, the 85 Exchange Notes are equally and ratably secured, except for (A) Liens existing as of the date of the Indentures and any extensions, renewals or replacements thereof, (B) Liens securing Senior Debt, (C) Liens securing the Exchange Notes, (D) Liens securing intercompany Indebtedness of the Company or a Restricted Subsidiary of the Company on assets of any Subsidiary of the Company, (E) Liens securing Indebtedness that is incurred to refinance Indebtedness that was secured by a Lien permitted under the applicable Indenture that was incurred in accordance with the provisions of the applicable Indenture; provided, however, that such Liens do not extend to or cover any property or assets of the Company or any of its Restricted Subsidiaries not securing the Indebtedness so refinanced, and (F) Permitted Liens. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or permit to exist or become effective any consensual encumbrance or consensual restriction on the ability of any Restricted Subsidiary to (a) pay dividends or make any other distributions on or in respect of its Capital Stock, (b) make loans or advances or to pay any Indebtedness or other obligation owed to the Company or any other Restricted Subsidiary of the Company or (c) transfer any of its property or assets to the Company or any other Restricted Subsidiary of the Company, except for such encumbrances or restrictions existing under or by reason of: (1) applicable law; (2) the Indentures; (3) non-assignment provisions of any contract or any lease entered into in the ordinary course of business; (4) any instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person or the properties or assets of the Person so acquired; (5) agreements existing on the date of the Indentures (including, without limitation, the Senior Credit Agreements and the Parent Note Indenture); (6) restrictions on the transfer of assets subject to any Lien permitted under the applicable Indenture imposed by the holder of such Lien; (7) restrictions imposed by any agreement to sell assets or Capital Stock permitted under the applicable Indenture to any Person pending the closing of such sale; (8) any agreement or instrument governing Capital Stock of any Person that is in effect on the date such Person is acquired by the Company or a Restricted Subsidiary of the Company; (9) any Purchase Money Note, or other Indebtedness or other contractual requirements of a Securitization Entity in connection with a Qualified Securitization Transaction; provided that such restrictions apply only to such Securitization Entity; (10) any agreement or instrument governing Indebtedness or Permitted Foreign Subsidiary Preferred Stock (whether or not outstanding) of Foreign Subsidiaries of the Company that was permitted by the applicable Indenture to be incurred; (11) other Indebtedness or Domestic Subsidiary Preferred Stock permitted to be incurred subsequent to the date of the Indentures pursuant to the provisions of the covenant described above under the caption "--Incurrence of Additional Indebtedness and Issuance of Preferred Stock"; provided that any such restrictions are ordinary and customary with respect to the type of Indebtedness or preferred stock being incurred or issued (under the relevant circumstances); (12) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business; and (13) any encumbrances or restrictions imposed by any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings of the contracts, instruments or obligations referred to in clauses (1) through (12) above; provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are, in the good faith judgment of the Company's Board of Directors, no more restrictive with respect to such dividend and other payment restrictions than those contained in the dividend or other payment restrictions prior to such amendment, modification, restatement, renewal, increase, supplement, refunding, replacement or refinancing. MERGER, CONSOLIDATION, OR SALE OF ASSETS The Indentures provide that the Company may not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to 86 another corporation, Person or entity unless (i) the Company is the surviving corporation or the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the entity or Person formed by or surviving any such consolidation or merger (if other than the Company) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of the Company under the Registration Rights Agreement, the Exchange Notes and the Indentures pursuant to supplemental indentures in forms reasonably satisfactory to the applicable Trustee; (iii) immediately after such transaction no Default or Event of Default exists; and (iv) except in the case of a merger of the Company with or into a Wholly Owned Subsidiary of the Company and except in the case of a merger entered into solely for the purpose of reincorporating the Company in another jurisdiction, the Company or the entity or Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made will, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable Four-Quarter Period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Consolidated Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock". TRANSACTIONS WITH AFFILIATES The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, enter into or permit to occur any transaction or series or related transactions (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with, or for the benefit of, any of its Affiliates involving aggregate consideration in excess of $2.5 million (an "Affiliate Transaction"), other than (x) Affiliate Transactions permitted under paragraph (b) below and (y) Affiliate Transactions on terms that are not materially less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate of the Company; provided, however, that for a transaction or series of related transactions with an aggregate value of $7.5 million or more, at the Company's option, either (i) a majority of the disinterested members of the Board of Directors of the Company shall determine in good faith that such Affiliate Transaction is on terms that are not materially less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate of the Company or (ii) the Board of Directors of the Company or any such Restricted Subsidiary party to such Affiliate Transaction shall have received an opinion from a nationally recognized investment banking firm that such Affiliate Transaction is on terms not materially less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate of the Company; and provided, further, that for an Affiliate Transaction with an aggregate value of $10.0 million or more the Board of Directors of the Company or any such Restricted Subsidiary party to such Affiliate Transaction shall have received an opinion from a nationally recognized investment banking firm that such Affiliate Transaction is on terms not materially less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate of the Company. The foregoing restrictions shall not apply to (i) reasonable fees and compensation paid to and indemnity provided on behalf of, officers, directors, employee or consultants of the Company or any Subsidiary as determined in good faith by the Company's Board of Directors or senior management; (ii) transactions exclusively between or among the Company and any of its Restricted Subsidiaries or exclusively between or among such Restricted Subsidiaries, provided such transactions are not otherwise prohibited by the applicable Indenture; (iii) transactions effected as part of a Qualified 87 Securitization Transaction; (iv) any agreement as in effect as of the date of the Indentures or any amendment or replacement thereto or any transaction contemplated thereby (including pursuant to any amendment or replacement thereto) so long as any such amendment or replacement agreement is not more disadvantageous to the Holders in any material respect than the original agreement as in effect on the date of the Indentures; (v) Restricted Payments permitted by the applicable Indenture; (vi) the payment of customary annual management, consulting and advisory fees and related expenses to the Principals and their Affiliates made pursuant to any financial advisory, financing, underwriting or placement agreement or in respect of other investment banking activities, including, without limitation, in connection with acquisitions or divestitures which are approved by the Board of Directors of the Company or such Restricted Subsidiary in good faith; (viii) payments or loans to employees or consultants that are approved by the Board of Directors of the Company in good faith, (ix) the existence of, or the performance by the Company or any of its Restricted Subsidiaries of its obligations under the terms of, any stockholders agreement (including any registration rights agreement or purchase agreement related thereto) to which it is a party as of the date of the Indentures and any similar agreements which it may enter into thereafter; provided, however, that the existence of, or the performance by the Company or any of its Restricted Subsidiaries of obligations under, any future amendment to any such existing agreement or under any similar agreement entered into after the date of the Indentures shall only be permitted by this clause (ix) to the extent that the terms of any such amendment or new agreement are not disadvantageous to the Holders of the applicable series of Notes in any material respect; (x) transactions permitted by, and complying with, the provisions of the covenant described under "--Merger, Consolidation, or Sale of Assets"; and (xi) transactions with customers, clients, suppliers, joint venture partners or purchasers or sellers of goods or services, in each case in the ordinary course of business (including, without limitation, pursuant to joint venture agreements) and otherwise in compliance with the terms of the applicable Indenture which are fair to the Company or its Restricted Subsidiaries, in the reasonable determination of the Board of Directors of the Company or the senior management thereof, or are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party. ADDITIONAL NOTE GUARANTEES The Indentures provide that if the Company or any of its Restricted Subsidiaries shall acquire or create another U.S. Subsidiary after the date of the Indentures, or if any Subsidiary becomes a U.S. Subsidiary after the date of the Indentures, then such newly acquired or created Subsidiary, shall execute a Note Guarantee and deliver an Opinion of Counsel, in accordance with the terms of the applicable Indenture; provided, that all Subsidiaries that have properly been designated as Unrestricted Subsidiaries in accordance with the applicable Indenture shall not be subject to the requirements of this covenant for so long as they continue to constitute Unrestricted Subsidiaries. CONDUCT OF BUSINESS The Indentures provide that the Company will not, and will not permit any of its Restricted Subsidiaries to, engage in any businesses a majority of whose revenues are not derived from the same or reasonably similar, ancillary or related to, or a reasonable extension, development or expansion of, the businesses in which the Company and its Restricted Subsidiaries are engaged on the date of the Indentures. REPORTS The Indentures provide that, whether or not required by the rules and regulations of the Commission, so long as any Notes are outstanding, the Company will furnish to the Holders of Notes (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" that 88 describes the financial condition and results of operations of the Company and its consolidated Subsidiaries (showing in reasonable detail, either on the face of the financial statements or in the footnotes thereto and in Management's Discussion and Analysis of Financial Condition and Results of Operations, the financial condition and results of operations of the Company and its Restricted Subsidiaries separate from the financial condition and results of operations of the Unrestricted Subsidiaries of the Company) and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (ii) all current reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports, in each case within the time periods specified in the Commission's rules and regulations. For so long as Parent is a Guarantor of the Notes, the Indentures will permit the Company to satisfy its obligations in this covenant with respect to financial information relating to the Company by furnishing financial information relating to Parent; provided that the same is accompanied by consolidating information that explains in reasonable detail the differences between the information relating to Parent, on the one hand, and the information relating to the Company and its Restricted Subsidiaries on a stand-alone basis, on the other hand. In addition, following the consummation of the exchange offer contemplated by the Registration Rights Agreement, whether or not required by the rules and regulations of the Commission, the Company will file a copy of all such information and reports with the Commission for public availability within the time periods specified in the Commission's rules and regulations (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition, the Company and the Subsidiary Guarantors have agreed that, for so long as any Exchange Notes remain outstanding, they will furnish to the Holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. EVENTS OF DEFAULT AND REMEDIES The following events are defined in the Indentures as "Events of Default": (i) the failure to pay interest on any Exchange Notes when the same becomes due and payable if the default continues for a period of 30 days, whether or not such payment shall be prohibited by the subordination provisions of the applicable Indenture; (ii) the failure to pay the principal on any Exchange Notes when such principal becomes due and payable, at maturity, upon redemption or otherwise (including the failure to make a payment to purchase Exchange Notes tendered pursuant to a Change of Control Offer or a Net Proceeds Offer), whether or not such payment shall be prohibited by the subordination provisions of the applicable Indenture; (iii) a default in the observance or performance of any other covenant or agreement contained in the applicable Indenture if the default continues for a period of 30 days after the Company receives written notice specifying the default (and demanding that such default be remedied) from the applicable Trustee or the Holders of at least 25% of the outstanding principal amount of the Exchange Notes of either series; (iv) the failure to pay at final stated maturity (giving effect to any extensions thereof) the principal amount of any Indebtedness of the Company or any Restricted Subsidiary (other than a Securitization Entity), which failure continues for at least 10 days, or the acceleration of the maturity of any such Indebtedness, which acceleration remains uncured and unrescinded for at least 10 days, if the aggregate principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at final maturity or which has been accelerated, aggregates $20.0 million or more at any time; (v) one or more judgments in an aggregate amount in excess of $20.0 million shall have been rendered against the Company or any of its Significant Subsidiaries and such judgments remain undischarged, unpaid or unstayed for a period of 60 days after such judgment or judgments become final and non-appealable; (vi) except as permitted by the Indenture, any Subsidiary Guarantee shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Guarantor, or any Person acting on behalf of any Guarantor shall deny or disaffirm its obligations under its Subsidiary Guarantee; and (vii) certain events of bankruptcy affecting the Company or any of its Significant Subsidiaries. 89 Upon the happening of any Event of Default specified in the applicable Indenture, the applicable Trustee or the Holders of at least 25% in principal amount of outstanding Exchange Notes of either series may declare the principal of and accrued interest on all the Exchange Notes of such series to be due and payable by notice in writing to the Company and the applicable Trustee specifying the respective Event of Default and that such notice is a "notice of acceleration" (the "Acceleration Notice"), and the same (i) shall become immediately due and payable or (ii) if there are any amounts outstanding under either of the Senior Credit Agreements, shall become immediately due and payable upon the first to occur of an acceleration under either of the Senior Credit Agreements or five Business Days after receipt by the Company and the Representative under the applicable Senior Credit Agreement of such Acceleration Notice but only if such Event of Default is then continuing. If an Event of Default with respect to bankruptcy proceedings of the Company occurs and is continuing, then such amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the applicable Trustee or any Holder of Exchange Notes. The Indentures provide that, at any time after a declaration of acceleration with respect to the Exchange Notes as described in the preceding paragraph, the Holders of a majority in principal amount of either series of Exchange Notes may rescind and cancel such declaration and its consequences as to such series (i) if the rescission would not conflict with any judgment or decree, (ii) if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration, (iii) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid, (iv) if the Company has paid the applicable Trustee its reasonable compensation and reimbursed the applicable Trustee for its expenses, disbursements and advances and (v) in the event of the cure or waiver of an Event of Default of the type described in clause (vi) of the description above of Events of Default, the applicable Trustee shall have received an Officers' Certificate and an Opinion of Counsel that such Event of Default has been cured or waived. The holders of a majority in principal amount of either series of Exchange Notes may waive any existing Default or Event of Default under the applicable Indenture, and its consequences, except a default in the payment of the principal of or interest on any Exchange Notes. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Exchange Notes or the applicable Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Exchange Notes by accepting an Exchange Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Exchange Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Company may, at its option and at any time, elect to have all of its obligations discharged with respect to either class of Exchange Notes ("Legal Defeasance") except for (i) the rights of Holders of outstanding Exchange Notes of such series to receive payments in respect of the principal of, premium, if any, and interest and Liquidated Damages on such series of Exchange Notes when such payments are due from the trust referred to below, (ii) the Company's obligations with respect to such Exchange Notes concerning issuing temporary Exchange Notes, registration of Exchange Notes, mutilated, destroyed, lost or stolen Exchange Notes and the maintenance of an office or agency for payment and money for security payments held in trust, (iii) the rights, powers, trusts, duties and immunities of the applicable Trustees, and the Company's obligations in connection therewith and (iv) the Legal Defeasance provisions of the applicable Indenture. In addition, the Company may, at its option and at any time, elect to have the obligations of the Company released with respect to certain 90 covenants that are described in the applicable Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to such series of Exchange Notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "Events of Default" will no longer constitute an Event of Default with respect to such series of Exchange Notes. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Company must irrevocably deposit with the applicable Trustee, in trust, for the benefit of the Holders of the applicable series of Exchange Notes, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, interest and Liquidated Damages, if any, on all outstanding Exchange Notes of the applicable series on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether such series of Exchange Notes are being defeased to maturity or to a particular redemption date; (ii) in the case of Legal Defeasance, the Company shall have delivered to the applicable Trustee an Opinion of Counsel in the United States reasonably acceptable to the applicable Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of the applicable Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders of the outstanding Exchange Notes of such series will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the applicable Trustee an Opinion of Counsel in the United States reasonably acceptable to such Trustee confirming that the Holders of the outstanding Exchange Notes of such series will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit) or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument (including the applicable Indenture and the Senior Credit Agreements) (other than a default resulting from the borrowing of funds to be applied to such deposit) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (vi) the Company must have delivered to the applicable Trustee an Opinion of Counsel to the effect that after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (vii) the Company must deliver to the applicable Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of such series of Exchange Notes over the other creditors of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (viii) the Company must deliver to the applicable Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. TRANSFER AND EXCHANGE A Holder may transfer or exchange Exchange Notes in accordance with the applicable Indenture. The applicable Registrar and the applicable Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to 91 pay any taxes and fees required by law or permitted by the applicable Indenture. The Company is not required to transfer or exchange any Note selected for redemption. Also, the Company is not required to transfer or exchange any Exchange Note for a period of 15 days before a selection of Exchange Notes to be redeemed. The registered Holder of an Exchange Note will be treated as the owner of it for all purposes. AMENDMENT, SUPPLEMENT AND WAIVER Except as provided in the next two succeeding paragraphs, either of the Indentures and either class of Exchange Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Exchange Notes of such series then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Exchange Notes of such class), and any existing default or compliance with any provision of the applicable Indenture or the Exchange Notes of such class may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Exchange Notes of such class (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Exchange Notes of such series). Without the consent of each Holder affected, an amendment or waiver may not (with respect to any Notes of a particular series held by a non-consenting Holder): (i) reduce the principal amount of Exchange Notes of such series whose Holders must consent to an amendment, supplement or waiver, (ii) reduce the principal of or change the fixed maturity of any Exchange Note of a particular series or alter the provisions with respect to the redemption of the Exchange Notes of such series (other than provisions relating to the covenants described above under the caption "--Repurchase at the Option of Holders"), (iii) reduce the rate of or change the time for payment of interest on any Exchange Note of such series, (iv) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the Exchange Notes of such series (except a rescission of acceleration of the Exchange Notes of such series by the Holders of at least a majority in aggregate principal amount of the Exchange Notes of such series and a waiver of the payment default that resulted from such acceleration), (v) make any Exchange Note of such series payable in money other than that stated in the Exchange Notes of such series, (vi) make any change in the provisions of the applicable Indenture relating to waivers of past Defaults or the rights of Holders of Exchange Notes of such series to receive payments of principal of or premium, if any, or interest on the Exchange Notes of such series, (vii) waive a redemption payment with respect to any Exchange Note of such series (other than a payment required by one of the covenants described above under the caption "--Repurchase at the Option of Holders") or (viii) make any change in the foregoing amendment and waiver provisions. In addition, any amendment to the provisions of Article 10 of the applicable Indenture (which relate to subordination) will require the consent of the Holders of at least 75% in aggregate principal amount of the Exchange Notes of such series then outstanding if such amendment would adversely affect the rights of Holders of Exchange Notes of such series. Any amendment to the provisions of Article 10 of the applicable Indenture or the related definitions will also require the consent of the majority of the lenders under each of the Senior Credit Agreements. Notwithstanding the foregoing, without the consent of any Holder of Exchange Notes of a particular class, the Company and the applicable Trustee may amend or supplement the applicable Indenture or the Exchange Notes of such class to cure any ambiguity, defect or inconsistency, to provide for uncertificated Exchange Notes of such class in addition to or in place of certificated Exchange Notes of such class, to provide for the assumption of the Company's obligations to Holders of Exchange Notes of such class in the case of a merger or consolidation or sale of all or substantially all of the Company's assets, to make any change that would provide any additional rights or benefits to the Holders of Exchange Notes of such class or that does not adversely affect the legal rights under 92 the applicable Indenture of any such Holder, or to comply with requirements of the Commission in order to effect or maintain the qualification of the applicable Indenture under the Trust Indentures Act. CONCERNING THE TRUSTEES The Indentures contain certain limitations on the rights of the Trustees, should either of the Trustees become a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustees will be permitted to engage in other transactions; however, if either of the Trustees acquires any conflicting interest such Trustee must eliminate such conflict within 90 days, apply to the Commission for permission to continue or resign. The Holders of a majority in principal amount of the then outstanding Exchange Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the applicable Trustee, subject to certain exceptions. The Indentures provide that in case an Event of Default shall occur (which shall not be cured), the applicable Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the applicable Trustee will be under no obligation to exercise any of its rights or powers under the applicable Indenture at the request of any Holder of Exchange Notes, unless such Holder shall have offered to the applicable Trustee security and indemnity satisfactory to it against any loss, liability or expense. ADDITIONAL INFORMATION Anyone who receives this Prospectus may obtain copies of the Indentures and Registration Rights Agreement, without charge, by writing to Sealy Mattress Company, Halle Building, 10th Floor, 1228 Euclid Avenue, Cleveland, Ohio 44115, Attention: General Counsel. CERTAIN DEFINITIONS Set forth below are certain defined terms used in the Indentures. Reference is made to the Indentures for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "Accreted Value" means, as of any date of determination prior to the Full Accretion Date, the sum of (a) the initial offering price of each Senior Subordinated Discount Exchange Note and (b) the portion of the excess of the principal amount of each Senior Subordinated Discount Exchange Note over such initial offering price which shall have been accreted thereon through such date, such amount to be so accreted on a daily basis at 10 7/8% per annum of the initial offering price of the Senior Subordinated Discount Exchange Notes, compounded semi-annually on each June 15 and December 15 from the date of issuance of the Senior Subordinated Discount Exchange Notes through the date of determination; provided that, on and after the Full Accretion Date, the Accreted Value of each Senior Subordinated Discount Exchange Note shall be equal to the principal amount of such Senior Subordinated Discount Exchange Note. "Acquired Indebtedness" means Indebtedness of a Person or any of its Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of the Company or that is assumed by the Company or any of its Restricted Subsidiaries in connection with the acquisition of assets from such Person, in each case excluding any Indebtedness incurred by such Person in connection with, or in anticipation or contemplation of, such Person becoming a Restricted Subsidiary of the Company or such acquisition. "Affiliate" means a Person who directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Company. The term "control" means the 93 possession directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person whether through the ownership of voting securities, by contract or otherwise. Notwithstanding the foregoing, no Person (other than the Company or any Subsidiary of the Company) in whom a Securitization Entity makes an Investment in connection with a Qualified Securitization Transaction shall be deemed to be an Affiliate of the Company or any of its Subsidiaries solely by reason of such Investment. "all or substantially all" shall have the meaning given such phrase in the Revised Model Business Corporation Act. "Asset Acquisition" means (a) an Investment by the Company or any Restricted Subsidiary of the Company in any other Person if, as a result of such Investment, such Person shall become a Restricted Subsidiary of the Company, or shall be merged with or into the Company or any Restricted Subsidiary of the Company, or (b) the acquisition by the Company or any Restricted Subsidiary of the Company of all or substantially all of the assets of any other Person or any division or line of business of any other Person. "Asset Sale" means any direct or indirect sale, issuance, conveyance, transfer, lease (other than operating leases entered into in the ordinary course of business), assignment or other transfer for value by the Company or any of its Restricted Subsidiaries to any Person other than the Company or a Restricted Subsidiary of the Company of (a) any Capital Stock of any Restricted Subsidiary of the Company or (b) any other property or assets of the Company or any Restricted Subsidiary of the Company other than in the ordinary course of business; provided, however, that Asset Sales shall not include (i) a transaction or series of related transactions for which the Company or its Restricted Subsidiaries receive aggregate consideration of less than $1.0 million, (ii) the sale, lease, conveyance, disposition or other transfer of all substantially all of the assets of the Company as permitted under the provisions described above under the caption "--Certain Covenants-- Merger, Consolidation and Sale of Assets" or any disposition that constitutes a Change of Control, (iii) the sale or discount, in each case without recourse, of accounts receivable arising in the ordinary course of business, but only in connection with the compromise or collection thereof, (iv) the factoring of accounts receivable arising in the ordinary course of business pursuant to arrangements customary in the industry, (v) the licensing of intellectual property, (vi) disposals or replacements of obsolete, uneconomical, negligible, worn out or surplus property in the ordinary course of business, (vii) the sale, lease conveyance, disposition or other transfer by the Company or any Restricted Subsidiary of assets or property to one or more Restricted Subsidiaries in connection with Investments permitted by the covenant described under the caption "--Restricted Payments", (viii) sales of accounts receivable, equipment and related assets (including contract rights) of the type specified in the definition of "Qualified Securitization Transaction" to a Securitization Entity for the fair market value thereof, including cash in an amount at least equal to 75% of the fair market value thereof. For the purposes of clause (viii), Purchase Money Notes shall be deemed to be cash. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. 94 "Cash Equivalents" means: (i) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either S&P or Moody's; (iii) commercial paper maturity no more than one year from the date of creation thereof and at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances (or, with respect to foreign banks, similar instruments) maturing within one year from the date of acquisition thereof issued by any bank organized under the laws of the United States of America or any state thereof or the District of Columbia, Japan or any member of the European Economic Community or any U.S. branch of a foreign bank having at the date of acquisition thereof combined capital and surplus of not less than $200.0 million; provided that instruments issued by banks not having one for the two highest ratings obtainable from either S&P or Moody's or by banks organized under the laws of Japan or any member of the European Economic Community shall not constitute Cash Equivalents for purposes of the subordination provisions of the applicable Indenture; (v) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above entered into with any bank meeting the qualifications specified in clause (iv) above; and (vi) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (i) through (v) above. "Consolidated EBITDA" means, with respect to any Person, for any period, the sum (without duplication) of such Person's (i) Consolidated Net Income and (ii) to the extent Consolidated Net Income has been reduced thereby, (A) all income taxes and foreign withholding taxes of such Person and its Restricted Subsidiaries paid or accrued in accordance with GAAP for such period, (B) Consolidated Interest Expense, (C) Consolidated Noncash Charges, (D) all one- time cash compensation payments made in connection with the Transactions, (E) any payments related to addressing the Company's or any of its Restricted Subsidiary's "Year 2000" information systems issue and EITF 97-13 "reengineering" efforts and (F) all bad debt and factoring losses incurred specifically with respect to the bankruptcy of Montgomery Ward. "Consolidated Fixed Charge Coverage Ratio" means, with respect to any Person, the ratio of Consolidated EBITDA of such Person during the most recent four full fiscal quarters for which internal financial statements are available (the "Four-Quarter Period") ending on or prior to the date of the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of such Person for the Four-Quarter Period. In addition to and without limitation of the foregoing, for purposes of this definition, Consolidated EBITDA and Consolidated Fixed Charges shall be calculated after giving effect on a pro forma basis for the period of such calculation to (i) the incurrence of any Indebtedness or the issuance of any preferred stock of such Person or any of its Restricted Subsidiaries (and the application of the proceeds thereof) and any repayment of other Indebtedness or redemption of other preferred stock occurring during the Four-Quarter Period or at any time subsequent to the last day of the Four-Quarter Period and on or prior to the Transaction Date, as if such incurrence, repayment, issuance or redemption, as the case may be (and the application of the proceeds thereof), occurred on the first day of the Four-Quarter Period and (ii) any Asset Sale or Asset Acquisition (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of such Person or one of its Restricted Subsidiaries (including any Person who becomes a Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming or otherwise being liable for Acquired Indebtedness and also including any Consolidated EBITDA (including any Pro Forma Cost Savings) associated with any such Asset Acquisition) occurring during the Four-Quarter Period or at any time subsequent to the last day of the Four-Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition 95 (including the incurrence of, or assumption or liability for any such Indebtedness or Acquired Indebtedness) occurred on the first day of the Four- Quarter Period. If such Person or any of its Restricted Subsidiaries directly or indirectly Guarantees Indebtedness of a third Person, the preceding sentence shall give effect to the incurrence of such guaranteed Indebtedness as if such Person or any Restricted Subsidiary of such Person had directly incurred or otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating Consolidated Fixed Charges for purposes of determining the denominator (but not the numerator) of this Consolidated Fixed Charge Coverage Ratio, (1) interest on outstanding Indebtedness determined on a fluctuating basis as of the Transaction Date and which will continue to be so determined thereafter shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest on such Indebtedness in effect on the Transaction Date; (2) if interest on any Indebtedness actually incurred on the Transaction Date may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rates, then the interest rate in effect on the Transaction Date will be deemed to have been in effect during the Four-Quarter Period; and (3) notwithstanding clause (1) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Swap Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements. "Consolidated Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of (i) Consolidated Interest Expense (before amortization or write-off of debt issuance costs) plus (ii) the amount of all cash dividend payments on any series of preferred stock of such Person plus (iii) the amount of all dividend payments on any series of Permitted Foreign Subsidiary Preferred Stock or Permitted Domestic Subsidiary Preferred Stock; provided that with respect to any series of preferred stock that was not paid cash dividends during such period but that is eligible to be paid cash dividends during any period prior to the maturity date of the Exchange Notes, cash dividends shall be deemed to have been paid with respect to such series of preferred stock during such period for purposes of clause (ii) of this definition. "Consolidated Interest Expense" means, with respect to any Person for any period, the sum of, without duplication, (i) the aggregate of all cash and non-cash interest expense with respect to all outstanding Indebtedness of such Person and its Restricted Subsidiaries, including the net costs associated with Interest Swap Obligations, for such period determined on a consolidated basis in conformity with GAAP, (ii) the consolidated interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period, and (iii) the interest component of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such Person and its Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP. "Consolidated Net Income" of the Company means, for any period, the aggregate net income (or loss) of the Company and its Restricted Subsidiaries for such period on a consolidated basis, determined in accordance with GAAP, provided that there shall be excluded therefrom (a) gains and losses from Asset Sales (without regard to the $1.0 million limitation set forth in the definition thereof) or abandonments or reserves relating thereto and the related tax effects according to GAAP, (b) gains and losses due solely to fluctuations in currency values and the related tax effects according to GAAP, (c) items classified as a cumulative effect accounting change or as extraordinary, unusual or nonrecurring gains and losses (including, without limitation, severance, relocation and other restructuring costs), and the related tax effects according to GAAP, (d) the net income (or loss) of any Person acquired in a pooling of interests transaction accrued prior to the date it becomes a Restricted Subsidiary of the Company or is merged or consolidated with the Company or any Restricted Subsidiary of the Company, (e) the net income of any Restricted Subsidiary of the Company to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of the Company of that income is restricted by contract, operation, operation of law or otherwise, (f) the net 96 loss of any Person, other than a Restricted Subsidiary of the Company, (g) the net income of any Person, other than a Restricted Subsidiary of the Company, except to the extent of cash dividends or distributions paid to the Company or a Restricted Subsidiary of the Company by such Person, (h) only for purposes of clause (c)(i) of the first paragraph of the covenant described under the caption "--Restricted Payments", any amounts included pursuant to clause (c)(iii) of the first paragraph of such covenant, and (i) one time non-cash compensation charges, including any arising from existing stock options resulting from any merger or recapitalization transaction. For purposes of clause (c)(i) of the first paragraph of the covenant described under the caption "--Restricted Payments", Consolidated Net Income shall be reduced by any cash dividends paid with respect to any series of Designated Preferred Stock. "Consolidated Noncash Charges" means, with respect to any Person for any period, the aggregate depreciation, amortization and other non-cash expenses of such Person and its Restricted Subsidiaries reducing Consolidated Net Income of such Person for such period, determined on a consolidated basis in accordance with GAAP excluding any such non-cash charge constituting an extraordinary item or loss or any such non-cash charge which requires an accrual of or a reserve for cash charges for any future period. "Credit Facilities" means one or more debt facilities (including, without limitation, the Senior Credit Agreements) or commercial paper facilities with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) and/or letters of credit. "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any Restricted Subsidiary of the Company against fluctuations in currency values. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Designated Noncash Consideration" means any non-cash consideration received by the Company or one of its Restricted Subsidiaries in connection with an Asset Sale that is so designated as Designated Noncash Consideration pursuant to an Officers' Certificate executed by the principal executive officer and the principal financial officer of the Company or such Restricted Subsidiary. Such Officers' Certificate shall state the basis of such valuation, which shall be a report of a nationally recognized investment banking firm with respect to the receipt in one or a series of related transactions of Designated Noncash Consideration with a fair market value in excess of $10.0 million. "Designated Preferred Stock" means Preferred Stock that is so designated as Designated Preferred Stock, pursuant to an Officers' Certificate executed by the principal executive officer and the principal financial officer of the Company, on the issuance date thereof, the cash proceeds of which are excluded from the calculation set forth in clause (iii) of the first paragraph of the covenant described under the caption "-- Restricted Payments". "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible, or for which it is exchangeable, at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the Holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the Exchange Notes mature; provided, however, that any Capital Stock that would constitute Disqualified Stock solely because the holders thereof have the right to require the Company to repurchase such Capital Stock upon the occurrence of a Change of Control or an Asset Sale shall not constitute Disqualified Stock if the terms of such 97 Capital Stock provide that the Company may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with the covenant described above under the caption "--Restricted Payments". "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Equity Offering" means any offering of Qualified Capital Stock of Parent or the Company; provided that, in the event of any Equity Offering by Parent, Parent contributes to the common equity capital of the Company (other than as Disqualified Stock) the portion of the net cash proceeds of such Equity Offering necessary to pay the aggregate redemption price (plus accrued interest to the redemption date) of the Notes to be redeemed pursuant to the preceding paragraph. "Existing Indebtedness" means Indebtedness of the Company and its Subsidiaries (other than Indebtedness under the Senior Credit Agreements) in existence on the date of the Indentures, until such amounts are repaid. "Foreign Subsidiaries" means the Company's current and future non-U.S. Subsidiaries. "Four-Quarter Period" has the meaning specified in the definition of Consolidated Fixed Charge Coverage Ratio. "Full Accretion Date" means December 15, 2002. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date of the Indentures. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements (including Interest Swap Obligations) and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates (including Currency Agreements). "Indebtedness" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or banker's acceptances or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all Indebtedness of others secured by a Lien on any asset of such Person (whether or not such Indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness issued with original issue discount, and (ii) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. For purposes of calculating the amount of Indebtedness of a Securitization 98 Entity outstanding as of any date, the face or notional amount of any interest in receivables or equipment that is outstanding as of such date shall be deemed to be Indebtedness but any such interests held by Affiliates of such Securitization Entity shall be excluded for purposes of such calculation. "Initial Public Offering" means the first underwritten public offering of Qualified Capital Stock by either Parent or by the Company pursuant to a registration statement filed with the Commission in accordance with the Securities Act for aggregate net cash proceeds of a least $50.0 million; provided that in the event the Initial Public Offering is consummated by Parent, Parent contributes to the common equity capital of the Company at least $50.0 million of the net cash proceeds of the Initial Public Offering. "Interest Swap Obligations" means the obligations of any Person, pursuant to any arrangement with any other Person, whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such other Persons calculated by applying a fixed or a floating rate of interest on the same notional amount. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If the Company or any Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Subsidiary of the Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of the covenant described above under the caption "--Restricted Payments". "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Marketable Securities" means publicly traded debt or equity securities that are listed for trading on a national securities exchange and that were issued by a corporation whose debt securities are rated in one of the three highest rating categories by either S&P or Moody's. "Moody's" means Moody's Investors Service, Inc. "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements) and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. 99 "Non-Recourse Debt" means Indebtedness (i) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor or otherwise), or (c) constitutes the lender; and (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries. "Non-Guarantor Subsidiaries" means (i) the Foreign Subsidiaries and (ii) Advanced Sleep Products, a California corporation, Sealy Components--Pads, Inc., a Delaware corporation, Sealy Mattress Company of San Diego, a California corporation, Sealy Connecticut, Inc., a Connecticut corporation, and Sealy Mattress Company of S.W. Virginia, a Virginia corporation. "Obligations" means any principal, interest (including, without limitation, interest that, but for the filing of a petition in bankruptcy with respect to an obligor, would accrue on such obligations), penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Parent" means Sealy Corporation, a Delaware corporation. "Parent Note Indenture" means the indenture governing the Existing Exchange Notes between The Bank of New York (as successor trustee to Mellon Bank, F.S.B. (as successor trustee to KeyBank National Association)) and Parent. "Parent Notes" means the existing 10 1/4% Senior Subordinated Exchange Notes due 2003 of Parent. "Permitted Business" means any business (including stock or assets) that derives a majority of its revenues from the manufacture, distribution and sale of mattresses, foundation and other bedding products and activities that are reasonably similar, ancillary or related to, or a reasonable extension, development or expansion of, the businesses in which the Company and its Restricted Subsidiaries are engaged on the date of the Indentures. "Permitted Domestic Subsidiary Preferred Stock" means any series of Preferred Stock of a domestic restricted Subsidiary of the Company that constitutes Qualified Capital Stock and has a fixed dividend rate, the liquidation value of all series of which, when combined with the aggregate amount of Indebtedness of the Company and its Restricted Subsidiaries incurred pursuant to clause (xvi) of the definition of Permitted Indebtedness, does not exceed $30.0 million; provided that such amount shall increase to $50.0 million upon consummation of an Initial Public Offering. "Permitted Investments" means (i) Investments by the Company or any Restricted Subsidiary of the Company in any Restricted Subsidiary of the Company that is a Guarantor or a Foreign Subsidiary (whether existing on the date of the Indentures or created thereafter) or in any other Person (including by means of any transfer of cash or other property) if as a result of such Investment such Person shall become a Restricted Subsidiary of the Company that is a Guarantor or a Foreign Subsidiary and Investments in the Company by any Restricted Subsidiary of the Company, (ii) cash and Cash Equivalents, (iii) Investments existing on the date of the Indentures, (iv) loans and advances to employees and officers of the Company and its Restricted Subsidiaries in the ordinary course of Business, (v) accounts receivable created or acquired in the ordinary course of Business, (vi) Currency Agreements and Interest Swap Obligations entered into in the ordinary course of the Company's 100 businesses and otherwise in compliance with the applicable Indenture, (vii) Investments in Unrestricted Subsidiaries in an amount at any one time outstanding not to exceed $20.0 million; (viii) Investments in securities of trade creditors or customers received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers, (ix) guarantees by the Company of Indebtedness otherwise permitted to be incurred by Restricted Subsidiaries of the Company that are either Guarantors or Foreign Subsidiaries under the applicable Indenture, (x) additional Investments having an aggregate fair market value, taken together with all other Investments made pursuant to this clause (x) that are at that time outstanding, not to exceed 5% of Total Assets at the time of such Investment (with the fair market value of each Investment being measured at the time made and without giving effect to subsequent changes in value), (xi) any Investment by the Company or a Subsidiary of the Company in a Securitization Entity or any Investment by a Securitization Entity in any other Person in connection with a Qualified Securitization Transaction; provided that any Investment in a Securitization Entity is in the form of a Purchase Money Note or an equity interest, (xii) any transaction to the extent it constitutes an Investment that is permitted by, and made in accordance with, clause (b) of the "Limitations on Transactions with Affiliates" covenant (other than transactions described in clause (v) of such clause (b)), (xiii) Investments the payment for which consists exclusively of Qualified Capital Stock of the Company and (xiv) Investments received by the Company or its Restricted Subsidiaries as consideration for asset sales, including Asset Sales; provided that in the case of an Asset Sale, such Asset Sale is effected in compliance with the covenant described under the caption "--Redemption or Repurchase at Option of Holders--Asset Sales". "Permitted Foreign Subsidiary Preferred Stock" means any series of Preferred Stock of a foreign Restricted Subsidiary of the Company that constitutes Qualified Capital Stock and has a fixed dividend rate, the liquidation value of all series of which, when combined with the aggregate amount of Indebtedness of foreign Restricted Subsidiaries of the Company incurred pursuant to clause (iii) of the definition of Permitted Indebtedness, does not exceed $15.0 million; provided that such amount shall increase to $30.0 million upon consummation of an Initial Public Offering. "Permitted Liens" means the following types of Liens: (i) Liens for taxes, assessments or governmental charges or claims either (a) not delinquent or (b) contested in good faith by appropriate proceedings and as to which the Company or its Restricted Subsidiaries shall have set aside on its books such reserves as may be required pursuant to GAAP; (ii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, including any Lien securing letters of credit issued in the ordinary course of business consistent with past practice in connection therewith, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (iv) judgment Liens not giving rise to an Event of Default; (v) easements, rights-of-way, zoning restrictions and other similar charges or encumbrances in respect of real property not interfering in any material respect with the ordinary conduct of the business of the Company or any of its Restricted Subsidiaries; (vi) any interest or title of a lessor under any Capitalized Lease Obligation; 101 (vii) purchase money Liens to finance property or assets of the Company or any Restricted Subsidiary of the Company acquired in the ordinary course of business; provided, however, that (A) the related purchase money Indebtedness shall not exceed the cost of such property or assets and shall not be secured by any property or assets of the Company or any Restricted Subsidiary of the Company other than the property and assets so acquired and (B) the Lien securing such Indebtedness shall be created with 90 days of such acquisition; (viii) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment, or storage of such inventory or other goods; (ix) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (x) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual, or warranty requirements of the Company or any of its Restricted Subsidiaries, including rights of offset and set- off; (xi) Liens securing Interest Swap Obligations which Interest Swap Obligations relate to Indebtedness that is otherwise permitted under the applicable Indenture; (xii) Liens securing Indebtedness under Currency Agreements; (xiii) Liens securing Indebtedness of foreign Restricted Subsidiaries of the Company incurred in reliance on clause (iii) of the second paragraph of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"; (xiv) Liens securing Acquired Indebtedness incurred in reliance on clause (viii) of the second paragraph of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"; (xv) Liens incurred in the ordinary course of business of the Company or any Restricted Subsidiary with respect to obligations that do not in the aggregate exceed $10.0 million at any one time outstanding; (xvi) Liens on assets transferred to a Securitization Entity or on assets of a Securitization Entity, in either case incurred in connection with a Qualified Securitization Transaction; (xvii) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Company and its Restricted Subsidiaries; (xviii) Liens arising from filing Uniform Commercial Code financing statements regarding leases; (xix) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customer duties in connection with the importation of goods; (xx) Liens on assets of Unrestricted Subsidiaries that secure Non- Recourse Debt of Unrestricted Subsidiaries; and (xxi) Liens existing on the date of the Indentures, together with any Liens securing Indebtedness incurred in reliance on clause (xiv) of the definition of Permitted Indebtedness in order to refinance the Indebtedness secured by Liens existing on the date of the Indentures; provided that the Liens securing the refinancing Indebtedness shall not extend to property other than that pledged under the Liens securing the Indebtedness being refinanced. 102 "Pro Forma Cost Savings" means, with respect to any period, the reduction in costs that occurred during the Four-Quarter Period or after the end of the Four-Quarter Period and on or prior to the Transaction Date that were (i) directly attributable to an Asset Acquisition and calculated on a basis that is consistent with Regulation S-X under the Securities Act as in effect and applied as of January 1, 1997 or (ii) implemented by the business that was the subject of any such Asset Acquisition within six months of the date of the Asset Acquisition and that are supportable and quantifiable by the underlying accounting records of such business, as if, in the case of each of clause (i) and (ii), all such reductions in costs had been effected as of the beginning of such period. "Productive Assets" means assets (including Capital Stock) that are used or usable by the Company and its Restricted Subsidiaries in Permitted Businesses. "Purchase Money Note" means a promissory note of a Securitization Entity evidencing a line of credit, which may be irrevocable, from the Company or any Restricted Subsidiary of the Company in connection with a Qualified Securitization Transaction, which note shall be repaid from cash available to the Securitization Entity, other than amounts required to be established as reserves pursuant to agreements, amounts paid to investors in respect of interest, principal and other amounts owing to such investors and amounts paid in connection with the purchase of newly generated receivables or newly acquired equipment. "Qualified Capital Stock" means any Capital Stock that is not Disqualified Stock. "Qualified Securitization Transaction" means any transaction or series of transactions pursuant to which the Company or any of its Restricted Subsidiaries may sell, convey or otherwise transfer to (a) a Securitization Entity (in the case of a transfer by the Company or any of its Restricted Subsidiaries) and (b) any other Person (in case of a transfer by a Securitization Entity), or may grant a security interest in, any accounts receivable or equipment (whether now existing or arising or acquired in the future) of the Company or any of its Restricted Subsidiaries, and any assets related thereto including, without limitation, all collateral securing such accounts receivable and equipment, all contracts and contract rights and all Guarantees or other obligations in respect such accounts receivable and equipment, proceeds of such accounts receivable and equipment and other assets (including contract rights) which are customarily transferred or in respect of which security interests are customarily granted in connection with asset securitization transactions involving accounts receivable and equipment. "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "S&P" means Standard & Poor's. "Securitization Entity" means a Wholly Owned Subsidiary of the Company (or another Person in which the Company or any Subsidiary of the Company makes an Investment and to which the Company or any Subsidiary of the Company transfers accounts receivable or equipment and related assets) that engages in no activities other than in connection with the financing of accounts receivable or equipment and that is designated by the Board of Directors of the Company (as provided below) as a Securitization Entity (a) no portion of the Indebtedness or any other Obligations (contingent or otherwise) of which (i) is guaranteed by the Company or any Restricted Subsidiary of the Company (excluding guarantees of Obligations (other than the principal of, and interest on, Indebtedness)) pursuant to Standard Securitization Undertakings, (ii) is recourse to or obligates the Company or any Restricted Subsidiary of the Company in any way other than pursuant to Standard Securitization Undertakings or (iii) subjects any property or asset of the Company or any Restricted Subsidiary of the 103 Company, directly or indirectly, contingently or otherwise, to the satisfaction thereof, other than pursuant to Standard Securitization Undertakings, (B) with which neither the Company nor any Restricted Subsidiary of the Company has any material contract, agreement, arrangement or understanding other than on terms no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons that are not Affiliates of the Company, other than fees payable in the ordinary course of business in connection with servicing receivables of such entity, and (c) to which neither the Company nor any Restricted Subsidiary of the Company has any obligation to maintain or preserve such entity's financial condition or cause such entity to achieve certain levels of operating results. Any such designation by the Board of Directors of the Company shall be evidenced to each of the Trustees by filing with the Trustees a certified copy of the resolution of the Board of Directors of the Company giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions. "Senior Credit Agreements" mean, collectively, (i) that certain Credit Agreement, dated as of December 18, 1997, and (ii) that certain AXELs Credit Agreement, dated as of December 18, 1997, in each case by and among the Company, Goldman Sachs Credit Partners L.P., as arranging agent and syndication agent, Morgan Guaranty and Trust Company of New York, as administrative agent, Bankers Trust Company, as documentation agent, and the financial institutions party thereto, initially providing for up to $550.0 million of revolving and term credit borrowings, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended (including any amendment and restatement thereof), modified, renewed, refunded, replaced, refinanced or restructured (including, without limitation, any amendment increasing the amount of available borrowing thereunder) from time to time and whether with the same or any other agent, lender or group of lenders. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Act, as such Regulation is in effect on the date hereof. "Standard Securitization Undertakings" means representations, warranties, covenants and indemnities entered into by the Company or any Subsidiary of the Company that are reasonably customary in an accounts receivable or equipment transactions. "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof), but shall not include any Unrestricted Subsidiary. "Subsidiary Guarantors" means each of (i) all Restricted Subsidiaries (but excluding the Non-Guarantor Subsidiaries) and (ii) any other subsidiary that executes a Note Guarantee in accordance with the provisions of the applicable Indenture, and their respective successors and assigns. 104 "Total Assets" means the total consolidated assets of the Company and its Restricted Subsidiaries, as set forth on the Company's most recent consolidated balance sheet. "Treasury Rate" means, as of any Redemption Date, the yield to maturity as of such Redemption Date of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15 (519) that has become publicly available at least two Business Days prior to such Redemption Date (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the period from such Redemption Date to December 15, 2002; provided, however, that if the period from such Redemption Date to December 15, 2002 is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used. "Unrestricted Subsidiary" means (i) any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution, but only to the extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (c) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has at least one director on its board of directors that is not a director or executive officer of the Company or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of the Company or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the applicable Trustee by filing with the applicable Trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by the covenant described above under the caption "Certain Covenants--Restricted Payments". If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the applicable Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock", the Company shall be in default of such covenant). The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (i) such Indebtedness is permitted under the covenant described under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock", calculated on a pro forma basis as if such designation had occurred at the beginning of the four-quarter reference period, (ii) such Subsidiary shall execute a Note Guarantee and deliver an Opinion of Counsel, in accordance with the terms of the applicable Indenture and (iii) no Default or Event of Default would be in existence following such designation. "U.S. Subsidiary" means any Subsidiary of the Company that is incorporated in a State in the United States or the District of Columbia or that Guarantees or otherwise becomes an obligor with respect to any Indebtedness of the Company or another Guarantor. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. 105 "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person and one or more Wholly Owned Subsidiaries of such Person. "Wholly Owned Restricted Subsidiary" of any Person means a Restricted Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries of such Person. 106 THE EXCHANGE OFFER PURPOSE AND EFFECT OF THE EXCHANGE OFFER The Notes were originally sold by the Company on December 11, 1997 to the Initial Purchaser pursuant to the Purchase Agreement. The Initial Purchaser subsequently resold the Notes to qualified institutional buyers in reliance on Rule 144A under the Securities Act and to a limited number of institutional accredited investors that agreed to comply with certain transfer restrictions and other conditions. As a condition to the Purchase Agreement, the Company entered into the Registration Rights Agreement with the Initial Purchaser pursuant to which the Company has agreed to: (i) file an Exchange Offer Registration Statement with the Commission on or prior to 90 days after the Closing Date, (ii) use its best efforts to have the Exchange Offer Registration Statement declared effective by the Commission on or prior to 150 days after the Closing Date, (iii) unless the Exchange Offer would not be permitted by applicable law or Commission policy, commence the Exchange Offer and use its best efforts to issue on or prior to 30 business days after the date on which the Exchange Offer Registration Statement was declared effective by the Commission, New Notes in exchange for all Notes tendered prior thereto in the Exchange Offer and (iv) if obligated to file the Shelf Registration Statement, use its best efforts to file the Shelf Registration Statement with the Commission on or prior to 45 days after such filing obligation arises and to cause the Shelf Registration to be declared effective by the Commission on or prior to 90 days after such obligation arises. For each Note surrendered to the Company pursuant to the Exchange Offer, the holder of such Note will receive an Exchange Note having a principal amount equal to that of the surrendered Note. Interest on each Exchange Note will accrue from the date of its original issue. Under existing interpretations of the staff of the Commission contained in several no-action letters to third parties, the Exchange Notes would in general be freely tradeable after the Exchange Offer without further registration under the Securities Act. However, any purchaser of Notes who is an "affiliate" of the Company, a broker-dealer who owns Notes acquired directly from the Company or an affiliate of the Company or who intends to participate in the Exchange Offer for the purpose of distributing the Exchange Notes (i) will not be able to rely on the interpretation of the staff of the Commission, (ii) will not be able to tender its Notes in the Exchange Offer and (iii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the Notes, unless such sale or transfer is made pursuant to an exemption from such requirements. If (i) the Company is not required to file the Exchange Offer Registration Statement or permitted to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (ii) any Holder of Transfer Restricted Securities notifies the Company prior to the 20th day following consummation of the Exchange Offer that (A) it is prohibited by law or Commission policy from participating in the Exchange Offer or (B) that it may not resell the New Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales or (C) that it is a broker-dealer and owns Notes acquired directly from the Company or an affiliate of the Company, the Company will file with the Commission a Shelf Registration Statement to cover resales of the Notes by the Holders thereof who satisfy certain conditions relating to the provision of information in connection with the Shelf Registration Statement. The Company will use its best efforts to cause the applicable registration statement to be declared effective as promptly as possible by the Commission. For purposes of the foregoing, "Transfer Restricted Securities" means each Note until (i) the date on which such Note has been exchanged by a person other than a broker-dealer for a New Note in the Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of a Note for a New Note, the date on which such New Note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (iii) the date on which such Note has been effectively registered under 107 the Securities Act and disposed of in accordance with the Shelf Registration Statement or (iv) the date on which such Note is distributed to the public pursuant to Rule 144 under the Act. If (a) the Company fails to file any of the Registration Statements required by the Registration Rights Agreement on or before the date specified for such filing, (b) any of such Registration Statements is not declared effective by the Commission on or prior to the date specified for such effectiveness (the "Effectiveness Target Date"), or (c) the Company fails to consummate the Exchange Offer within 30 business days of the Effectiveness Target Date with respect to the Exchange Offer Registration Statement, or (d) the Shelf Registration Statement or the Exchange Offer Registration Statement is declared effective but thereafter ceases to be effective or usable in connection with resales of Transfer Restricted Securities during the periods specified in the Registration Rights Agreement (each such event referred to in clauses (a) through (d) above a "Registration Default"), then the Company will pay Liquidated Damages to each Holder of Notes, with respect to the first 90- day period immediately following the occurrence of the first Registration Default in an amount equal to $.05 per week per $1,000 principal amount of Notes held by such Holder. The amount of the Liquidated Damages will increase by an additional $.05 per week per $1,000 principal amount of Notes with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of Liquidated Damages for all Registration Defaults of $.50 per week per $1,000 principal amount of Notes. All accrued Liquidated Damages will be paid by the Company on each Damages Payment Date to the Global Note Holder by wire transfer of immediately available funds or by federal funds check and to Holders of Certificated Securities by wire transfer to the accounts specified by them or by mailing checks to their registered addresses if no such accounts have been specified. Following the cure of all Registration Defaults, the accrual of Liquidated Damages will cease. Holders of Notes will be required to make certain representations to the Company (as described in the Registration Rights Agreement) in order to participate in the Exchange Offer and will be required to deliver certain information to be used in connection with the Shelf Registration Statement and to provide comments on the Shelf Registration Statement within the time periods set forth in the Registration Rights Agreement in order to have their Notes included in the Shelf Registration Statement and benefit from the provisions regarding Liquidated Damages set forth above. The Commission has taken the position that Participating Broker-Dealers may fulfill their prospectus delivery requirements with respect to the Exchange Notes (other than a resale of an unsold allotment from the original sale of the Notes) with the prospectus contained in the Exchange Offer Registration Statement. Under the Registration Rights Agreement, the Company is required to allow Participating Broker-Dealers and other persons, if any, subject to similar prospectus delivery requirements to use the prospectus contained in the Exchange Offer Registration Statement in connection with the resale of such Exchange Notes. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this Prospectus and in the Letter of Transmittal, the Company will accept any and all Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. The Company will issue $1,000 principal amount of Exchange Notes in exchange for each $1,000 principal amount of outstanding Notes accepted in the Exchange Offer. Holders may tender some or all of their Notes pursuant to the Exchange Offer. However, Notes may be tendered only in integral multiples of $1,000. The form and terms of the Exchange Notes are the same as the form and terms of the Notes except that (i) the Exchange Notes bear a Series B designation and a different CUSIP Number from the Notes, (ii) the Exchange Notes have been registered under the Securities Act and hence will not bear legends restricting the transfer thereof and (iii) the holders of the Exchange Notes will not be entitled to certain rights under the Registration Rights Agreement, including the provisions providing 108 for an increase in the interest rate on the Notes in certain circumstances relating to the timing of the Exchange Offer, all of which rights will terminate when the Exchange Offer is terminated. The Exchange Notes will evidence the same debt as the Notes and will be entitled to the benefits of the Indenture. As of the date of this Prospectus, $125,000,000 aggregate principal amount of Senior Subordinated Notes and $128,000,000 aggregate principal amount of Senior Subordinated Discount Notes were outstanding. The Company has fixed the close of business on , 1998 as the record date for the Exchange Offer for purposes of determining the persons to whom this Prospectus and the Letter of Transmittal will be mailed initially. Holders of Notes do not have any appraisal or dissenters' rights under the General Corporation Law of Delaware or the Indenture in connection with the Exchange Offer. The Company intends to conduct the Exchange Offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the Commission thereunder. The Company shall be deemed to have accepted validly tendered Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders for the purpose of receiving the Exchange Notes from the Company. If any tendered Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, the certificates for any such unaccepted Notes will be returned, without expense, to the tendering holder thereof as promptly as practicable after the Expiration Date. Holders who tender Notes in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of Notes pursuant to the Exchange Offer. The Company will pay all charges and expenses, other than transfer taxes in certain circumstances, in connection with the Exchange Offer. See "--Fees and Expenses". EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "Expiration Date" shall mean 5:00 p.m., New York City time, on , 1998, unless the Company, in its sole discretion, extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. Notwithstanding the foregoing, the Company will not extend the Expiration Date beyond , 1998. The Company has no current plans to extend the Exchange Offer. In order to extend the Exchange Offer, the Company will notify the Exchange Agent of any extension by oral or written notice and will mail to the registered holders an announcement thereof, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. The Company reserves the right, in its sole discretion, (i) to delay accepting any Notes, to extend the Exchange Offer or to terminate the Exchange Offer if any of the conditions set forth below under "--Conditions" shall not have been satisfied, by giving oral or written notice of such delay, extension or termination to the Exchange Agent or (ii) to amend the terms of the Exchange Offer in any manner. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof to the registered holders. INTEREST ON THE EXCHANGE NOTES The Senior Subordinated Exchange Notes will bear interest from their date of issuance. Holders of Senior Subordinated Notes that are accepted for exchange will receive, in cash, accrued interest 109 thereon to, but not including, the date of issuance of the Exchange Notes. Such interest will be paid with the first interest payment on the Senior Subordinated Exchange Notes on June 15, 1998. Interest on the Notes accepted for exchange will cease to accrue upon issuance of the Exchange Notes. Interest on the Senior Subordinated Exchange Notes is payable semi-annually on each June 15 and December 15, commencing on June 15, 1998. The Senior Subordinated Discount Exchange Notes are being issued at a substantial discount from their principal amount so as to yield gross proceeds of approximately $75.4 million. No interest will accrue or be payable on the Senior Subordinated Discount Exchange Notes prior to December 15, 2002. Thereafter, interest on the Senior Subordinated Discount Exchange Notes will accrue and will be payable in cash semi-annually in arrears on June 15 and December 15 of each year, commencing June 15, 2003. PROCEDURES FOR TENDERING Only a holder of Notes may tender such Notes in the Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign and date the Letter of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed if required by the Letter of Transmittal, and mail or otherwise deliver such Letter of Transmittal or such facsimile, together with the Notes and any other required documents, to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. To be tendered effectively, the Notes, Letter of Transmittal and other required documents must be completed and received by the Exchange Agent at the address set forth below under "Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration Date. Delivery of the Notes may be made by book-entry transfer in accordance with the procedures described below. Confirmation of such book-entry transfer must be received by the Exchange Agent prior to the Expiration Date. By executing the Letter of Transmittal, each holder will make to the Company the representations set forth above in the third paragraph under the heading "--Purpose and Effect of the Exchange Offer." The tender by a holder and the acceptance thereof by the Company will constitute agreement between such holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS. Any beneficial owner whose Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. See "Instruction to Registered Holder and/or Book-Entry Transfer Facility Participant from Owner" included with the Letter of Transmittal. Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution (as defined below) unless the Notes tendered pursuant thereto are tendered (i) by a registered holder who has not completed the box entitled "Special Registration 110 Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. In the event that signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be by a member firm of the Medallion System (an "Eligible Institution"). If the Letter of Transmittal is signed by a person other than the registered holder of any Notes listed therein, such Notes must be endorsed or accompanied by a properly completed bond power, signed by such registered holder as such registered holder's name appears on such Notes with the signature thereon guaranteed by an Eligible Institution. If the Letter of Transmittal or any Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, offices of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and evidence satisfactory to the Company of their authority to so act must be submitted with the Letter of Transmittal. The Company understands that the Exchange Agent will make a request promptly after the date of this Prospectus to establish accounts with respect to the Notes at the book-entry transfer facility, The Depository Trust Company (the "Book-Entry Transfer Facility"), for the purpose of facilitating the Exchange Offer, and subject to the establishment thereof, any financial institution that is a participant in the Book-Entry Transfer Facility's system may make book-entry delivery of Notes by causing such Book-Entry Transfer Facility to transfer such Notes into the Exchange Agent's account with respect to the Notes in accordance with the Book-Entry Transfer Facility's procedures for such transfer. Although delivery of the Notes may be effected through book- entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility, an appropriate Letter of Transmittal properly completed and duly executed with any required signature guarantee and all other required documents must in each case be transmitted to and received or confirmed by the Exchange Agent at its address set forth below on or prior to the Expiration Date, or, if the guaranteed delivery procedures described below are complied with, within the time period provided under such procedures. Delivery of documents to the Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent. The Depositary and DTC have confirmed that the Exchange Offer is eligible for the DTC Automated Tender Offer Program ("ATOP"). Accordingly, DTC participants may electronically transmit their acceptance of the Exchange Offer by causing DTC to transfer Notes to the Depositary in accordance with DTC's ATOP procedures for transfer. DTC will then send an Agent's Message to the Depositary. The term "Agent's Message" means a message transmitted by DTC, received by the Depositary and forming part of the confirmation of a book- entry transfer, which states that DTC has received an express acknowledgment from the participant in DTC tendering Notes which are the subject of such book-entry confirmation, that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that Sealy may enforce such agreement against such participant. In the case of an Agent's Message relating to guaranteed delivery, the term means a message transmitted by DTC and received by the Depositary, which states that DTC has received an express acknowledgment from the participant in DTC tendering Notes that such participant has received and agrees to be bound by the Notice of Guaranteed Delivery. Notwithstanding the foregoing, in order to validly tender in the Exchange Offer with respect to Securities transferred pursuant to ATOP, a DTC participant using ATOP must also properly complete and duly execute the applicable Letter of Transmittal and deliver it to the Depositary. Pursuant to authority granted by DTC, any DTC participant which has Notes credited to its DTC account at any time (and thereby held of record by DTC's nominee) may directly provide a tender as though it were the registered holder by so completing, executing and delivering the applicable Letter of Transmittal to the Depositary. DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. 111 All questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered Notes and withdrawal of tendered Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Notes not properly tendered or any Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right in its sole discretion to waive any defects, irregularities or conditions of tender as to particular Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Notes must be cured within such time as the Company shall determine. Although the Company intends to notify holders of defects or irregularities with respect to tenders of Notes, neither the Company, the Exchange Agent nor any other person shall incur any liability for failure to give such notification. Tenders of Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering holders, unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Notes and (i) whose Notes are not immediately available, (ii) who cannot deliver their Notes, the Letter of Transmittal or any other required documents to the Exchange Agent or (iii) who cannot complete the procedures for book-entry transfer, prior to the Expiration Date, may effect a tender if: (a) the tender is made through an Eligible Institution; (b) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the holder, the certificate number(s) of such Notes and the principal amount of Notes tendered, stating that the tender is being made thereby and guaranteeing that, within five New York Stock Exchange trading days after the Expiration Date, the Letter of Transmittal (or facsimile thereof) together with the certificate(s) representing the Notes (or a confirmation of book-entry transfer of such Notes into the Exchange Agent's account at the Book-Entry Transfer Facility), and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent; and (c) such properly completed and executed Letter of Transmittal (of facsimile thereof), as well as the certificate(s) representing all tendered Notes in proper form for transfer (or a confirmation of book-entry transfer of such Notes into the Exchange Agent's account at the Book-Entry Transfer Facility), and all other documents required by the Letter of Transmittal are received by the Exchange Agent upon five New York Stock Exchange trading days after the Expiration Date. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent to holders who wish to tender their Notes according to the guaranteed delivery procedures set forth above. WITHDRAWAL OF TENDERS Except as otherwise provided herein, tenders of Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To withdraw a tender of Notes in the Exchange Offer, a telegram, telex, letter or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Notes to be withdrawn (the "Depositor"), (ii) identify the Notes to be withdrawn (including the certificate number(s) and principal amount of such 112 Notes, or, in the case of Notes transferred by book-entry transfer, the name and number of the account at the Book-Entry Transfer Facility to be credited), (iii) be signed by the holder in the same manner as the original signature on the Letter of Transmittal by which such Notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the Trustee with respect to the Notes register the transfer of such Notes into the name of the person withdrawing the tender and (iv) specify the name in which any such Notes are to be registered, if different from that of the Depositor. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no Exchange Notes will be issued with respect thereto unless the Notes so withdrawn are validly retendered. Any Notes which have been tendered but which are not accepted for exchange will be returned to the holder thereof without cost to such holder as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Notes may be retendered by following one of the procedures described above under "--Procedures for Tendering" at any time prior to the Expiration Date. CONDITIONS Notwithstanding any other term of the Exchange Offer, the Company shall not be required to accept for exchange, or exchange Exchange Notes for, any Notes, and may terminate or amend the Exchange Offer as provided herein before the acceptance of such Notes, if: (a) any action or proceeding is instituted or threatened in any court or by or before any governmental agency with respect to the Exchange Offer which, in the sole judgment of the Company, might materially impair the ability of the Company to proceed with the Exchange Offer or any material adverse development has occurred in any existing action or proceeding with respect to the Company or any of its subsidiaries; or (b) any law, statute, rule, regulation or interpretation by the staff of the Commission is proposed, adopted or enacted, which, in the sole judgment of the Company, might materially impair the ability of the Company to proceed with the Exchange Offer or materially impair the contemplated benefits of the Exchange Offer to the Company; or (c) any governmental approval has not been obtained, which approval the Company shall, in its sole discretion, deem necessary for the consummation of the Exchange Offer as contemplated hereby. If the Company determines in its sole discretion that any of the conditions are not satisfied, the Company may (i) refuse to accept any Notes and return all tendered Notes to the tendering holders, (ii) extend the Exchange Offer and retain all Notes tendered prior to the expiration of the Exchange Offer, subject, however, to the rights of holders to withdraw such Notes (see "-- Withdrawal of Tenders") or (iii) waive such unsatisfied conditions with respect to the Exchange Offer and accept all properly tendered Notes which have not been withdrawn. EXCHANGE AGENT The Bank of New York has been appointed as Exchange Agent for the Exchange Offer. Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal and requests for Notice of Guaranteed Delivery should be directed to the Exchange Agent addressed as follows: The Bank of New York 101 Barclay Street 21st Floor New York, New York 10286 Delivery to an address other than as set forth above will not constitute a valid delivery. 113 FEES AND EXPENSES The expenses of soliciting tenders will be borne by the Company. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telecopy, telephone or in person by officers and regular employees of the Company and its affiliates. The Company has not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers, dealers, or others soliciting acceptances of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The cash expenses to be incurred in connection with the Exchange Offer will be paid by the Company. Such expenses include fees and expenses of the Exchange Agent and Trustee, accounting and legal fees and printing costs, among others. ACCOUNTING TREATMENT The Exchange Notes will be recorded at the same carrying value as the Notes, which is face value, as reflected in the Company's accounting records on the date of exchange. Accordingly, no gain or loss for accounting purposes will be recognized by the Company. The expenses of the Exchange Offer will be expensed over the term of the Exchange Notes. CONSEQUENCES OF FAILURE TO EXCHANGE The Notes that are not exchanged for Exchange Notes pursuant to the Exchange Offer will remain restricted securities. Accordingly, such Notes may be resold only (i) to the Company (upon redemption thereof or otherwise), (ii) so long as the Notes are eligible for resale pursuant to Rule 144A, to a person inside the United States whom the seller reasonably believes is a qualified institutional buyer within the meaning of Rule 144A under the Securities Act in a transaction meeting the requirements of Rule 144A, in accordance with Rule 144 under the Securities Act, or pursuant to another exemption from the registration requirements of the Securities Act (and based upon an opinion of counsel reasonably acceptable to the Company), (iii) outside the United States to a foreign person in a transaction meeting the requirements of Rule 904 under the Securities Act, or (iv) pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States. RESALE OF THE EXCHANGE NOTES With respect to resales of Exchange Notes, based on interpretations by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that a holder or other person who receives Exchange Notes, whether or not such person is the holder (other than a person that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) who receives Exchange Notes in exchange for Notes in the ordinary course of business and who is not participating, does not intend to participate, and has no arrangement or understanding with person to participate, in the distribution of the Exchange Notes, will be allowed to resell the Exchange Notes to the public without further registration under the Securities Act and without delivering to the purchasers of the Exchange Notes a prospectus that satisfies the requirements of Section 10 of the Securities Act. However, if any holder acquires Exchange Notes in the Exchange Offer for the purpose of distributing or participating in a distribution of the Exchange Notes, such holder cannot rely on the position of the staff of the Commission enunciated in such no-action letters or any similar interpretive letters, and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction, unless an exemption from registration is otherwise available. Further, each Participating Broker- Dealer that receives Exchange Notes for its own account 114 in exchange for Notes, where such Notes were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. As contemplated by these no-action letters and the Registration Rights Agreement, each holder accepting the Exchange Offer is required to represent to the Company in the Letter of Transmittal that (i) the Exchange Notes are to be acquired by the holder or the person receiving such Exchange Notes, whether or not such person is the holder, in the ordinary course of business, (ii) the holder or any such other person (other than a broker-dealer referred to in the next sentence) is not engaging and does not intend to engage, in the distribution of the Exchange Notes, (iii) the holder or any such other person has no arrangement or understanding with any person to participate in the distribution of the Exchange Notes, (iv) neither the holder nor any such other person is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act, and (v) the holder or any such other person acknowledges that if such holder or other person participates in the Exchange Offer for the purpose of distributing the Exchange Notes it must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the Exchange Notes and cannot rely on those no- action letters. As indicated above, each Participating Broker-Dealer that receives an Exchange Note for its own account in exchange for Notes must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. For a description of the procedures for such resales by Participating Broker-Dealers, see "Plan of Distribution". 115 CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following discussion (including the opinion of special counsel described below) is based upon current provisions of the Internal Revenue Code of 1986, as amended, applicable Treasury regulations, judicial authority and administrative rulings and practice. There can be no assurance that the Internal Revenue Service (the "Service") will not take a contrary view, and no ruling from the Service has been or will be sought. Legislative, judicial or administrative changes or interpretations may be forthcoming that could alter or modify the statements and conditions set forth herein. Any such changes or interpretations may or may not be retroactive and could affect the tax consequences to holders. Certain holders (including insurance companies, tax- exempt organizations, financial institutions, broker-dealers, foreign corporations and persons who are not citizens or residents of the United States) may be subject to special rules not discussed below. The Company recommends that each holder consult such holder's own tax advisor as to the particular tax consequences of exchanging such holder's Notes for Exchange Notes, including the applicability and effect of any state, local or foreign tax laws. Kirkland & Ellis, special counsel to the Company, has advised the Company that in its opinion, the exchange of the Notes for Exchange Notes pursuant to the Exchange Offer will not be treated as an "exchange" for federal income tax purposes because the Exchange Notes will not be considered to differ materially in kind or extent from the Notes. Rather, the Exchange Notes received by a holder will be treated as a continuation of the Notes in the hands of such holder. As a result, there will be no federal income tax consequences to holders exchanging Notes for Exchange Notes pursuant to the Exchange Offer. PLAN OF DISTRIBUTION Each Participating Broker-Dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of Exchange Notes received in exchange for Notes where such Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that for a period of 180 days after the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any Participating Broker-Dealer for use in connection with any such resale. In addition, until [ ], 1998, all dealers effecting transactions in the Exchange Notes may be required to deliver a prospectus. The Company will not receive any proceeds from any sales of the Exchange Notes by Participating Broker-Dealers. Exchange Notes received by Participating Broker-Dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over- the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchaser or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such Participating Broker- Dealer and/or the purchasers of any such Exchange Notes. Any Participating Broker-Dealer that resells the Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. 116 For a period of 180 days after the Expiration Date the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any Participating Broker-Dealer that requests such documents in the Letter of Transmittal. LEGAL MATTERS Certain legal matters in connection with the issuance of the Exchange Notes offered hereby will be passed upon for the Company by Kirkland & Ellis, New York, New York. EXPERTS The financial statements of Sealy Corporation as of November 30, 1997 and December 1, 1996 and for each of the years in the three-year period ended November 30, 1997, have been included herein and in the registration statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 117 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS SEALY CORPORATION Consolidated Financial Statements: Report of independent auditors.......................................... F-2 Consolidated balance sheets as of November 30, 1997 and December 1, 1996................................................................... F-3 Consolidated statements of operations for the years ended November 30, 1997, December 1, 1996 and November 30, 1995........................... F-6 Consolidated statements of stockholders' equity for the years ended November 30, 1997, December 1, 1996 and November 30, 1995.............. F-7 Consolidated statements of cash flows for the years ended November 30, 1997, December 1, 1996 and November 30, 1995........................... F-8 Notes to consolidated financial statements.............................. F-9 Condensed Consolidated Financial Statements: Condensed consolidated statements of income for the quarters ended March 1, 1998 and March 2, 1997.............................................. F-37 Condensed consolidated balance sheets as of March 1, 1998 and November 30, 1997............................................................... F-38 Condensed consolidated statements of cash flows for the quarters ended March 1, 1998 and March 2, 1997........................................ F-39 Notes to condensed consolidated financial statements.................... F-40
F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Sealy Corporation: We have audited the accompanying consolidated balance sheets of Sealy Corporation and subsidiaries as of November 30, 1997 and December 1, 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended November 30, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sealy Corporation and subsidiaries as of November 30, 1997 and December 1, 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended November 30, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Cleveland, Ohio January 7, 1998 F-2 SEALY CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
NOVEMBER 30, DECEMBER 1, 1997 1996 ------------ ----------- ASSETS Current assets: Cash and cash equivalents........................... $ 6,057 $ 16,619 Accounts receivable, less allowance for doubtful accounts (1997--$7,696; 1996--$6,814).............. 93,918 77,179 Inventories......................................... 46,007 33,992 Net assets held for sale............................ -- 35,492 Prepaid expenses.................................... 7,935 2,587 Prepaid taxes....................................... 14,594 1,522 Deferred income taxes............................... -- 6,337 -------- -------- 168,511 173,728 Property, plant and equipment--at cost: Land................................................ 9,760 12,109 Buildings and improvements.......................... 53,890 53,741 Machinery and equipment............................. 86,248 82,664 Construction in progress............................ 19,705 7,549 -------- -------- 169,603 156,063 Less accumulated depreciation....................... 43,995 34,697 -------- -------- 125,608 121,366 Other assets: Goodwill--net of accumulated amortization (1997-- $57,261; 1996--$45,532)............................ 406,778 428,460 Patents and other intangibles--net of accumulated amortization (1997--$6,540; 1996--$5,187).......... 4,491 5,844 Debt issuance costs, net, and other assets.......... 15,679 10,530 -------- -------- 426,948 444,834 -------- -------- $721,067 $739,928 ======== ========
See accompanying notes to consolidated financial statements. F-3 SEALY CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
NOVEMBER 30, DECEMBER 1, 1997 1996 ------------ ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion--long-term obligations.............. $ -- $ 18,620 Accounts payable.................................... 49,676 35,797 Accrued expenses: Customer incentives and advertising............... 30,704 20,704 Compensation...................................... 17,771 14,047 Other............................................. 20,200 23,691 Deferred income taxes............................. 1,936 -- -------- -------- 120,287 112,859 -------- -------- Long-term obligations................................. 330,000 269,507 Other noncurrent liabilities.......................... 35,713 34,822 Deferred income taxes................................. 30,001 29,746 Stockholders' equity: Preferred stock, $.01 par value; Authorized, 10,000 shares; Issued, none............................... -- -- Class A common stock, $.01 par value; Authorized, 49,500 shares; Issued (1997--29,932; 1996-- 29,409)............................................ 299 294 Class B common stock, $.01 par value; Authorized, 500 shares, Issued (1997--11; 1996--11)............ -- -- Additional paid-in capital.......................... 257,320 256,489 Retained (deficit) earnings......................... (50,614) 37,418 Foreign currency translation adjustment............. (1,939) (1,207) -------- -------- 205,066 292,994 -------- -------- Commitment and contingencies.......................... -- -- -------- -------- $721,067 $739,928 ======== ========
See accompanying notes to consolidated financial statements. F-4 (THIS PAGE INTENTIONALLY LEFT BLANK) F-5 SEALY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED ------------------------------------- NOVEMBER 30, DECEMBER 1, NOVEMBER 30, 1997 1996 1995 ------------ ----------- ------------ Net sales................................ $804,834 $697,638 $653,942 -------- -------- -------- Cost and expenses: Cost of goods sold..................... 455,905 397,259 362,416 Selling, general and administrative (including provisions for bad debts of $4,528, $918 and $812, respectively).. 262,023 216,674 216,670 Loss on net assets held for sale....... -- 11,762 -- Stock based compensation............... 1,635 4,779 (13,260) Amortization of intangibles............ 13,264 13,594 14,056 Interest expense, net.................. 31,396 28,797 31,018 -------- -------- -------- Income before income taxes, extraordinary item, and cumulative effect of change in accounting principle........................... 40,611 24,773 43,042 Income taxes............................. 22,509 25,279 23,572 -------- -------- -------- Income/(loss) before extraordinary item and cumulative effect of change in accounting principle.................. 18,102 (506) 19,470 Extraordinary item--loss from early extinguishment of debt (net of income tax benefit of $1,353) (Note 16)........ 2,030 -- -- Cumulative effect of change in accounting principle (net of income tax benefit of $2,885) (Note 15)....................... 4,329 -- -- -------- -------- -------- Net income/(loss).................... $ 11,743 $ (506) $ 19,470 ======== ======== ======== Earnings/(loss) per common share: Before extraordinary item and cumulative effect of change in accounting principle.................. $ 0.59 $ (0.02) $ 0.65 Extraordinary item..................... (0.07) -- -- Cumulative effect of change in accounting principle.................. (0.14) -- -- -------- -------- -------- Net earnings/(loss) per common share............................... $ 0.38 $ (0.02) $ 0.65 ======== ======== ======== Weighted average number of common shares and equivalents outstanding during period.................................. 30,880 29,428 30,143
See accompanying notes to consolidated financial statements. F-6 SEALY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
CLASS A CLASS B FOREIGN -------------- ------------- ADDITIONAL RETAINED CURRENCY COMMON STOCK COMMON STOCK PAID-IN EARNINGS TRANSLATION SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT TOTAL ------ ------ ------ ------ ---------- --------- ----------- -------- November 30, 1994....... 29,434 $294 -- $-- $269,229 $ 53,917 $(1,207) $322,233 Net income............. -- -- -- -- -- 19,470 -- 19,470 Performance share plan.................. -- -- -- -- (13,260) -- -- (13,260) Management stock award................. 10 1 -- -- -- -- -- 1 Valuation adjustment on common stock and warrants subject to repurchase............ -- -- -- -- 2,300 -- -- 2,300 Stock options exercised............. 7 -- -- -- 67 -- -- 67 Warrants exercised..... -- -- 9 -- -- -- -- -- Foreign currency translation........... -- -- -- -- -- -- 70 70 ------ ---- --- ---- -------- -------- ------- -------- November 30, 1995....... 29,451 295 9 -- 258,336 73,387 (1,137) 330,881 Net loss............... -- -- -- -- -- (506) -- (506) Performance share plan.................. -- -- -- -- 4,510 -- -- 4,510 Management stock award................. 68 -- -- -- 269 -- -- 269 Valuation adjustment on common stock and warrants subject to repurchase............ -- -- -- -- (308) -- -- (308) Warrants exercised..... -- -- 2 -- -- -- -- -- Repurchase of management stock...... (110) (1) -- -- -- -- -- (1) Dividend............... -- -- -- -- -- (35,463) -- (35,463) Withdrawals from performance share plan.................. -- -- -- -- (3,498) -- -- (3,498) Shares tendered under performance share plan.................. -- -- -- -- (2,820) -- -- (2,820) Foreign currency translation........... -- -- -- -- -- -- (70) (70) ------ ---- --- ---- -------- -------- ------- -------- December 1, 1996........ 29,409 294 11 -- 256,489 37,418 (1,207) 292,994 Net Income............. -- -- -- -- -- 11,743 -- 11,743 Management stock award................. 285 3 -- -- 1,299 -- -- 1,302 Performance share plan.................. 233 2 -- -- (134) -- -- (132) Exercised stock options............... 5 -- -- -- 29 -- -- 29 Valuation adjustment on common stock and warrants subject to repurchase............ -- -- -- -- (363) -- -- (363) Dividend............... -- -- -- -- -- (99,775) -- (99,775) Foreign currency translation........... -- -- -- -- -- -- (732) (732) ------ ---- --- ---- -------- -------- ------- -------- November 30, 1997....... 29,932 $299 11 $-- $257,320 $(50,614) $(1,939) $205,066 ====== ==== === ==== ======== ======== ======= ========
See accompanying notes to consolidated financial statements. F-7 SEALY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED ------------------------------------- NOVEMBER 30, DECEMBER 1, NOVEMBER 30, 1997 1996 1995 ------------ ----------- ------------ Cash flows from operating activities: Net income/(loss)...................... $ 11,743 $ (506) $ 19,470 Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation........................... 10,851 13,037 10,144 Cumulative effect of change in accounting principle.................. 7,214 -- -- Extraordinary item--early extinguishment of debt................ 3,383 -- -- Loss on net assets held for sale....... -- 11,762 -- Loss on disposal of assets............. 1,061 178 813 Stock based compensation............... 1,165 4,779 (13,260) Deferred income taxes.................. 8,528 5,781 11,974 Amortization of: Intangibles.......................... 13,264 13,594 14,056 Debt issuance cost................... 1,841 2,683 3,136 Other, net............................. (4,449) 922 (1,502) Changes in operating assets and liabilities: Accounts receivable.................... (16,739) (4,119) (3,975) Inventories............................ (12,015) (5,543) 7,267 Prepaid expenses....................... (5,348) (821) 952 Prepaid taxes.......................... (3,119) (1,522) -- Accounts payable/accrued expenses/other noncurrent liabilities................ 24,669 4,192 14,252 -------- -------- -------- Net cash provided by operating activities........................ 42,049 44,417 63,327 -------- -------- -------- Cash flows from investing activities: Purchase of property, plant and equipment............................. (29,140) (12,045) (11,804) Proceeds from sale of subsidiary....... 35,000 -- -- Proceeds from sale of property, plant and equipment......................... 5,561 1,089 7,468 -------- -------- -------- Net cash provided by (used in) investing activities.............. 11,421 (10,956) (4,336) -------- -------- -------- Cash flows from financing activities: Repayment of long-term obligations..... (63,127) (23,727) (62,952) Net borrowing from Revolving Credit Facility.............................. 105,000 25,000 -- Dividend............................... (99,775) (35,463) -- Debt issuance costs.................... (6,130) -- -- -------- -------- -------- Net cash used in financing activi- ties.............................. (64,032) (34,190) (62,952) -------- -------- -------- Change in cash and cash equivalents...... (10,562) (729) (3,961) Cash and cash equivalents: Beginning of period.................... 16,619 17,348 21,309 -------- -------- -------- End of period.......................... $ 6,057 $ 16,619 $ 17,348 ======== ======== ======== Supplemental disclosures: Taxes paid, net........................ $ 12,432 $ 14,334 $ 9,405 Interest paid, net..................... $ 29,523 $ 26,487 $ 28,670 Other non-cash activity: Goodwill reduction resulting from pre- acquisition net operating loss utilization........................... $ 9,953 -- --
See accompanying notes to consolidated financial statements. F-8 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies used in the preparation of the consolidated financial statements are summarized below. (A) BUSINESS Sealy Corporation (the "Company" or the "Parent"), is engaged in the home furnishings business and manufactures, distributes and sells conventional bedding products including mattresses and foundations. Substantially all of the Company's trade accounts receivable are from retail businesses. The Company recognizes revenue upon shipment of goods to customers. The Company purchases substantially all of its Stearns & Foster foundation parts and approximately 50% of its Sealy foundation parts from one vendor, which has patents on various interlocking wire configurations. While the Company attempts to reduce the risks of dependence on a single external source, there can be no assurance that there would not be an interruption of production if this vendor or any other vendor were to discontinue supplying the Company for any reason. (B) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. (C) INTERNATIONAL OPERATIONS The Company translates the assets and liabilities of its non-U.S. subsidiaries at the exchange rates in effect at year-end and the results of operations at the average rate throughout the year. The translation adjustments are recorded directly as a separate component of shareholders' equity, while transaction gains (losses) are included in net income. (D) CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with a maturity at the time of purchase of three months or less to be cash equivalents. Cash equivalents are stated at cost which approximates market value. (E) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are depreciated over their expected useful lives principally by the straight-line method for financial reporting purposes and by both accelerated and straight-line methods for tax reporting purposes. (F) AMORTIZATION OF INTANGIBLES Goodwill represents the excess of the purchase price paid over the fair value of net assets acquired and is amortized on a straight-line basis over a forty year period. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future cash flows. The amount of goodwill impairment, if any, would be measured based on projected discounted future results using a discount rate reflecting the Company's average cost of funds. F-9 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Other intangibles include patents and trademarks which are amortized on the straight-line method over periods ranging from 5 to 20 years. The costs related to the issuance of debt are capitalized and amortized to interest expense using the effective-interest method over the lives of the related debt. (G) EARNINGS PER COMMON SHARE Net earnings per common share is based upon weighted average number of shares of the Company's common stock and common stock equivalents outstanding for the periods presented. Common stock equivalents included in the computation, using the treasury stock method, represent shares issuable upon the assumed exercise of warrants, stock options and performance shares that would have a dilutive effect in periods in which there were earnings. (H) INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (I) ADVERTISING COSTS The Company expenses all advertising costs as incurred. Advertising expenses for the years ended November 30, 1997, December 1, 1996, and November 30, 1995 amounted to $97,314, $74,649 and $92,726, respectively. (J) COMMITMENTS AND CONTINGENCIES Liabilities for loss contingencies, including environmental remediation costs, arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Recoveries from third parties which are probable of realization are separately recorded, and are not offset against the related environmental liability, in accordance with Financial Accounting Standards Board Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts. (K) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (L) RECLASSIFICATION Certain reclassifications of previously reported financial information were made to conform to the 1997 presentation. F-10 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (M) FISCAL YEAR Effective December 1, 1995, the Company changed its fiscal year end from November 30 to a 52- or 53-week year ending on the Sunday closest to November 30. Accordingly, the 1997 fiscal year ended on November 30, the 1996 fiscal year ended on December 1 and the 1995 fiscal year ended on November 30. All general references to years relate to fiscal years unless otherwise noted. (2) INVENTORIES Inventories are valued at cost not in excess of market, using the first-in, first-out (FIFO) method. The major components of inventory as of November 30, 1997 and December 1, 1996 were as follows:
1997 1996 ------- ------- (IN THOUSANDS) Raw materials.............................................. $26,251 $18,300 Work in process............................................ 12,594 11,624 Finished goods............................................. 7,162 4,068 ------- ------- $46,007 $33,992 ======= =======
(3) LONG-TERM OBLIGATIONS Long-term debt as of November 30, 1997 and December 1, 1996 consisted of the following:
1997 1996 -------- -------- (IN THOUSANDS) $275,000,000 Second Restated Secured Credit Agreement- Revolving Credit Facility............................ $130,000 $ -- 1994 Restated Credit Agreement: Revolving Credit Facility........................... -- 25,000 Term Loan Facility.................................. -- 63,052 10 1/4% Senior Subordinated Notes..................... 200,000 200,000 Other................................................. -- 75 -------- -------- 330,000 288,127 Less current portion.................................. -- 18,620 -------- -------- $330,000 $269,507 ======== ========
On May 27, 1994, the Company entered into a restated secured credit agreement (the "1994 Credit Agreement") with a majority of its then current group of senior lenders (the "Senior Lenders"), which modified the terms of the 1993 Credit Agreement by reducing the amounts under its existing term loan facilities thereunder from an aggregate of $250 million to a single facility of $150 million (the "Term Loan Facility") and by increasing the amount available under its existing revolving credit facility thereunder from $75 million to $125 million (the "Revolving Credit Facility"). The Revolving Credit Facility provided sublimits for a $30 million discretionary letter of credit facility ("Letters of Credit") and a discretionary swing loan facility of up to $5 million. F-11 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The $275,000,000 Second Restated Secured Credit Agreement (the "1997 Credit Agreement") was consummated on February 25, 1997 and consists of a $275 million reducing revolving credit facility with a $25 million discretionary letter of credit facility and a discretionary swing loan facility of up to $20 million ("Revolving Credit Facility"). The 1997 Credit Agreement has a final maturity date of January 15, 2003, and provides for periodic reductions in the amounts of available credit in accordance with the following schedule:
REMAINING COMMITMENT REVOLVER REDUCTION DATE REDUCTION COMMITMENT -------------- ----------- ------------ November 29, 1998................................. $15 million $260 million November 28, 1999................................. $20 million $240 million December 3, 2000.................................. $30 million $210 million December 2, 2001.................................. $30 million $180 million June 2, 2002...................................... $30 million $150 million
Additional mandatory commitment reductions will occur equal to 100% of net after-tax cash proceeds from any sale of assets in excess of $15 million in each fiscal year, and equal to 50% of net proceeds from the issuance of permitted subordinated debt. Base rate loans and Eurodollar rate loans are based on a pricing grid which provides for an interest rate plus a margin. The margin is adjustable on the Company's total senior debt to adjusted EBITDA ratio. For the first six months of the 1997 Credit Agreement, the margin on the Eurodollar rate borrowing was 1.25%. In September, 1997, the margin decreased to 1.0% and remained as such through November 30, 1997. The initial commitment fee, which is also subject to a pricing grid, was 0.375% during the first six months of the 1997 Credit Agreement. In September 1997, the commitment fee decreased to 0.3% and remained as such through November 30, 1997. During the twelve months ended November 30, 1997, the maximum amount outstanding under the Revolving Credit Facility, excluding Letters of Credit, was $160 million. At November 30, 1997, the Company had approximately $135 million available under the Revolving Credit Facility, with Letters of Credit issued totaling approximately $10 million. The Company's net weighted average borrowing cost was 9.0% for fiscal 1997 and 1996. All obligations of the Company under the 1997 Credit Agreement are jointly and severally guaranteed by each direct and indirect domestic subsidiary of the Company and secured by the first priority liens on and security interests in substantially all of the assets of the Company and its domestic subsidiaries and by first priority pledges of substantially all of the capital stock of most of the subsidiaries of the Company; however, such security is subject to release upon the Company attaining specified senior unsecured (either actual or implied) credit ratings. The Company also is subject to certain affirmative and negative covenants under both the 1997 Credit Agreement and the Indenture relating to its 10 1/4% Senior Subordinated Notes due 2003, including requirements and restrictions with respect to capital expenditures, dividends, maximum leverage and other financial ratios. The 10 1/4% (formerly 9 1/2%) Senior Subordinated Notes (the "Parent Notes") sold pursuant to a public offering on May 7, 1993 mature on May 1, 2003 with interest payable semiannually in cash on May 1 and November 1 of each year. The Notes may be redeemed at the option of the Company on or after May 1, 1998, under the conditions and at the redemption prices as specified in the note indenture, dated as of May 7, 1993, under which the Parent Notes were issued (the "Parent Note Indenture"). The Parent Notes are subordinated to all existing and future Senior Debt of the Company as defined in the Parent Note Indenture. F-12 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Pursuant to a Solicitation of Consents dated as of January 24, 1997, as subsequently amended (the "Consent Solicitation"), the Company solicited consents from the record holders (the "Registered Holders") of its Parent Notes to certain amendments, consents and waivers under the Indenture (the "Indenture"), dated as of May 7, 1993, between the Company and Mellon Bank, F.S.B., as successor trustee (the "Trustee"), under which the Notes were issued. Following receipt of the requisite consents of the Registered Holders, on February 21, 1997, the Company and the Trustee executed a Supplemental Indenture incorporating the amendments to the Indenture. The Supplemental Indenture provided for (i) an increase in the interest rate on the Notes to 10 1/4%, (ii) provision to allow for the payment of a special dividend of up to One Hundred Million Dollars ($100,000,000) (the "Dividend") to qualifying equity security holders of the Company, (iii) an increase in the redemption premiums paid to Registered Holders in the event the Notes are repurchased by the Company, and (iv) the corresponding waiver of Section 4.05 of the Indenture, such that the Dividend will not constitute a "Restricted Payment" (as defined in the Indenture). The Company paid an aggregate of Four Million Dollars ($4,000,000) on a pro rata basis to those Registered Holders that had timely consented. In December, 1997, the Company completed a Recapitalization which included the tendering of Parent Notes and repayment of Parent indebtedness under the 1997 Credit Agreement. See Note 16, Subsequent Events. (4) LEASE COMMITMENTS The Company leases certain operating facilities, offices and equipment. The following is a schedule of future minimum annual lease commitments and sublease rentals at November 30, 1997.
COMMITMENTS UNDER ------------------ SUBLEASE OPERATING RENTAL FISCAL YEAR LEASES INCOME ----------- --------- -------- (IN THOUSANDS) 1998.................................................... $ 8,028 $102 1999.................................................... 6,357 -- 2000.................................................... 5,663 -- 2001.................................................... 4,349 -- 2002.................................................... 3,830 Later years............................................. 10,264 -- ------- ---- $38,491 $102 ======= ====
Rental expense charged to operations is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED NOV. 30, 1997 DEC. 1, 1996 NOV. 30, 1995 ------------- ------------ ------------- (IN THOUSANDS) Minimum rentals................... $ 9,153 $ 9,096 $9,084 Contingent rentals (based upon delivery equipment mileage)...... 1,361 1,067 809 ------- ------- ------ $10,514 $10,163 $9,893 ======= ======= ======
The Company has the option to renew certain plant operating leases, with the longest renewal period extending through 2015. Most of the operating leases provide for increased rent through increases in general price levels. F-13 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (5) STOCK OPTION AND RESTRICTED STOCK PLANS The Company adopted the 1989 Stock Option Plan ("1989 Plan") in 1989, the 1992 Stock Option Plan ("1992 Plan") in 1992 and the 1997 Stock Option Plan ("1997 Plan") in 1996 and reserved 100,000 shares, 600,000 shares and 2,400,000 shares, respectively, of Class A Common Stock of the Company (the "Shares") for future issuance. Options under the 1989 Plan, the 1992 Plan and the 1997 Plan may be granted either as Incentive Stock Options as defined in Section 422A of the Internal Revenue Code or Nonqualified Stock Options subject to the provisions of Section 83 of the Internal Revenue Code. Prior to fiscal year 1995, the Company issued options under the 1989 Plan totaling 3,300 Shares (net of subsequent forfeitures), all of which are exercisable on or after November 30, 1994. Any unexercised options terminate on the tenth anniversary of the date of grant or earlier, in connection with termination of employment. The options outstanding (net of forfeitures) and the related exercise price for all 1989 Plan options as of November 30, 1997 adjusted for the dividends paid on May 17, 1997 and February 28, 1997 were 4,862 Shares and $34.02. No 1989 Plan options have been exercised since the date of grant. Outstanding options (net of subsequent forfeitures) and the related exercise prices adjusted for the dividends paid in May 17, 1996 and February 28, 1997 under the 1992 Plan are as follows: 63,158 granted in June, 1992 with an exercise price of $5.12 per Share; 67,584 granted in June, 1993 with an exercise price of $6.16 per Share; 77,175 granted in June, 1994 with an exercise price of $9.17 per Share; 105,105 granted in June, 1995 with an exercise price of $10.85 per Share and 130,830 granted in June, 1996 with an exercise price of $7.23 per Share. The 1992 Plan options are exercisable 25% upon grant and 25% per year thereafter. The exercise price is equal to the estimated fair value of the Company's stock at the date of grant. 1992 Plan options totaling 11,958 shares were exercised during the three years ended November 30, 1997. At November 30, 1997, options for 351,833 Shares issued under the 1992 Plan are exercisable. During Fiscal 1993, the Company adopted the 1993 Non-Employee Director Stock Option Plan (the "1993 Plan"), which was subsequently amended on April 6, 1994 and June 27, 1995. The 1993 Plan provides for the one-time automatic grant of ten-year options to acquire up to 10,000 Shares to all current and future directors who are not employed by the Company, by Zell/Chilmark or by their respective affiliates ("Non-Employee Directors"). Options granted under the 1993 Plan vest immediately and are initially exercisable at a price equal to the fair market value of the Shares on the date of grant. For options granted prior to March 1, 1994, the exercise price of options granted pursuant to this Plan increased on the first anniversary date of such grant by 4%, which became the fixed exercise price for all such options. Options issued thereafter, if any, will be exercisable over their term at the fair market value on the date of grant. Pursuant to the 1993 Plan, the Company granted options to acquire up to 50,000 Shares to Non-Employee Directors in fiscal year 1993 at an initial exercise price of $9.05 per Share. The 1993 Plan was amended on June 27, 1995 to provide for the grant of an additional option to purchase 5,000 Shares to each eligible director and thereafter providing for the automatic annual grant of an option to each eligible director to purchase an additional 5,000 Shares at fair market value on the date of grant. Pursuant to the 1993 Plan, the Company granted options to acquire up to 5,000 Shares to each eligible director in fiscal 1995, 1996 and 1997 with a fixed exercise price of $15.95, $10.63 and $9.60 per Share, respectively. The options outstanding (net of forfeitures) and their related strike prices at November 30, 1997 adjusted for the dividends paid on May 17, 1996 and February 28, 1997 are 60,780 Shares at $6.21, 30,384 Shares at $10.52, 26,872 Shares at $7.01, and 20,000 Shares at $9.60 for the 1993, 1995, 1996 and 1997 grants, respectively. As of November 30, 1997 no options under the 1993 Plan have been exercised. F-14 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In 1996, pursuant to an employment agreement with the Company's CEO, the Company granted him an aggregate of 67,635 shares of restricted stock with a fair value of $637,800 at date of grant. The restricted stock was to vest at a rate of approximately 25% at each anniversary date of the grant. The Company also awarded a grant of ten-year stock options to acquire up to an aggregate of 587,342 Shares at an exercise price of $7.23 per Share (representing fair market value at the time of grant) adjusted for the dividends paid on May 17, 1997 and February 28, 1997. The stock options were to vest at a rate of 25% at each anniversary date of the grant. On May 31, 1997 the Human Resources Committee, under the 1997 Plan, granted the CEO a ten-year stock option to acquire up to 75,000 Shares at an exercise price of $9.60 per Share (representing fair market value of the time of grant). In May 1997, the Company granted ten-year stock options to acquire 921,400 shares at an exercise price of $9.60 per share (representing fair market value at the time of grant). The options vest 50% on the third anniversary date of the grant and 50% on the fourth anniversary date of the grant. Outstanding options (net of forfeitures) at November 30, 1997 were 910,200. As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the Company continues to account for its stock option and stock incentive plans in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and makes no charges against capital with respect to options granted. SFAS No. 123 does however require the disclosure of pro forma information regarding Net income and Earnings per share determined as if the Company had accounted for its stock options under the fair value method. For purposes of this pro forma disclosure the estimated fair value of the options is amortized to expense over the options' vesting period.
1997 1996 ------- ------ Net income (loss)............................. As reported $11,743 $ (506) Pro forma $10,814 $ (892) Net Earnings (loss) per share................. As reported $ 0.38 $(0.02) Pro forma $ 0.35 $(0.03)
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to Fiscal 1996 and all related Plans were terminated effective December 18, 1997, the above pro forma effect may not be representative of that to be expected in future years. F-15 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The fair value for all options granted in Fiscal 1997 and 1996 were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: the expected life for all options is seven years; the expected dividend yield for all stock is zero percent and the expected volatility of all stock is zero percent. Adjustments were made to the then outstanding options and related stock prices as a result of the dividends paid on May 17, 1996 and February 28, 1997. Such adjustments were treated as modifications of outstanding awards in accordance with SFAS No. 123. The risk free interest rates utilized for the grants made during Fiscal 1997 and 1996 and for the May 1996 and February 1997 modifications of all then outstanding grants are as follows:
RISK FREE INTEREST RATE ----------------------------------- ORIGINAL MODIFICATION MODIFICATION OPTION GRANT DATE GRANT MAY 1996 FEBRUARY 1997 ----------------- -------- ------------ ------------- 1989 Plan: December 1989........................ -- -- 5.15% 1992 Plan: June 1992............................ -- -- 6.06% June 1993............................ -- -- 6.22% June 1994............................ -- -- 6.31% June 1995............................ -- -- 6.38% June 1996............................ 6.77% -- 6.46% 1993 Plan: March 1993........................... -- 6.26% 6.46% June 1995............................ -- 6.51% 6.46% June 1996............................ 6.77% -- 6.46% May 1997............................. 6.64% -- -- CEO Award: March 1996........................... 5.82% -- 6.46% 1997 Plan: June 1997............................ 6.64% -- --
A summary of the status and changes of shares subject to options and the related average price per share is as follows:
SHARES SUBJECT AVERAGE OPTION TO OPTIONS PRICE PER SHARE -------------- --------------- Outstanding November 30, 1995............... 346,450 $12.41 --------- ------ Granted................................... 531,500 $10.58 Adjustment................................ 7,622 -- Canceled.................................. (37,500) 11.66 --------- ------ Outstanding December 1, 1996................ 848,072 11.19 --------- ------ Granted................................... 941,400 9.40 Adjustment................................ 341,478 -- Exercised................................. (4,958) 5.82 Canceled.................................. (41,700) 10.81 --------- ------ Outstanding November 30, 1997............... 2,084,292 $ 8.52 ========= ======
F-16 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Options exercisable and shares available for future grant at Fiscal Year End:
1997 1996 1995 --------- ------- ------- Options exercisable.............................. 641,895 312,447 225,450 Weighted-average option price per share of options exercisable............................. $7.91 $11.29 $11.39 Weighted-average fair value of options granted during the year................................. $9.60 $10.63 $15.95 Shares available to grant........................ 1,741,086 339,550 413,550
The ranges of exercise prices and the remaining contractual life of options as of November 30, 1997 were:
RANGE OF EXERCISE PRICES $5.12 TO $10.85 $34.02 ------------------------ --------------- -------- Options outstanding: Outstanding as of November 30, 1997............ 2,079,430 4,862 Weighted-average remaining contractual life.... 8.4 Yrs. 2.0 Yrs. Weighted-average exercise price................ $8.44 $34.02 Options exercisable: Outstanding as of November 30, 1997............ 637,033 4,862 Weighted-average remaining contractual life.... 7.0 Yrs. 2.0 Yrs. Weighted-average exercise price................ $7.66 $34.02
In 1996, the Company adopted the 1996 Transitional Restricted Stock Plan (the "1996 Transitional Plan") effective December 1, 1996 which terminates on January 3, 2000, and no grants shall thereafter be awarded under the Plan. All grants awarded under the Plan prior to such date shall remain in effect until they have been exercised or terminated in accordance with the terms and provisions of the Plan. On January 6, 1997, 281,400 Shares, which vest on January 3, 2000, were granted to 32 senior executives of the Company (including 15,800 shares each to Mr. Fazio, Mr. Fellmy, Mr. McIlquham and Mr. Rogers) under the Plan with a fair value of $3,632,874 at date of grant. The Plan provides for partial vesting at a rate of 50% if a grantee incurs a "termination" (as defined in the Plan) from January 3, 1999 to January 2, 2000. During Fiscal 1997, 35,800 Shares were forfeited and 39,700 additional Shares were issued to three senior executives of the Company (none of whom were Named Executive Officers) resulting in Shares outstanding at November 30, 1997 of 285,300. As a result of the Recapitalization (see Note 16) effective on December 18, 1997, the Human Resources Committee of the Company's Board of Directors removed all restrictions on the then outstanding restricted stock issued under the 1996 Transitional Plan and those shares were paid out as a result of the Recapitalization at the Recapitalization share price of $14.3027. As of December 18, 1997, the Human Resources Committee accelerated vesting of the Company issued and then outstanding stock options under the 1989 Plan, 1992 Plan, 1993 Plan and 1997 Plan (collectively the "Terminated Stock Option Plans"); terminated the Terminated Stock Option Plans; and paid each holder of options under the Terminated Stock Option Plans reasonable compensation for such terminations which compensation was equal to the spread between the Merger share price of $14.3027 and the respective per share exercise price for the terminated stock options. Prior to December 18, 1997 certain members of senior management were offered and elected to cancel their options under the Terminated Stock Option Plans and their restricted stock under the 1996 Transitional Plan. Those senior executives received nonqualified stock options which were subsequently cancelled and exchanged on December 18, 1997 for ten- year stock options to acquire 145,516 shares of the Company's post- Recapitalization Class L Common Stock at an exercise price of $10.125 per share F-17 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) and ten-year stock options to acquire 1,309,644 shares of the Company's post- Recapitalization Class A Common Stock at an exercise price of $0.125 per share. See Note 16 for description of new Class A and Class L Common shares. These options were fully vested at the time of grant and the exercise price was set at 25% of fair market value at the time of grant. (6) INCOME TAXES The Company and its domestic subsidiaries file a consolidated U.S. Federal income tax return. Income tax expense attributable to income from continuing operations consists of:
YEAR ENDED YEAR ENDED YEAR ENDED NOV. 30, 1997 DEC. 1, 1996 NOV. 30, 1995 ------------- ------------ ------------- (IN THOUSANDS) Current: Federal......................... $10,679 $15,494 $ 6,384 State and local................. 2,616 1,196 1,404 Canada, Commonwealth of Puerto Rico and Mexico................ 4,016 2,808 3,810 ------- ------- ------- 17,311 19,498 11,598 Deferred.......................... 5,198 5,781 11,974 ------- ------- ------- Income tax expense................ $22,509 $25,279 $23,572 ======= ======= =======
Income before income taxes from Canadian operations amounted to $8,643, $7,042 and $7,247, for the years ended November 30, 1997, December 1, 1996 and November 30, 1995. The differences between the effective tax rate and the statutory U.S. Federal income tax rate are explained as follows:
YEAR ENDED YEAR ENDED YEAR ENDED NOV. 30, 1997 DEC. 1, 1996 NOV. 30, 1995 ------------- ------------ ------------- Income tax expense (benefit) computed at statutory U.S. Federal income tax rate.......... 35.0% 35.0% 35.0% State and local income taxes, net of Federal tax benefit........... 6.2 6.1 4.5 Permanent differences resulting from purchase accounting......... 9.4 16.1 9.6 Foreign tax rate differential and effects of foreign earnings repatriation..................... 3.5 6.5 5.4 Sale of subsidiary................ 1.8 37.3 -- Other items, net.................. (0.5) 1.0 0.3 ---- ----- ---- 55.4% 102.0% 54.8% ==== ===== ====
At November 30, 1997 and December 1, 1996, the total deferred tax assets and deferred tax liabilities were $15,571 and $19,265, $47,508 and $42,674, respectively. The significant components of the deferred tax assets were accrued salaries and benefits of $7,669 and $7,447, respectively and net operating loss carryforwards of $3,577 in Fiscal 1996, and the deferred tax liabilities relating to property, plant and equipment were $21,445 and $23,601 and intangible assets of $12,262 and $13,204, respectively. F-18 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A provision has not been made for U.S. or foreign taxes on undistributed earnings of subsidiaries which operate in Canada and Puerto Rico. Upon repatriation of such earnings, withholding taxes might be imposed that are then available for use as credits against a U.S. Federal income tax liability, subject to certain limitations. The amount of taxes that would be payable on repatriation of the entire amount of undistributed earnings is immaterial. During 1997, goodwill was reduced by $9,953 for the utilization of previously unrecognized pre-acquisition net operating loss carryforwards. (7) RETIREMENT PLANS Substantially all employees are covered by profit sharing plans, where specific amounts are set aside in trust for retirement benefits. The total profit sharing expense was $5.9 million, $5.0 million, and $5.4 million for the years ended November 30, 1997, December 1, 1996, and November 30, 1995, respectively. (8) WARRANTS SERIES A AND SERIES B WARRANTS Series A and Series B Warrants (collectively, "Restructure Warrants") were issued under a Warrant Agreement (the "Agreement") dated as of November 6, 1991 between the Company and its subsidiary, Sealy, Inc., as warrant agent. The Restructure Warrants, when exercised, entitled the Holder thereof to receive one Share in exchange for the exercise price per Share for Series A warrants and Series B warrants, subject to adjustment under certain circumstances. As of November 30, 1997, the Series A and Series B Warrants were exercisable into 4,337,959 and 1,686,446 Shares, respectively. Under the Agreement, adjustments are to be made to the exercise ratio and exercise price of the Restructure Warrants in the event the Company issues shares of its capital stock at less than Current Market Value (including under employee benefit plans). The Company has issued shares under its Performance Share Plan, 1996 Transitional Plan and certain employee issuances, triggering the anti-dilution adjustments, and these adjustments have been made pursuant to the Warrant Agreement. The Series A and Series B Warrants conversion ratio and exercise price at November 30, 1997 were 1.0207 and $15.6751 per share and 1.0207 and $22.0431 per share, respectively and at December 1, 1996 were 1.0115 and $15.8182 per share and 1.0115 and $22.2444 per share, respectively, The Restructure Warrants were exercisable at any time and from time to time on or prior to November 6, 2001 ("Expiration Date"). The Restructure Warrants may terminate and become void prior to the Expiration Date in the event that such warrants are redeemed by the Company pursuant to its right to redeem the Restructure Warrants on any date after November 6, 1996 at a redemption price per Share as defined in the Warrant Agreement. On October 27, 1997, the Company's Board of Directors, in connection with the Recapitalization (see Note 16), authorized such a redemption effective February 3, 1998 (the "Redemption Date") of all outstanding Restructure Warrants. In accordance with criteria set forth in the Warrant Agreement and as defined in the Warrant Agreement, two independent financial firms performed a valuation effective December 2, 1997 and established a redemption price. The redemption price was $0.9411 for each Series A Warrant and $0.3777 for each Series B Warrant. Holders were given the option to exercise their Restructure Warrants prior to the redemption date, surrender their certificates representing their Restructure Warrants and receive the redemption price within five business days of the surrender, or receive the redemption price within five business days of the Redemption Date. F-19 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MERGER WARRANTS Merger Warrants were issued under a Warrant Agreement ("Warrant Agreement") dated as of August 1, 1989 between the Company and KeyCorp Shareholder Services, Inc., as successor warrant agent. Each Merger Warrant, when exercised, will entitle the holder thereof to receive one fiftieth of one share of Class B Common Stock ("Warrant Shares") of the Company (50 to 1 ratio) in exchange for the exercise price of $.01 per share, subject to adjustment under certain circumstances. The Company has issued shares under its Performance Share Plan, 1996 Transitional Restricted Stock Plan and certain employee issuances, triggering the anti-dilution adjustment provision, and these adjustments have been made pursuant to the Warrant Agreement resulting in a revised conversion ratio of 48.64 to 1 on December 1, 1996 and 47.98 to 1 on November 30, 1997. The Merger Warrants became exercisable subsequent to August 9, 1995. As a result of exercised Merger Warrants, 607 and 2,085 shares of Class B Common Stock were issued in Fiscal 1997 and 1996, respectively. The Company is required to offer to repurchase the Merger Warrants and Warrant Shares upon the removal of any limitations to repurchase or upon the occurrence of certain other events. Merger Warrants and Warrant Shares are, therefore, not considered to be a part of the Company's stockholders' equity but, are included in other noncurrent liabilities in the accompanying consolidated balance sheets. Authorized Merger Warrants at November 30, 1997 and December 1, 1996 are exercisable into an aggregate of 203,751 and 207,747 shares of Class B Common Stock, respectively. As a result of the Recapitalization (see Note 16) effective on December 18, 1997, Merger Warrant holders upon exercise of their Merger Warrants at a conversion rate of 47.98 to 1 are entitled only to receive a cash payment of $14.2927 which is the spread between the Recapitalization share price of $14.3027 and the Merger Warrant exercise price of $0.01. As a result of the Recapitalization, Warrants not exercised prior to such Recapitalization can no longer be converted to Class B shares and upon subsequent exercise will receive the same amount in cash without interest. As of December 17, 1997, the Company forwarded to a third party paying agent the amount necessary to fund the future cash requirements with respect to remaining then outstanding Merger Warrants and Class B Common Stock. (9) COMMON STOCK Prior to the Merger, holders of Class A Common Stock were entitled to one vote per share on all matters submitted to a vote of stockholders while the holders of Class B Common Stock were entitled to one-half vote per share. Except with respect to voting rights, the terms of the Class A Common Stock and the Class B Common Stock were identical. Shares of Class B Common Stock, under certain circumstances, were convertible into shares of Class A Common Stock. In connection with the Recapitalization (see Note 16), new Class A, B, L and M Common Shares were issued. (10) PERFORMANCE SHARE PLAN Effective April 1, 1992, the Company adopted a Performance Share Plan ("Plan") for certain employees of the Company. Under the Plan, the Board of Directors may approve the issuance of up to 3.0 million performance share units each representing the right to receive up to one Share if the Company meets specified cumulative operating cash flow targets over the five-year period ending December 1, 1996. During fiscal 1996, two participants withdrew from the Plan resulting in an adjustment to additional paid-in capital. As of December 1, 1996, the conclusion of the Plan, 451,740 Shares were awarded under the Plan of which 207,549 Shares were tendered to the Company by Plan participants to cover their estimated tax liability, resulting in the issuance of 244,191 Shares in January 1997. F-20 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Plan is a variable stock compensation plan pursuant to which the fair value of Shares issuable under the Plan will be recorded as compensation expense over the Plan's five-year term ending December 1, 1996. In addition to the annual amount of compensation expense under the Plan, such amount will be adjusted to give cumulative effect to any change in the amount of non-cash compensation expense previously recorded in prior reporting periods, resulting from subsequent increases or decreases in the fair value of the Shares or the number of performance share units outstanding since such reporting period and to any change in management's estimate of its ability to achieve the cumulative operating cash flow targets as defined in the Plan. Performance Share Plan expense for the year ended December 1, 1996 amounted to $4.5 million. The Company recorded a $13.3 million credit to non-cash compensation expense under the Plan for the year ended November 30, 1995. (11) SUMMARY OF INTERIM FINANCIAL INFORMATION (UNAUDITED)
NET INCOME/ EARNINGS PER NET SALES GROSS PROFIT (LOSS) COMMON SHARE ------------ ------------- ------------ ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997: First quarter......... $ 168,904 $ 72,890 $ 1,158 $ 0.04 Second quarter........ 180,625 80,951 3,282 0.11 Third quarter......... 229,919 101,864 7,917 0.26 Fourth quarter........ 225,386 93,224 (614) (0.02) 1996: First quarter......... $ 159,475 $ 69,583 $ 2,854 $ 0.09 Second quarter........ 165,177 68,935 2,909 0.10 Third quarter......... 192,546 84,434 7,083 0.24 Fourth quarter........ 180,440 77,427 (13,352) (0.45)
During the first and fourth quarters of Fiscal 1997, the Company recorded an after-tax loss of $2.0 million ($0.07 per share), from early extinguishment of debt in connection with the Refinancing, and $4.3 million ($0.14 per share), from write-offs in connection with EITF 97-13 (see Note 15), respectively. During the fourth quarter of Fiscal 1996, the Company recorded an after-tax loss on pending sale of subsidiary of $17.6 million and a noncash charge of $3.2 million in connection with the Company's Performance Share Plan. (12) CONTINGENCIES In accordance with procedures established under the Environmental Cleanup Responsibility Act (now known as the Industrial Site Recovery Act), Sealy and one of its subsidiaries are parties to an Administrative Consent Order ("ACO") issued by the New Jersey Department of Environmental Protection ("DEP"). Pursuant to the ACO the Company and such subsidiary agreed to conduct soil and groundwater investigation and remediation at the plant previously owned by the subsidiary in South Brunswick, New Jersey. The Company does not believe that its manufacturing processes were a source of the contaminants found to exist above regulatorily acceptable levels in the groundwater. The Company and its subsidiary have retained primary responsibility for the investigation and any necessary clean up plan approved by the DEP under the terms of the ACO. The DEP previously approved both the Company's soil remediation plans and its initial groundwater remediation plans. Further investigation in 1996 revealed certain additional areas of soil contamination resulting from activities at the South Brunswick facility prior to the Company's acquisition F-21 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) of the site. In 1997, the Company with DEP approval completed essentially all soil remediation and conducted a pilot test for a Company-proposed revision to the groundwater remediation program. While the Company cannot predict the ultimate timing or cost to remediate this facility based on facts currently known, management believes the previously established accrual for site investigation and remediation costs is adequate to cover the Company's reasonably estimable liability and does not believe the resolution of this matter will have a material adverse effect on the Company's financial position or future operations. In March, 1994, the Company filed a claim in the U.S. District Court for the District of New Jersey against former owners of the site and their lenders under the Comprehensive Environmental Response, Compensation and Liability Act seeking contribution for site investigation and remedial costs. In March, 1997, the Company received $1.7 million from a former owner of the site and one of the lenders to the former owner in final settlement of this litigation which was recorded as an increase to other non-current liabilities. In January 1997, the Company filed a claim in the U.S. District Court of New Jersey against former insurance companies for the Company under the Comprehensive Environmental Response, Compensation and Liability Act seeking contribution for site investigation and remedial costs. A parallel case seeking a judgement of non-liability was filed by some (but not all) of these insurance companies in the U.S. District Court for the Northern District of Ohio. The Company is awaiting a ruling by the District Courts involved. The Company has also voluntarily proceeded to develop a remediation plan for isolated soil and groundwater contamination at its Oakville, Connecticut property that the Company believes is solely attributable to the manufacturing operations of previous unaffiliated occupants. Based on the facts currently known, management does not believe that resolution of this matter will have a material adverse effect on the Company's financial position or future operations. On May 22, 1997, the Company filed in the United States District Court for the Northern District of Illinois a motion to terminate certain antitrust final judgments ("the Judgments") entered on December 30, 1964 and December 26, 1967. These Judgements, among other things, prohibited the Company from suggesting resale prices to its dealers. During the pendency of the Company's motion to terminate the Judgments, and based upon allegations received by the Department of Justice ("the Department") concerning a possible resale price maintenance agreement with a Stearns & Foster dealer, the Department, on September 8, 1997, issued to the Company a Civil Investigative Demand seeking documents relating to, among other things, communications between the Company and dealers concerning the retail price of mattresses. In response to the Civil Investigative Demand, the Company produced certain documents and the deposition of a Company executive was taken. Immediately following such document production and deposition, the Department consented to the termination of the Judgments and an order terminating the Judgments was entered by the Court on September 19, 1997. After the Court terminated the Judgments, the Department notified the Company on September 29, 1997 that it was limiting the Civil Investigative Demand to certain narrow specifications. In October 1997, the Company produced additional documents in response to the Civil Investigative Demand. On November 24, 1997 the Company received a request from the Department for clarification and additional information. The Company has responded to that request. (13) FINANCIAL INSTRUMENTS Due to the short maturity of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, their carrying values approximate fair value. The carrying amount of long-term debt under the Term Loan Facility and Revolving Credit Facility approximate fair value because the F-22 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) interest rate adjusts to market interest rates. The fair value of long-term debt under the 10 1/4% Senior Subordinated Notes, based on a quoted market price, was $215 million and $201 million at November 30, 1997 and December 1, 1996, respectively. (14) DISPOSITION On January 15, 1997, the Company completed the sale of Woodstuff Manufacturing, Inc., a wholly owned subsidiary that manufactured and marketed solid wood bedroom furniture under the "Samuel Lawrence" brand name. The divestiture produced cash proceeds of $35.0 million and resulted in a book loss of $17.6 million. The loss on sale of this subsidiary includes income tax expense of $5.8 million arising from the tax gain on the transaction, as well as transaction costs related to the sale. A summary of the net assets held for sale at December 1, 1996 is as follows (amounts in thousands): Accounts receivable.............................................. $ 9,228 Inventory........................................................ 6,907 Other current assets............................................. 480 Property, plant and equipment, net............................... 10,329 Other assets..................................................... 26,246 Accounts payable and accrued expenses............................ (4,939) Other liabilities................................................ (1,998) Excess of net assets over proceeds from sale..................... (10,761) -------- Net assets held for sale......................................... $ 35,492 ========
(15) CUSTOMER RECEIVABLE On July 7, 1997, Montgomery Ward, which is a major customer of the Company, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. During fiscal 1997, the Company recorded increases in bad debt reserves of $2,766 million and related factoring expenses of $1,261 million, in response to this situation. The Company has since reinstated shipments to Montgomery Ward and will continue to monitor and attempt to limit its exposure in this situation. Management believes that this situation will not have a material adverse effect on the Company's financial position or future operations. (16) YEAR 2000 ISSUE (UNAUDITED) The Company believes that the new Business Systems, including appropriate software, being installed both alongside and as part of an upgrade of its existing computer system will address the dating system flaw inherent in most operating systems (the "Year 2000 Issue"). There can be no assurance, however, that the new Business Systems will be installed and fully operational at all locations and for all applications prior to the turn of the century, and management has therefore deemed it necessary to convert its current system to be Year 2000 compliant. The Company has conducted a comprehensive impact analysis to determine what computing platforms and date-aware functions with respect to its existing computer operating systems will be disrupted by the Year 2000 Issue. In January, 1998, the Company completed a prioritization of the impacted areas identified to date and commenced the detailed program code changes through a contracted third party vendor which has experience in Year 2000 conversions for the Company's existing system including the same release of such system. The Company is in the preliminary stages of assessment of its vendors and customers status with respect to the Year 2000 Issue. The required code changes, testing and implementation necessary to address the Year 2000 Issue is projected to be completed by May, 1999, and is expected to cost approximately $4.0 million. F-23 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (17) NEW ACCOUNTING PRONOUNCEMENTS On November 20, 1997 the Emerging Issues Task Force (EITF) reached a final consensus that business process reengineering costs incurred in connection with an overall information technology transformation project should be expensed as incurred (EITF 97-13). The transition provisions require companies that had previously capitalized such business process reengineering costs to identify these costs and quantify the unamortized amounts remaining on the balance sheet as of the beginning of the quarter which includes November 20, 1997. These unamortized amounts are required to be written off as a cumulative effect of a change in accounting principle in such quarter. The Company has adopted EITF 97-13 resulting in a loss of $4.3 million, net of income tax benefit of $2.9 million, representing the cumulative write-off of previously capitalized costs as of August 31, 1997 primarily relating to the Company's new Business Systems project. All business process reengineering costs subsequent to August 31, 1997 have been expensed. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earning per Share. SFAS No. 128 supersedes APB Opinion No. 15, Earnings per Share ("Opinion No. 15"), and requires the calculation and dual presentation of basic and diluted earnings per share ("EPS"), replacing the measures of primary and fully- diluted EPS as reported under Opinion No. 15. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, earlier application is not permitted. Accordingly, EPS presented on the accompanying statements of income are calculated under the guidance of Opinion 15. Under SFAS No. 128, the basic and diluted EPS on net income for fiscal 1997 would have been $0.39 and $0.38, respectively. In June 1997, SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information", were issued. The Company plans to adopt these standards when required in fiscal 1999. (18) SUBSEQUENT EVENTS On October 30, 1997, Parent entered into an agreement and plan of merger (the "Merger Agreement") with Sandman Merger Corporation, a transitory Delaware merger corporation ("Sandman"), and Zell/Chilmark Fund, L.P., a Delaware limited partnership ("Zell"). Zell owned approximately 87% of the issued and outstanding common stock of Parent (the "Existing Common Stock"). Pursuant to the Merger Agreement, upon the satisfaction of certain conditions, Sandman was merged with and into Parent with Parent being the surviving corporation effective on December 18, 1997 (the "Closing Date") and the Company was recapitalized (the "Recapitalization") whereby certain equity investors, including members of management, acquired an approximate 90.0% economic equity stake (85.3% voting equity stake) in the Company. A portion of the issued and outstanding shares of common stock of the Company was converted into the right to receive aggregate cash equal to $419.3 million less (i) certain seller fees and expenses and (ii) certain costs in connection with the extinguishment of certain outstanding options and warrants of the Company and the remaining portion was converted into voting preferred stock and then reconverted into $25.0 million in aggregate principal amount of junior subordinated notes of the Company and a retained voting common stock interest in the Company of approximately 14.7%. Concurrent with the Recapitalization, the Company refinanced existing indebtedness (the "Refinancing") by Sealy Mattress Company (the "Issuer"), a wholly owned subsidiary of the Parent, entering into and borrowing $460 million under the Senior Credit Agreements and by issuing $125 million of Senior Subordinated Notes and $128 million of Senior Subordinated Discount Notes. F-24 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) After the Recapitalization, the issued and outstanding capital stock of the Company will consist of Class A common stock, par value $0.01 per share ("Class A Common"), Class B common stock, par value $0.01 per share ("Class B Common"), Class L common stock, par value $0.01 per share ("Class L Common"), and Class M common stock, par value $0.01 per share ("Class M Common" and collectively with the Class A Common, Class B Common and Class L Common, "Common Stock"). The Class L Common and the Class M Common are senior in right of payment to the Class A Common and Class B Common. Holders of Class B Common and Class M Common have no voting rights except as required by law. The holders of Class A Common and Class L Common are entitled to one vote per share on all matters to be voted upon by the stockholders of the Company, including the election of directors. The Board of Directors of the Company is authorized to issue preferred stock, par value $0.01 per share, with such designations and other terms as may be stated in the resolutions providing for the issue of any such preferred stock adopted from time to time by the Board of Directors. Upon the consummation of the Recapitalization, Parent and certain of its stockholders, including the Bain Funds, Harvard Private Capital, Inc. ("Harvard"), Sealy Investors 1, LLC, Sealy Investors 2, LLC, Sealy Investors 3, LLC (the "LLCs") and Zell (collectively, the "Stockholders") entered into a stockholders agreement (the "Stockholders Agreement"). The Stockholders Agreement (i) required that each of the parties thereto vote all of its voting securities of Parent and take all other necessary or desirable actions to cause the size of the Board of Directors of Parent to be established at seven members and to cause three designees of the Bain Funds and one designee of Harvard to be elected to the Board of Directors; (ii) granted Parent and the Bain Funds a right of first offer on any proposed transfer of shares of capital stock of Parent held by Zell, Harvard or the LLCs; (iii) granted Harvard a right of first offer on any proposed transfer of shares of capital stock of Parent held by the Bain Funds; (iv) granted tag-along rights on certain transfers of shares of capital stock of Parent; (v) required the Stockholders to consent to a sale of Parent to an independent third party if such sale is approved by holders constituting a majority of the then outstanding shares of voting common stock of Parent; and (vi) except in certain instances, prohibits Zell from transferring any shares of capital stock of Parent until the tenth anniversary of the date of the consummation of the Recapitalization. Certain of the foregoing provisions of the Stockholders Agreement terminate upon the consummation of an initial Public Offering or an Approved Sale (as each is defined in the Stockholders Agreement). Immediately prior to the closing of the Recapitalization (the "Closing"), Parent contributed (the "Capital Contribution") all of the issued and outstanding capital stock of Sealy, Inc., an Ohio corporation, The Stearns & Foster Bedding Company, a Delaware corporation, Advanced Sleep Products, a California corporation, Sealy Components-Pads, Inc., a Delaware corporation, and Sealy Mattress Company of San Diego, a California corporation, to the capital of the Issuer. Immediately after the Capital Contribution, the Issuer became the only direct subsidiary of Parent and owns 100% of the operations of Parent. At the Closing, Sandman was merged with and into Parent with Parent the surviving corporation. On November 18, 1997 Parent commenced an offer (the "Tender Offer") to purchase for cash up to all (but not less than a majority in principal amount outstanding) of its 10 1/4% Senior Subordinated Notes due 2003 (the "Parent Notes") and a related solicitation (the "Consent Solicitation") of consents to modify certain terms of the Indenture under which the Parent Notes were issued (the "Parent Note Indenture"). The purchase price to be paid in respect to validly tendered Parent Notes and related consents were determined by a formula set forth in the offer to purchase with respect to the Tender Offer. The Offerings were conditioned upon the consummation of the Tender Offer for, and the obtaining of consents with respect to, at least a majority in aggregate principal amount of the Parent Notes outstanding. Parent's obligation to accept for purchase and to pay for the Parent Notes validly F-25 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) tendered pursuant to the Tender Offer was conditioned upon, among other things, consummation of the other elements of the Recapitalization. The Company's 1997 Credit Agreement was terminated in connection with the Recapitalization. The 1997 Credit Agreement provided for a $275.0 million reducing revolving credit facility and a discretionary swing loan facility of up to $20.0 million. Upon consummation of the Transactions, the Issuer entered into the AXELs credit agreement (the "Senior AXELs Credit Agreement") and a credit agreement providing for Tranche A Term Loans and revolving borrowings (the "Senior Revolving Credit Agreement" and, together with the Senior AXELs Credit Agreement, the "Senior Credit Agreements"). The Senior Credit Agreements provided for loans of up to $550.0 million, consisting of a $450.0 million term loan facility (the "Term Loan Facility") and a $100.0 million revolving credit facility (the "Revolving Credit Facility"). The Issuer distributed the proceeds of the Term Loan Facility and its initial borrowings under the Revolving Credit Facility to Parent to provide a portion of the funds necessary to consummate the Transactions. Indebtedness of the Issuer under the Senior Credit Agreements is secured and guaranteed by Parent and certain of the Issuer's current and all of the Issuer's future U.S. subsidiaries and will bear interest at a floating rate. See Note 17 for further details regarding guarantees including consolidating condensed financial statements for guarantors and non-guarantors. The Senior Credit Agreements will require the Company to meet certain financial tests, including minimum levels of adjusted EBITDA as determined in the agreements, minimum interest coverage and maximum leverage ratio. The Senior Credit Agreements also contains covenants which, among other things, limit capital expenditures, indebtedness and/or the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset sales, mergers and consolidations, prepayments of other indebtedness (including the Notes), liens and encumbrances and other matters customarily restricted in such agreements. Indebtedness under the Senior Credit Agreements bears interest at a floating rate. Indebtedness under the Revolving Credit Facility and the Term Loans initially (subject to reduction based on attainment of certain leverage ratio levels) bears interest at a rate based upon (i) the Base Rate (defined as the highest of (x) the rate of interest announced publicly by Morgan Guaranty Trust Company of New York from time to time, as its base rate and (y) the Federal funds effective rate from time to time plus 0.50%) plus 1.25% in respect of the Tranche A Term Loans and the loans under the Revolving Credit Facility (the "Revolving Loans"), 1.50% in respect of the AXELs Series B, 1.75% in respect of the AXELs Series C and 2.00% in respect of the AXELs Series D, or (ii) the Adjusted Eurodollar Rate (as defined in the Senior Credit Agreements) for one, two, three or six months (or, subject to general availability, two weeks or twelve months), in each case plus 2.25% in respect of Tranche A Term Loans and Revolving Loans, 2.50% in respect of AXELs Series B, 2.75% in respect of AXELs Series C and 3.00% in respect to AXELs Series D. The Tranche A Term Loans mature in December 2002. The AXELs Series B mature in December 2004. The AXELs Series C mature in December 2005. The AXELs Series D mature in December 2006. The Tranche A Term Loans are subject to quarterly amortization payments commencing in March 1999, the AXELs Series B, the AXELs Series C and the AXELs Series D are subject to quarterly amortization payments commencing in March 1998 with the AXELs Series B amortizing in nominal amounts until the maturity of the Tranche A Term Loans, the AXELs Series C amortizing in nominal amounts until the maturity of the AXELs Series B and the AXELs Series D amortizing in nominal amounts until the maturity of the AXELs Series C. The Revolving Credit Facility matures in December 2002. In addition, the Senior Credit Agreements provide for mandatory repayments, subject to certain exceptions, of the Term Loans, and reductions in the Revolving Credit Facility, based on the net proceeds of certain asset sales outside the ordinary course of business of the Issuer and its F-26 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) subsidiaries, the net proceeds of insurance, the net proceeds of certain debt and equity issuances, and excess cash flow (as defined in the Senior Credit Agreements). The Notes were issued pursuant to an Indenture (the "Senior Subordinated Note Indenture") among the Issuer, the Guarantors and The Bank of New York, as trustee (the "Senior Subordinated Note Trustee"). The Senior Subordinated Discount Notes were issued pursuant to an Indenture (the "Senior Subordinated Discount Note Indenture" and, together with the Senior Subordinated Note Indenture, the "Indentures") among the Issuer, the Guarantors and The Bank of New York, as trustee (the "Senior Subordinated Discount Note Trustee" and, together with the Senior Subordinated Note Trustee, the "Trustees"). The Senior Subordinated Notes are limited in aggregate principal amount to $300.0 million, of which $125.0 million was issued in the Offering, and matures on December 15, 2007. Interest on the Senior Subordinated Notes accrue at the rate of 9 7/8% per annum and is payable semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 1998, to Holders of record on the immediately preceding June 1 and December 1. Additional Senior Subordinated Notes may be issued from time to time after the date of the Senior Subordinated Note Indenture, subject to the provisions of the Senior Subordinated Note Indenture. Except as provided below, the Senior Subordinated Notes are not redeemable at the Company's option prior to December 15, 2002. Thereafter, the Senior Subordinated Notes are subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on December 15 of the years indicated below:
PERCENTAGE OF YEAR PRINCIPAL AMOUNT ---- ---------------- 2002........................ 104.937% 2003........................ 103.292% 2004........................ 101.646% 2005 and thereafter......... 100.000%
Notwithstanding the foregoing, during the first 36 months after December 11, 1997, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of Senior Subordinated Notes originally issued under the Senior Subordinated Note Indenture at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages thereon, if any, to the redemption date, with the net cash proceeds of any Equity Offerings; (as defined in the indentures) provided that at least $80.0 million in aggregate principal amount of Senior Subordinated Notes remain outstanding immediately after the occurrence of such redemption (excluding Senior Subordinated Notes held by the Company and its Subsidiaries); and provided further that such redemption shall occur within 120 days of the date of the closing of any such Equity Offering. The Senior Subordinated Discount Notes are limited in aggregate principal amount at maturity to $275.0 million, of which $128.0 million were issued in the Offering, and mature on December 15, 2007. The Senior Subordinated Discount Notes were offered at a substantial discount from their principal amount at maturity. Until December 15, 2002 (the "Full Accretion Date"), no interest (other than liquidated damages, if applicable) will accrue or be paid in cash on the Senior Subordinated Discount Notes, but the Accreted Value will accrete (representing the amortization of original issue discount) F-27 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) between the issuance date and the Full Accretion Date, on a semi-annual bond equivalent basis. Beginning on the Full Accretion Date, interest on the Senior Subordinated Discount Notes will accrue at the rate of 10 7/8% per annum and will be payable in cash semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 2003, to Holders of record on the immediately preceding June 1 and December 1. Additional Senior Subordinated Discount Notes may be issued from time to time after the date of the Senior Subordinated Discount Note Indenture, subject to the provisions of the Senior Subordinated Discount Note Indenture. Interest on the Senior Subordinated Discount Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Full Accretion Date. Except as provided below, the Senior Subordinated Discount Notes will not be redeemable at the Company's option prior to December 15, 2002. Thereafter, the Senior Subordinated Discount Notes will be subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and liquidated damages thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on December 15 of the years indicated below:
PERCENTAGE OF YEAR PRINCIPAL AMOUNT ---- ---------------- 2002........................ 105.437% 2003........................ 103.625% 2004........................ 101.812% 2005 and thereafter......... 100.000%
Notwithstanding the foregoing, during the first 36 months after December 11, 1997, the Company may on any one or more occasions redeem up to 35% of the Accreted Value of Senior Subordinated Discount Notes originally issued under the Senior Subordinated Discount Note Indenture at a redemption price of 110.875% of the Accreted Value, plus accrued and unpaid liquidated damages thereon, if any, to the redemption date, with the net cash proceeds of any Equity Offerings; (as defined in the Indentures) provided that at least $50.0 million in aggregate Accreted Value of Senior Subordinated Discount Notes remain outstanding immediately after the occurrence of such redemption (excluding Senior Subordinated Discount Notes held by the Company and its Subsidiaries); and provided, further, that such redemption shall occur within 120 days of the date of the closing of any such Equity Offering. The unaudited pro forma balance sheet data of the Company as of November 30, 1997 shown below gives effect to the Recapitalization and the Refinancing as if they each had occurred on November 30, 1997 (in 000's): ASSETS Current assets.................................................. $ 177,717 Other assets.................................................... 574,231 --------- Total assets.................................................. $ 751,948 ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities............................................. $ 118,250 Long-term debt obligations, including current portion........... 687,648 Other liabilities............................................... 67,982 --------- Total liabilities............................................. 873,880 Stockholders' deficit........................................... (121,932) --------- Total liabilities and stockholders' deficit................... $ 751,948 =========
F-28 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The unaudited pro forma statement of operations data for the year ended November 30, 1997 shown below gives effect to (i) the Recapitalization; (ii) the Refinancing; and (iii) the divestitures of the Company's Samuel Lawrence subsidiary and South Brunswick plant in January, 1997 and March, 1997, respectively, as if they each occurred on December 2, 1996 (in 000's) but does not reflect certain non-recurring Recapitalization charges and an extraordinary loss related to the Refinancing: Revenue......................................................... $799,503 ======== Net loss........................................................ $ (9,403) ======== Net loss per common share....................................... $ (0.30) ========
(19) GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION As discussed in Note 16, the Parent and each of the Guarantor Subsidiaries has fully and unconditionally guaranteed, on a joint and several basis, the obligation to pay principal and interest with respect to the Notes. The Guarantor Subsidiaries are wholly-owned subsidiaries of the Company. Substantially all of the Issuer's operating income and cashflow is generated by its subsidiaries. As a result, funds necessary to meet the Issuer's debt service obligations are provided in part by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of the Issuer's subsidiaries, could limit the Issuer's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the Notes. The Notes contain certain covenants that, among other things, limit the ability of the Issuer and its Restricted Subsidiaries (as defined) to incur additional indebtedness and issue Disqualified Stock (as defined), pay dividends or distributions or make investments or make certain other Restricted Payments (as defined), enter into certain transactions with affiliates, dispose of certain assets, incur liens and engage in mergers and consolidations. Although holders of the Notes will be direct creditors of the Issuer's principal direct subsidiaries by virtue of the guarantees, the Issuer has subsidiaries ("Non- Guarantor Subsidiaries") that are not included among the Guarantor Subsidiaries, and such subsidiaries will not be obligated with respect to the Notes. As a result, the claims of creditors of the Non-Guarantor Subsidiaries will effectively have priority with respect to the assets and earnings of such companies over the claims of creditors of the Issuer, including the holders of the Notes. The following supplemental consolidating condensed financial statements present: 1. Consolidating condensed balance sheets as of November 30, 1997 and December 1, 1996, consolidating condensed statements of operations and cash flows for each of the years in the three year period ended November 30, 1997. 2. Sealy Corporation (the "Parent" and a "guarantor"), Sealy Mattress Company (the "Issuer"), combined Guarantor Subsidiaries and combined Non- Guarantor Subsidiaries with their investments in subsidiaries accounted for using the equity method. 3. Elimination entries necessary to consolidate the Parent and all of its subsidiaries. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. F-29 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEALY CORPORATION SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET NOVEMBER 30, 1997 (IN THOUSANDS)
SEALY COMBINED COMBINED SEALY MATTRESS GUARANTOR NON-GUARANTOR CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- -------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents........... $ -- $ 20 $ 2,062 $ 3,975 $ -- $ 6,057 Accounts receivable, net................... -- 3,434 79,150 11,334 -- 93,918 Inventories............ -- 1,912 39,240 5,190 (335) 46,007 Prepaid expenses and other assets.......... (9,206) 294 29,819 1,622 -- 22,529 -------- ------- -------- ------- --------- -------- (9,206) 5,660 150,271 22,121 (335) 168,511 Property, plant and equipment--at cost..... -- 4,664 152,045 12,894 -- 169,603 Less accumulated depreciation........... -- 1,254 40,603 2,138 -- 43,995 -------- ------- -------- ------- --------- -------- -- 3,410 111,442 10,756 -- 125,608 Other assets: Goodwill and other intangibles, net...... -- 14,461 361,976 34,832 -- 411,269 Net investment in and advances to (from) subsidiaries and affiliates............ 543,783 2,636 (357,823) (28,591) (160,005) -- Debt issuance costs, net and other assets................ 8,918 35 6,641 85 -- 15,679 -------- ------- -------- ------- --------- -------- 552,701 17,132 10,794 6,326 (160,005) 426,948 -------- ------- -------- ------- --------- -------- Total assets......... $543,495 $26,202 $272,507 $39,203 ($160,340) $721,067 ======== ======= ======== ======= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion--long- term obligations...... $ -- $ -- -- $ -- $ -- $ -- Accounts payable....... -- 2,086 40,743 6,847 -- 49,676 Accrued incentives and advertising........... -- 1,473 26,782 2,449 -- 30,704 Accrued compensation... -- 246 16,244 1,281 -- 17,771 Other accrued expenses.............. 2,287 222 18,172 1,573 (118) 22,136 -------- ------- -------- ------- --------- -------- 2,287 4,027 101,941 12,150 (118) 120,287 Long-term obligations... 330,000 -- -- -- -- 330,000 Other noncurrent liabilities............ 2,969 -- 32,744 -- -- 35,713 Deferred income taxes... 3,173 896 22,693 3,239 -- 30,001 Stockholders' equity.... 205,066 21,279 115,129 23,814 (160,222) 205,066 -------- ------- -------- ------- --------- -------- Total liabilities and stockholders' equity.............. $543,495 $26,202 $272,507 $39,203 ($160,340) $721,067 ======== ======= ======== ======= ========= ========
F-30 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEALY CORPORATION SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET DECEMBER 1, 1996 (IN THOUSANDS)
SEALY COMBINED COMBINED SEALY MATTRESS GUARANTOR NON-GUARANTOR CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- -------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash and cash equiva- lents................. $ -- $ 54 $ 3,118 $ 13,447 $ -- $ 16,619 Accounts receivable, net................... -- 2,861 67,296 7,022 -- 77,179 Inventories............ -- 1,551 28,251 4,464 (274) 33,992 Net assets held for sale.................. -- -- -- 35,492 -- 35,492 Prepaid expenses and deferred taxes........ (5,603) 228 13,925 1,896 -- 10,446 -------- ------- --------- -------- --------- -------- (5,603) 4,694 112,590 62,321 (274) 173,728 Property, plant and equipment--at cost..... -- 4,214 135,581 16,268 -- 156,063 Less accumulated depreciation........... -- 976 31,593 2,128 -- 34,697 -------- ------- --------- -------- --------- -------- -- 3,238 103,988 14,140 -- 121,366 Other assets: Goodwill and other in- tangibles, net........ -- 14,873 383,692 35,739 -- 434,304 Net investment in and advances to (from) subsidiaries and af- filiates.............. 586,883 24,776 (337,985) (35,875) (237,799) -- Debt issuance costs, net and other assets.. 7,981 -- 2,495 54 -- 10,530 -------- ------- --------- -------- --------- -------- 594,864 39,649 48,202 (82) (237,799) 444,834 -------- ------- --------- -------- --------- -------- Total assets........... $589,261 $47,581 $ 264,780 $ 76,379 $(238,073) $739,928 ======== ======= ========= ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion--long- $ 18,620 $ -- $ -- $ -- $ -- $ 18,620 term obligations...... Accounts payable....... -- 1,556 30,161 4,080 -- 35,797 Accrued incentives and -- 1,101 17,668 1,935 -- 20,704 advertising........... Accrued compensation... -- 227 12,687 1,133 -- 14,047 Other accrued ex- penses................ 6,251 157 17,837 (458) (96) 23,691 -------- ------- --------- -------- --------- -------- 24,871 3,041 78,353 6,690 (96) 112,859 Long-term obligations... 269,398 -- 74 35 -- 269,507 Other noncurrent liabilities............ 2,606 -- 32,210 6 -- 34,822 Deferred income taxes... (608) 901 24,925 4,528 -- 29,746 Stockholders' equity.... 292,994 43,639 129,218 65,120 (237,977) 292,994 -------- ------- --------- -------- --------- -------- Total liabilities and stockholders' equity.. $589,261 $47,581 $ 264,780 $ 76,379 $(238,073) $739,928 ======== ======= ========= ======== ========= ========
F-31 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEALY CORPORATION SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS YEAR ENDED NOVEMBER 30, 1997 (IN THOUSANDS)
SEALY COMBINED COMBINED SEALY MATTRESS GUARANTOR NON-GUARANTOR CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- -------- ------------ ------------- ------------ ------------ Net sales............... $ -- $37,973 $708,914 $75,042 $(17,095) $804,834 Costs and expenses: Cost of goods sold..... -- 23,256 400,785 48,878 (17,014) 455,905 Selling, general and administrative........ 1,336 11,464 233,512 17,346 -- 263,658 Amortization of intangibles........... -- 411 11,764 1,089 -- 13,264 Interest expense, net.. 32,114 -- (75) (643) -- 31,396 Loss (Income) from equity investees...... 8,969 8,258 -- -- (17,227) -- Loss (Income) from non- guarantor equity investees............. -- 20 (4,104) -- 4,084 -- Capital charge and intercompany interest allocation............ (69,376) 3,689 64,821 866 -- -- -------- ------- -------- ------- -------- -------- Income/(loss) before income taxes, extraordinary item and cumulative effect of a change in accounting principle.............. 26,957 (9,125) 2,211 7,506 13,062 40,611 Income taxes............ 13,103 (156) 6,140 3,422 -- 22,509 -------- ------- -------- ------- -------- -------- Income/(loss) before extraordinary item and cumulative effect of change in accounting principle.............. 13,854 (8,969) (3,929) 4,084 13,062 18,102 Extraordinary item..... 2,030 -- -- -- -- 2,030 Cumulative effect of a change in accounting principle............. -- -- 4,329 -- -- 4,329 -------- ------- -------- ------- -------- -------- Net income/(loss)....... $ 11,824 $(8,969) $ (8,258) $ 4,084 $ 13,062 $ 11,743 ======== ======= ======== ======= ======== ========
F-32 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEALY CORPORATION SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 1, 1996 (IN THOUSANDS)
SEALY COMBINED COMBINED SEALY MATTRESS GUARANTOR NON-GUARANTOR CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- -------- ------------ ------------- ------------ ------------ Net sales............... $ -- $ -- $560,540 $120,223 $(16,421) $697,638 Costs and expenses: 33,296 Cost of goods sold..... -- 19,867 305,100 88,592 (16,300) 397,259 Selling, general and administrative........ 150 9,082 190,628 21,593 -- 221,453 Loss on net assets held for sale.............. -- 11,762 -- -- -- 11,762 Amortization of intangibles........... -- 411 11,450 1,733 -- 13,594 Interest expense, net.. 30,364 -- 91 (1,658) -- 28,797 Loss (Income) from equity investees...... (2,608) 1,796 -- -- 812 -- Income from non- guarantor equity investees............. -- (15,829) (2,920) -- 18,749 -- Capital charge and intercompany interest allocation............ (35,043) 3,209 41,595 (9,761) -- -- -------- ------- -------- -------- -------- -------- Income/(loss) before income taxes........... 7,137 2,998 14,596 19,724 (19,682) 24,773 Income taxes............ 7,522 390 16,392 975 -- 25,279 -------- ------- -------- -------- -------- -------- Net income/(loss)....... $ (385) $ 2,608 $ (1,796) $ 18,749 $(19,682) $ (506) ======== ======= ======== ======== ======== ========
SEALY CORPORATION SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS YEAR ENDED NOVEMBER 30, 1995 (IN THOUSANDS)
SEALY COMBINED COMBINED SEALY MATTRESS GUARANTOR NON-GUARANTOR CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- -------- ------------ ------------- ------------ ------------ Net sales............... $ -- $30,460 $537,672 $96,296 $(10,486) $653,942 Costs and expenses: Cost of goods sold..... -- 16,548 286,088 70,209 (10,429) 362,416 Selling, general and administrative........ (13,080) 8,382 192,205 15,903 -- 203,410 Amortization of intangibles........... -- 411 12,143 1,502 -- 14,056 Interest expense, net.. 33,113 -- (819) (1,276) -- 31,018 Income from equity investees............. (11,870) (9,001) -- -- 20,871 -- Income from non- guarantor equity investees............. -- (1,346) (4,160) -- 5,506 -- Capital charge and intercompany interest allocation............ (32,794) 2,773 29,678 343 -- -- -------- ------- -------- ------- -------- -------- Income/(loss) before income taxes........... 24,631 12,693 22,537 9,615 (26,434) 43,042 Income taxes............ 5,104 823 13,536 4,109 -- 23,572 -------- ------- -------- ------- -------- -------- Net income/(loss)....... $ 19,527 $11,870 $ 9,001 $ 5,506 $(26,434) $ 19,470 ======== ======= ======== ======= ======== ========
F-33 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEALY CORPORATION SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS YEAR ENDED NOVEMBER 30, 1997 (IN THOUSANDS)
SEALY COMBINED COMBINED SEALY MATTRESS GUARANTOR NON-GUARANTOR CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- -------- ------------ ------------- ------------ ------------ Net cash provided by (used in) operating activities............. $ 29,901 $(40,205) $ 7,532 $ 44,782 $ 39 $ 42,049 -------- -------- -------- -------- -------- -------- Cash flows from investing activities: Proceeds from sale of subsidiary............ -- 35,000 -- -- -- 35,000 Purchase of property, plant and equipment... -- (450) (27,109) (1,581) -- (29,140) Proceeds from sale of property, plant and equipment............. -- 5,150 410 1 -- 5,561 Net activity in investment in and advances to (from) subsidiaries and affiliates............ 34,131 13,862 23,942 (7,284) (64,651) -- -------- -------- -------- -------- -------- -------- Net proceeds provided by (used in) investing activities............ 34,131 53,562 (2,757) (8,864) (64,651) 11,421 Cash flows from financing activities: Dividend............... (99,775) -- -- -- -- (99,775) Repayment of long-term obligations, net...... (63,127) -- -- -- -- (63,127) Net borrowing-- revolving credit facility.............. 105,000 -- -- -- -- 105,000 Debt issuance costs.... (6,130) -- -- -- -- (6,130) Net equity activity with Parent........... -- (13,391) (5,831) (45,390) 64,612 -- -------- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities............ (64,032) (13,391) (5,831) (45,390) 64,612 (64,032) -------- -------- -------- -------- -------- -------- Change in cash and cash equivalents............ -- (34) (1,056) (9,472) -- (10,562) Cash and cash equivalents: Beginning of period..... -- 54 3,118 13,447 -- 16,619 -------- -------- -------- -------- -------- -------- End of period........... $ -- $ 20 $ 2,062 $ 3,975 $ -- $ 6,057 ======== ======== ======== ======== ======== ========
F-34 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEALY CORPORATION SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 1, 1996 (IN THOUSANDS)
SEALY COMBINED COMBINED SEALY MATTRESS GUARANTOR NON-GUARANTOR CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- -------- ------------ ------------- ------------ ------------ Net cash provided by (used in) operating activities............. $ 15,398 $16,923 $ 32,242 $19,105 $(39,251) $ 44,417 -------- ------- -------- ------- -------- -------- Cash flows from investing activities: Purchase of property, plant and equipment... -- (134) (11,581) (870) 540 (12,045) Proceeds from sale of property, plant and equipment............. -- -- 1,579 50 (540) 1,089 Net activity in investment in and advances to (from) subsidiaries and affiliates............ 17,267 (8,175) (26,695) 1,888 15,715 -- -------- ------- -------- ------- -------- -------- Net proceeds provided by (used in) investing activities.......... 17,267 (8,309) (36,697) 1,068 15,715 (10,956) Cash flows from financing activities: Dividend............... (35,463) -- -- -- -- (35,463) Repayment of long-term obligations, net...... (22,202) -- (1,608) 83 -- (23,727) Net borrowing-- revolving credit facility.............. 25,000 -- -- -- -- 25,000 Debt issuance costs.... -- -- -- -- -- -- Net equity activity with Parent........... -- (8,569) (4,830) (10,137) 23,536 -- -------- ------- -------- ------- -------- -------- Net cash provided by (used in) financing activities.......... (32,665) (8,569) (6,438) (10,054) 23,536 (34,190) -------- ------- -------- ------- -------- -------- Change in cash and cash equivalents............ -- 45 (10,893) 10,119 -- (729) Cash and cash equivalents: Beginning of period..... -- 9 14,011 3,328 -- 17,348 -------- ------- -------- ------- -------- -------- End of period........ $ -- $ 54 $ 3,118 $13,447 $ -- $ 16,619 ======== ======= ======== ======= ======== ========
F-35 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEALY CORPORATION SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS YEAR ENDED NOVEMBER 30, 1995 (IN THOUSANDS)
SEALY COMBINED COMBINED SEALY MATTRESS GUARANTOR NON-GUARANTOR CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- -------- ------------ ------------- ------------ ------------ Net cash provided by (used in) operating activities............. $ 26,749 $ 22,771 $ 42,832 $ 23,472 $(52,497) $ 63,327 -------- -------- -------- -------- -------- -------- Cash flows from investing activities: Purchase of property, plant and equipment... -- (79) (8,204) (3,521) -- (11,804) Proceeds from sale of property, plant and equipment............. -- -- 7,417 51 -- 7,468 Net activity in investment in and advances to (from) subsidiaries and affiliates............ 32,251 (5,468) (11,113) (25,456) 9,786 -- -------- -------- -------- -------- -------- -------- Net proceeds provided by (used in) investing activities............ 32,251 (5,547) (11,900) (28,926) 9,786 (4,336) Cash flows from financing activities: Dividend............... -- -- -- -- -- -- Repayment of long-term obligations, net...... (59,000) -- (3,918) (34) -- (62,952) Net borrowing-- revolving credit facility.............. -- -- -- -- -- -- Debt issuance costs.... -- -- -- -- -- -- Net equity activity with Parent........... -- (17,162) (16,484) (8,404) 42,050 -- -------- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities............ (59,000) (17,162) (20,402) (8,438) 42,050 (62,952) -------- -------- -------- -------- -------- -------- Change in cash and cash equivalents............ -- 62 10,530 (13,892) (661) (3,961) Cash and cash equivalents: Beginning of period.... -- (53) 3,481 17,220 661 21,309 -------- -------- -------- -------- -------- -------- End of period.......... $ -- $ 9 $ 14,011 $ 3,328 $ -- $ 17,348 ======== ======== ======== ======== ======== ========
F-36 SEALY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
QUARTER ENDED QUARTER ENDED MARCH 1, MARCH 2, 1998 1997 ------------- ------------- Net sales.......................................... $209,259 $168,904 Costs and expenses: Cost of goods sold............................... 121,484 96,697 Selling, general and administrative.............. 87,597 55,574 Amortization of intangibles...................... 3,162 3,480 Interest expense, net............................ 15,528 6,801 -------- -------- 227,771 162,552 -------- -------- (Loss) income before income tax and extraordinary item.............................................. (18,512) 6,352 Income tax (benefit) expense....................... (747) 3,164 -------- -------- (Loss) income before extraordinary item.......... (17,765) 3,188 Extraordinary item--loss from early extinguishment of debt (net of income tax benefit of $9,636 and $1,353, respec- tively)........................................... 14,455 2,030 -------- -------- Net (loss) income................................ $(32,220) $ 1,158 ======== ======== (Loss)/earnings per common share--basic: (Loss) income before extraordinary item............ $ (0.59) $ 0.11 Extraordinary item................................. (0.47) (0.07) -------- -------- Net (loss) income................................ $ (1.06) $ 0.04 ======== ======== (Loss)/earnings per common share--diluted: (Loss)income before extraordinary item............. $ (0.59) $ 0.11 Extraordinary item................................. (0.47) (0.07) -------- -------- Net (loss) income................................ $ (1.06) $ 0.04 ======== ======== Weighted average number of common shares outstand- ing: Basic............................................ 30,345 29,726 Diluted.......................................... 30,345 30,035
See accompanying notes to condensed consolidated financial statements. F-37 SEALY CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
MARCH 1, NOVEMBER 30, 1998 1997 ---------- ------------ ASSETS Current assets: Cash and cash equivalents........................... $ 6,170 $ 6,057 Accounts receivable, less allowance for doubtful accounts (1998-$8,175; 1997-$7,696)................ 105,341 93,918 Inventories......................................... 50,718 46,007 Prepaid expenses and deferred taxes................. 13,783 22,529 ---------- -------- 176,012 168,511 Property, plant and equipment--at cost................ 174,547 169,603 Less: accumulated depreciation........................ (46,493) (43,995) ---------- -------- 128,054 125,608 Other assets: Goodwill and other intangibles--net of accumulated amortization (1998-$66,963; 1997-$63,801).......... 408,107 411,269 Debt issuance costs, net, and other assets.......... 38,530 15,679 ---------- -------- 446,637 426,948 ---------- -------- $ 750,703 $721,067 ========== ======== LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY Current liabilities: Current portion of long-term obligations............ $ 3,701 $ -- Accounts payable.................................... 44,566 49,676 Accrued interest.................................... 10,629 2,038 Accrued incentives and advertising.................. 33,301 30,704 Accrued compensation................................ 6,946 17,771 Other accrued expenses.............................. 24,470 20,098 ---------- -------- 123,613 120,287 Long-term obligations................................. 705,272 330,000 Other noncurrent liabilities.......................... 36,261 35,713 Deferred income taxes................................. 13,376 30,001 Stockholders' (deficit) equity: Common stock........................................ 303 299 Additional paid-in capital.......................... 134,414 257,320 Retained deficit.................................... (260,303) (50,614) Foreign currency translation adjustment............. (2,233) (1,939) ---------- -------- (127,819) 205,066 Commitments and contingencies......................... -- -- ---------- -------- $750,703 $721,067 ========== ========
See accompanying notes to condensed consolidated financial statements. F-38 SEALY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
QUARTER QUARTER ENDED ENDED MARCH MARCH 1, 2, 1998 1997 --------- ------- Net cash (used in) provided by operating activities.......... $ (23,346) $ 27 --------- ------- Investing activities: Proceeds from sale of subsidiary........................... -- 35,000 Purchase of property and equipment, net.................... (5,300) (3,955) --------- ------- Net cash (used in) provided by investing activities...... (5,300) 31,045 --------- ------- Financing activities: Treasury stock repurchase.................................. (413,078) -- Proceeds from long-term obligations, net................... 351,648 68,348 Equity contributions....................................... 121,317 -- Dividend................................................... -- (99,776) Debt issuance costs........................................ (31,128) (6,130) --------- ------- Net cash provided by (used in) financing activities...... 28,759 (37,558) --------- ------- Change in cash and cash equivalents.......................... 113 (6,486) Cash and cash equivalents: Beginning of period........................................ 6,057 16,619 --------- ------- End of period.............................................. $ 6,170 $10,133 ========= ======= Supplemental disclosures: Cash paid for: Taxes paid, net............................................ $ 1,567 $ 3,250 Cash interest paid......................................... $ 12,340 $ 1,361 Selected noncash items: Depreciation............................................... $ 2,711 $ 3,141 Issuance of Junior Notes................................... $ 25,000 $ -- Rollover Equity............................................ $ 15,235 $ --
See accompanying notes to condensed consolidated financial statements. F-39 SEALY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 1, 1998 NOTE A--BASIS OF PRESENTATION This report covers Sealy Corporation and its subsidiaries (collectively, the "Company"). The accompanying unaudited condensed consolidated financial statements should be read together with the Company's Annual Report on Form 10-K for the year ended November 30, 1997. The accompanying unaudited condensed consolidated financial statements contain all adjustments which, in the opinion of management, are necessary to present fairly the financial position of the Company at March 1, 1998, and its results of operations and cash flows for the periods presented herein. All adjustments in the periods presented herein are normal and recurring in nature. Certain reclassifications of previously reported financial information were made to conform to the 1998 presentation. NOTE B--INVENTORIES The major components of inventories were as follows:
MARCH 1, NOVEMBER 30, 1998 1997 -------- ------------ (IN THOUSANDS) Raw materials....................................... $28,939 $26,251 Work in process..................................... 13,884 12,594 Finished goods...................................... 7,895 7,162 ------- ------- $50,718 $46,007 ======= =======
NOTE C--RECAPITALIZATION On October 30, 1997, Sealy Corporation ("Parent") entered into an agreement and plan of merger (the "Merger Agreement") with Sandman Merger Corporation, a transitory Delaware merger corporation ("Sandman"), and Zell/Chilmark Fund, L.P., a Delaware limited partnership ("Zell"). Zell owned approximately 87% of the issued and outstanding common stock of Parent (the "Existing Common Stock"). Pursuant to the Merger Agreement, upon the satisfaction of certain conditions, Sandman was merged with and into Parent with Parent being the surviving corporation effective on December 18, 1997 (the "Closing Date") and the Company was recapitalized (the "Recapitalization") whereby certain equity investors, including members of management, acquired an approximate 90.0% economic equity stake (85.3% voting equity stake) in the Company. A portion of the issued and outstanding shares of common stock of the Company was converted into the right to receive aggregate cash equal to $419.3 million less (i) certain seller fees and expenses and (ii) certain costs in connection with the extinguishment of certain outstanding options and warrants of the Company and the remaining portion was converted into voting preferred stock and then reconverted into $25.0 million in aggregate principal amount of a junior subordinated note of the Company ("Junior Note") and a retained voting common stock interest in the Company of approximately 14.7%. Concurrent with the Recapitalization, the Company refinanced existing indebtedness (the "Refinancing") by Sealy Mattress Company (the "Issuer"), a wholly owned subsidiary of the Parent, issuing $125 million of Senior Subordinated Notes and $128 million, with net proceeds to the Company of $75.4 million, of Senior Subordinated Discount Notes (the "Notes") and by entering into and borrowing $460 million under the Senior Credit Agreements. F-40 SEALY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) THREE MONTHS ENDED MARCH 1, 1998 After the Recapitalization, the issued and outstanding capital stock of the Company consists of Class A common stock, par value $0.01 per share ("Class A Common"), Class B common stock, par value $0.01 per share ("Class B Common"), Class L common stock, par value $0.01 per share ("Class L Common"), and Class M common stock, par value $0.01 per share ("Class M Common" and collectively with the Class A Common, Class B Common and Class L Common, "Common Stock"). The Class L Common and the Class M Common are senior in right of payment to the Class A Common and Class B Common. Holders of Class B Common and Class M Common have no voting rights except as required by law. The holders of Class A Common and Class L Common are entitled to one vote per share on all matters to be voted upon by the stockholders of the Company, including the election of directors. The Board of Directors of the Company is authorized to issue preferred stock, par value $0.01 per share, with such designations and other terms as may be stated in the resolutions providing for the issue of any such preferred stock adopted from time to time by the Board of Directors. Upon the consummation of the Recapitalization, Parent and certain of its stockholders, including the Bain Funds, Harvard Private Capital, Inc. ("Harvard"), Sealy Investors 1, LLC, Sealy Investors 2, LLC, Sealy Investors 3, LLC (the "LLCs") and Zell (collectively, the "Stockholders") entered into a stockholders agreement (the "Stockholders Agreement"). The Stockholders Agreement (i) required that each of the parties thereto vote all of its voting securities of Parent and take all other necessary or desirable actions to cause the size of the Board of Directors of Parent to be established at seven members and to cause three designees of the Bain Funds and one designee of Harvard to be elected to the Board of Directors; (ii) granted Parent and the Bain Funds a right of first offer on any proposed transfer of shares of capital stock of Parent held by Zell, Harvard or the LLCs, (iii) granted Harvard a right of first offer on any proposed transfer of shares of capital stock of Parent held by Bain Funds; (iv) granted tag-along rights on certain transfers of shares of capital stock of Parent; (v) required the Stockholders to consent to a sale of Parent to an independent third party if such sale is approved by holders constituting a majority of the then outstanding shares of voting common stock of Parent; and (vi) except in certain instances, prohibits Zell from transferring any shares of capital stock of Parent until the tenth anniversary of the date of the consummation of the Recapitalization. Certain of the foregoing provisions of the Stockholders Agreement terminate upon the consummation of an Initial Public Offering or an Approved Sale (as each is defined in the Stockholders Agreement). Immediately prior to the closing of the Recapitalization (the "Closing"), Parent contributed (the "Capital Contribution") all of the issued and outstanding stock of Sealy, Inc., an Ohio corporation, the Stearns & Foster Bedding Company, a Delaware corporation, Advanced Sleep Products, a California corporation, Sealy Components-Pad, Inc., a Delaware corporation and Sealy Mattress Company of San Diego, a California corporation, to the capital of the Issuer. Immediately after the Capital Contribution, the Issuer became the only direct subsidiary of Parent and owns 100% of the operations of Parent. At the Closing, Sandman was merged with and into Parent with Parent the surviving corporation. The Recapitalization transaction resulted in an aggregate direct net charge to APIC and retained deficit totaling $421.7 million primarily comprised of the costs associated with the purchase of the then outstanding Class A and Class B Common Stock, the repurchase of Merger Warrants and the repurchase of Series A and Series B Restructure Warrants. The Recapitalization transaction also resulted in a pretax charge within selling, general and administrative expense of $18.8 million comprised of accelerated vesting of stock options and restricted stock and other incentive based compensation payments to employees in connection with the transaction. The Company recorded a F-41 SEALY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) THREE MONTHS ENDED MARCH 1, 1998 $14.5 million charge, net of income tax benefit of $9.6 million, representing the writeoff of the remaining unamortized debt issue costs related to long- term obligations repaid in connection with the Recapitalization as well as consent fees and premiums paid related to the Tender Offer of the Parent Notes (each of which as defined in Note D below) in connection with the Recapitalization. NOTE D--LONG-TERM OBLIGATIONS
MARCH 1, NOVEMBER 30, 1998 1997 -------- ------------ (IN THOUSANDS) Senior Axels Credit Agreement........................ $330,000 $ -- Senior Revolving Credit Agreement: Tranche A Term Loans............................... 120,000 -- Revolving Credit Facility.......................... 29,000 -- Senior Subordinated Notes............................ 125,000 -- Senior Subordinated Discount Notes................... 77,153 -- Junior Subordinated Note............................. 25,619 -- $275,000,000 Second Restated Secured Credit Agreement--Revolving Credit Facility................ -- 130,000 10 1/4% Senior Subordinated Notes Due 2003........... 2,201 200,000 -------- -------- 708,973 330,000 Less current portion................................. 3,701 -- -------- -------- $705,272 $330,000 ======== ========
On November 18, 1997 Parent commenced an offer (the "Tender Offer") to purchase for cash up to all (but not less than a majority in principal amount outstanding) of its 10 1/4% Senior Subordinated Notes due 2003 (the "Parent Notes") and a related solicitation (the "Consent Solicitation") of consents to modify certain terms of the Indenture under which the Parent Notes were issued (the "Parent Note Indenture"). The purchase price to be paid in respect to validly tendered Parent Notes and related consents were determined by a formula set forth in the offer to purchase with respect to the Tender Offer. The Offerings were conditioned upon the consummation of the Tender Offer for, and the obtaining of consents with respect to, at least a majority in aggregate principal amount of the Parent Notes outstanding. Parent's obligation to accept for purchase and to pay for the Parent Notes validly tendered pursuant to the Tender Offer was conditioned upon, among other things, consummation of the other elements of the Recapitalization. The Company's 1997 Credit Agreement was terminated in connection with the Recapitalization. The 1997 Credit Agreement provided for a $275.0 million reducing revolving credit facility and a discretionary swing loan facility of up to $20.0 million. Upon consummation of the Transactions, the Issuer entered into the AXELs credit agreement (the "Senior AXELs Credit Agreement") and a credit agreement providing for Tranche A Term Loans and revolving borrowings (the "Senior Revolving Credit Agreement" and, together with the Senior AXELs Credit Agreement, the "Senior Credit Agreements"). The Senior Credit Agreements provide for loans of up to $550.0 million, consisting of a $450.0 million term loan facility (the "Term Loan Facility") and a $100.0 million revolving credit facility (the "Revolving Credit Facility"). The Issuer distributed the proceeds of the Term Loan Facility and its initial borrowings under the Revolving Credit Facility to Parent to provide a portion of the funds necessary to consummate the Recapitalization. Indebtedness of the Issuer under the Senior Credit F-42 SEALY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) THREE MONTHS ENDED MARCH 1, 1998 Agreements is secured and guaranteed by Parent and certain of the Issuer's current and all of the Issuer's future U.S. subsidiaries and will bear interest at a floating rate. See Note I for further details regarding guarantees including consolidating condensed financial statements for guarantors and non-guarantors. The Senior Credit Agreements will require the Company to meet certain financial tests, including minimum levels of adjusted EBITDA as determined in the agreements, minimum interest coverage and maximum leverage ratio. The Senior Credit Agreements also contains covenants which, among other things, limit capital expenditures, indebtedness and/or the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset sales, mergers and consolidations, prepayments of other indebtedness (including the Notes), liens and encumbrances and other matters customarily restricted in such agreements. Indebtedness under the Senior Credit Agreements bears interest at a floating rate. Indebtedness under the Revolving Credit Facility and the Term Loans initially (subject to reduction based on attainment of certain leverage ratio levels) bears interest at a rate based upon (i) the Base Rate (defined as the highest of (x) the rate of interest announced publicly by Morgan Guaranty Trust Company of New York from time to time, as its base rate and (y) the Federal funds effective rate from time to time plus 0.50%) plus 1.25% in respect of the Tranche A Term Loans and the loans under the Revolving Credit Facility (the "Revolving Loans"), 1.50% in respect of the AXELs Series B, 1.75% in respect of the AXELs Series C and 2.00% in respect of the AXELs Series D, or (ii) the Adjusted Eurodollar Rate (as defined in the Senior Credit Agreements) for one, two, three or six months (or, subject to general availability, two weeks or twelve months), in each case plus 2.25% in respect of Tranche A Term Loans and Revolving Loans, 2.50% in respect of AXELs Series B, 2.75% in respect of AXELs Series C and 3.00% in respect to AXELs Series D. The Tranche A Term Loans mature in December 2002. The AXELs Series B mature in December 2004. The AXELs Series C mature in December 2005. The AXELs Series D mature in December 2006. The Tranche A Term Loans are subject to quarterly amortization payments commencing in March 1999, the AXELs Series B, the AXELs Series C and the AXELs Series D are subject to quarterly amortization payments commencing in March 1998 with the AXELs Series B amortizing in nominal amounts until the maturity of the Tranche A Term Loans, the AXELs Series C amortizing in nominal amounts until the maturity of the AXELs Series B and the AXELs Series D amortizing in nominal amounts until the maturity of the AXELs Series C. The Revolving Credit Facility matures in December 2002. In addition, the Senior Credit Agreements provide for mandatory repayments, subject to certain exceptions, of the Term Loans, and reductions in the Revolving Credit Facility, based on the net proceeds of certain asset sales outside the ordinary course of business of the Issuer and its subsidiaries, the net proceeds of insurance, the net proceeds of certain debt and equity issuances, and excess cash flow (as defined in the Senior Credit Agreements). The Junior Note has an initial principal balance outstanding of $25.0 million and mature on December 18, 2008. Interest on the Junior Note accrues at 10% per annum if paid within ten days of the end of each calendar quarter or at 12% if the Company elects to add accrued interest for such quarter to the then outstanding principal balance. The Company has the option, at each quarter end, to elect to pay the interest due for the quarter or add such interest to the principal balance through the term of the Note. The Notes were issued pursuant to an Indenture (the "Senior Subordinated Note Indenture") among the Issuer, the Guarantors and The Bank of New York, as trustee (the "Senior Subordinated Note Trustee"). The Senior Subordinated Discount Notes were issued pursuant to an Indenture (the F-43 SEALY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) THREE MONTHS ENDED MARCH 1, 1998 "Senior Subordinated Discount Note Indenture" and together with the Senior Subordinated Note Indenture, the "Indentures") among the Issuer, the Guarantors, and The Bank of New York, as trustee (the "Senior Subordinated Discount Note Trustee" and, together with the Senior Subordinated Note Trustee, the "Trustees"). The Senior Subordinated Notes are limited in aggregate principal amount to $300.0 million, of which $125.0 million was issued in the Offering, and matures on December 15, 2007. Interest on the Senior Subordinated Notes accrue at the rate of 9 7/8% per annum and is payable semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 1998, to Holders of record on the immediately preceding June 1 and December 1. Additional Senior Subordinated Notes may be issued from time to time after the date of the Senior Subordinated Note Indenture, subject to the provisions of the Senior Subordinated Note Indenture. Except as provided below, the Senior Subordinated Notes are not redeemable at the Company's option prior to December 15, 2002. Thereafter, the Senior Subordinated Notes are subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on December 15 of the years indicated below:
PERCENTAGE OF PRINCIPAL YEAR AMOUNT ---- ------------- 2002................................ 104.937% 2003................................ 103.292% 2004................................ 101.646% 2005 and thereafter................. 100.000%
Notwithstanding the foregoing, during the first 36 months after December 11, 1997, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of Senior Subordinated Notes originally issued under the Senior Subordinated Note Indenture at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages thereon, if any, to the redemption date, with the net cash proceeds of any Equity Offerings; (as defined in the Indentures) provided that at least $80.0 million in aggregate principal amount of Senior Subordinated Notes remain outstanding immediately after the occurrence of such redemption (excluding Senior Subordinated Notes held by the Company and its Subsidiaries); and provided further that such redemption shall occur within 120 days of the date of closing of any such Equity Offering. The Senior Subordinated Discount Notes are limited in aggregate principal amount at maturity to $275.0 million, of which $128.0 million were issued in the Offering, and mature on December 15, 2007. The Senior Subordinated Discount Notes were offered at a substantial discount from their principal amount at maturity. Until December 15, 2002 (the "Full Accretion Date"), no interest (other than liquidated damages, if applicable) will accrue or be paid in cash on the Senior Subordinated Discount Notes, but the Accreted Value will accrete (representing the amortization of original issue discount) between the issuance date and the Full Accretion Date, on a semi-annual bond equivalent basis. Beginning on the Full Accretion Date, interest on the Senior Subordinated Discount Notes will accrue at the rate of 10 7/8% per annum and will be payable in cash semi-annually in arrears on June 15 and F-44 SEALY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) THREE MONTHS ENDED MARCH 1, 1998 December 15 of each year, commencing on June 15, 2003, to Holders of record on the immediately preceding June 1 and December 1. Additionally Senior Subordinated Discount Notes may be issued from time to time after the date of the Senior Subordinated Discount Note Indenture, subject to the provisions of the Senior Subordinated Discount Note Indenture. Interest on the Senior Subordinated Discount Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Full Accretion Date. Except as provided below, the Senior Subordinated Discount Notes will not be redeemable at the Company's option prior to December 15, 2002. Thereafter, the Senior Subordinated Discount Notes will be subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and liquidated damages thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on December 15 of the years indicated below:
PERCENTAGE OF PRINCIPAL YEAR AMOUNT ---- ------------- 2002................................ 105.437% 2003................................ 103.625% 2004................................ 101.812% 2005 and thereafter................. 100.000%
Notwithstanding the foregoing, during the first 36 months after December 11, 1997, the Company may on any one or more occasions redeem up to 35% of the Accreted Value of Senior Subordinated Discount Notes originally issued under the Senior Subordinated Discount Note Indenture at a redemption price of 110.875% of the Accreted Value, plus accrued and unpaid liquidated damages thereon, if any, to the redemption date, with the net cash proceeds of any Equity Offerings; (as defined in the Indentures) provided that at least $50.0 million in aggregate Accreted Value of Senior Subordinated Discount Notes remain outstanding immediately after the occurrence of such redemption (excluding Senior Subordinated Discount Notes held by the Company and its Subsidiaries); and provided, further, that such redemption shall occur within 120 days of the date of the closing of any such Equity Offering. NOTE E--CONTINGENCIES In accordance with procedures established under the Environmental Cleanup Responsibility Act (now known as the Industrial Site Recovery Act), Sealy and one of its subsidiaries are parties to an Administrative Consent order ("ACO") issued by the New Jersey Department of Environmental Protection ("DEP"). Pursuant to the ACO, the Company and such subsidiary agreed to conduct soil and groundwater investigation and remediation at the plant previously owned by the subsidiary in South Brunswick, New Jersey. The Company does not believe that its manufacturing processes were a source of the contaminants found to exist above regulatorily acceptable levels in the groundwater. The Company and its subsidiary have retained primary responsibility for the investigation and any necessary clean up plan approved by the DEP under the terms of the ACO. Since issuance of the ACO, the DEP has approved the Company's soil remediation plans and its initial groundwater remediation plan. Further investigation in 1996 revealed certain additional areas of F-45 SEALY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) THREE MONTHS ENDED MARCH 1, 1998 soil contamination resulting from activities at the South Brunswick facility prior to the Company's acquisition of the site. In 1997, the Company, with DEP approval, completed essentially all soil remediation and conducted a pilot test for a company-proposed revision to the groundwater remediation program. The Company's revised groundwater remediation plan will be submitted to the DEP for approval in 1998. While the Company cannot predict the ultimate timing or cost to remediate this facility based on facts currently known, management believes the previously established accrual for site investigation and remediation costs is adequate to cover the Company's reasonably estimable liability and does not believe the resolution of this matter will have a material adverse effect on the Company's financial position or future operations. In March, 1994, the Company filed a claim in the U.S. District Court for the District of New Jersey against former owners of the site and their lenders under the Comprehensive Environmental Response, Compensation and Liability Act seeking contribution for site investigation and remedial costs. In March, 1997, the Company received $1.7 million from a former owner of the site and one of the lenders to the former owner in the final settlement of this litigation which was recorded as an increase to other non-current liabilities. In January 1997, the Company filed a claim in the U.S. District Court of New Jersey against former insurance companies for the Company under the Comprehensive Environmental Response, Compensation and Liability Act seeking contribution for site investigation and remedial costs. A parallel case seeking a judgement of non-liability was filed by some (but not all) of these insurance companies in the U.S. District Court for the Northern District of Ohio. Both the New Jersey and Ohio District Courts have ruled that New Jersey law applies and the Company has filed a motion seeking a favorable decision holding the insurance companies liable for investigation and remediation costs without the need for trial. The Company also has begun to remediate soil and groundwater contamination at an inactive facility located in Oakville, Connecticut. Although the Company is conducting the remediation voluntarily, it obtained Connecticut Department of Environmental Protection approval of the remediation plan. The Company believes the contamination is attributable to the manufacturing operations of previous unaffiliated occupants of the facility. In 1994, the Company filed a cost recovery action in U.S. District Court to require these entities to complete the remediation and reimburse the Company for its cleanup costs. This litigation is pending. Based on the facts currently known, management does not believe that resolution of this matter will have a material adverse effect on the Company's financial position or future operations. On May 22, 1997, the Company filed in the United States District Court for the Northern District of Illinois a motion to terminate certain antitrust final judgments (the "Judgments") entered on December 30, 1964 and December 26, 1967. These Judgments, among other things, prohibited the Company from suggesting resale prices to its dealers. During the pendency of the Company's motion to terminate the Judgments, and based upon allegations received by the Department of Justice ("the Department") concerning a possible resale price maintenance agreement with a Stearns & Foster dealer, the Department, on September 8, 1997, issued to the Company a Civil Investigative Demand seeking documents relating to, among other things, communications between the Company and dealers concerning the retail price of mattresses. In response to the Civil Investigative Demand, the Company produced certain documents and the deposition of a Company executive was taken. Immediately following such document production and deposition, the Department consented to the F-46 SEALY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) THREE MONTHS ENDED MARCH 1, 1998 termination of the Judgments and an order terminating the Judgments was entered by the Court on September 19, 1997. After the Court terminated the Judgments, the Department notified the Company on September 29, 1997 that it was limiting the Civil Investigative Demand to certain narrow specifications. In October 1997, the Company produced additional documents in response to the Civil Investigative Demand. On November 24, 1997 the Company received a request from the Department for clarification and additional information. The Company has responded to that request. NOTE F--STOCK OPTION PLAN On December 18, 1997, the Company's Board of Directors adopted the 1998 Stock Option Plan ("1998 Plan") and reserved 5,000,000 shares of Class A Common Stock of the Company for issuance. Options under the 1998 Plan may be granted either as Incentive Stock Options as defined in Section 422A of the Internal Revenue Code or Nonqualified Stock Options subject to the provisions of Section 83 of the Internal Revenue Code. On March 18, 1998, the Company granted ten-year stock options to acquire 2,072,250 shares of Class A Common Stock at an exercise price of $0.50 per share (representing fair market value at the time of grant) and 1,175,000 shares of Class A Common Stock at an exercise price of $4.18 per share (representing a premium to fair market value at the time of grant). The options vest 40% upon the second anniversary, and 20% on the third, fourth and fifth anniversary dates of the grant. NOTE G--YEAR 2000 ISSUE The Company believes that the new Business Systems, including appropriate software, being installed both alongside and as part of an upgrade of its existing computer system will address the dating system flaw inherent in most operating systems (the "Year 2000 Issue"). There can be no assurance, however, that the new Business Systems will be installed and fully operational at all locations and for all applications prior to the turn of the century, and management has therefore deemed it necessary to convert its current system to be Year 2000 compliant. The Company has conducted a comprehensive impact analysis to determine what computing platforms and date-aware functions with respect to its existing computer operating systems will be disrupted by the Year 2000 Issue. In January, 1998, the Company completed a prioritization of the impacted areas identified to date and commenced the detailed program code changes through a contracted third party vendor which has experience in Year 2000 conversions for the Company's existing system including the same release of such system. The Company is in the preliminary stages of assessment of its vendors and customers status with respect to the Year 2000 Issue. The required code changes, testing and implementation necessary to address the Year 2000 Issue is projected to be completed by May, 1999, and is expected to cost approximately $4.0 million. NOTE H--SUBSEQUENT EVENTS On March 10, 1998, the Company announced its plans to relocate its Corporate headquarters and Research & Development Center from Cleveland, Ohio to Archdale, North Carolina. The Company will also relocate its Lexington, North Carolina manufacturing plant to Archdale, North Carolina. The Company has entered into an agreement to purchase a property which currently includes an office building and a manufacturing facility. The Company will construct an additional office building on this property to house its Corporate headquarters. The Company is currently reviewing financing alternatives with respect to the property purchase and construction project which it expects to finalize F-47 SEALY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) THREE MONTHS ENDED MARCH 1, 1998 in the second quarter of fiscal 1998. The Company estimates total costs associated with this relocation will result in a pretax charge of approximately $8.5 million which will be recognized primarily in fiscal 1998 with the balance in fiscal 1999. On March 30, 1998, the Company announced a call for redemption of all outstanding Parent Notes. The redemption price of 106.33%, plus accrued interest, or approximately $2.5 million, will be paid on May 1, 1998, after which time interest will cease to accrue on the Notes. NOTE I--GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION As discussed in Note D, the Parent and each of the Guarantor Subsidiaries have fully and unconditionally guaranteed, on a joint and several basis, the obligation to pay principal and interest with respect to the Notes. The Guarantor Subsidiaries are wholly-owned subsidiaries of the Company. Substantially all of the Issuer's operating income and cashflow is generated by its subsidiaries. As a result, funds necessary to meet the Issuer's debt service obligations are provided in part by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of the Issuer's subsidiaries, could limit the Issuer's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the Notes. The Notes contain certain covenants that, among other things, limit the ability of the Issuer and its Restricted Subsidiaries (as defined) to incur additional indebtedness and issue Disqualified Stock (as defined), pay dividends or distributions or make investments or make certain other Restricted Payments (as defined), enter into certain transactions with affiliates, dispose of certain assets, incur liens and engage in mergers and consolidations. Although holders of the Notes will be direct creditors of the Issuer's principal direct subsidiaries by virtue of the guarantees, the Issuer has subsidiaries ("Non- Guarantor Subsidiaries") that are not included among the Guarantor Subsidiaries, and such subsidiaries will not be obligated with respect to the Notes. As a result, the claims of creditors of the Non-Guarantor Subsidiaries will effectively have priority with respect to the assets and earnings of such companies over the claims of creditors of the Issuer, including the holders of the Notes. The following supplemental consolidating condensed financial statements present: 1. Consolidating condensed balance sheets as of March 1, 1998 and November 30, 1997, consolidating condensed statements of operations and cash flows for the three-month periods ended March 1, 1998 and March 2, 1997. 2. Sealy Corporation (the "Parent" and a "Guarantor"), Sealy Mattress Company (the "Issuer"), combined Guarantor Subsidiaries and combined Non- Guarantor Subsidiaries with their investments in subsidiaries accounted for using the equity method. 3. Elimination entries necessary to consolidate the Parent and all of its subsidiaries. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. F-48 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEALY CORPORATION SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET MARCH 1, 1998 (IN THOUSANDS)
COMBINED SEALY COMBINED NON- SEALY MATTRESS GUARANTOR GUARANTOR CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- -------- ------------ ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents........... $ -- $ 20 $ 31 $ 6,119 $ -- $ 6,170 Accounts receivable, net................... -- 3,587 92,244 9,510 -- 105,341 Inventories............ -- 2,001 43,945 5,209 (437) 50,718 Prepaid expenses and deferred taxes........ (9,237) 294 21,265 1,461 -- 13,783 --------- -------- -------- ------- -------- -------- (9,237) 5,902 157,485 22,299 (437) 176,012 Property, plant and equipment--at cost..... -- 4,818 156,829 12,900 -- 174,547 Less: accumulated depreciation........... -- (1,335) (42,953) (2,205) -- (46,493) --------- -------- -------- ------- -------- -------- -- 3,483 113,876 10,695 -- 128,054 Other assets: Goodwill and other intangibles, net...... -- 14,362 359,063 34,682 -- 408,107 Net investment in and advances to (from) subsidiaries and affiliates............ (92,054) 549,815 (368,025) (29,562) (60,174) -- Debt issuance costs, net and other assets................ -- 30,878 7,621 31 -- 38,530 --------- -------- -------- ------- -------- -------- (92,054) 595,055 (1,341) 5,151 (60,174) 446,637 --------- -------- -------- ------- -------- -------- Total assets......... $(101,291) $604,440 $270,020 $38,145 $(60,611) $750,703 ========= ======== ======== ======= ======== ======== LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY Current liabilities: Current portion--long- term obligations...... $ 2,201 $ 1,500 $ -- $ -- $ -- $ 3,701 Accounts payable....... -- 2,316 34,474 7,776 -- 44,566 Accrued interest....... 3 10,626 -- -- -- 10,629 Accrued incentives and advertising........... -- 1,408 29,985 1,908 -- 33,301 Accrued compensation... -- 151 5,893 902 -- 6,946 Other accrued expenses.............. 2,369 469 22,028 (307) (89) 24,470 --------- -------- -------- ------- -------- -------- 4,573 16,470 92,380 10,279 (89) 123,613 Long-term obligations... 25,619 679,653 -- -- -- 705,272 Other noncurrent liabilities............ 3,585 -- 32,676 -- -- 36,261 Deferred income taxes... (7,249) 371 16,467 3,787 -- 13,376 Stockholders' (deficit) equity................. (127,819) (92,054) 128,497 24,079 (60,522) (127,819) --------- -------- -------- ------- -------- -------- Total liabilities and stockholders' (deficit) equity.... $(101,291) $604,440 $270,020 $38,145 $(60,611) $750,703 ========= ======== ======== ======= ======== ========
F-49 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEALY CORPORATION SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET NOVEMBER 30, 1997 (IN THOUSANDS)
SEALY COMBINED COMBINED SEALY MATTRESS GUARANTOR NON-GUARANTOR CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- -------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents...... $ -- $ 20 $ 2,062 $ 3,975 $ -- $ 6,057 Accounts receivable, net....... -- 3,434 79,150 11,334 -- 93,918 Inventories.................... -- 1,912 39,240 5,190 (335) 46,007 Prepaid expenses and deferred taxes......................... (9,206) 294 29,819 1,622 -- 22,529 -------- ------- -------- ------- --------- -------- (9,206) 5,660 150,271 22,121 (335) 168,511 Property, plant and equipment-- at cost........................ -- 4,664 152,045 12,894 -- 169,603 Less: accumulated depreciation.. -- (1,254) (40,603) (2,138) -- (43,995) -------- ------- -------- ------- --------- -------- -- 3,410 111,442 10,756 -- 125,608 Other assets: Goodwill and other intangibles, net.............. -- 14,461 361,976 34,832 -- 411,269 Net investment in and advances to (from) subsidiaries and affiliates.................... 543,783 2,636 (357,823) (28,591) (160,005) -- Debt issuance costs, net and other assets.................. 8,918 35 6,641 85 -- 15,679 -------- ------- -------- ------- --------- -------- 552,701 17,132 10,794 6,326 (160,005) 426,948 -------- ------- -------- ------- --------- -------- Total assets................. $543,495 $26,202 $272,507 $39,203 $(160,340) $721,067 ======== ======= ======== ======= ========= ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current portion--long-term obligations................... $ -- $ -- $ -- $ -- $ -- $ -- Accounts payable............... -- 2,086 40,743 6,847 -- 49,676 Accrued interest............... 1,973 -- 65 -- -- 2,038 Accrued incentives and advertising................... -- 1,473 26,782 2,449 -- 30,704 Accrued compensation........... -- 246 16,244 1,281 -- 17,771 Other accrued expenses......... 314 222 18,107 1,573 (118) 20,098 -------- ------- -------- ------- --------- -------- 2,287 4,027 101,941 12,150 (118) 120,287 Long-term obligations........... 330,000 -- -- -- -- 330,000 Other noncurrent liabilities.... 2,969 -- 32,744 -- -- 35,713 Deferred income taxes........... 3,173 896 22,693 3,239 -- 30,001 Stockholders' equity............ 205,066 21,279 115,129 23,814 (160,222) 205,066 -------- ------- -------- ------- --------- -------- Total liabilities and stockholders' equity........ $543,495 $26,202 $272,507 $39,203 $(160,340) $721,067 ======== ======= ======== ======= ========= ========
F-50 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEALY CORPORATION SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 1, 1998 (IN THOUSANDS)
SEALY COMBINED COMBINED SEALY MATTRESS GUARANTOR NON-GUARANTOR CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- -------- ------------ ------------- ------------ ------------ Net sales............... $ -- $ 9,781 $185,535 $18,022 $ (4,079) $209,259 Costs and expenses: Cost of goods sold..... -- 6,251 108,012 11,300 (4,079) 121,484 Selling, general and administrative........ 17,426 2,880 61,331 5,960 -- 87,597 Amortization of intan- gibles................ -- 99 2,914 149 -- 3,162 Interest expense, net.. 2,197 13,395 (41) (23) -- 15,528 Loss (income) from equity investees...... (1,066) (13,519) -- -- 14,585 -- Loss (income) from nonguarantor equity investees............. -- -- (181) -- 181 -- Capital charge and intercompany interest allocation............ -- 134 (581) 447 -- -- -------- ------- -------- ------- -------- -------- Income/(loss) before in- come taxes and extraor- dinary item............ (18,557) 541 14,081 189 (14,766) (18,512) Income taxes............ (792) (525) 562 8 -- (747) -------- ------- -------- ------- -------- -------- Income/(loss) before ex- traordinary item....... (17,765) 1,066 13,519 181 (14,766) (17,765) Extraordinary item...... 14,455 -- -- -- -- 14,455 -------- ------- -------- ------- -------- -------- Net income/(loss)....... $(32,220) $ 1,066 $ 13,519 $ 181 $(14,766) $(32,220) ======== ======= ======== ======= ======== ========
F-51 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEALY CORPORATION SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 2, 1997 (IN THOUSANDS)
SEALY COMBINED COMBINED SEALY MATTRESS GUARANTOR NON-GUARANTOR CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- -------- ------------ ------------- ------------ ------------ Net sales............... $ -- $ 7,550 $145,262 $19,099 $ (3,007) $168,904 Costs and expenses: Cost of goods sold..... -- 4,825 81,157 13,722 (3,007) 96,697 Selling, general and administrative........ 254 2,261 49,011 4,048 -- 55,574 Amortization of intangibles........... -- 99 3,030 351 -- 3,480 Interest expense, net.. 7,299 -- (15) (483) -- 6,801 Loss (income) from equity investees...... (6,981) (7,238) -- -- 14,219 -- Loss (income) from nonguarantor equity investees............. -- 398 (1,013) -- 615 -- Capital charge and intercompany interest allocation............ -- 85 (321) 236 -- -- ------- ------- -------- ------- -------- -------- Income/(loss) before income taxes and extraordinary item..... (572) 7,120 13,413 1,225 (14,834) 6,352 Income taxes............ (3,760) 139 6,175 610 -- 3,164 ------- ------- -------- ------- -------- -------- Income/(loss) before extraordinary item..... 3,188 6,981 7,238 615 (14,834) 3,188 Extraordinary item...... 2,030 -- -- -- -- 2,030 ------- ------- -------- ------- -------- -------- Net income/(loss)....... $ 1,158 $ 6,981 $ 7,238 $ 615 $(14,834) $ 1,158 ======= ======= ======== ======= ======== ========
F-52 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEALY CORPORATION SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 1, 1998 (IN THOUSANDS)
SEALY COMBINED COMBINED SEALY MATTRESS GUARANTOR NON-GUARANTOR CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- --------- ------------ ------------- ------------ ------------ Net cash provided by (used in) operating activities............. $ (17,348) $(25,706) $(7,031) $1,184 $25,555 $ (23,346) --------- --------- ------- ------ ------- --------- Cash flows from investing activities: Purchase of property and equipment, net.... -- (174) (5,031) (95) -- (5,300) Net activity in investment in and advances to (from) subsidiaries and affiliates............ 636,345 (621,760) 10,182 971 (25,738) -- --------- --------- ------- ------ ------- --------- Net proceeds provided by (used in) investing activities............ 636,345 (621,934) 5,151 876 (25,738) (5,300) Cash flows from financing activities: Treasury stock repurchase costs ..... (413,078) -- -- -- -- (413,078) Proceeds from (repayment of) long- term obligations, net................... (327,799) 679,447 -- -- -- 351,648 Equity contributions... 121,317 -- -- -- -- 121,317 Debt issuance costs ... 563 (31,691) -- -- -- (31,128) Net equity activity with Parent........... -- (116) (151) 84 183 -- --------- --------- ------- ------ ------- --------- Net cash (used in) provided by financing activities............ (618,997) 647,640 (151) 84 183 28,759 --------- --------- ------- ------ ------- --------- Change in cash and cash equivalents............ -- -- (2,031) 2,144 -- 113 Cash and cash equivalents: Beginning of period.... -- 20 2,062 3,975 -- 6,057 --------- --------- ------- ------ ------- --------- End of period.......... $ -- $ 20 $ 31 $6,119 -- $ 6,170 ========= ========= ======= ====== ======= =========
F-53 SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEALY CORPORATION SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 2, 1997 (IN THOUSANDS)
SEALY COMBINED COMBINED SEALY MATTRESS GUARANTOR NON-GUARANTOR CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- -------- ------------ ------------- ------------ ------------ Net cash provided by (used in) operating activities... $ 10,030 $ 6,760 $ 6,450 $ 1,887 $(25,100) $ 27 -------- -------- -------- ------- -------- -------- Cash flows from investing activities: Proceeds from sale of subsidiary............ -- 35,000 -- -- -- 35,000 Purchases of property and equipment, net.... -- (175) (3,703) (77) -- (3,955) Net activity in invest- ment in and advances to (from) subsidiaries and affiliates........ 27,494 5,642 10,413 (6,105) (37,444) -- -------- -------- -------- ------- -------- -------- Net proceeds provided by (used in) investing activities............ 27,494 40,467 6,710 (6,182) (37,444) 31,045 Cash flows from financing activities: Proceeds from (repayment of) long- term obligations, et.. 68,382 -- 1 (35) -- 68,348 Dividend............... (99,776) -- -- -- -- (99,776) Debt issuance costs.... (6,130) -- -- -- -- (6,130) Net equity activity with Parent .......... -- (47,200) (10,141) (5,203) 62,544 -- -------- -------- -------- ------- -------- -------- Net cash used in fi- nancing activities.... (37,524) (47,200) (10,140) (5,238) 62,544 (37,558) -------- -------- -------- ------- -------- -------- Change in cash and cash equivalents............ -- 27 3,020 (9,533) -- (6,486) Beginning of period.... -- 54 3,118 13,447 -- 16,619 -------- -------- -------- ------- -------- -------- End of period.......... $ -- $ 81 $ 6,138 $ 3,914 $ -- $ 10,133 ======== ======== ======== ======= ======== ========
Cash and cash equivalents: F-54 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE- SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY EXCHANGE MADE HERE- UNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ----------- TABLE OF CONTENTS
PAGE ---- Summary.................................................................. 1 Risk Factors............................................................. 16 The Transactions......................................................... 24 Use of Proceeds.......................................................... 26 Capitalization........................................................... 27 Selected Historical Consolidated Financial and Other Data................ 28 Unaudited Pro Forma Condensed Consolidated Financial Data................ 30 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 35 Business................................................................. 43 Management............................................................... 57 Security Ownership....................................................... 65 Certain Transactions..................................................... 68 Description of Senior Credit Agreements.................................. 69 Description of Exchange Notes............................................ 70 The Exchange Offer....................................................... 107 Certain Federal Income Tax Consequences.................................. 116 Plan of Distribution..................................................... 116 Legal Matters............................................................ 117 Experts.................................................................. 117 Index to Consolidated Financial Statements............................... F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SEALY MATTRESS COMPANY ----------- LOGO SEALY LOGO STEARNS & FOSTER ----------- OFFER TO EXCHANGE ITS SERIES B 9 7/8% SENIOR SUBORDINATED NOTES DUE 2007 FOR ANY AND ALL OF ITS OUTSTANDING SERIES A SENIOR SUBORDINATED NOTES DUE 2007 AND ITS SERIES B 10 7/8% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2007 FOR ANY AND ALL OF ITS OUTSTANDING SERIES A SENIOR SUBORDINATED DISCOUNT NOTES DUE 2007 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company is incorporated under the laws of the State of Ohio. Section 1701.13 of the General Corporation Law of the State of Ohio, inter alia, ("Section 1701.13") provides that an Ohio corporation may indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative, other than an action by or in the right of the corporation, by reason of the fact he is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, member, manager, or agent of another corporation, domestic or foreign, nonprofit or for profit, a limited liability company, or a partnership, joint venture, trust, or other enterprise. The indemnity may include expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, if he had no reasonable cause to believe that his conduct was unlawful. An Ohio corporation may indemnify or agree to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, member, manager, or agent of another corporation, domestic or foreign, nonprofit or for profit, a limited liability company, or a partnership, joint venture, trust, or other enterprise. The indemnity may include expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense or settlement of such action or suit, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification is permitted (i) without judicial approval if the person is adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation or (ii) with respect to any action or suit in which the only liability asserted against a director is pursuant to unlawful loans, dividends, or distribution of assets (Section 1701.95). Where an officer, director, employee or agent is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses, including attorney's fees, which such officer or director has actually and reasonably incurred. The Company's Certificate of Incorporation provides for the indemnification of directors and officers of the Company to the fullest extent permitted by the General Corporation Law of the State of Ohio, as it currently exists or may hereafter be amended. Section 1701.13 further authorizes a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee or agent of another corporation or enterprise, against any liability asserted against him and incurred by him in any such capacity, arising out of his status as such, whether or not the corporation would have the power to indemnify him under Section 1701.13. The Company maintains and has in effect insurance policies covering all of the Company's directors and officers against certain liabilities for actions taken in such capacities, including liabilities under the Securities Act of 1933. II-1 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS. *2.1 Agreement and Plan of Merger, dated as of October 30, 1997, by and among Sealy Corporation, Sandman Merger Corporation and Zell/Chilmark Fund, L.P. (Incorporated by reference to Exhibit 2.1 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *2.2 First Amendment to the Agreement and Plan of Merger, dated as of December 18, 1997, by and among Sealy Corporation, Sandman Merger Corporation and Zell/Chilmark Fund, L.P. (Incorporated by reference to Exhibit 2.2 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). 3.1 Amended and Restated Certificate of Incorporation of Sealy Mattress Company. 3.2 By-laws of Sealy Mattress Company. *4.1 Indenture, dated as of December 18, 1997, by and among Sealy Mattress Company, the Guarantors named therein and The Bank of New York, as trustee, with respect to the Series A and Series B 9 7/8% Senior Subordinated Notes due 2007. (Incorporated by reference to Exhibit 4.1 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *4.2 Indenture, dated as of December 18, 1997, by and among Sealy Mattress Company, the Guarantors named therein and The Bank of New York, as trustee, with respect to the Series A and Series B 10 7/8% Senior Subordinated Notes due 2007. (Incorporated by reference to Exhibit 4.2 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *4.3 Second Supplemental Indenture, dated as of December 5, 1997, by and between Sealy Corporation and The Bank of New York, as trustee. (Incorporated by reference to Exhibit 4.3 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). 5.1 Opinion and consent of Kirkland & Ellis. 8.1 Opinion of Kirkland & Ellis as to federal income tax consequences. *10.1 Dealer Manager Agreement, dated as of November 18, 1997, among Sandman Merger Corporation, Sealy Corporation and Goldman, Sachs & Co. (Incorporated by reference to Exhibit 10.1 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *10.2 Purchase Agreement, dated as of December 11, 1997, by and among Sealy Mattress Company, the Guarantors named therein, Goldman, Sachs & Co., J.P. Morgan Securities Inc. and BT Alex. Brown Incorporated. (Incorporated by reference to Exhibit 10.2 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *10.3 Registration Rights Agreement, dated as of December 18, 1997, by and among Sealy Mattress Company, the Guarantors named therein, Goldman, Sachs & Co., J.P. Morgan Securities Inc. and BT Alex. Brown Incorporated. (Incorporated by reference to Exhibit 10.3 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). 10.4 Credit Agreement, dated as of December 18, 1997, among Sealy Mattress Company, the Guarantors named therein, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, Morgan Guaranty Trust Company of New York, as administrative agent, Bankers Trust Company, as documentation agent, and the other institutions named therein.
II-2 10.5 AXEL Credit Agreement, dated as of December 18, 1997, among Sealy Mattress Company, the Guarantors named therein, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, Morgan Guaranty Trust Company of New York, as administrative agent, Bankers Trust Company, as documentation agent, and the other institutions named therein. *10.6 Amended and Restated Employment Agreement, dated as of August 1, 1997, by and between Sealy Corporation and Ronald L. Jones. (Incorporated by reference to Exhibit 10.6 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *10.7 Employment Agreement, dated as of August 25, 1997, by and between Sealy Corporation and Bruce G. Barman. (Incorporated by reference to Exhibit 10.7 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *10.8 Employment Agreement, dated as of August 12, 1997, by and between Sealy Corporation and Jeffrey C. Claypool. (Incorporated by reference to Exhibit 10.8 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *10.9 Employment Agreement, dated as of July 30, 1997, by and between Sealy Corporation and Gary T. Fazio. (Incorporated by reference to Exhibit 10.9 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *10.10 Employment Agreement, dated as of August 25, 1997, by and between Sealy Corporation and Douglas E. Fellmy. (Incorporated by reference to Exhibit 10.10 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *10.11 Employment Agreement, dated as of August 28, 1997, by and between Sealy Corporation and David J. McIlquham. (Incorporated by reference to Exhibit 10.11 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *10.12 Employment Agreement, dated as of August 1, 1997, by and between Sealy Corporation and Lawrence J. Rogers. (Incorporated by reference to Exhibit 10.12 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *10.13 Change of Control Agreement, dated as of September 3, 1997, by and between Sealy Corporation and John G. Bartik. (Incorporated by reference to Exhibit 10.13 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *10.14 Change of Control Agreement, dated as of August 4, 1997, by and between Sealy Corporation and James G. Goughenour. (Incorporated by reference to Exhibit 10.14 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *10.15 Change of Control Agreement, dated as of August 27, 1997, by and between Sealy Corporation and Richard F. Sowerby. (Incorporated by reference to Exhibit 10.15 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *10.16 Change of Control Agreement, dated as of August 1, 1997, by and between Sealy Corporation and Ronald H. Stolle. (Incorporated by reference to Exhibit 10.16 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *10.17 Change of Control Agreement, dated as of August 11, 1997, by and between Sealy Corporation and Kenneth L. Walker. (Incorporated by reference to Exhibit 10.17 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *10.18 Amendment to Amended and Restated Employment Agreement and Termination of Stockholders Agreement, dated as of December 17, 1997, between Ronald L. Jones and Sealy Corporation. (Incorporated by reference to Exhibit 10.18 filed with the Parent's Current Report on Form 8-K dated December 18, 1997).
II-3 *10.19 Amendment to Employment Agreements, dated as of December 17, 1997, between the employee named therein and Sealy Corporation. (Incorporated by reference to Exhibit 10.19 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *10.20 Form of Amendment to Change of Control Agreements, dated as of December 17, 1997. (Incorporated by reference to Exhibit 10.20 filed with the Parent's Current Report on Form 8-K dated December 18, 1997). *10.21 Sealy Profit Sharing Plan, Amended and Restated Date: December 1, 1989. (Incorporated herein by reference to Exhibit 10.1 to the Form 10-K for the fiscal year ended November 30, 1995 (File No. 1-8738)). *10.22 Sealy Benefit Equalization Plan, dated December 1, 1994. (Incorporated herein by reference to Exhibit 10.2 to the Form 10-K for the fiscal year ended November 30, 1995 (File No. 1-8738)). *10.23 Sealy Trust Agreement dated June 1, 1990. (Incorporated herein by reference to Exhibit 10.3 to Parent's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File No. 1-8738)). *10.24 The Ohio Mattress Holding Company 1989 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.16 to Annual Report on Form 10-K of The Ohio Mattress Holding Company and The Ohio Mattress Company for the year ended November 30, 1989, File No. 33-29246, filed March 2, 1990). *10.25 Sealy Corporation Bonus Program. (Incorporated herein by reference to Exhibit 10.5 to the Form 10-K for the fiscal year ended November 30, 1995 (File No. 1-8738)). *10.26 Severance Agreement dated March 1, 1996 by and between Sealy Corporation and Lyman M. Beggs. (Incorporated herein by reference to Exhibit 10.6 to the Form 10-Q Quarterly Report of Parent dated March 3, 1996 (File No. 1-8738)). *10.27 Sealy Corporation 1992 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.7 to Parent's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)). *10.28 Sealy Corporation Performance Share Plan. (Incorporated herein by reference to Exhibit 10.8 to Parent's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)). *10.29 Employment Agreement dated as of October 31, 1992, by and between Sealy Corporation and Lyman M. Beggs. (Incorporated herein by reference to Exhibit 10.9 to Parent's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)). *10.30 Letter Agreement, dated as of October 31, 1992 by and between Sealy Corporation and Lyman M. Beggs. (Incorporated herein by reference to Exhibit 10.10 to Parent's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)). *10.31 Stockholder Agreement, dated as of October 31, 1992 by and between Sealy Corporation and Lyman M. Beggs. (Incorporated herein by reference to Exhibit 10.11 to Parent's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)). *10.32 Letter Agreement, dated June 5, 1991 by and between Sealy Corporation and Sam F. Smith, Jr. (Incorporated herein by reference to Exhibit 10.15 to Parent's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)). *10.33 Sealy Corporation 1993 Non-Employee Director Stock Option Plan. (Incorporated herein by reference to Exhibit 10.17 to the Form S-1 Registration Statement of Parent (File No. 33-59134)). (As amended by Amendment No. 1 dated April 6, 1994 and filed as Exhibit 10.13 to Parent's Annual Report on Form 10-K for the fiscal year ended November 30, 1994.)
II-4 *10.34 Amendment No. 2 to Sealy Corporation 1993 Non-Employee Director Stock Option Plan, dated June 27, 1995. (Incorporated herein by reference to Exhibit 10.14 to Parent's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)). *10.35 Amendment No. 3 to Sealy Corporation 1993 Non-Employee Director Stock Option Plan dated as of May 1, 1996. (Incorporated herein by reference to Exhibit 10.15 to Parent's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)). *10.36 Employment Agreement dated March 4, 1996 by and between Sealy Corporation and Ronald L. Jones. (Incorporated herein by reference to Exhibit 10.15 to the Form 10-Q Quarterly Report of Parent dated March 3, 1996 (File No. 1-8738)). *10.37 Amendment No. 1 to Sealy Bonus Plan. (Incorporated herein by reference to Exhibit 10.17 to Parent's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)). *10.38 Sealy Corporation Bonus Plan. (Incorporated herein by reference to Exhibit 10.18 to Parent's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)). *10.39 Amendment No. 1 to Sealy Corporation 1992 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.19 to Parent's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)). *10.40 Amendment No. 1 to Sealy Corporation Performance Share Plan. (Incorporated herein by reference to Exhibit 10.20 to Parent's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)). *10.41 Amendment No. 1 to Sealy Profit Sharing Plan. (Incorporated herein by reference to Exhibit 10.21 to Parent's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)). *10.42 Amendment No. 2 to Sealy Profit Sharing Plan. (Incorporated herein by reference to Exhibit 10.22 to Parent's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)). *10.43 1996 Transitional Restricted Stock Plan. (Incorporated herein by reference to Exhibit 10.23 to Parent's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)). *10.44 Sealy Corporation 1997 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.24 to Parent's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)). *10.45 Stock Option Agreement dated March 4, 1996 by and between Sealy Corporation and Ronald L. Jones. (Incorporated herein by reference to Exhibit 10.25 to Parent's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)). *10.46 Stockholder Agreement dated March 4, 1996 by and among Sealy Corporation and Ronald L. Jones. (Incorporated herein by reference to Exhibit 10.26 to Parent's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)). *10.47 Restricted Stock Agreement dated March 4, 1996 by and between Sealy Corporation and Ronald L. Jones. (Incorporated herein by reference to Exhibit 10.27 to Parent's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)). *10.48 Stockholders Agreement dated as of December 18, 1997 by and among Sealy Corporation and the Stockholders named therein.
II-5 *10.49 Registration Rights Agreement dated as of December 18, 1997 by and among Sealy Corporation and the Stockholders named therein. *10.50 Management Services Agreement dated as of December 18, 1997 by and between Sealy Corporation, Sealy Mattress and Bain Capital, Inc. 10.51 Purchase Agreement dated January 1, 1998 between Hollingsworth and Stout Enterprises, LLC and Sealy, Inc. and Amendment No. 1 thereto dated April 13, 1998. 12.1 Statement of Computation of Ratios. *21.1 Subsidiaries of Sealy Mattress Company. 23.1 Consent of KPMG Peat Marwick LLP. 23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1). *24.1 Powers of Attorney (included on signature page hereto). *25.1 Statement of Eligibility of Trustee on Form T-1. *27.1 Financial Data Schedule (Incorporated herein by reference to Exhibit 27.1 to Parent's Annual Report on Form 10-K for the fiscal year ended December 1, 1996). *99.1 Form of Letter of Transmittal. *99.2 Form of Notice of Guaranteed Delivery. *99.3 Form of Tender Instructions.
- -------- * Previously filed (B) FINANCIAL STATEMENT SCHEDULES. Not Applicable. ITEM 22. UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof; (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; and (4) If the registrant is a foreign private issuer, to file a post- effective amendment to the registration statement to include any financial statements required by Rule 3-19 of the chapter at the start of any delayed offering or throughout a continuous offering. Financial statements and II-6 information otherwise required by Section 10(a)(3) of the Act need not be furnished, provided, that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to registration statements on Form F-3, a post-effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Act or Rule 3-19 of this chapter if such financial statements and information are contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Form F-3. (1) The undersigned registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (2) The registrant undertakes that every prospectus: (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Securities Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described under Item 20 or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. The undersigned registrant hereby undertakes to supply by means of a post- effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-8 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. Sealy Mattress Company /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY OR ON BEHALF OF THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel and KENNETH L. WALKER Secretary * Director June 3, 1998 - ------------------------------------- JOSH BEKENSTEIN * Director June 3, 1998 - ------------------------------------- PAUL EDGERLEY * Director June 3, 1998 - ------------------------------------- MICHAEL KRUPKA
II-9 SIGNATURE CAPACITY DATE * Director June 3, 1998 - ------------------------------------- JOHN M. SALLAY * Director June 3, 1998 - ------------------------------------- JAMES W. JOHNSTON * Director June 3, 1998 - ------------------------------------- JONAS STEINMAN
II-10 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. Sealy Corporation /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY OR ON BEHALF OF THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance RICHARD F. SOWERBY (principal financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel and KENNETH L. WALKER Secretary
II-11 SIGNATURE CAPACITY DATE * Director June 3, 1998 - ------------------------------------- JOSH BEKENSTEIN * Director June 3, 1998 - ------------------------------------- PAUL EDGERLEY * Director June 3, 1998 - ------------------------------------- MICHAEL KRUPKA * Director June 3, 1998 - ------------------------------------- JOHN M. SALLAY * Director June 3, 1998 - ------------------------------------- JAMES W. JOHNSTON * Director June 3, 1998 - ------------------------------------- JONAS STEINMAN
II-12 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. Sealy Mattress Company of Puerto Rico /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel, KENNETH L. WALKER Secretary and Director /s/ Ronald H. Stolle Director June 3, 1998 - ------------------------------------- RONALD H. STOLLE
II-13 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. Ohio-Sealy Mattress Manufacturing Co., Inc. (Randolph) /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel, KENNETH L. WALKER Secretary and Director /s/ Ronald H. Stolle Director June 3, 1998 - ------------------------------------- RONALD H. STOLLE
II-14 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. Ohio-Sealy Mattress Manufacturing Co.--Ft. Worth /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel, KENNETH L. WALKER Secretary and Director /s/ Ronald H. Stolle Director June 3, 1998 - ------------------------------------- RONALD H. STOLLE
II-15 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. Ohio-Sealy Mattress Manufacturing Co. /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel, KENNETH L. WALKER Secretary and Director /s/ Ronald H. Stolle Director June 3, 1998 - ------------------------------------- RONALD H. STOLLE
II-16 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. Ohio-Sealy Mattress Manufacturing Co.--Housto /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel, KENNETH L. WALKER Secretary and Director /s/ Ronald H. Stolle Director June 3, 1998 - ------------------------------------- RONALD H. STOLLE
II-17 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. Sealy Mattress Company of Michigan, Inc. /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel, KENNETH L. WALKER Secretary and Director /s/ Ronald H. Stolle Director June 3, 1998 - ------------------------------------- RONALD H. STOLLE
II-18 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. Sealy Mattress Company of Kansas City, Inc. /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel, KENNETH L. WALKER Secretary and Director /s/ Ronald H. Stolle Director June 3, 1998 - ------------------------------------- RONALD H. STOLLE
II-19 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. Sealy of Maryland and Virginia, Inc. /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel, KENNETH L. WALKER Secretary and Director /s/ Ronald H. Stolle Director June 3, 1998 - ------------------------------------- RONALD H. STOLLE
II-20 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. Sealy Mattress Company of Illinois /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel, KENNETH L. WALKER Secretary and Director /s/ Ronald H. Stolle Director June 3, 1998 - ------------------------------------- RONALD H. STOLLE
II-21 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. A. Brandwein & Co. /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel, KENNETH L. WALKER Secretary and Director /s/ Ronald H. Stolle Director June 3, 1998 - ------------------------------------- RONALD H. STOLLE
II-22 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. Sealy Mattress Company of Albany, Inc. /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel, KENNETH L. WALKER Secretary and Director /s/ Ronald H. Stolle Director June 3, 1998 - ------------------------------------- RONALD H. STOLLE
II-23 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. Sealy of Minnesota, Inc. /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel, KENNETH L. WALKER Secretary and Director /s/ Ronald H. Stolle Director June 3, 1998 - ------------------------------------- RONALD H. STOLLE
II-24 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. Sealy Mattress Company of Memphis /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel, KENNETH L. WALKER Secretary and Director /s/ Ronald H. Stolle Director June 3, 1998 - ------------------------------------- RONALD H. STOLLE
II-25 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. The Stearns & Foster Bedding Company /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel, KENNETH L. WALKER Secretary and Director /s/ Ronald H. Stolle Director June 3, 1998 - ------------------------------------- RONALD H. STOLLE
II-26 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. The Stearns & Foster Upholstery Furniture Company /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel, KENNETH L. WALKER Secretary and Director /s/ Ronald H. Stolle Director June 3, 1998 - ------------------------------------- RONALD H. STOLLE
II-27 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. Sealy, Inc. /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel, KENNETH L. WALKER Secretary and Director /s/ Ronald H. Stolle Director June 3, 1998 - ------------------------------------- RONALD H. STOLLE
II-28 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. The Ohio Mattress Company Licensing and Components Group /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel, KENNETH L. WALKER Secretary and Director /s/ Ronald H. Stolle Director June 3, 1998 - ------------------------------------- RONALD H. STOLLE
II-29 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON JUNE 3, 1998. Sealy Mattress Manufacturing Company, Inc. /s/ Ronald L. Jones By: _________________________________ Name: Ronald L. Jones Title: Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE CAPACITY DATE /s/ Ronald L. Jones Chief Executive June 3, 1998 - ------------------------------------- Officer, President RONALD L. JONES and Director (principal executive officer) /s/ Richard F. Sowerby Vice President of June 3, 1998 - ------------------------------------- Finance (principal RICHARD F. SOWERBY financial and accounting officer) /s/ Kenneth L. Walker Vice President, June 3, 1998 - ------------------------------------- General Counsel, KENNETH L. WALKER Secretary and Director /s/ Ronald H. Stolle Director June 3, 1998 - ------------------------------------- RONALD H. STOLLE
II-30 EX-3.1 2 AMENDED & RESTATED CERT. OF INC. OF SEALY EXHIBIT 3.1 C-108 Prescribed by TED W. BROWN Charter #________ Secretary of State Approved by______ Date_____________ Fee$_____________ CERTIFICATE OF AMENDED ARTICLES OF INCORPORATION OF Sealy Mattress Company (formerly Ohio-Sealy Mattress Manufacturing Co.) - -------------------------------------------------------------------------------- (Name of Incorporation) Thomas L. Smudz , who is ( ) Chairman of the Board - --------------------------------- ( ) President (check one) (X) Vice President and John D. Moran , who is ( ) Secretary (check one) ------------------------------ (X) Assistant Secretary of the above named Ohio corporation for profit with its principal location at Cleveland, Ohio do hereby certify that: (check the appropriate box and complete - --------- the appropriate statements) [ ] a meeting of the shareholders was duly called and held on __________, 19__, at which meeting a quorum of the shareholders was present in person or by proxy, and by the affirmative vote of the holders of shares entitling them to exercise _____% of the voting power of the corporation, [X] in a writing signed by all of the shareholders who would be entitled to a notice of a meeting held for that purpose, the following Amended Articles of Incorporation were adopted to supersede and take the place of the existing Articles and all amendments thereto: AMENDED ARTICLES OF INCORPORATION FIRST: The name of the corporation is Sealy Mattress Company . ---------------------------- SECOND: The place in the State of Ohio where its principal office is located is the City of Cleveland , Cuyahoga County. --------------- -------------- THIRD: The purposes of the corporation are as follows: To engage in any lawful act or activity for which a corporation may be formed in Ohio. FOURTH: The number of shares which the corporation is authorized to have outstanding is 1,000 shares of common stock with a par value of $1.00 per share. FIFTH: These amended articles of incorporation take the place of and supersede the existing articles of incorporation as heretofore amended. IN WITNESS WHEREOF, the above named officers, acting for and on behalf of the corporation, have subscribed their names this 28 day of January , ------ ----------- 1988. X[signed] Thomas L. Smudz ----------------------------------------------- (Chairman, President or Vice President) X[signed] John D. Moran ----------------------------------------------- (Secretary of Assistant Secretary) NOTE: Ohio law does not permit one officer to sign in two capacities. Two separate signatures are required, even if this necessitates the election of a second officer before the filing can be made. -2- AMENDED ARTICLES OF INCORPORATION --------------------------------- OF -- OHIO-SEALY MATTRESS MANUFACTURING CO. ------------------------------------- ARTICLE I -------- NAME The name of the corporation shall be OHIO-SEALY MATTRESS MANUFACTURING CO. (hereinafter called the "Corporation"). ARTICLE II ---------- PRINCIPAL PLACE OF BUSINESS The place in Ohio where the principal of ice of the Corporation is to be located is Cleveland, Cuyahoga County, Ohio. ARTICLE III ----------- PURPOSES The said Corporation is formed for the purpose of engaging in the business of manufacturing, buying, selling, and generally dealing in mattresses, springs, bedding and in fabrics, cloth, materials, articles and commodities. In furtherance and not in limitation of the general powers conferred by the laws of the State of Ohio, and the objectives and purposes herein set forth, it is expressly provided that this Corporation shall also have the following powers, to-wit: To purchase, acquire, hold, convey, lease, mortgage, or dispose of property, real or personal, tangible or intangible. To have one or more offices, warehouses and/or manufacturing facilities to carry on any or all of its operations and business, and without restrictions or limitations as to amount, to purchase, lease or otherwise acquire, hold and own, and to mortgage, sell, convey, lease, or otherwise dispose of real and personal property of every class and description in any of the states, territories or possessions of the United States and in the District of Columbia, and in any and all foreign countries, including the Commonwealth of Puerto Rico, subject to the laws of such state, district, territory, possession or country. To invest in, buy and sell, long or short, on margin or otherwise, stocks (whether common or preferred) bonds, securities, commodities, undivided interests in any real or personal property, shares or interest in investment companies or investment trusts, or discretionary Common Trust Funds and any other property, real or personal, foreign or domestic; and for the foregoing purposes, to borrow money or pledge the credit or any assets of the Corporation. To purchase or other vise acquire, hold, sell and transfer the shares of its own common shares, provided it shall not use its funds or property for the purchase or acquisition of its own shares of common shares when such use would cause any impairment of its capital except as otherwise permitted by law, and provided further that shares of its own common shares belonging to it shall not be voted directly or indirectly. This power shall include, but not by way of limitation, the right to re-purchase its shares upon the termination of employment or the death of a shareholder. To acquire in whole or in part the business, good will, rights, property and assets of all kinds of any corporation, association, partnership, combination, organization, entity, or individual, domestic or foreign; and to pay for the same in cash, stocks, bonds, notes, debentures or other securities or obligations of the Corporation or otherwise; and to hold, possess and improve such properties and to conduct in any legal manner the whole or any part of the business so acquired; and to pledge, mortgage, sell or otherwise dispose of the same. To endorse or guarantee the payment of principal or interest, or both, or dividends upon any stocks, bonds, obligations or other securities or evidences of indebtedness issued or created by any other corporation of the State of Ohio, or any other state, or of any country, nation or government, or political authority, so far as the same may be permitted by law. To do any or all of the things herein set forth to the same extent as natural persons might or could do in any part of the world, as principals, agents, contractors, trustees or otherwise, alone or in company with others. It is the intention that the purposes, objects, and powers specified in this Article III and all subdivisions thereof shall, except as otherwise expressly provided, in no wise be limited or restricted by reference to or inference from the terms of any other clause or paragraph of this Article, and that each of the purposes, objects, and powers specified in this Article III shall be regarded as independent purposes, objects, and powers. -2- ARTICLE IV ---------- CAPITAL STOCK A. AUTHORIZED SHARES ----------------- The number of shares which the Corporation is authorized to have issued and outstanding is 25,500,000 shares, consisting of 25,000,000 shares of Common Stock with a par value of $1.00 per share (hereinafter designated "Common Stock") and 500,000 shares of Preferred Stock with a par value of $1.00 per share (hereinafter designated "Preferred Stock"). B. COMMON STOCK ------------ The Common Stock shall be subject to the express terms of the Preferred Stock and any series thereof. Each share of Common Stock shall be equal to every other share of Common Stock. C. PREFERRED STOCK --------------- (1) General ------- (a) In the discretion of the Board of Directors, shares of Preferred Stock may be issued from time to time in one or more series. The express terms of shares of Preferred Stock of different series shall be identical, except that there may be variations in respect of: (i) the dividend rate, (ii) the dates of payment of dividends and the dates from which they are cumulative, (iii) redemption rights and price, (iv) liquidation price, (v) sinking fund requirements, (vi) conversion rights, (vii) restrictions on the issuance of shares of the same series or of any other class or series, and (viii) any and all other terms in respect of which variations may be from time to time permitted by law. (b) The Board of Directors is hereby authorized and empowered to adopt amendments to these .Amended Articles of Incorporation in respect of any unissued or treasury shares of Preferred Stock and thereby to fix or change: (i) the division of such shares into series and the designation and authorized number of shares of each series, (ii) the dividend rate, (iii) the dates of payment of dividends and the dates from which they are cumulative, (iv) liquidation price, (v) redemption rights and price, (vi) sinking fund requirements, (vii) restrictions on the issuance of shares of any class or series, and (ix) any and all other terms in respect of which the adoption of such amendments by the Board of Directors may be from time to time permitted by law. -3- (c) Nothing in the immediately preceding Clauses (a) and (b) is intended to require that shares of any series in fact possess any or all of the terms referred to in the enumerations contained in said Clauses or permitted bylaw, whether or not shares of any one or more other series do in fact possess such terms. (2) Dividends --------- (a) Holders of Preferred Stock of each series shall be entitled to receive dividends, when and as declared by the Board of Directors, which shall be payable at such times and at such rates, but not in excess thereof, as maybe fixed by the Board of Directors, in preference to and in priority over dividends on the Common Stock. Such dividends on the Preferred Stock shall be cumulative with respect to each such series from the date determined by the Board of Directors. (b) So long as any shares of Preferred Stock are outstanding, the Corporation shall not declare or pay any dividend on or make any distribution of assets on account of Common Stock, or purchase directly or indirectly any Common Stock, unless all accumulated dividends on the Preferred Stock have been declared and paid. (3) Liquidation ----------- Upon any dissolution, liquidation or winding-up of the Corporation, the holders of Preferred Stock shall be entitled to receive out of the assets of the Corporation, whether from capital, surplus or earnings, and before any distribution of any assets shall be made on account of Common Stock, the amount per share fixed by the Board of Directors plus unpaid dividends to the date fixed for distribution. Holders of Preferred Stock shall be entitled to no further participation in any distribution made in conjunction with any such dissolution, liquidation or winding- up. Neither the consolidation or merger of the Corporation nor the sale of all or substantially all of its assets shall be deemed a dissolution, liquidation or winding-up within the meaning of this Paragraph. (4) Redemption ---------- (a) Any series of Preferred Stock which is redeemable shell be subject to the following provisions of this Paragraph (4), except as the Board of Directors shall otherwise provide pursuant to the provisions of Clause (b) of Paragraph (1) of this Section C. (b) The Corporation, at its option to be exercised by the Board of Directors, may redeem the whole or any part of the shares of such -4- series, at any time or from time to time, at the redemption price fixed for such shares by the Board of Directors plus unpaid dividends to the redemption date fixed by the Board of Directors. If at any time less than all of the shares of such Preferred Stock then outstanding shall be called for redemption, the Board of Directors may select the series of such Preferred Stock to be redeemed, and if less than all the shares of such series are to be called for redemption, the shares to be redeemed may be selected by lot, or pro rata, or by such other method as the Board of Directors may deem equitable. Notice of every such redemption, stating the redemption date, the redemption price, and the place of payment thereof, shall be given by mailing a copy of such notice to the holders of record of the shares to be redeemed at their addresses as the same appear in the records of the Corporation and by publishing such notice at least once in a newspaper of general circulation in the cities of Cleveland, Ohio, and New York, New York, but not less than thirty (30) days nor more than sixty (60) days prior to the date fixed for redemption. (c) If such notice of redemption shall have been duly given, and if on or before the redemption date specified in such notice all funds necessary for such redemption shall have been set aside so as to be available herefor, then, notwithstanding that any certificate for shares so called for redemption shall not have been surrendered for cancellation, from and after the redemption date, the shares represented thereby shall no longer be deemed outstanding and all rights with respect to such shares shall cease and terminate, except only the right of the holders thereof to receive the amount payable upon redemption, but without interest, upon endorsement, if required, and surrender of the certificates for such shares. (d) If, before the redemption date specified in such notice, the Corporation shall deposit with a bank or trust company named in such notice, doing business in Cleveland, Ohio, or New York, New York, and having a capital and surplus aggregating at least $5,000,000, in trust, to be applied to the redemption of the shares so called for redemption, all funds necessary for such redemption, payable at any time after such deposit to the holders entitled thereto, but without interest, upon endorsement, if required, and surrender of the certificates for such shares, then, notwithstanding that any certificate for shares so called for redemption shall not have been surrendered for cancellation, from and after the date of such deposit, the shares represented thereby shall no longer be deemed outstanding and all rights with respect to such shares shall cease and terminate except (i) the right of the holders thereof to receive from such bank or trust company the amount payable upon -5- redemption, but without interest, upon endorsement, if required, and surrender of the certificates for such shares and (ii) any conversion rights then in effect with respect to such shares, such conversion rights to cease and terminate on the redemption date or on such earlier date as may now or hereafter be provided in these Amended Articles of Incorporation. Any funds so deposited which shall not be required for such redemption by reason of the exercise of any such conversion rights subsequent to the date of such deposit shall be returned to the Corporation. All interest accrued on funds so deposited shall belong to the Corporation and shall be paid to it from time to time. In case the holders of shares called for redemption shall not, within three (3) years after such deposit, claim the amount deposited with respect to the redemption thereof, such bank or trust company shall, upon demand, without the necessity of notifying any then holders of the shares so called for redemption, pay over to the Corporation such unclaimed amounts, and thereupon such bank or trust company shall be relieved of any responsibility in respect thereof, and the holders of the shares so called for redemption shall thereafter look only to the Corporation for the payment thereof, but without interest. D. VOTING RIGHTS ------------- (1) General ------- Each shareholder shall be entitled to cast one vote for each share. Except as otherwise provided by law or by these Amended Articles of Incorporation, the shareholders of all classes shall vote as a single class. In case of any action for which the affirmative vote of the holders of a designated proportion of the shares of any class is required by law or by these Amended Articles of Incorporation, the shareholders of such class shall vote as a single class irrespective of series. (2) Protective Provisions as to Preferred Stock ------------------------------------------- (a) The Corporation shall not, without first obtaining the affirmative vote of the holders of at least a majority of the outstanding shares of Preferred Stock, authorize or create, or increase the authorized amount of, Preferred Stock or a class of stock ranking on a parity with or prior to the Preferred Stock (or any security convertible into such Preferred Stock or class or stock ranking on a parity with or prior to the Preferred Stock); provided, however, that the holders of the shares of Preferred Stock shall not have any rights under the provisions of this Clause (a) to vote in respect of any action specified in this Clause (a) if, in connection with the accomplishment of such action, provision is to be made for the redemption of all of the shares of Preferred Stock at the time outstanding. -6- (b) If and whenever dividends on the Preferred Stock shall be in arrears and such arrears shall aggregate an amount at least equal to six (6) quarterly dividends upon such stock, the holders of the Preferred Stock, voting separately as a class, shall be entitled, at any annual meeting of the shareholders or at a special meeting of the holders of the Preferred Stock called as hereinafter provided, to elect two (2) Directors (hereinafter sometimes called the "Preferred Directors") in addition to all other rights to vote for Directors. Whenever all arrears in dividends on the Preferred Stock then outstanding shall have been paid and dividends thereon for the then current dividend period shall have been paid, or declared and a sum sufficient in payment thereof set apart, the right of the holders of the Preferred Stock to elect two (2) Directors shall cease, subject always to the same provisions for the vesting of such voting rights in the case of any similar future arrearages in dividends. At any time after such voting power shall have been so vested in the holders of the Preferred Stock, the Secretary of the Corporation may, and, upon the written request of the holders of record of twenty-five per cent (25%) or more of the Preferred Stock then outstanding, addressed to him at the principal office of the Corporation, shall, call a special meeting of the holders of the Preferred Stock for the election of the Preferred Directors, to be held within thirty (30) days after such call and at the place and upon the notice provided by law and by the Code of Regulations of the Corporation for the holding of meetings of shareholders; provided, however, that the Secretary shall not be required to call such special meeting in the case of any such request received less than ninety (90) days before the date fixed for any annual meeting of shareholders. If any such special meeting required to be called as provided shall not be called by the Secretary within the thirty (30) days after the receipt of any such request, then the holders of record of twenty- five per cent (25%) or more of the shares of the Preferred Stock then outstanding may designate in writing one of their number to call such meeting, and the person so designated may call such meeting to be held at the place and upon the notice above provided and for that purpose shall have access to the stock ledger of the Corporation. No such special meeting and no adjournment thereof shall be held on a date later than thirty (30) days before the annual meeting of the shareholders next succeeding the time when the holders of the Preferred Stock become entitled to elect the Preferred Directors. At any special or annual meeting at which Preferred Directors are to be elected, the holders of at least a majority of the issued and outstanding shares of Preferred Stock, present in person or by proxy, shall constitute a quorum for the holding of such election. In the absence of such quorum, the holders of a majority of such shares present or represented may adjourn such election by resolution to a date fixed therein and no further notice thereof shall be required. At any special meeting or annual meeting at which Preferred Directors are to be elected, provided a quorum of the holders of Preferred Stock is present in person or by proxy, then by vote of the holders of at least a majority of the -7- shares of Preferred Stock present or represented at such meeting, the holders of the Preferred Stock shall be entitled to elect the Preferred Directors, and, unless an increase in the authorized number of Directors theretofore made pursuant to this Clause (b) is then in effect, the then authorized number of Directors of the Corporation shall be increased by two (2) for such meeting. Preferred Directors shall hold office until the next annual election of Directors and until their respective successors shall have been duly elected and qualified. In the event that any vacancy shall occur among the Preferred Directors, the remaining Preferred Director shall within one (1) month after its occurrence designate in a writing filed with the Secretary of the Corporation the person to fill such vacancy, but if such remaining Preferred Director shall not file such designation within such time, or if there be no remaining Preferred Director, such vacancy or vacancies may be filled by a majority of the remaining members of the Board of Directors. In the event that any vacancy shall occur among the Directors other than Preferred Directors, such vacancy shall be filled by a majority of the remaining Directors other than Preferred Directors. Whenever the holders of the Preferred Stock shall be divested of the voting power as above provided, the terms of office of the Preferred Directors shall forthwith terminate and the number of the Board of Directors shall be reduced accordingly. E. ELIMINATION OF PRE-EMPTIVE AND OTHER RIGHTS ------------------------------------------- Except for the conversion rights now or hereafter expressly provided for in these Amended Articles of Incorporation, no shareholder of any class shall have any pre emptive or other right to subscribe for, purchase or acquire shares of the same or any other class, or any securities convertible into or evidencing or accompanied by any right to subscribe for, purchase or acquire shares of the same or any other class, whether now or hereafter authorized. ARTICLE V --------- VOTING REQUIREMENTS A. VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS ----------------------------------------------- (1) Vote Requirements ----------------- The affirmative vote of the holders of not less than eighty (80) percent of the outstanding shares of Common Stock of the Corporation and the affirmative vote of the holders of not less than sixty-seven (67) percent of the outstanding shares of Common Stock of the Corporation held by shareholders other than a "Related Person" (as defined in this Article) who is a party to any "Business Combination" (as defined in this Article) shall be required for the approval or authorization of -8- such Business Combination of the Corporation with a Related Person; provided, however, that the eighty (80) percent and sixty-seven (67) percent voting requirements shall not be applicable if: (a) The "Continuing Directors" of the Corporation (as defined in this Article) by a two-thirds (2/3) vote (i) have expressly approved the acquisition of outstanding shares of Common Stock of the Corporation that caused the Related Person involved in the Business Combination to become a Related Person, such approval being made prior to said acquisition, or (ii) have expressly approved the Business Combination prior to that time at which the Related Person involved in the Business Combination became a Related Person; or (b) The Business Combination is solely between the Corporation and another corporation, 50 percent or more of the voting stock of which is owned by the Corporation and none of which is owned by the Related Person; provided that if the Corporation is not the surviving entity each shareholder of the Corporation receives the same type of consideration in such transaction in proportion to the shares owned; or (c) The Business Combination is a merger or consolidation, and the cash or fair market value (as Determined by the Continuing Directors) of the property, securities or other consideration to be received per share by holders of Common Stock of the Corporation pursuant to the Business Combination is not less than the higher of (i) the highest per share price paid by the Related Person involved in the Business Combination in acquiring any of its holdings of the Corporation's Common Stock or (ii) an amount that bears the same or greater percentage relationship to the market price of the Corporation's Common Stock immediately prior to the announcement of such Business Combination as the highest per share price determined in Clause (i) above bears to the market price of the Corporation's Common Stock immediately prior to the commencement of the acquisition of the Corporation's Common Stock that caused such Related Person to become a Related Person. Appropriate adjustments shall be made regarding both clauses (i) and (ii) above for recapitalizations and for stock splits, stock dividends, and like distributions. (2) Definitions ----------- For the purposes of this Article: (a) The term "Business Combination" shall mean (i) any merger or consolidation of the Corporation with or into a Related Person; (ii) any sale, lease, exchange, transfer or other disposition, including without limitation a mortgage or any other security device of all or any "Substantial Part" (as defined in this Article) of -9- the assets of the Corporation (including without limitation any voting securities of a subsidiary) or of the assets of a subsidiary of the Corporation, to a Related Person; (iii) any merger or consolidation of a Related Person with or into the Corporation or a subsidiary of the Corporation; (iv) any sale, lease, exchange, transfer or other disposition of all or any Substantial Part of the assets of a Related Person to the Corporation or a subsidiary of the Corporation; (v) the issuance of am securities of the Corporation or a subsidiary of the Corporation to a Related Person; (vi) the acquisition by the Corporation or a subsidiary of the Corporation of any securities of a Related Person; and (vii) any agreement, contract or other arrangement providing for any transactions herein described in Clauses (i) to (vi) of this definition of Business Combination. (b) The term "Related Person" shall mean and include any individual, corporation, partnership or other person or entity which, together with their "Affiliates" and "Associates" (as defined on January 7, 1983, in Rule 12b-2 promulgated under the Securities Exchange Act of 1934), "Beneficially Owns" (as defined on January 7, 1983, in Rule 13d-3 promulgated under the Securities Exchange Act of 1934) in the aggregate twenty (20) percent or more of the outstanding shares of Common Stock of the Corporation, and shall mean any Affiliate or Associate of such Related Person. (c) The term "Substantial Part" shall mean more than thirty (30) percent of the fair market value of the total assets of the Corporation in question, as determined by the Continuing Directors, at the end of the Corporation's most recent fiscal year ending prior to the time said determination is made. (d) The term "Continuing Director" shall mean a director who was a member of the Board of Directors of the Corporation immediately prior to the time the Related Person involved in a Business Combination became a Related Person. (e) For the purposes of subparagraph A(1 )(c) of this Article, the term "other consideration to be received" shall include, without limitation, Common Stock of the Corporation retained by its existing public shareholders in the event of a Business Combination in which the Corporation is the surviving corporation. (f) Without limitation, any shares of Common Stock of the Corporation that any Related Person has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, -10- warrants or options. or otherwise, shall be deemed beneficially owned by a Related Person. B. REPEAL OR AMENDMENT OF VOTE REQUIREMENTS FOR CERTAIN BUSINESS COMBINATIONS -------------------------------------------------------------------------- The provisions set forth at this Section B of Article V and at Section A of Article V herein may not be repealed or amended in any respect, unless such action is approved by the affirmative vote of the holders of not less than eighty (80) percent of the outstanding shares of Common Stock of the Corporation; provided, however, that if there is a Related Person such eighty (80) percent vote must include the affirmative vote of at least sixty-seven (67) percent of the outstanding shares of Common Stock held by shareholders other than a Related Person. C. OTHER VOTING REQUIREMENTS ------------------------- Notwithstanding any provision of the Ohio Revised Code, now or hereafter in force, requiring for any purpose the vote or consent of the holders of shares entitling them to exercise two-thirds (2/3) or any other proportion of the voting power of the Corporation or of any class or classes of shares thereof, such action may be taken by the vote or consent of the holders of shares entitling them to exercise a majority of the voting power of the Corporation or of such class or classes. This Clause shall not apply to the voting requirements of Sections A and B of this Article V. ARTICLE VI ---------- PURCHASE OF STOCK Any provision hereof to the contrary notwithstanding, the Corporation shall have the power upon the affirmative note of a simple majority of its Board of Directors to purchase, to hold, to sell and to transfer shares of its own capital stock. ARTICLE VII ----------- INTERDEALING No officer, Director or shareholder of the Corporation shall be disqualified by his office, membership or stock ownership from dealing or contracting with the Corporation, whether as vendor, purchaser, employee, agent or in any other similar or dissimilar capacity, nor shall any transaction, contract or act of the Corporation be either void or voidable or in any other way affected or invalidated by reason of the fact that any such officer, Director or shareholder of the corporation, any firm of which he may be a member or any other corporation of which he may be an officer, Director or shareholder is in any way interested in such transaction, contract or act, provided the interest of such officer, Director or shareholder is disclosed to or known by the -11- Board of Directors of the Corporation or such members thereof as shall be present at any meeting at which action is taken upon any such transaction, contract or act. No such officer, Director or shareholder shall be accountable or otherwise responsible to the Corporation for or in connection with any such act, contract or transaction or for any gains or profits realized by him by reason of the fact that he, any firm of which he is a member or any other corporation of which he is an officer, Director or shareholder, is interested in any such transaction, contract or act. Any such officer, Director or shareholder, if he is a Director, may be counted in determining the existence of a quorum at any meeting of the Board of Directors of the Corporation which shall authorize or take action upon any such transaction, contract or act, and he may vote at any such meeting to authorize, adopt, ratify or approve any such transaction, contract or act to the same extent as if he, any firm of which he is a member or any other corporation of which he is an officer, Director or shareholder, were not interested in such transaction, contract or act. ARTICLE VIII ------------ PREVIOUS AMENDED ARTICLES SUPERSEDED These Amended Articles of Incorporation supersede the present Amended Articles of the Corporation and all amendments thereto filed with the Secretary of State of Ohio. -12- EX-3.2 3 AMENDED & RESTATED BY-LAWS OF SEALY EXHIBIT 3.2 4/1/88 BY-LAWS OF SEALY MATTRESS COMPANY ARTICLE I OFFICES ------- SECTION 1.1. Registered Office. The registered office of the corporation ----------------- in the State of Ohio shall be located at 815 Superior Avenue, N.E., in the City of Cleveland, and the name of the corporation's registered agent is C T Corporation System. SECTION 1.2. Other Offices. The corporation may have offices at such other ------------- places both within or without the State of Ohio as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS ------------------------ SECTION 2.1. Annual Meeting. The annual meeting of the shareholders of the -------------- corporation shall be held at such place and time as the Board of Directors shall fix, on the first Wednesday in April of each year commencing in 1989 or on such other date as the Board shall fix, for the purpose of electing directors and transacting of such other business as may come before the meeting. SECTION 2.2. Special Meetings. Special meetings of the shareholders for ---------------- any purpose or purposes may be called and the tIme, date and location thereof designated by the Board of Directors or the Chairman of the Board of Directors (if a Chairman of the Board of Directors shall have been elected). SECTION 2.3. Notice of Meetings. Written notice stating the time, date and ------------------ place of each annual or special meeting of shareholders and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the date of the meeting. SECTION 2.4. Quorum. The holders of at least a majority of the shares ------ entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business at any meeting of shareholders. If a quorum shall not be present at any meeting, the persons holding or entitled to vote by proxy a majority of the shares entitled to vote at the meeting present or represented at the meeting may adjourn the meeting without notice other than announcement at the meeting (unless other notice is required by law) to any other time, date and place. At any such adjourned meeting at which a quorum is present or represented, any business may be transacted that could have been transacted at the original meeting had a quorum been present or represented. SECTION 2.5. Action by Consent. Any action required or permitted to be ----------------- taken by the shareholders of the corporation may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof. ARTICLE III DIRECTORS --------- SECTION 3.1. Number and Election. The number of directors shall be fixed ------------------- at three (3), but may be increased or, subject to the provisions of Ohio law, decreased from time to time by resolution of the Board of Directors, provided, that at no time shall the number of directors be less than one (1), and no decrease shall have the effect of shortening the term of any incumbent director. Directors shall be elected annually by the shareholders, and the persons receiving the greatest number of votes shall be the directors. Each director elected shall hold office until the successor of such director is elected and qualified or until the death or resignation of such director or the removal of such director. Directors need not be residents of the State of Ohio or shareholders of this corporation. SECTION 3.2. Resignation. Any director may resign by giving written notice ----------- to the corporation. Any such resignation shall take effect at the time of receipt of notice thereof or at any later time specified therein, and, unless expressly required, acceptance of such resignation shall not be necessary to make it effective. SECTION 3.3. Vacancies and Newly Created Directorships. Any vacancy in the ----------------------------------------- Board of Directors (whether resulting from death, resignation, removal or otherwise) and any newly created directorship may be filled by the affirmative vote of a majority of the directors then in office, though less than a quorum. SECTION 3.4. Regular Meetings. An annual meeting of the Board of Directors ---------------- shall be held, without notice other than this by-law, immediately after, and at the same place as, the annual meeting of shareholders of the corporation. Additional regular meetings of the Board of Directors may be held without -2- notice at such times, dates and places as may be fixed by the Board of Directors. SECTION 3.5. Special Meetings. Special meetings of the Board of Directors ---------------- may be called by the Chairman of the Board of Directors (if a Chairman shall have been elected), or any two directors, and such meetings shall be held at such time, date and place as shall be designated in the call. Except as otherwise prescribed by the Ohio General Corporation Law as amended from time to time (the "Ohio Statute") written or actual oral notice of the time, date and place of each special meeting, addressed to each director at such director's business address, shall be given at least 48 hours prior to such meeting. Such written notice may be delivered in person, mailed or transmitted by telegram, or, if the addressee has such equipment, by telex or teletype, and shall be deemed to have been given when delivered in person or to the telegraph company, when transmitted on telex or teletype equipment, or 48 hours after deposit in the United States mail postage prepaid. .Any director may waive notice of any meeting. SECTION 3.6. Quorum. A majority of the whole Board of Directors shall ------ constitute a quorum for the transaction of business at any meeting of the Board of Directors unless a greater number is required by law or the articles of incorporation. If a quorum shall not be present at any meeting a majority of the directors present may adjourn the meeting without notice other than announcement at the meeting to any other time, date and place. Any member of the Board of Directors or of any committee designated by the Board may participate in a meeting of the directors or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can near each other, and participation in a meeting by means of such equipment shall constitute presence in person at such meeting. SECTION 3.7. Presumption of Assent. Unless otherwise provided by the Ohio --------------------- Statute, a director of the corporation who is present at a meeting of the Board of Directors at which action is taken on any corporate matter shall be presumed to have assented to the action taken unless the dissent of such director shall be entered in the minutes of the meeting or unless such director shall file a written dissent to such action with the person acting as Secretary of the meeting before the adjournment hereof or shall forward such dissent by registered mail to the Secretary of the corporation immediately after the adjournment of the meeting. Such right or dissent shall not apply to a director who voted in favor of such action. -3- SECTION 3.8. Action without Meeting. Unless otherwise restricted by the ---------------------- certificate of incorporation or these by-laws, any action required or permitted to be taken at any meeting of he Board of Directors, or of any committee thereof, may be taken without a meeting, if a written consent thereto is signed by all members of the board or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the board or committee. SECTION 3.9. Executive Committee. The Board of Directors may, by ------------------- resolution passed by a majority of the number of directors fixed by these by- laws, designate three or more directors of the corporation to constitute an executive committee, which, to the extent provided in such resolution and by Ohio law, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation and may authorize the seal of the corporation to be affixed to all papers that may require it. SECTION 3.10. Other Committees. The Board of Directors may, by resolution ---------------- passed by a majority of the number of directors fixed by these by-laws, designate such other committees as it may from time to time determine. Each such committee shall consist of three or more directors, shall serve for such term and shall have and may exercise, during intervals between meetings of the Board of Directors, such lawfully delegable duties, functions and powers as the Board of Directors may from time to time prescribe. SECTION 3.11. Quorum and Manner of Acting --Committees. The presence of a ---------------------------------------- majority or members or any committee shall constitute a quorum for the transaction of business at any meeting of such committee, and the act of a majority of those present shall be necessary for the taking of any action at such meeting. SECTION 3.12. Committee Chairman, Books and Records, Etc. The chairman of ------------------------------------------ each committee shall be selected from among the members of the committee by the Board of Directors. Each committee shall keep a record of its acts and proceedings, and all actions of each committee shall be reported to the Board of Directors at its next meeting. Each committee shall fix its own rules of procedure not inconsistent with these bylaws or the resolution of the Board of Directors designating such committee and shall meet at such times and places and upon such call or notice as shall be provided by such rules. -4- ARTICLE IV OFFICERS -------- SECTION 4.1. Designation of Officers. The officers of the corporation ----------------------- shall be a President, one or more Vice Presidents (who may be designated by class or function), a Treasurer, a Secretary and such other officers (including Assistant Treasurers and Assistant Secretaries) as the Board of Directors may elect. The Board of Directors may at any time, in its discretion, elect a Chairman of the Board or Directors (the "Chairman") to be the chief executive officer of the corporation and to have the other powers and duties set forth herein. SECTION 4.2. Election and Term. Each officer shall be elected by the ----------------- Board of Directors to serve until the successor thereof is elected or until the earlier resignation or removal of such officer. SECTION 4.3. Resignation, Removal and Vacancies. Any officer may ---------------------------------- resign by giving written notice to the Chairman or the Secretary. Any such resignation shall take effect at the time of receipt of notice thereof or at any later time specified therein, and, unless expressly required, acceptance of such resignation shall not be necessary to make it effective. Any officer may be removed, with or without cause, by a majority of the directors then in office, and a vacancy in any office (whether resulting from death, resignation, removal or otherwise) may be filled by the Board of Directors. The removal of any officer shall be without prejudice to any rights such officer may have under any agreement. SECTION 4.4. Chairman. In the event that the Board of Directors -------- determines to elect a Chairman pursuant to Section 4.1 hereof, the Chairman shall be the chief executive officer of the corporation and shall have authority and responsibility for the general management, direction and overall supervision, subject to the authority of the Board of Directors, or the corporation's business and affairs and its officers and employees, and shall have the power to appoint, remove and discharge any and all employees of the corporation not elected or appointed directly by the Board of Directors. The Chairman shall preside at all meetings of the Board of Directors and shareholders and shall have authority to designate the duties and powers of other officers and delegate special powers and duties to specified officers, so long as such designation shall not be inconsistent with any statute, these by- laws or any action of the Board of Directors. The Chairman shall also have power to execute, and shall execute deeds, mortgages, bonds, contracts or other instruments of the corporation except where required or permitted by law to be otherwise signed and executed and except where the -5- signing and execution thereof shall be expressly delegated by the Board of Directors or by the Chairman to some other officer or agent of the corporation. the Chairman may sign, pursuant to Section 6.1 hereof, certificates for shares of stock of the corporation, the issuance of which shall have been duly authorized by the Board of Directors. the stock in general shall have all other powers and shall perform all other duties that are normally incident to the chief executive officer of a corporation or as may be prescribed by the Board of Directors from time to time. SECTION 4.5. President. Prior to the time, if any, at which the Board --------- of Directors shall elect a Chairman pursuant to Section 4.4 hereof, the President shall have the duties, responsibilities and powers set forth in Section 4.4 hereof. In the event that the Board of Directors elects a Chairman, the President, under the Chairman, and subject to the authority of the Board of Directors and the Chairman, shall be the chief operating officer of the corporation and shall be charged with implementing the policies of the corporation as determined by the Chairman and the Board or Directors. In the event that the Chairman, due to absence or any other cause, shall refuse or be unable at any time to attend to or to perform the duties of Chairman as above prescribed, the President shall perform the duties of the Chairman. The President may sign, pursuant to Section 6.1 hereof, certificates for shares of stock in the corporation, the issuance of which shall have been duly authorized by the Board of Directors. The President shall have such other powers and duties as the Board of Directors or the Chairman (if a Chairman shall have been elected) may from time to time determine. SECTION 4.6. Vice Presidents. In the absence of the President, or in --------------- the event or the President's inability or refusal to act, the Vice Presidents, in order of their rank as fixed by the Board of Directors or, if not ranked, the Vice President designated by the Board of Directors or the Chairman (if a Chairman shall have been elected), shall perform all duties of the President and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties, not inconsistent with statute, these by- laws, or any action of the Board of Directors, as from time to time may be prescribed for them, respectively, by the Board of Directors or the Chairman (if a Chairman shall have been elected), which may include the execution of deeds, mortgages, bonds, contracts or other instruments of the corporation. Any Vice President may sign, pursuant to Section 6.1 hereof, certificates for shares of stock of the corporation, the issuance of which shall have been duly authorized by the Board of Directors. -6- SECTION 4.7. Treasurer. The Treasurer shall: (a) be responsible to --------- the Board of Directors for the receipt, custody and disbursement of all funds and securities of the corporation; (b) receive and give receipts for funds due and payable to the corporation from any source whatsoever and deposit all such funds in the name of the corporation in such banks, trust companies or other depositories as shall from time to time be selected in accordance with the provisions of Section 5.2 of these by-laws; (c) disburse the funds of the corporation as ordered by the Board of Directors or the Chairman or as otherwise required in the conduct of the business of the corporation; (d) render to the Chairman or the Board of Directors, upon request, an account of all transactions of such officer as Treasurer and of the financial condition of the corporation; and (e) in general, perform all the duties normally incident to the office of Treasurer and such other duties as may from time to time be assigned by the Chairman (if a Chairman shall have been elected), the President, the Board of Directors or these by-laws. The Treasurer may sign, pursuant to Section 6.1 hereof, certificates for shares of stock of the corporation, the issuance of which shall have been duly authorized by resolution of the Board of Directors. The Treasurer may delegate such details of the performance of duties of the office of Treasurer as may be appropriate in the exercise of reasonable care to one or more persons in the place of such officer, but shall not thereby be relieved of responsibility for the performance of such duties. SECTION 4.8. Secretary. The Secretary shall: (a) keep the minutes of --------- the meetings of the shareholders, the Board of Directors and committees of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these by-laws or as required by law; (c) have charge of the corporate records and of the seal of the corporation; (d) affix the seal of the corporation or a facsimile hereof, or cause the same to be affixed, to all certificates for shares prior to the issue thereof and to all documents the execution of which on behalf of the corporation under its seal is duly authorized by the Board of Directors or otherwise in accordance with the provisions of these by-laws; (e) keep a register of the post office addresses of each shareholder, director and committee member that shall from time to time be furnished to the Secretary by such shareholder, director or member; (f) sign, pursuant to Section 6.1 hereof, certificates for shares or stock of the corporation, the issuance of which shall have been duly authorized by resolution of the Board of Directors; (g) have general charge of the stock transfer books of the corporation; and (h) in general, perform all duties normally incident to the office of Secretary and such other duties as may from time to time be assigned by the Chairman (if a Chairman shall have been elected), the President or the Board of -7- Directors. The Secretary may delegate such details of the performance of the duties of the office of Secretary as may be appropriate in the exercise of reasonable care to one or more persons in the place of such officer, but shall not thereby be relieved of responsibility for the performance of such duties. SECTION 4.9. Assistant Treasurers and Assistant Secretaries. The ---------------------------------------------- Assistant Treasurers and Assistant Secretaries, if any, shall perform all functions and duties that may be assigned to them by the Treasurer or Secretary, respectively, or by the Chairman (if a Chairman shall have been elected), the President or the Board of Directors. If authorized by the Treasurer or the Secretary, as the case may be, any Assistant Treasurer or Assistant Secretary may sign, pursuant to Section 6.1 hereof, certificates for shares of the corporation in place of the Treasurer or Secretary, respectively. SECTION 4.10. Other Officers. The Board of Directors may from time to -------------- time elect such other officers to perform such duties and responsibilities as it shall prescribe. SECTION 4.11. Salaries. The compensation of the officers of the -------- corporation shall be fixed from time to time by the Board of Directors or by such officer as it shall designate for such purpose or as it shall otherwise direct. No officer snail be prevented from receiving a salary or other compensation by reason of the fact that such officer is also a director of the corporation. ARTICLE V CHECKS AND DEPOSITS ------------------- SECTION 5.1. Checks, Drafts, Etc.. All checks, demands, drafts or -------------------- other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers or agent or agents of the corporation, and in such manner, as shall from time to time be authorized by the Board of Directors. SECTION 5.2. Deposits. All funds of the corporation not otherwise -------- employed shall be deposited from time to t me to the credit of the corporation in such banks, trust companies or other depositories as the Board of Directors may select. -8- ARTICLE VI SHARE RECORDS AND TRANSFERS --------------------------- SECTION 6.1. Share Certificates. Every shareholder shall be entitled ------------------ to have a certificate in such form as the Board of Directors shall from time to time approve, signed on behalf of the corporation by the President or any elected Vice President, and by the Treasurer or the Secretary (or, if so authorized, any Assistant Treasurer or Assistant Secretary) certifying the number of shares held of record by such shareholder. SECTION 6.2. Record Ownership. A record of the name and address of ---------------- the holder of each certificate, the number of shares represented thereby, and the date of issue thereof shall be made on the corporation's books. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof, and shall not be bound to recognize any equitable or other claim to or interest in any snare on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise required by the laws of Ohio. SECTION 6.3. Lost Certificates. Any person claiming a share ----------------- certificate in lieu of one lost, stolen, mutilated or destroyed shall give the corporation an affidavit as to its loss, theft, mutilation or destruction. Such holder shall also, if required by the Board of Directors, give the corporation a bond, in such form and amount as may be approved by the Board of Directors (or any agent of the corporation to which authority for such approval shall have been delegated by the Board) sufficient to indemnify the corporation against any claim that may be made against it on account of the alleged loss, theft, mutilation or destruction of the certificate or the issuance of a new certificate. SECTION 6.4. Transfer of Shares. Transfer of shares of stock shall be ------------------ made on the books of the corporation only by direction of the person named in the certificate or such person's attorney, lawfully constituted in writing, and only upon the surrender or cancellation of the certificate therefor, duly endorsed or accompanied by a written assignment of the shares evidenced thereby. SECTION 6.5. Transfer Agent and Registrar. The corporation may ---------------------------- appoint one or more transfer offices or agencies, each in charge of a transfer agent designated by the Board of Directors (who shall have custody, subject to the direction of the Secretary, of the original stock ledger and stock records of the corporation) where the shares of the capital stock of the corporation of any class or series specified in such appointment -9- shall be registered. The corporation may also appoint one or more registry offices, each in charge of a registrar designated by the Board of Directors, where its stock of any class or series specified in such appointment shall be registered. Except as otherwise provided by resolution of the Board of Directors with respect to temporary certificates, no certificate for shares of capital stock of the corporation for which a transfer agent or registrar has been appointed shall be valid unless countersigned by such transfer agent and registered by such registrar authorized as aforesaid. SECTION 6.6. Restrictions on Transfer. Any shareholder may enter into ------------------------ an agreement with other shareholders or with the corporation providing for reasonable limitation or restriction on the right of such shareholder to transfer shares of capital stock of the corporation held by such shareholder, including, without limiting the generality of the foregoing, agreements granting to such other shareholders or to the corporation the right to purchase for a given period of time any of such shares. Any such limitation or restriction on the transfer of shares of this corporation may be set forth on certificates representing shares of capital stock, in which case the corporation or the transfer agent shall not be required to transfer such shares upon the books of the corporation without receipt of satisfactory evidence of compliance with the terms of such limitation or restriction. ARTICLE VII GENERAL PROVISIONS ------------------ SECTION 7.1. Fiscal Year. The fiscal year of the corporation shall ----------- end on November 30 of each year. SECTION 7.2. Voting of Securities. Subject to control and direction -------------------- of the Board of Directors, the Chairman of the Board (if a Chairman shall have been elected) or such other person as the Board of Directors may designate for such purpose either generally or in any particular instance shall have full power and authority, in the name and on behalf of the corporation, to attend, act and vote at any meeting of security holders of any company in which the corporation may hold any securities, or to consent as a security holder to any action proposed to be taken by such company. At any such meeting, or in connection with any such action, the Chairman or the Board (if a Chairman shall have been elected) or such other person shall possess and may exercise any and all rights and powers incident to the ownership of such securities which, as the holder thereof, the corporation might possess and exercise, and such person may exercise such power and authority through the execution of proxies or written consents or may delegate such power and -10- authority to any other officer, agent or employee of the corporation. SECTION 7.3. Amendments to By-Laws. Unless otherwise provided in the --------------------- Ohio Statute or the articles of incorporation, these by-laws may be altered or repealed by majority vote of the shareholders. ARTICLE VIII INDEMNIFICATION AND INSURANCE ----------------------------- SECTION 8.1. Right to Indemnification. In addition to any ------------------------ indemnification provision in the articles of incorporation, each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest extent authorized by the Ohio Statute, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), against ail expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in -------- ------- Section 8.2, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the corporation. The right to indemnification conferred in this Section 8.1 shall be a contract right and shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Ohio -------- ------- Statute requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not -11- in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under Section 8.2 or otherwise. The corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the corporation with the same scope and effect as the foregoing indemnification of directors and officers. SECTION 8.2. Right of Claimant to Bring Suit. If a claim under ------------------------------- Section 8.1 is not paid in full by the corporation within thirty days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Ohio Statute for the corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such act on that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Ohio Statute, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its shareholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. SECTION 8.3. Non-Exclusivity of Rights. The right to indemnification ------------------------- and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article VIII shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, by-law, agreement, vote of shareholders or disinterested directors or otherwise. SECTION 8.4. Insurance. The corporation may maintain insurance, at --------- its expense, to protect itself and any director, -12- officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Ohio Statute. -13- EX-5.1 4 OPINION & CONSENT OF KIRKLAND & ELLIS EXHIBIT 5.1 KIRKLAND & ELLIS PARTNERSHIPS INCLUDING PROFESSIONAL CORPORATIONS Citicorp Center 153 East 53rd Street New York, New York 10022-4675 212 446-4800 Facsimile: 212 446-4900 May __, 1998 Sealy Mattress Company Halle Building 10th Floor 1228 Euclid Avenue Cleveland, Ohio 44115 Re: Offer by Sealy Mattress Company to Exchange its (i) Series B 97/8% Senior Subordinated Notes due 2007 for any and all its 97/8% Senior Subordinated Notes due 2007 and (ii) Series B 107/8% Senior Subordinated Discount Notes due 2007 for any and all its 107/8% Senior Subordinated Discount Notes due 2007 Ladies and Gentlemen: We are acting as special counsel to Sealy Mattress Company, an Ohio corporation (the "Company"), in connection with the proposed registration by the Company of (i) up to $125,000,000 in aggregate principal amount of the Company's Series B 97/8% Senior Subordinated Notes due 2007 (the "Senior Subordinated Exchange Notes") and (ii) up to $128,000,000 in aggregate principal amount of the Company's Series B 107/8% Senior Subordinated Discount Notes due 2007 (the "Senior Subordinated Discount Exchange Notes" and, together with the Senior Subordinated Exchange Notes, the "Exchange Notes"), pursuant to a Registration Statement on Form S-4 originally filed with the Securities and Exchange Commission (the "Commission") on March 18, 1998 under the Securities Act of 1933, as amended (the "Securities Act") (such Registration Statement, as amended or supplemented, is hereinafter referred to as the "Registration Statement"), for the purpose of effecting an exchange offer (the "Exchange Offer") for (i) the Company's 97/8% Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes") and (ii) the Company's 107/8% Senior Subordinated Discount Notes due 2007 (the "Senior Subordinated Discount Notes" and, together with the Senior Sealy Mattress Company May __, 1998 Page 2 Subordinated Notes, the "Notes"), respectively. The Senior Subordinated Exchange Notes are to be issued pursuant to the Senior Subordinated Note Indenture (the "Senior Subordinated Note Indenture"), dated as of December 18, 1997, among the Company, the guarantors named therein (the "Guarantors"), and The Bank of New York, as trustee (the "Trustee"), in exchange for and in replacement of the Company's outstanding Senior Subordinated Notes, of which $125,000,000 in aggregate principal amount is outstanding. The Senior Subordinated Discount Notes are to be issued pursuant to the Senior Subordinated Discount Note Indenture (the "Senior Subordinated Discount Note Indenture" and, together with the Senior Subordinated Note Indenture, the "Indentures"), dated as of December 18, 1997, between the Company, the Guarantors, and the Trustee, in exchange for and in replacement of the Company's outstanding Senior Subordinated Discount Notes, of which $128,000,000 in aggregate principal amount at maturity is outstanding. The Exchange Notes will be guaranteed on a senior subordinated basis by the Guarantors (the "Guarantees"). In connection with the Exchange Offer, we have examined originals, or copies certified or otherwise identified to our satisfaction, of such documents, corporate records and other instruments as we have deemed necessary for the purposes of this opinion, including (i) the corporate and organizational documents of the Company and the Guarantors, (ii) minutes and records of the corporate proceedings of the Company and the Guarantors with respect to the issuance of the Exchange Notes, (iii) the Registration Statement and exhibits thereto and (iv) the Registration Rights Agreement, dated as of December 18, 1997, among the Company, the guarantors named therein, Goldman Sachs & Co., J.P. Morgan Securities Inc. and BT Alex. Brown Incorporated. For purposes of this opinion, we have assumed the authenticity of all documents submitted to us as originals, the conformity to the originals of all documents submitted to us as copies and the authenticity of the originals of all documents submitted to us as copies. We have also assumed the genuineness of the signatures of persons signing all documents in connection with which this opinion is rendered, the authority of such persons signing on behalf of the parties thereto other than the Company and the Guarantors, and the due authorization, execution and delivery of all documents by the parties thereto other than the Company and the Guarantors. As to any facts material to the opinions expressed herein which we have not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company, the Guarantors, and others. Sealy Mattress Company May __, 1998 Page 3 Based upon and subject to the foregoing qualifications, assumptions and limitations and the further limitations set forth below, we are of the opinion that: (1) The Company is a corporation existing and in good standing under the General Corporation Law of the State of Ohio. (2) The issuance of the Exchange Notes has been duly authorized by the Company. (3) Each Guarantee has been duly authorized by the respective Guarantor. (4) When, as and if (i) the Registration Statement shall have become effective pursuant to the provisions of the Securities Act, (ii) the Indentures shall have been qualified pursuant to the provisions of the Trust Indenture Act of 1939, as amended, (iii) the Notes shall have been validly tendered to the Company, (iv) the Exchange Notes shall have been issued in the form and containing the terms described in the Registration Statement, the Indentures, the resolutions of the Company's Board of Directors (or authorized committee thereof) authorizing the foregoing and any legally required consents, approvals, authorizations and other order of the Commission and any other regulatory authorities to be obtained, the Exchange Notes when issued pursuant to the Exchange Offer will be legally issued, fully paid and nonassessable and will constitute valid and binding obligations of the Company and the Guarantees will constitute valid and binding obligations of the Guarantors under the terms and conditions described in the Registration Statement, the Indentures, the resolutions of the Guarantors' Board of Directors (or authorized committee thereof) authorizing the foregoing and any legally required consents, approvals, authorizations and other order of the Commission and any other regulatory authorities to be obtained. Our opinions expressed above are subject to the qualifications that we express no opinion as to the applicability of, compliance with, or effect of (i) any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent conveyance, moratorium or other similar law affecting the enforcement of creditors' rights generally, (ii) general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), (iii) public policy considerations which may limit the rights of parties to obtain certain remedies and (iv) any laws except the laws of the State of New York and the General Corporation Law of the State of Ohio. We advise you that issues addressed by this letter may be governed in whole or in part by other laws, but we express no opinion as to whether any relevant difference exists between the laws upon which our opinions are based and any other laws which may actually govern. For Sealy Mattress Company May __, 1998 Page 4 purposes of the opinion in paragraph 1, we have relied exclusively upon recent certificates issued by the Ohio Secretary of State, and such opinion is not intended to provide any conclusion or assurance beyond that conveyed by such certificates. We have assumed without investigation that there has been no relevant change or development between the respective dates of such certificates and the date of this letter. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement. We also consent to the reference to our firm under the heading "Legal Matters" in the Registration Statement. In giving this consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of the rules and regulations of the Commission. We do not find it necessary for the purposes of this opinion, and accordingly we do not purport to cover herein, the application of the securities or "Blue Sky" laws of the various states to the issuance of the Exchange Notes. This opinion is limited to the specific issues addressed herein, and no opinion may be inferred or implied beyond that expressly stated herein. We assume no obligation to revise or supplement this opinion should the present laws of the States of Ohio or New York be changed by legislative action, judicial decision or otherwise. This opinion is furnished to you in connection with the filing of the Registration Statement, and is not to be used, circulated, quoted or otherwise relied upon for any other purposes. Yours very truly, /s/ Kirkland & Ellis KIRKLAND & ELLIS EX-8.1 5 OPINION OF KIRKLAND & ELLIS EXHIBIT 8.1 KIRKLAND & ELLIS PARTNERSHIPS INCLUDING PROFESSIONAL CORPORATIONS Citicorp Center 153 East 53rd Street New York, New York 10022-4675 212 446-4800 Facsimile: 212 446-4900 May __, 1998 Sealy Mattress Company Halle Building 10th Floor 1228 Euclid Avenue Cleveland, Ohio 44115 Re: Offer by Sealy Mattress Company to Exchange its (i) Series B 97/8% Senior ------------------------------------------------------------------------- Subordinated Notes due 2007 for any and all its 97/8% Senior Subordinated ------------------------------------------------------------------------- Notes due 2007 and (ii) Series B 107/8% Senior Subordinated Discount Notes -------------------------------------------------------------------------- due 2007 for any and all its 107/8% Senior Subordinated Discount Notes due -------------------------------------------------------------------------- 2007 ---- We have acted as special counsel to Sealy Mattress Company (the "Company") in ------- connection with its offer (the "Exchange Offer") to Exchange its: (i) Series B -------------- 97/8% Senior Subordinated Notes due 2007 (the "Senior Subordinated Exchange ---------------------------- Notes") for any and all of its 97/8% Senior Subordinated Notes due 2007 (the - ----- "Senior Subordinated Notes"); and (ii) Series B 107/8% Senior Subordinated ------------------------- Discount Notes due 2007 (the "Senior Subordinated Discount Exchange Notes" and, ------------------------------------------- together with the Senior Subordinated Exchange Notes, the "Exchange Notes") for -------------- any and all of its 107/8% Senior Subordinated Discount Notes due 2007 (the "Senior Subordinated Discount Notes" and, together with the Senior Subordinated ---------------------------------- Notes, the "Notes"). ----- You have requested our opinion as to certain United States federal income tax consequences of the Exchange Offer. In preparing our opinion, we have reviewed and relied upon the Company's Registration Statement on Form S-4, filed with the Securities and Exchange Commission (the "Commission") on March 18, 1998, as amended by Amendment No. 1 thereto filed with the Commission on May 5, 1998 and Amendment No. 2 thereto filed with the Commission on the date hereof (the "Registration Statement"), and such other documents as we deemed necessary. ---------------------- On the basis of the foregoing, it is our opinion that the exchange of the Notes for Exchange Notes pursuant to the Exchange Offer will not be treated as an "exchange" for United States federal income tax purposes. The opinions set forth above are based upon the applicable provisions of the Internal Revenue Code of 1986, as amended; the Treasury Regulations promulgated or proposed thereunder; current positions of the Internal Revenue Service (the "IRS") contained in published revenue rulings, revenue procedures, and --- announcements; existing judicial decisions; and other applicable authorities. No tax rulings have been sought from the IRS with respect to any of the matters discussed herein. Unlike a ruling from the IRS, opinions of counsel are not binding on the IRS. Hence, no assurance can be given that the opinions stated in this letter will not be successfully challenged by the IRS or by a court. We express no opinion concerning any United States federal income tax consequences of the Exchange Offer except as expressly set forth above. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm and the summarization of this opinion under the section titled "Certain Federal Income Tax Consequences" in the Registration Statement. Very truly yours, /s/ Kirkland & Ellis Kirkland & Ellis EX-10.4 6 SEALY CREDIT AGREEMENT-EXHIBIT EXHIBIT 10.4 EXHIBIT I [FORM OF NOTICE OF BORROWING] NOTICE OF BORROWING Pursuant to that certain Credit Agreement dated as of December 18, 1997, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the ``CREDIT AGREEMENT'', the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among Sealy Mattress Company, an Ohio corporation, as borrower (``COMPANY''), Sealy Corporation, a Delaware corporation, as guarantor, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, the financial institutions listed therein as Lenders (``LENDERS''), Morgan Guaranty Trust Company of New York, as administrative agent (``ADMINISTRATIVE AGENT''), and Bankers Trust Company, as documentation agent, this represents Company's request to borrow as follows: 1. Date of borrowing: ----------------- ---------------------------, ------------ 2. Amount of borrowing: $ ------------------- --------------------------- 3. Lender(s): [ ] a. Lenders, in ---------- accordance with their applicable Pro Rata Shares [ ] b. Swing Line Lender 4. Type of Loans: [ ] a. Tranche A Term Loans ------------- [ ] b. Revolving Loans [ ] c. Swing Line Loan 5. Interest rate option: [ ] a. Base Rate Loan(s) -------------------- [ ] b. Eurodollar Rate Loans with an initial Interest Period of ____________ month(s) The proceeds of such Loans are to be deposited in Company's account at Administrative Agent. The undersigned officer, to the best of his or her knowledge, on behalf of the Company certifies that: (i) The representations and warranties contained in the Credit Agreement and the other Loan Documents are or shall be true, correct and complete in all material respects on and as of the date hereof to the same extent as though made on and as of the Funding Date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties were true, correct and complete in all material respects on and as of such earlier date; [(i) No event has occurred and is continuing or would result from the consummation of the borrowing contemplated hereby that would constitute an Event of Default or a Potential Event of Default; [and] [(ii) FOR REVOLVING LOANS: The amount of the proposed borrowing will not cause the Total Utilization of Revolving Loan Commitments to exceed the Revolving Loan Commitments.]. DATED: ____________________ SEALY MATTRESS COMPANY By: -------------------------------- Name: Title: EXHIBIT II [FORM OF NOTICE OF CONVERSION/CONTINUATION] NOTICE OF CONVERSION/CONTINUATION Pursuant to that certain Credit Agreement dated as of December 18, 1997, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among Sealy Mattress Company, an Ohio corporation, as borrower ("COMPANY"), Sealy Corporation, a Delaware corporation, as guarantor, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, the financial institutions listed therein as Lenders, Morgan Guaranty Trust Company of New York, as administrative agent, and Bankers Trust Company, as documentation agent, this represents Company's request to convert or continue Loans as follows: 1. Date of conversion/continuation: ------------------------------- ----------------,------ 2. Amount of Loans being converted/continued: $ ----------------------------------------- ----------- 3. Type of Loans being [_] a. Tranche A Term Loans converted/continued: [_] b. Revolving Loans ------------------- 4. Nature of conversion/continuation: --------------------------------- [_] a. Conversion of Base Rate Loans to Eurodollar Rate Loans [_] b. Conversion of Eurodollar Rate Loans to Base Rate Loans [_] c. Continuation of Eurodollar Rate Loans as such 5. If Loans are being continued as or converted to Eurodollar Rate Loans, the duration of the new Interest Period that commences on the conversion/continuation date: month(s) --------------- II-I-1 In the case of a conversion to or continuation of Eurodollar Rate Loans, the undersigned officer, to the best of his or her knowledge, and Company certify that no Event of Default has occurred and is continuing under the Credit Agreement. DATED: SEALY MATTRESS COMPANY ------------------------- By: --------------------------------- Name: Title: II-I-2 EXHIBIT III [FORM OF NOTICE OF ISSUANCE OF LETTER OF CREDIT] NOTICE OF ISSUANCE OF LETTER OF CREDIT Pursuant to that certain Credit Agreement dated as of December 18, 1997, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among Sealy Mattress Company, an Ohio corporation, as borrower ("COMPANY"), Sealy Corporation, a Delaware corporation, as guarantor, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, the financial institutions listed therein as Lenders, Morgan Guaranty Trust Company of New York, as administrative agent ("ADMINISTRATIVE AGENT"), and Bankers Trust Company, as documentation agent, this represents Company's request for the issuance of a Letter of Credit by Administrative Agent as follows: 1. Date of issuance of Letter of Credit: ________________, ________ ------------------------------------ 2. Type of Letter of Credit: [_] a. Commercial Letter of Credit ------------------------ [_] b. Standby Letter of Credit 3. Face amount of Letter of Credit: $________________________ ------------------------------- 4. Currency of Letter of Credit (if not in U.S. Dollars): ----------------------------------------------------- ---------- 5. Expiration date of Letter of Credit: ________________, ________ ----------------------------------- 6. Name and address of beneficiary: ------------------------------- ___________________________________________ ___________________________________________ ___________________________________________ ___________________________________________ 7. Attached hereto is: ------------------ [_] a. the verbatim text of such proposed Letter of Credit [_] b. a description of the proposed terms and conditions of such Letter of Credit, including a precise description of any documents to be presented by the beneficiary which, if presented by the beneficiary prior to the expiration date of such Letter of Credit, would require the Issuing Lender to make payment under such Letter of Credit. III-1 The undersigned officer, to the best of his or her knowledge, on behalf of the Company certifies that: (i) The representations and warranties contained in the Credit Agreement and the other Loan Documents are or shall be true, correct and complete in all material respects on and as of the date of issuance of the proposed Letter of Credit, to the same extent as though made on and as of the date hereof, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties were true, correct and complete in all material respects on and as of such earlier date; (ii) No event has occurred and is continuing or would result from the issuance of the Letter of Credit contemplated hereby that would constitute an Event of Default or a Potential Event of Default; and (iii) The issuance of the proposed Letter of Credit will not cause (a) the Letter of Credit Usage to exceed $20,000,000 or (b) the Total Utilization of Revolving Loan Commitments to exceed the Revolving Loan Commitments. DATED: ____________________ SEALY MATTRESS COMPANY By: ---------------------------- Name: Title: III-2 EXHIBIT IV [FORM OF TRANCHE A TERM NOTE] SEALY MATTRESS COMPANY PROMISSORY NOTE DUE DECEMBER __, 2002 $[1] New York, New York [Closing Date] FOR VALUE RECEIVED, SEALY MATTRESS COMPANY, an Ohio corporation ("COMPANY"), promises to pay to [2] ("PAYEE") or its registered assigns the principal amount of [3] ($[1]) in the installments referred to below. Company also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of that certain Credit Agreement dated as of December 18, 1997 by and among Company, Sealy Corporation, a Delaware corporation, as guarantor, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, the financial institutions listed therein, Morgan Guaranty Trust Company of New York, as administrative agent ("ADMINISTRATIVE AGENT"), and Bankers Trust Company, as documentation agent (said Credit Agreement, as it may be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined). Company shall make principal payments on this Note in consecutive quarterly installments, commencing on March __, 1998 and ending on December __, 2002. Each such installment shall be due on the date specified in the Credit Agreement and in an amount determined in accordance with the provisions thereof; provided -------- that the last such installment shall be in an amount sufficient to repay the entire unpaid principal balance of this Note, together with all accrued and unpaid interest thereon. This Note is one of Company's "Tranche A Term Notes" in the aggregate principal amount of $120,000,000 and is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and - -------------------- [1] Insert amount of Lender's Tranche A Term Loan in numbers. [2] Insert Lender's name in capital letters. [3] Insert amount of Lender's Tranche A Term Loan in words. IV-1 conditions under which the Tranche A Term Loan evidenced hereby was made and is to be repaid. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the Funding and Payment Office or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. Unless and until an Assignment Agreement effecting the assignment or transfer of this Note shall have been accepted by Agent and recorded in the Register as provided in subsection 10.1B(ii) of the Credit Agreement, Company and Agent shall be entitled to deem and treat Payee as the owner and holder of this Note and the Loan evidenced hereby. Payee hereby agrees, by its acceptance hereof, that before disposing of this Note or any part hereof it will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid; provided, however, that the failure to make a -------- ------- notation of any payment made on this Note shall not limit or otherwise affect the obligations of Company hereunder with respect to payments of principal of or interest on this Note. Whenever any payment on this Note shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest on this Note. This Note is subject to mandatory prepayment as provided in subsection 2.4B(iii) of the Credit Agreement and to prepayment at the option of Company as provided in subsection 2.4B(i) of the Credit Agreement. THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF COMPANY AND PAYEE HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. This Note is subject to restrictions on transfer or assignment as provided in subsections 10.1 and 10.16 of the Credit Agreement. IV-2 No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligations of Company, which are absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. After the occurrence of an Event of Default, Company promises to pay all costs and expenses, including reasonable attorneys' fees, all as provided in subsection 10.2 of the Credit Agreement, incurred in the collection and enforcement of this Note. Company hereby consents to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waives diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. IN WITNESS WHEREOF, Company has caused this Note to be duly executed and delivered by its officer thereunto duly authorized as of the date and at the place first written above. SEALY MATTRESS COMPANY By: -------------------------------- Name: Title: IV-3 EXHIBIT V [FORM OF REVOLVING NOTE] SEALY MATTRESS COMPANY PROMISSORY NOTE DUE DECEMBER __, 2002 $[1] New York, New York [Closing Date] FOR VALUE RECEIVED, SEALY MATTRESS COMPANY, an Ohio corporation ("COMPANY"), promises to pay to [2] ("PAYEE") or its registered assigns, on or before December 18, 2002, the lesser of (x) [3] ($[1]) and (y) the unpaid principal amount of all advances made by Payee to Company as Revolving Loans under the Credit Agreement referred to below. Company also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of that certain Credit Agreement dated as of December 18, 1997 by and among Company, Sealy Corporation, a Delaware corporation, as guarantor, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, the financial institutions listed therein, Morgan Guaranty Trust Company of New York, as administrative agent ("ADMINISTRATIVE AGENT"), and Bankers Trust Company, as documentation agent (said Credit Agreement, as it may be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined). This Note is one of Company's "Revolving Notes" in the aggregate principal amount of $100,000,000 and is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and conditions under which the Revolving Loans evidenced hereby were made and are to be repaid. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the Funding and Payment Office or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. Unless and until an Assignment Agreement effecting the - ---------------------- [1] Insert amount of Lender's Revolving Loan Commitment in numbers. [2] Insert Lender's name in capital letters. [3] Insert amount of Lender's Revolving Loan Commitment in words. V-1 assignment or transfer of this Note shall have been accepted by Agent and recorded in the Register as provided in subsection 10.1B(ii) of the Credit Agreement, Company and Agent shall be entitled to deem and treat Payee as the owner and holder of this Note and the Loans evidenced hereby. Payee hereby agrees, by its acceptance hereof, that before disposing of this Note or any part hereof it will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid; provided, -------- however, that the failure to make a notation of any payment made on this Note - ------- shall not limit or otherwise affect the obligations of Company hereunder with respect to payments of principal of or interest on this Note. Whenever any payment on this Note shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest on this Note. This Note is subject to mandatory prepayment as provided in subsection 2.4B(iii) of the Credit Agreement and to prepayment at the option of Company as provided in subsection 2.4B(i) of the Credit Agreement. THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF COMPANY AND PAYEE HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. This Note is subject to restrictions on transfer or assignment as provided in subsections 10.1 and 10.16 of the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligations of Company, which are absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. After the occurrence of an Event of Default, Company promises to pay all costs and expenses, including reasonable attorneys' fees, all as provided in subsection 10.2 of the Credit V-2 Agreement, incurred in the collection and enforcement of this Note. Company hereby consents to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waives diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. IN WITNESS WHEREOF, Company has caused this Note to be duly executed and delivered by its officer thereunto duly authorized as of the date and at the place first written above. SEALY MATTRESS COMPANY By: ----------------------------------- Name: Title: V-3 TRANSACTIONS ON REVOLVING NOTE
Outstanding Type of Amount of Amount of Principal Loan Made Loan Made Principal Paid Balance Notation Date This Date This Date This Date This Date Made By - ------- --------- --------- -------------- ----------- --------
V-4 EXHIBIT VI [FORM OF SWING LINE NOTE] SEALY MATTRESS COMPANY PROMISSORY NOTE DUE DECEMBER __, 2002 $10,000,000 New York, New York [Closing Date] FOR VALUE RECEIVED, SEALY MATTRESS COMPANY, an Ohio corporation ("COMPANY"), promises to pay to MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("PAYEE") or its registered assigns, on or before December __, 2002, the lesser of (x) TEN MILLION AND NO/100 Dollars ($10,000,000.00) and (y) the unpaid principal amount of all advances made by Payee to Company as Swing Line Loans under the Credit Agreement referred to below. Company also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of that certain Credit Agreement dated as of December 18, 1997 by and among Company, Sealy Corporation, a Delaware corporation, as guarantor, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, the financial institutions listed therein, Morgan Guaranty Trust Company of New York, as administrative agent ("ADMINISTRATIVE AGENT"), and Bankers Trust Company, as documentation agent (said Credit Agreement, as it may be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined). This Note is Company's "Swing Line Note" and is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and conditions under which the Swing Line Loans evidenced hereby were made and are to be repaid. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the Funding and Payment Office or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. Whenever any payment on this Note shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest on this Note. VI-1 This Note is subject to mandatory prepayment as provided in subsection 2.4B(iii) of the Credit Agreement and to prepayment at the option of Company as provided in subsection 2.4B(i) of the Credit Agreement. THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF COMPANY AND PAYEE HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. This Note is subject to restrictions on transfer or assignment as provided in subsections 10.1 and 10.16 of the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligations of Company, which are absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. After the occurrence of an Event of Default, Company promises to pay all costs and expenses, including reasonable attorneys' fees, all as provided in subsection 10.2 of the Credit Agreement, incurred in the collection and enforcement of this Note. Company hereby consents to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waives diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. VI-2 IN WITNESS WHEREOF, Company has caused this Note to be duly executed and delivered by its officer thereunto duly authorized as of the date and at the place first written above. SEALY MATTRESS COMPANY By: -------------------------------------- Name: Title: VI-3 TRANSACTIONS ON SWING LINE NOTE
Outstanding Amount of Amount of Principal Loan Made Principal Paid Balance Notation Date This Date This Date This Date Made By - ------- --------- -------------- ----------- --------
VI-4 EXHIBIT VII [FORM OF COMPLIANCE CERTIFICATE] COMPLIANCE CERTIFICATE THE UNDERSIGNED HEREBY CERTIFY ON BEHALF OF HOLDINGS (AS DEFINED BELOW) THAT: (1) We are the duly elected [Title] and [Title] of Sealy Corporation, a Delaware corporation ("HOLDINGS"); (2) We have reviewed the terms of that certain Credit Agreement dated as of December 18, 1997, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined in this Certificate (including Attachment No. 1 annexed hereto and made a part hereof) being used in this Certificate as therein defined), by and among Company, Holdings, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, the financial institutions listed therein, Morgan Guaranty Trust Company of New York, as administrative agent ("ADMINISTRATIVE AGENT"), and Bankers Trust Company, as documentation agent, and the terms of the other Loan Documents, and we have made, or have caused to be made under our supervision, a review in reasonable detail of the transactions and condition of Holdings and its Subsidiaries during the accounting period covered by the attached financial statements; and (3) The examination described in paragraph (2) above did not disclose, and we have no knowledge of, the existence of any condition or event which constitutes an Event of Default or Potential Event of Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate. [Set forth [below] [in a separate attachment to this Certificate] are all exceptions to paragraph (3) above listing, in detail, the nature of the condition or event, the period during which it has existed and the action which Holdings has taken, is taking, or proposes to take with respect to each such condition or event: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------] VII-1 The foregoing certifications, together with the computations set forth in Attachment No. 1 annexed hereto and made a part hereof and the financial statements delivered with this Certificate in support hereof, are made and delivered this ____ day of ____________, [199_] [200_] pursuant to subsection 6.1(iv) of the Credit Agreement. SEALY CORPORATION By: -------------------------------- Name: Title: By: -------------------------------- Name: Title: VII-2 ATTACHMENT NO. 1 TO COMPLIANCE CERTIFICATE This Attachment No. 1 is attached to and made a part of a Compliance Certificate dated as of ______________, [199_][200_] and pertains to the period from ____________, [199_][200_] to ____________, [199_][200_]. Subsection references herein relate to subsections of the Credit Agreement. A. MINIMUM INTEREST COVERAGE RATIO (for the four-Fiscal Quarter period ending _____________, [199_][200_]) 1. Consolidated Net Income: $_____________ 2. Consolidated Interest Expense, together with any non-cash interest expense with respect to the Junior Subordinated Seller Notes not included in Consolidated Interest Expense: $_____________ 3. Provisions for taxes based on income (including, without duplication, foreign withholding tax): $_____________ 4. Total depreciation expense: $_____________ 5. Total amortization expense: $_____________ 6. Other non-cash items reducing Consolidated Net Income: 7. Less other non-cash items increasing Consolidated ---- Net Income: $_____________ 8. Schedule 1.1(i) deductions: $_____________ 9. Cumulative effect of accounting changes to the extent such changes result in a reduction of Consolidated Net Income: $_____________ 10. Cumulative effect of accounting changes to the extent such changes result in an increase in Consolidated Net Income $_____________ VII-3 11. Consolidated Adjusted EBITDA (1+2+3+4+5+6-7+8+9-10): $_____________ 12. Interest Coverage Ratio (11):(2): ____:1.00 13. Minimum ratio required under subsection 7.6A: ____:1.00 B. MAXIMUM LEVERAGE RATIO (as of _____________, [199_][200_]) 1. Consolidated Total Debt: $_____________ 2. Consolidated Adjusted EBITDA (A.11 above): $_____________ 3. Leverage Ratio (1):(2): ____:1.00 4. Maximum Leverage Ratio permitted under subsection 7.6B: ____:1.00 C. MINIMUM CONSOLIDATED ADJUSTED EBITDA (for the four- Fiscal Quarter period ending ____________, [199_][200_]) 1. Consolidated Adjusted EBITDA (A.11 above): $_____________ 2. Minimum required under subsection 7.6C: $_____________ D. CONSOLIDATED CAPITAL EXPENDITURES 1. Consolidated Capital Expenditures for Fiscal Year-to-date: $_____________ 2. Maximum amount of Consolidated Capital Expenditures permitted under subsection 7.8A for Fiscal Year (as adjusted in accordance with the provisos to such subsection; calculations attached hereto): $_____________ 3. MIS Upgrade Expenditures not included in calculations under D.1 above: $_____________ 4. Maximum permitted under subsection 7.8B $12,000,000 5. Consolidated Capital Expenditures (not included in calculations under D.1 or D.3 above) VII-4 made in reliance on subsection 7.8C (calculations against Excess Proceeds Amount at the time of each such expenditure attached hereto): $_____________ VII-5 EXHIBIT VIII KIRKLAND & ELLIS A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS Citicorp Center 153 East 53rd Street New York, NY 10022-4675 To Call Writer Direct: 212 446-4800 Facsimile: 212 446-4800 212 446-4900 December 18, 1997 To the Administrative Agent, the Collateral Agent, the Documentation Agent, the Syndication Agent and each of the Lenders party to the Credit Agreement referred to below: Ladies and Gentlemen: We are issuing this opinion letter in our capacity as special legal counsel to Sealy Corporation, a Delaware corporation ("Holdings"), Sealy -------- Mattress Company, an Ohio corporation (the "Borrower"), and each other Domestic -------- Subsidiary of Borrower that is a party to a Subsidiary Guaranty (collectively, the "Subsidiary Guarantors" and, together with Holdings and the Borrower, the --------------------- "Credit Parties," and each a "Credit Party"), in response to the requirement in - --------------- ------------ (a) subsections 4.1J(vii) and 4.1(P) of the Credit Agreement (the "Term ---- A/Revolver Credit Agreement") dated as of the date hereof by and among Holdings, - --------------------------- the Borrower, the various lending institutions party thereto (the "Term ---- A/Revolver Lenders"), Goldman Sachs Credit Partners L.P., as Arranger and - ------------------ Syndication Agent, Morgan Guaranty Trust Company of New York, as Administrative Agent, and Bankers Trust Company, as Documentation Agent, and (b) subsection 3.1J(vi) and 3.1(P) of the AXEL Credit Agreement (the "AXEL Credit Agreement," --------------------- and together with the Term A/Revolver Credit Agreement, the "Credit ------ Agreements"), dated as of the date hereof by and among Holdings, the Borrower, the various lending institutions party thereto (the "AXEL Lenders," collectively ------------ with the AXEL Lenders and Term A/Revolver Lenders, (the "Lenders")), Goldman ------- Sachs Credit Partners L.P., as Arranger and Syndication Agent, Morgan Guaranty Trust Company of New York, as Administrative Agent and Bankers Trust Company, as Documentation Agent (the Lenders and the various aforementioned agents under the Credit Agreements being herein called "you"). The term "Transaction Documents" --- --------------------- whenever it is used in this letter means the Credit Agreements and the following additional documents: (a) the Notes, (b) the Guaranties and Collateral Documents executed on or before the date hereof listed on Schedule E (the ---------- "Collateral Documents"), (c) the Financing Statements (as defined in opinion - --------------------- paragraph 9 of this letter) executed by the Credit Parties, (d) the Recapitalization Agreement and (e) the Related Documents listed on Schedule F. ---------- Unless otherwise indicated, capitalized terms used herein but not otherwise defined herein have the respective meanings set forth in the Credit Agreements. CHICAGO DENVER LONDON LOS ANGELES NEW YORK KIRKLAND & ELLIS December 18, 1997 Page 2 Subject to the assumptions, qualifications, exclusions and other limitations which are identified in this letter and in the schedules attached to this letter, we advise you, and with respect to each legal issue addressed in this letter, it is our opinion, that: 1. Holdings is a corporation existing and in good standing under the General Corporation Law of the State of Delaware. Each Subsidiary Guarantor is a corporation existing under the general corporate law of its state of incorporation. Each Credit Party is in good standing in the jurisdictions set forth below such Credit Party's name on Schedule -------- G. For purposes of the foregoing opinions in this paragraph, we have - relied exclusively upon the certificates issued by the governmental authorities in each respective state of incorporation and other relevant jurisdictions for the other Credit Parties incorporated in states other than Delaware, Illinois and New York and such opinions are not intended to provide any conclusion or assurance beyond that conveyed by such certificates. Based upon our review of the Certificate (or Articles, as the case may be) of Incorporation and Bylaws of each Credit Party (other than the Borrower), each Credit Party (other than the Borrower) has the corporate power to own its property and assets of which we are aware and to transact the business in which, to our actual knowledge, it is engaged or presently proposes to engage (as such business is described in the Offering Circular dated December 11, 1997, relating to the Senior Subordinated Notes and the Discount Notes). 2. Each Credit Party (other than the Borrower) has the corporate power to enter into each of the Transaction Documents (other than the Recapitalization Agreement) to which it is a party and perform its obligations under each of the Credit Agreements, the Notes, the Collateral Documents and the Related Documents to which it is a party. 3. The Board of Directors of each Credit Party (other than the Borrower) has adopted by requisite vote the resolutions necessary to authorize such Credit Party's execution and delivery of the Transaction Documents (other than the Recapitalization Agreement) to which it is a party and the performance of the Transaction Documents (other than the Recapitalization Agreement and the Financing Statements) to which it is a party and no approval by the shareholders of such Credit Parties is required in connection with the authorization of such execution, delivery and performance of the KIRKLAND & ELLIS December 18, 1997 Page 3 Transaction Documents (other than the Recapitalization Agreement) to which it is a party. 4. Each Credit Party (other than the Borrower) has duly executed and delivered the Transaction Documents (other than the Recapitalization Agreement) to which it is a party. 5. Each of the Transaction Documents (other than the Recapitalization Agreement and the Financing Statements) is a valid and binding obligation of each Credit Party that is a party thereto and is enforceable against each such Credit Party in accordance with its terms. 6. The execution and delivery of the Transaction Documents (other than the Recapitalization Agreement) to which it is a party by each Credit Party and performance of the obligations under the Transaction Documents (other than the Recapitalization Agreement and the Financing Statements) to which it is a party will not (a) conflict with any of the Transaction Documents, (b) violate any existing provisions of such Credit Party's Certificate (or Articles, as the case may be) of Incorporation or Bylaws, (c) constitute a violation by such Credit Party of any applicable provision of existing statutory law or governmental regulation covered by this letter, (d) result in the creation or imposition of any lien, charge or encumbrance upon any of the property of any Credit Party other than liens, charges and encumbrances in your favor or (e) violate any existing order, writ, injunction or decree applicable to any Credit Party of which we are aware of any court or governmental instrumentality. Without limiting the foregoing, the making of the Loans and the application of the proceeds thereof as provided in the Credit Agreements do not violate Regulations G, T, U or X of the Board of Governors of the Federal Reserve System. 7. No Credit Party is presently required to obtain any consent, approval, authorization or order of any court or governmental agency in order to obtain the right to enter into any of the Transaction Documents (other than the Recapitalization Agreement) or to take any of the actions taken by such Credit Party in connection with the consummation of the transactions contemplated by the Transaction Documents (other than the Recapitalization Agreement), except for: (a) those obtained or made on or prior to the Closing Date, (b) any actions or filings to perfect the liens and security KIRKLAND & ELLIS December 18, 1997 Page 4 interests granted under the Collateral Documents, (c) actions or filings required in connection with ordinary course conduct by the Credit Parties of their respective businesses and ownership or operation by the Credit Parties of their respective assets and (d) actions and filings required under the Securities Act of 1933, as amended, or any state "blue sky" law or related regulation and the Trust Indenture Act of 1939, as amended (as to which matters, except as specifically set forth in paragraph 18, we express no opinion). 8. Each of the Holdings Security Agreement, the Company Security Agreement, the Company Patent and Trademark Security Agreement, the Subsidiary Security Agreement, the Subsidiary Patent and Trademark Security Agreement and Section 4 of the Mortgage (the "New York -------- Mortgage") dated the date hereof executed by Sealy Mattress of Albany, -------- Inc. ("Sealy Albany") (collectively, the "Security Agreements") ------------ ------------------- creates a valid and enforceable security interest in favor of the Collateral Agent in the collateral therein respectively described (the "Collateral") which constitutes property in which a security interest ---------- can be granted under Article 9 of the Uniform Commercial Code as enacted in New York (the "New York UCC"). Such Collateral is referred ------------ to herein as the "Code Collateral." --------------- 9. The Uniform Commercial Code financing statements (Form UCC-1) which have been signed by representatives of each of the applicable Credit Parties and delivered on or before the date of this letter in connection with the transactions specified in the Collateral Documents (the "Financing Statements"), have been duly executed and delivered by -------------------- each such Credit Party. When certain of the Financing Statements have been duly filed or recorded, as appropriate, in the Offices of the Secretary of State of the States of New York and Illinois (and, with respect to certain of the Financing Statements signed by Sealy Albany, the Office of the Clerk, Albany County), the security interests under the Security Agreements in the Code Collateral presently located or deemed located in the States of New York and Illinois under Section 9- 103 of the New York UCC will be perfected to the extent such security interests in such Code Collateral can be perfected by the filing of financing statements in the States of New York and Illinois. 10. Under Section 9-103 of the New York UCC, the perfection and effect of perfection of the security interests in favor of the Collateral Agent in the remaining Code Collateral will be governed by laws other than those of the States of New York and KIRKLAND & ELLIS December 18, 1997 Page 5 Illinois. Although we express no opinion as to such laws, we have reviewed the Commerce Clearing House, Inc. Secured Transactions Guide as supplemented through November 25, 1997 (the "Guide") and, based ----- solely on such review, we advise you that when the remaining Financing Statements executed by each Credit Party are duly filed or recorded, as appropriate, in the filing offices set forth on Schedule -------- H, the security interests under the Security Agreements in - such Code Collateral described therein will be perfected to the extent such security interests can be perfected by the filing of financing statements in such other states. 11. Upon the filing and recordation of the Company Patent and Trademark Security Agreement and the Subsidiary Patent and Trademark Security Agreement with the United States Patent and Trademark Office (and the payment of required filing fees) and the filing of appropriate financing statements as described in paragraphs 9 and 10 of this letter, the security interest for the benefit of the Collateral Agent in the United States patents and registered trademarks described therein will be perfected under applicable Federal law to the extent that security interests in such Collateral may be perfected under such Federal laws. 12. Assuming (in addition to all other assumptions upon which this letter is based) that the Collateral Agent has taken and is retaining possession in the State of New York of the certificates representing the securities which are certificated and pledged pursuant to the Holdings Pledge Agreement, the Company Pledge Agreement and the Subsidiary Pledge Agreement (collectively, the "Pledge Agreements"), ----------------- duly endorsed to the Collateral Agent or in blank by an effective endorsement (within the meaning of Section 8-102(a)(11) of the New York UCC), the security interest in favor of the Collateral Agent in such pledged securities is perfected by "control" under the New York UCC; and assuming further (in addition to all other assumptions upon which this letter is based) that the Collateral Agent has taken possession of such pledged certificated securities and such accompanying endorsements without notice (actual or constructive), at or prior to the time of the delivery of such pledged certificated securities and endorsements to the Collateral Agent, of any adverse claim within the meaning of Section 8-102(a)(1) of the New York UCC, the Collateral Agent has acquired a security interest in such pledged securities free of any such adverse claims. KIRKLAND & ELLIS December 18, 1997 Page 6 13. The New York Mortgage is in proper form for recording and, upon recordation in the Office of the Clerk, Albany County and the payment of all applicable recording fees and taxes, will create in favor of the Collateral Agent a valid and enforceable mortgage lien on Sealy Albany's interest in that portion of the "Mortgaged Property", as defined therein, that constitutes real property (including fixtures, to the extent the same constitute real property). 14. The Credit Parties are not "investment companies" within the meaning of the Investment Company Act of 1940, as amended. 15. The Credit Parties are not "holding companies" or "subsidiary companies" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 16. To the best of our actual knowledge (based solely upon lien searches, inquiries of officers of the Credit Parties and the certificates executed and delivered to us by officers of such parties), (i) there are no actions, suits or proceedings pending or threatened (a) against any Credit Parties (other than those identified in Schedules 4.10(A)- (G) to the Recapitalization Agreement), which have not been disclosed to you or your counsel or (b) against any Credit Parties with respect to any of the Transaction Documents and (ii) there does not exist any judgment, order or injunction prohibiting or imposing any material adverse condition upon the consummation of the transactions contemplated by the Transaction Documents. 17. All monetary obligations of the Borrower under the Credit Agreements are within the definition of "Senior Debt" under, and as defined in, the Senior Subordinated Note Indenture, the Discount Note Indenture and the Junior Subordinated Seller Notes. 18. It is not necessary in connection with the execution and delivery of the Notes and the Credit Agreements to the Lenders to register the Notes or the Credit Agreements or the Loans under the Securities Act of 1933, as amended, or to qualify any indenture in respect thereof under the Trust Indenture Act of 1939, as amended. KIRKLAND & ELLIS December 18, 1997 Page 7 In preparing this letter, we have relied without any independent verification upon the assumptions recited in Schedule B to this letter and upon: ---------- (i) information contained in certificates obtained from governmental authorities; (ii) factual information represented to be true in the Credit Agreements and the other Transaction Documents; (iii) factual information provided to us in a support certificate signed by the Credit Parties; and (iv) factual information we have obtained from such other sources as we have deemed reasonable. We have assumed without investigation that there has been no relevant change or development between the dates as of which the information cited in the preceding sentence was given and the date of this letter and that the information upon which we have relied is accurate and does not omit disclosures necessary to prevent such information from being misleading. While we have not conducted any independent investigation to determine facts upon which our opinions are based or to obtain information about which this letter advises you, we confirm that we do not have any actual knowledge which has caused us to conclude that our reliance and assumptions cited in the preceding paragraph are unwarranted or that any information supplied in this letter is wrong. The terms "knowledge," "actual knowledge" and "aware" whenever used in this letter with respect to our firm means conscious awareness at the time this letter is delivered on the date it bears by the following Kirkland & Ellis lawyers who have had significant involvement with negotiation or preparation of the Transaction Documents (herein called "our Designated Transaction Lawyers"): Lance C. Balk, Linda K. Riley Myers, Debra B. Arenare, Mark J. Eagan, Frederick Tanne, Brian Land, Jeffrey W. Stevenson, Robert J. Frances, Brian W. Raftery, Andrew E. Nagel, Jordon L. Kruse and Jeff A. Hess. Our advice on every legal issue addressed in this letter is based exclusively on the internal laws of New York and Illinois or the Federal law of the United States except that (i) the opinions in paragraphs 1 through 4 are also based on the General Corporation Law of the State of Delaware and our review of summary compilations of the corporate statutes of the jurisdictions of incorporation of the Subsidiary Guarantors that are incorporated in states other than Delaware, Illinois and New York and (ii) our advice in paragraph 10 is based on the laws as summarized in the Guide to the extent indicated in that paragraph. We advise you that issues addressed by this letter may be governed in whole or in part by other laws, but we express no opinion as to whether any relevant difference exists between the laws upon which our opinions are based and any other laws which may actually govern. Our opinions are subject to all qualifications in Schedule A and do not cover or otherwise address any law or ---------- legal issue which is identified in the attached Schedule C or any provision in ---------- the Credit Agreement or any of the other Transaction Documents of any type identified in Schedule D. Provisions in the Transaction Documents which are not ---------- excluded by KIRKLAND & ELLIS December 18, 1997 Page 8 Schedule D or any other part of this letter or its attachments are called the - ---------- "Relevant Agreement Terms." ------------------------ Our advice on each legal issue addressed in this letter represents our opinion as to how that issue would be resolved were it to be considered by the highest court of the jurisdiction upon whose law our opinion on that issue is based. The manner in which any particular issue would be treated in any actual court case would depend in part on facts and circumstances particular to the case, and this letter is not intended to guarantee the outcome of any legal dispute which may arise in the future. It is possible that some Relevant Agreement Terms of a remedial nature contained in the Collateral Documents may not prove enforceable for reasons other than those cited in this letter should an actual enforcement action be brought, but (subject to all the exceptions, qualifications, exclusions and other limitations contained in this letter) such unenforceability would not in our opinion prevent you from realizing the principal benefits purported to be provided by the Relevant Agreement Terms of a remedial nature contained in the Collateral Documents. This letter speaks as of the time of its delivery on the date it bears. We do not assume any obligation to provide you with any subsequent opinion or advice by reason of any fact about which our Designated Transaction Lawyers did not have actual knowledge at that time, by reason of any change subsequent to that time in any law covered by any of our opinions, or for any other reason. The attached schedules are an integral part of this letter, and any term defined in this letter or any schedule has that defined meaning wherever it is used in this letter or in any schedule to this letter. You may rely upon this letter only for the purpose served by the provisions in the Credit Agreements cited in the initial paragraph of this letter in response to which it has been delivered. Without our written consent: (i) no person other than you may rely on this letter for any purpose and (ii) this letter may not be cited or quoted in any financial statement, prospectus, private placement memorandum or other similar document. Notwithstanding the foregoing, persons who subsequently become Lenders (or participants in accordance with the terms of the Credit Agreements) may rely on this letter as of the time of its delivery on the date hereof as if this letter were addressed to them. Sincerely, /s/ Kirkland & Ellis Kirkland & Ellis SCHEDULE A GENERAL QUALIFICATIONS All of our opinions ("our opinions") in the letter to which this Schedule is attached ("our letter") are subject to each of the qualifications set forth in this Schedule. 1. Bankruptcy and Insolvency Exception. Each of our opinions in our ----------------------------------- letter is subject to the effect of bankruptcy, insolvency, reorganization, receivership, moratorium and other similar laws relating to or affecting creditors' rights. This exception includes: a. the federal Bankruptcy Code and thus comprehends, among others, matters of turn-over, automatic stay, avoiding powers, fraudulent transfer, preference, discharge, conversion of a non-recourse obligation into a recourse claim, limitations on ipso facto and anti-assignment clauses and the coverage of pre-petition security agreements applicable to property acquired after a petition is filed; b. all other federal and state bankruptcy, insolvency, reorganization, receivership, moratorium, arrangement and assignment for the benefit of creditors laws that affect the rights of creditors generally or that have reference to or affect only creditors of specific types of debtors; c. state fraudulent transfer and conveyance laws; and d. judicially developed doctrines in this area, such as substantive consolidation of entities and equitable subordination. 2. Equitable Principles Limitation. Each of our opinions as to the ------------------------------- validity, binding effect or enforceability of any of the Transaction Documents or to the availability of injunctive relief and other equitable remedies is subject to the effect of general principles of equity, whether applied by a court of law or equity. This limitation includes principles: a. governing the availability of specific performance, injunctive relief or other equitable remedies, which generally place the award of such remedies, subject to certain guidelines, in the discretion of the court to which application for such relief is made; b. affording equitable defenses (e.g., waiver, laches and estoppel) against a party seeking enforcement; A-1 c. requiring good faith and fair dealing in the performance and enforcement of a contract by the party seeking its enforcement; d. requiring reasonableness in the performance and enforcement of an agreement by the party seeking enforcement of the contract; e. requiring consideration of the materiality of (i) a breach and (ii) the consequences of the breach to the party seeking enforcement; f. requiring consideration of the commercial impracticability or impossibility of performance at the time of attempted enforcement; and g. affording defenses based upon the unconscionability of the enforcing party's conduct after the parties have entered into the contract. 3. Other Common Qualifications. Each of our opinions as to the validity, --------------------------- binding effect or enforceability of any of the Transaction Documents or to the availability of injunctive relief and other equitable remedies is subject to the effect of rules of law that: a. limit or affect the enforcement of provisions of a contract that purport to waive, or to require waiver of, the obligations of good faith, fair dealing, diligence and reasonableness; b. provide that forum selection clauses in contracts are not necessarily binding on the court(s) in the forum selected; c. limit the availability of a remedy under certain circumstances where another remedy has been elected; d. provide a time limitation after which a remedy may not be enforced; e. limit the right of a creditor to use force or cause a breach of the peace in enforcing rights; f. relate to the sale or disposition of collateral or the requirements of a commercially reasonable sale; g. limit the enforceability of provisions releasing, exculpating or exempting a party from, or requiring indemnification of a party for, liability for its own action or inaction, to the extent the action or inaction involves negligence, recklessness, willful misconduct, unlawful conduct, violation of public policy or litigation against another party determined adversely to such party; A-2 h. may, where less than all of a contract may be unenforceable, limit the enforceability of the balance of the contract to circumstances in which the unenforceable portion is not an essential part of the agreed exchange; i. govern and afford judicial discretion regarding the determination of damages and entitlement to attorneys' fees and other costs; j. may permit a party that has materially failed to render or offer performance required by the contract to cure that failure unless (i) permitting a cure would unreasonably hinder the aggrieved party from making substitute arrangements for performance, or (ii) it was important in the circumstances to the aggrieved party that performance occur by the date stated in the contract; and/or k. may render guarantees unenforceable under circumstances where your actions, failures to act or waivers, amendments or replacement of the Transaction Documents so radically change the essential nature of the terms and conditions of the guaranteed obligations and the related transactions that, in effect, a new relationship has arisen between you and the Borrower and/or other Credit Parties which is substantially and materially different from that presently contemplated by the Transaction Documents. 4. Referenced Provision Qualification. Each opinion regarding the ---------------------------------- validity, binding effect or enforceability of a provision (the "First ----- Provision")in any of the Transaction Documents requiring any Credit --------- Party to perform its obligations under, or to cause any other person to perform its obligations under, any other provision (a "Second ------ Provision") of any Transaction Document, or stating that any action --------- will be taken as provided in or in accordance with such Second Provision are subject to the same qualifications as the corresponding opinion in this letter relating to the validity, binding effect and enforceability of such Second Provision. Requirements in the Transaction Documents that provisions therein may only be waived or amended in writing may not be enforceable to the extent that an oral agreement or an implied agreement by trade practice or course of conduct has been created modifying any such provision. 5. Collateral Qualifications. The opinions and advice contained in our ------------------------- letter are subject to the following advice: a. certain rights of debtors and duties of secured parties referred to in Sections 1-102(3) and 9-501(3) of the New York UCC may not be waived, released, varied or disclaimed by agreement prior to a default; b. our opinions regarding the creation and perfection of security interests are subject to the effect of (i) the limitations on the existence and perfection of security interests in proceeds resulting from the operation of Section 9-306, A-3 Section 9-115 or Section 8-321(1) [1977 version] of any applicable Uniform Commercial Code; (ii) the limitations in favor of buyers imposed by Sections 9-307 and 9-308 of any applicable Uniform Commercial Code; (iii) the limitations with respect to documents, instruments and securities imposed by Section 9-309 and 8-303 of any applicable Uniform Commercial Code; (iv) other rights of persons in possession of money, instruments and proceeds constituting certificated or uncertificated securities; and (v) section 547 of the Bankruptcy Code with respect to preferential transfers and section 552 of the Bankruptcy Code with respect to any Collateral acquired by any Credit Party subsequent to the commencement of a case against or by any Credit Party under the Bankruptcy Code; c. Article 9 of each applicable Uniform Commercial Code requires the filing of continuation statements within specified periods in order to maintain the effectiveness of the filings referred to in our letter; d. Additional filings may be necessary if any Credit Party changes its name, identity or corporate structure or the jurisdiction in which any of its places of business, its chief executive office or any Collateral is located; e. your security interest in certain of the Collateral may not be perfected by the filing of financing statements under the Uniform Commercial Code; f. we express no opinion regarding the perfection of any security interest except as specifically set forth in our letter or regarding the continued perfection of any security interest in any Collateral upon or following the removal of such Collateral to another jurisdiction and we express no opinion regarding the priority of any security interest (except for the limited opinion set forth in paragraph 12 regarding the acquisition of certain security interests free of adverse claims); g. the assignment of any contract, lease, license, or permit may require the approval of the issuer thereof or the other parties thereto (other than to the extent provided in Section 9-318(4) of the New York UCC, security interests in the right to receive the payment of money under any such contract); h. we express no opinion with respect to any self-help remedies to the extent they vary from those available under the New York UCC or with respect to any remedies otherwise inconsistent with the New York UCC to the extent that the New York UCC is applicable thereto; i. a substantial body of case law treats guarantors as "debtors" under the New York UCC, thereby according guarantors rights and remedies of debtors established by the New York UCC; A-4 j. we express no opinion as to whether the guarantee would remain enforceable if you release the primary obligor either directly or by electing a remedy which precludes you from proceeding directly against the primary obligor; k. we express no opinion with respect to the creation, perfection or enforceability of security interests in property in which it is illegal or violative of governmental rules or regulations to grant a security interest (such as, for example, governmental permits and licenses), general intangibles which terminate or become terminable if a security interest is granted therein, property subject to negative pledge clauses of which you have knowledge, vehicles, ships, vessels, barges, boats, railroad cars, locomotives or other rolling stock, aircraft, aircraft engines, propellers and related parts, or other property for which a state or federal statute or treaty provides for registration or certification of title or which specifies a place of filing different than that specified in Section 9-401 of any applicable Uniform Commercial Code, cash which is not in your possession, uncertificated securities, crops, timber to be cut, fixtures, accounts subject to subsection (5) of Section 9-103 of any applicable Uniform Commercial Code, consumer goods, farm products, equipment used in farming operations, accounts or general intangibles arising from or relating to the sale of farm products by a farmer, property identified to a contract with, or in the possession of, the United States of America or any state, county, city, municipality or other governmental body or agency, goods for which a negotiable document of title has been issued, and copyrights, patents and trademarks (except as expressly set forth in opinion paragraph 11), other literary property rights, service marks, know-how, processes, trade secrets, undocumented computer software, unrecorded and unwritten data and information, and rights and licenses thereunder; l. we express no opinion with respect to the enforceability of any security interest in any accounts, chattel paper, documents, instruments or general intangibles with respect to which the account debtor or obligor is the United States of America, any state, county, city, municipality or other governmental body, or any department, agency or instrumentality thereof; m. we express no opinion with respect to the enforceability of any provision of any Transaction Document which purports to authorize you to sign or file financing statements or other documents without the signature of the debtor (except to the extent a secured party may execute and file financing statements without the signature of the debtor under Section 9-402(2) of the applicable Uniform Commercial Code); n. we express no opinion with respect to the enforceability of any provision of any Transaction Document which purports to authorize you to purchase at a A-5 private sale collateral which is not subject to widely distributed standard price quotations or sold on a recognized market; o. we note that the remedies under the Pledge Agreements to sell or offer for sale the Pledged Collateral (as defined in the Pledge Agreements) are subject to compliance with applicable state and federal securities laws; p. we express no opinion in this letter regarding creation or perfection of any security interest in, and the term "Code ---- Collateral" shall not include, any property in which a security ---------- interest may be granted under the Uniform Commercial Code in the New York UCC but which is property in which a security interest may not be granted under Article 9 of the Uniform Commercial Code as in effect in any of the following jurisdictions: the jurisdiction in which such property is located, the jurisdiction in which the debtor is located (as defined in Section 9-103(3)(d) of the New York UCC) or (in the case of a deposit account) the jurisdiction in which the office of the depositary institution at which the deposit account is maintained is located; q. we express no opinion regarding the enforceability of any pre- default waiver of redemption rights; and r. we express no opinion regarding the enforceability of any provisions asserting that Collateral is owned by or is property of a secured party prior to such secured party's foreclosure of such Collateral in accordance with the applicable Uniform Commercial Code or, in the case of cash collateral, the application of such cash collateral in payment of the secured obligations. A-6 SCHEDULE B ASSUMPTIONS For purposes of our letter, we have relied, without investigation, upon each of the following assumptions: 1. The Borrower is existing and in good standing in its jurisdiction of incorporation. 2. You are existing and in good standing in your jurisdiction of organization. 3. The Borrower has the full corporate power and authority to execute, deliver and to perform its obligations under each of the Transaction Documents to which it is a party and each of the Transaction Documents to which it is a party has been duly authorized by all necessary action and has been duly executed and delivered by the Borrower. 4. You have full power and authority (including without limitation under the laws of your jurisdiction of organization) to execute, deliver and to perform your obligations under each of the Transaction Documents to which you are a party and each of the Transaction Documents to which you are a party has been duly authorized by all necessary action on your part and has been duly executed and duly delivered by you. 5. The Transaction Documents to which you are a party constitute valid and binding obligations of yours and are enforceable against you in accordance with their terms (subject to qualifications, exclusions and other limitations similar to those applicable to our letter). 6. You have complied with all legal requirements pertaining to your status as such status relates to your rights to enforce the Transaction Documents to which you are a party against any of the Credit Parties. 7. Each document submitted to us for review is accurate and complete, each such document that is an original is authentic, each such document that is a copy conforms to an authentic original, and all signatures (other than those of or on behalf of the Credit Parties) on each such document are genuine. 8. There has not been any mutual mistake of fact or misunderstanding, fraud, duress or undue influence. 9. The conduct of the parties to the Transaction Documents has complied with any requirement of good faith, fair dealing and conscionability. B-1 10. You have acted in good faith and without notice of any defense against the enforcement of any rights created by, or adverse claim to any property or security interest transferred or created as part of, the transactions effected under the Transaction Documents (herein called the "Transactions"). ------------ 11. There are no agreements or understandings among the parties, written or oral, and there is no usage of trade or course or prior dealing among the parties that would, in either case, define, supplement or qualify the terms of the Credit Agreements or any of the other Transaction Documents. 12. With respect to the opinions set forth in opinion paragraphs 6 and 7, we assume that no Credit Party will in the future take any discretionary action (including a decision not to act) permitted under the Transaction Documents that would result in a violation of law or constitute a breach or default under any other agreements or court orders to which such Credit Party may be subject. 13. With respect to the opinions set forth in opinion paragraphs 5, 6 and 7, we assume that each Credit Party will in the future obtain all permits and governmental approvals required, and will in the future take all actions required, relevant to the consummation of the Transactions or performance of the Transaction Documents. 14. Each Credit Party's Certificate (or Articles, as the case may be) of Incorporation (or equivalent governing instrument), all amendments to that Certificate (or those Articles, as the case may be) of Incorporation all resolutions adopted establishing classes or series of stock under that Certificate (or those Articles, as the case may be) of Incorporation and each Credit Party's Bylaws and all amendments to its Bylaws have been adopted in accordance with all applicable legal requirements (except that this assumption is limited to those of the preceding items with respect to the adoption of which we did not have involvement). 15. With respect to the opinions set forth in opinion paragraph 18, we assume that you are acquiring Notes for investment and not with a view to the distribution thereof, and that each of you is an "Accredited Investor" as such term is defined in Regulation D under the Securities Act of 1933, as amended. 16. Collateral Assumptions. The opinions and advice contained in our ---------------------- letter are subject to the following assumptions: a. Each applicable Credit Party (i) has the requisite title and rights to any property involved in the Transactions including, without limiting the generality of the foregoing, each item of Collateral existing on the date hereof and (ii) will have the requisite title and rights to each item of Collateral arising after the date hereof. B-2 b. The descriptions of Collateral in the Collateral Documents and the Financing Statements reasonably describe the property intended to be described as Collateral and the legal descriptions of real estate described in the Financing Statements to be filed as fixture filings are accurate. c. Value (as defined in Section 1-201(44) of the New York UCC) has been given by you to each Credit Party for the security interests and other rights in and assignments of Collateral described in or contemplated by the Collateral Documents. d. The representations made by each Credit Party in the Security Agreements to which it is a party with respect to its chief executive office and location of equipment and inventory are and will remain true and correct. B-3 SCHEDULE C EXCLUDED LAW AND LEGAL ISSUES None of the opinions or advice contained in our letter covers or otherwise addresses any of the following laws, regulations or other governmental requirements or legal issues: 1. except with respect to the Investment Company Act of 1940, as amended, to the extent of our opinion in opinion paragraph 14, except with respect to the Public Utility Holdings Company Act of 1935, as amended, to the extent of our opinion in opinion paragraph 15, and except with respect to the Securities Act of 1933, as amended, and the Trust Indenture Act of 1939, as amended, to the extent of our opinions in opinion paragraph 18, federal securities laws and regulations (including all other laws and regulations administered by the United States Securities and Exchange Commission), state "Blue Sky" laws and regulations, and laws and regulations relating to commodity (and other) futures and indices and other similar instruments; 2. pension and employee benefit laws and regulations (e.g., ERISA); 3. federal and state antitrust and unfair competition laws and regulations; 4. compliance with fiduciary duty requirements; 5. the statutes and ordinances, the administrative decisions and the rules and regulations of counties, towns, municipalities and special political subdivisions and judicial decisions to the extent that they deal with any of the foregoing; 6. federal and state environmental, land use and subdivision, tax, racketeering (e.g., RICO), health and safety (e.g., OSHA), and labor ---- ---- laws and regulations; 7. federal patent, trademark (except to the extent of our opinion in paragraph 11) and copyright, state trademark, and other federal and state intellectual property laws and regulations; 8. federal and state laws, regulations and policies concerning (i) national and local emergency, (ii) possible judicial deference to acts of sovereign states, and (iii) criminal and civil forfeiture laws; 9. other federal and state statutes of general application to the extent they provide for criminal prosecution (e.g., mail fraud and wire fraud statutes); C-1 10. any laws, regulations, directives and executive orders that prohibit or limit the enforceability of obligations based on attributes of the party seeking enforcement (e.g., the Trading with the Enemy Act and the International Emergency Economic Powers Act); and 11. the effect of any law, regulation or order which hereafter is enacted, promulgated or issued. We have not undertaken any research for purposes of determining whether any Credit Party or any of the Transactions which may occur in connection with the Credit Agreements or any of the other Transaction Documents is subject to any law or other governmental requirement other than to those laws and requirements which in our experience would generally be recognized as applicable both to general business corporations which are not engaged in regulated business activities and to transactions of the type contemplated by the Transaction Documents to occur on the date hereof, and none of our opinions covers any such law or other requirement unless (i) one of our Designated Transaction Lawyers had actual knowledge of its applicability at the time our letter was delivered on the date it bears and (ii) it is not excluded from coverage by other provisions in our letter or in any Schedule to our letter. C-2 SCHEDULE D EXCLUDED PROVISIONS None of the opinions in the letter to which this Schedule is attached covers or otherwise addresses any of the following types of provisions which may be contained in the Transaction Documents: 1. Indemnification for negligence, willful misconduct or other wrongdoing or strict product liability or any indemnification for liabilities arising under securities laws. 2. Provisions mandating contribution towards judgments or settlements among various parties. 3. Waivers of (i) legal or equitable defenses, (ii) rights to damages, (iii ) rights to counter claim or set off, (iv) statutes of limitations, (v) rights to notice, (vi) the benefits of statutory, regulatory, or constitutional rights, unless and to the extent the statute, regulation, or constitution explicitly allows waiver, and (vii) other benefits to the extent they cannot be waived under applicable law. 4. Provisions providing for forfeitures or the recovery of amounts deemed to constitute penalties, or for liquidated damages to the extent deemed to be penalties, acceleration of future amounts due (other than principal) without appropriate discount to present value, and, (to the extent deemed to constitute penalties) late charges, prepayment charges, and increased interest rates upon default. 5. Time-is-of-the-essence clauses. 6. Provisions which provide a time limitation after which a remedy may not be enforced. 7. Agreements to submit to the jurisdiction of any particular court or other governmental authority (either as to personal jurisdiction or subject matter jurisdiction); waiver of service of process requirements which would otherwise be applicable; and provisions otherwise purporting to affect the jurisdiction and venue of courts. 8. Provisions appointing one party as an attorney-in-fact for an adverse party or providing that the decision of any particular person will be conclusive or binding on others. 9. Provisions purporting to limit rights of third parties who have not consented thereto or purporting to grant rights to third parties. D-1 10. Provisions which purport to award attorneys' fees solely to one party. 11. Provisions purporting to create a trust or constructive trust without compliance with applicable trust law. 12. Provisions that provide for the appointment of a receiver. 13. Provisions or agreements regarding proxies, shareholders agreements, shareholder voting rights, voting trusts, and the like. 14. Provisions in any of the Transaction Documents requiring any Credit Party to perform its obligations under, or to cause any other person to perform its obligations under, or stating that any action will be taken as provided in or in accordance with, any agreement or other document that is not a Transaction Document. 15. Provisions, if any, which are contrary to the public policy of any jurisdiction. D-2 SCHEDULE E COLLATERAL DOCUMENTS 1. Holdings Guaranty 2. Holdings Security Agreement 3. Holdings Pledge Agreement 4. Company Pledge Agreement 5. Company Security Agreement 6. Company Patent and Trademark Security Agreement 7. Subsidiary Guaranty 8. Subsidiary Pledge Agreement 9. Subsidiary Security Agreement 10. Subsidiary Patent and Trademark Security Agreement 11. Intercreditor Agreement 12. New York Mortgage E-1 SCHEDULE F RELATED DOCUMENTS 1. Junior Subordinated Seller Notes 2. Senior Subordinated Note Indenture 3. Senior Subordinated Notes 4. Discount Note Indenture 5. Senior Subordinated Discount Notes F-1 SCHEDULE G GOOD STANDING JURISDICTIONS 1. Sealy Corporation ----------------- Delaware 2. Sealy Mattress Company ---------------------- Ohio 3. A. Brandwein & Co. ------------------ Illinois Wisconsin 4. Sealy Mattress Company of Albany, Inc. -------------------------------------- New York 5. Ohio-Sealy Mattress Manufacturing Co. ------------------------------------- Georgia 6. Ohio-Sealy Mattress Company of Puerto Rico ------------------------------------------ Ohio 7. Ohio-Sealy Mattress Manufacturing Co., Inc. ------------------------------------------- Massachusetts 8. Sealy Mattress Company of Michigan, Inc. ---------------------------------------- Michigan 9. Sealy Mattress Company of Memphis --------------------------------- Louisiana Tennessee G-1 10. Ohio-Sealy Mattress Manufacturing Co. -- Houston ------------------------------------------------ Texas 11. The Ohio Mattress Company Licensing and Components Group -------------------------------------------------------- Colorado Delaware Illinois Indiana Ohio Pennsylvania 12. Sealy of Maryland and Virginia, Inc. ------------------------------------ Maryland 13. Sealy of Minnesota, Inc. ------------------------ Minnesota 14. Ohio-Sealy Mattress Manufacturing Co. -- Fort Worth --------------------------------------------------- Texas 15. Sealy Mattress Company of Kansas City, Inc. ------------------------------------------- Kansas Missouri 16. Sealy Mattress Manufacturing Company, Inc. ------------------------------------------ Arizona California Colorado Delaware Florida Hawaii Iowa New Jersey North Carolina Oregon Pennsylvania Utah G-2 17. Sealy Mattress Company of Illinois ---------------------------------- Illinois Wisconsin 18. The Stearns & Foster Bedding Company ------------------------------------ Arizona California Delaware Florida Georgia Illinois New Jersey Ohio Texas 19. The Stearns & Foster Upholstery Furniture Company ------------------------------------------------- Mississippi Ohio 20. Sealy, Inc. ----------- Ohio G-3 SCHEDULE H FILING OFFICES Reflected on Attached Chart H-1 CALFEE, HALTER & GRISWOLD LLP Attorneys at Law ------------------------------------------------- 1400 McDonald Investment Center 800 Superior Avenue Cleveland, Ohio 44114-2688 216/622-8200 Fax 216/241-0816 Direct Dial No. 216/622-8446 December 18, 1997 To the Administrative Agent, the Syndication Agent, the Documentation Agent and each of the Lenders party to the Credit Agreement or the AXEL Credit Agreement Ladies and Gentlemen: We have acted as counsel to Sealy Mattress Company, an Ohio corporation (the "Borrower"), in connection with the execution and delivery of (i) that certain Credit Agreement, dated as of December 18, 1997 (the "Credit Agreement") and (ii) that certain AXEL Credit Agreement dated, as of December 18, 1997 (the "AXEL Credit Agreement"), each among the Borrower, Sealy Corporation, a Delaware corporation and shareholder of the Borrower ("Sealy Corp."), Goldman Sachs Credit Partners, L.P., as arranger and Syndication Agent, Morgan Guaranty Trust Company of New York, as Administrative Agent, Bankers Trust Company, as Documentation Agent, and those financial institutions signatory thereto (the "Lenders"). Except as specified herein to the contrary, all capitalized terms used in this opinion shall have the meanings given lo them in the Credit Agreement and the AXEL Credit Agreement. This opinion is being delivered to you pursuant to and in satisfaction of subsection 4.1P of the Credit Agreement and subsection 3.1P of the AXEL Credit Agreement. In connection with this opinion, we have examined originals, or copies certified or otherwise authenticated to our satisfaction, of the following documents and records: (a) the Articles of Incorporation of the Borrower, certified as being true and correct as of December 17, 1997, by the Secretary of State of Ohio, and certified as being true and correct as of the date hereof by the Vice President and General Counsel of the Borrower; (b) a copy of the Code of Regulations of the Borrower, certified as being true and correct as of the date hereof by the Vice President and General Counsel of the Borrower; CALFEE, HALTER & GRISWOLD LLP December 18, 1997 Page 2 (c) a copy of resolutions adopted by the Board of Directors of the Borrower by written consent on December 18, 1997, authorizing, inter alia, the ----- ---- Borrower's execution and delivery of and performance under each of the Loan Documents to which the Borrower is a party, certified as being true and correct as of the date hereof by the Vice President and General Counsel of the Borrower; (d) a Certificate from the Secretary of State of the State of Ohio, dated December 17, 1997, with respect to the status of the Borrower as a corporation in good standing under the laws of the State of Ohio; (e) a Certificate executed by the Vice President and General Counsel of the Borrower, a copy of which Certificate is attached hereto as Exhibit A (the "General Counsel Certificate"); (f) an executed copy of the Credit Agreement and the AXEL Credit Agreement; (g) executed copies of the Notes to be issued on the Closing Date; (h) an executed copy of the Company Pledge Agreement; (i) an executed copy of the Company Security Agreement; (j) an executed copy of the Company Patent and Trademark Security Agreement; (k) the Closing Date Mortgage executed by Company; (l) the Intercreditor Agreement; (m) each of the Uniform Commercial Code financing statements executed by the Borrower (as itemized on Schedule I hereto) (the "Financing Statements"), and filed, respectively, in the offices referred to on such Financing Statements; and (n) such other documents and records, and such other certifications or representations as to factual matters of public officials or officers of the Borrower as we have deemed necessary to appropriate for the purpose of rendering this opinion. CALFEE, HALTER & GRISWOLD LLP December 18, 1997 Page 3 The documents, instruments, and financing Statements set forth in subparagraphs (f) through (m) above are collectively referred to as the "Loan Documents." In rendering this opinion we have relied upon the above-described certified copies of the Articles of Incorporation and Code of Regulations, as amended, of the Borrower and certified copies of the authorizing resolutions of the Borrower, and factual good standing certificates with respect to the Borrower, and, with respect to certain legal matters, the General Counsel Certificate. Any opinion hereinafter set forth with respect to the incorporation, existence, qualification to do business or good standing of the Borrower, is based solely thereon and we have not conducted an independent review or investigation of the matters set forth therein. Insofar as an opinion relates to matters set forth in the General Counsel Certificate, we have relied, with your consent, solely upon such General Counsel Certificate with respect to the accuracy of the factual matters and legal conclusions contained therein and, except as specifically set forth in the following sentence of this opinion, we have not independently verified or established the accuracy of such matters. We do note that the stock records and corporate records of the Borrower are incomplete and we are unable to verify the accuracy of certain information contained in the General Counsel Certificate. However, nothing has come to the attention of the attorneys in this firm who have directly and substantially participated in this transaction (consisting of Lawrence N. Schultz, Dale C. LaPorte, Thomas A. Cicarella, Douglas A. Neary, M. Ann Harlan and Tracy W. Smirnoff) providing clear evidence that the statements in the General Counsel's Certificate are incorrect with respect to such matters. Except to the extent expressly set forth herein, we have not undertaken any independent investigation with respect to such matters, and no inference as to our knowledge should be drawn from the fact of our legal representation of the Borrower in connection with other matters. In rendering our opinions, we have not conducted an investigation into the specific types of business and activities in which the Borrower engages or the manner in which it conducts business as would enable us to render an opinion (and, accordingly, we express no opinion) as to the applicability of any law or regulation of the United States or the State of Ohio not of general applicability to business corporations. On the basis of and in reliance upon the foregoing, and subject to the assumptions, limitations, qualifications and exceptions set forth below, we are of the opinion that: 1. The Borrower is a corporation validly existing and in good standing under the laws of the State of Ohio. Based upon our review of the Articles of Incorporation and Code of Regulations of the Borrower, the Borrower has the corporate power to own its property and assets of which we are aware and to transact the business in which, to our actual knowledge, it is CALFEE, HALTER & GRISWOLD LLP December 18, 1997 Page 4 engaged or presently proposes to engage (as such business is described in the Offering Circular dated December 11, 1997, relating to the Senior Subordinated Notes and Discount Notes). 2. The Borrower has the corporate power and authority to execute, deliver and perform the Loan Documents to which it is a party. The Borrower has duly executed the Loan Documents. 3. The execution, delivery and performance by the Borrower of those Loan Documents to which it is a party, and its Consummation of the transactions provided for therein, have been authorized by all necessary corporate action on behalf of the Borrower. 4. Neither the execution nor the delivery by the Borrower of the Loan Documents will conflict with, result in a breach or violation of, or constitute a default under, any of the terms, conditions or provisions of any present statute, rule or regulation binding on the Borrower. In rendering the opinions set forth above, we have assumed, without any independent investigation but without any knowledge to the contrary, that: (a) all records and documents that have been submitted to us as originals are authentic, and all records and documents that have been submitted to us as copies conform to authentic, original records and documents; (b) no action has been taken which amends, revokes or otherwise terminates or affects any of the documents or records which have reviewed; (c) the genuineness of all facsimile signatures; (d) the conformity to original documents of all documents submitted to us as certified, conformed, facsimile or photostatic copies; (e) the authenticity of the originals of such copies; and (f) all persons executing agreements, instruments or documents examined or relied upon by us had the capacity to sign such agreements, instruments or documents, and all such signatures are genuine (other than with respect to the signatures of officers of the Borrower). We render no opinion as to whether any of the Loan Documents is the valid, binding and enforceable obligation of the Borrower. CALFEE, HALTER & GRISWOLD LLP December 18, 1997 Page 5 We are admitted to the practice of law in the State of Ohio and the opinions expressed herein relate solely to the laws of the State of Ohio, and the federal laws of the United States, and no opinion is expressed with respect to any applicable law of any other jurisdiction or with respect to any law not of general applicability to business corporations which would impact the opinions provided herein. The information set forth herein is as of the date hereof. We assume no obligation to advise you of changes that may thereafter be brought to our attention. Our opinions are based on statutory laws and judicial decisions that are in effect on the date hereof, and we express no opinion with respect to any law, regulation, rule or governmental policy that may be enacted or adopted after the date hereof nor do we assume any responsibility to advise you of future changes in our opinions. A copy of this opinion letter may be delivered by any of you to any Eligible Assignee (as defined in the Credit Agreement or the AXEL Credit Agreement, as applicable) in connection with and at the time of any assignment and delegation by any of you as a Lender to such Eligible Assignee of all or a portion of your Loans and Commitments in accordance with the provisions of the Credit Agreement or the AXEL Credit Agreement, and such Eligible Assignee may rely on the opinions expressed above as if this opinion letter were addressed and delivered to such Eligible Assignee on the date hereof. This opinion is limited to the matters expressly stated herein. Except as set forth in the immediately preceding paragraph, the opinions expressed herein are solely for use by the Administrative Agent and the Lenders in connection with the Credit Agreement and may not be used, quoted or relied upon by you for any other purpose, or by any other person or entity for any purpose, without our prior written consent. Very truly yours, /s/ Calfee, Halter & Griswold LLP CALFEE, HALTER & GRISWOLD LLP Schedule I [Copies of 75 UCC-1 Filings received December 18, 1997--List to be compiled and supplied post-closing.] Exhibit A CERTIFICATE OF THE VICE PRESIDENT --------------------------------- AND GENERAL COUNSEL OF SEALY MATTRESS COMPANY --------------------------------------------- AND SEALY CORPORATION --------------------- TO: Calfee, Halter & Griswold LLP I, Kenneth L. Walker, do hereby certify that I am the duly elected and qualified Vice President and General Counsel of Sealy Mattress Company, an Ohio corporation (the "Borrower"), and Sealy Corporation, a Delaware corporation ("Sealy Corp."), and that as of the date hereof: 1. Attached hereto as Appendix 1 is a true and correct copy of the Articles of Incorporation of the Borrower as in effect on the date hereof, certified as of December 17th, 1997, by the Secretary of State of the State of ---- Ohio. 2. Attached hereto as Appendix 2 is a true and correct copy of the Code of Regulations, as amended, of the Borrower as in effect on the date hereof. 3. Attached hereto as Appendix 3 is a true and correct copy of resolutions duly adopted by the Board of Directors of the Borrower by written consent on December 18th, 1997, which resolutions have not been modified, revoked or ---- rescinded and remain in full force and effect on the date hereof. 4. The officers listed below are duly elected officers of the Borrower, holding the offices indicated opposite their respective names, duly authorized by the Directors of the Borrower to execute, deliver and perform the Loan Documents on behalf of the Borrower and to take all further action and to execute, deliver and perform all other documents as they deem advisable in connection with the transactions provided for therein, and the signatures set forth below are the genuine signatures of such officers: Offices Officer Signature - ------- ------- --------- President and Chief Executive Ronald L. Jones _______________________ Officer Vice President and Treasurer Ronald H. Stolle /s/ Ronald H. Stolle ----------------------- 5. The individuals listed below are the only directors of the Borrower and have all been duly elected by Sealy Corp., the sole shareholder of the Borrower: December 18, 1997 Page 7 Directors Signature --------- --------- Ronald L. Jones _______________________ Kenneth L. Walker /s/ Kenneth L. Walker ----------------------- Ronald H. Stolle /s/ Ronald H. Stolle ----------------------- 6. Sealy Corp. owns 1,000 shares of common stock, par value one dollar ($1.00) per share (the "Shares"), of the Borrower consisting of all of the issued and outstanding shares of capital stock of the Borrower. All of the Shares have been fully paid for by Sealy Corp. The Borrower has not issued or authorized any outstanding options, warrants or similar rights to subscribe for or purchase any capital stock of the borrower or outstanding securities convertible into, exchangeable for, or evidencing the right to subscribe for, any shares of capital stock or other equity securities of the Borrower. Please note, however, that the stock records and the corporate records of the Borrower are incomplete and I am unable to verify the accuracy of certain of the information including, without limitation, information regarding the election of directors and the issuance of shares of the Borrower. However, nothing has come to my attention which leads me to believe the statements set forth in this certificate are incorrect as to such matters. All capitalized terms not otherwise defined in this Certificate are used herein as defined in the opinion of Calfee, Halter & Griswold LLP delivered pursuant to subsection 4.1P of that certain Credit Agreement, dated as of December 18, 1997 (the "Credit Agreement") and subsection 3.1P of that certain AXEL Credit Agreement, dated as of December 18, 1997 (the "AXEL Credit Agreement"). The undersigned acknowledges and agrees that Calfee, Halter & Griswold LLP intend to, and may, rely on this Certificate and the matters contained herein, in rendering opinions in connection with the transactions contemplated by the Credit Agreement and the AXEL Credit Agreement. SEALY MATTRESS COMPANY By:/s/ Kenneth L. Walker -------------------------- Kenneth L. Walker Vice President and General Counsel Effective Date:_____________, 1997 December 18, 1997 Page 8 SEALY CORPORATION By:/s/ Kenneth L. Walker --------------------------- Kenneth L. Walker Vice President and General Counsel EXHIBIT IX [FORM OF OPINION OF O'MELVENY & MYERS LLP] [O'M&M Letterhead] [Date] 1 9 9 7 [file number] [doc ID] Goldman Sachs Credit Partners L.P., as Arranger and Syndication Agent Morgan Guaranty Trust Company of New York, as Administrative Agent Bankers Trust Company, as Documentation Agent and The Lenders Party to the Credit Agreement Referenced Below Re: Loans to Sealy Mattress Company ------------------------------- Ladies and Gentlemen: We have acted as counsel to Goldman Sachs Credit Partners L.P., as arranger and syndication agent (in such capacity, "Syndication Agent"), and Morgan Guaranty Trust Company of New York, as administrative agent (in such capacity, "Administrative Agent"; collectively, Syndication Agent and Administrative Agent are referred to herein as "Agents"), in connection with the preparation and delivery of (i) a Credit Agreement dated as of December 18, 1997 (the "Revolver/Tranche A Term Loan Credit Agreement") and (ii) an AXEL Credit Agreement dated as of December 18, 1997 (the "AXEL Credit Agreement"; together with the IX-1 Revolver/Tranche A Term Loan Credit Agreement, the "Credit Agreements"), each among Sealy Mattress Company, an Ohio corporation ("Company"), Sealy Corporation, a Delaware corporation ("Holdings"), the financial institutions listed therein as lenders, Agents and Bankers Trust Company, as documentation agent, and in connection with the preparation and delivery of certain related documents. We have participated in various conferences with representatives of Company and Agents and conferences and telephone calls with Kirkland & Ellis, counsel to Company and Holdings, during which the Credit Agreements and related matters have been discussed, and we have also participated in the meeting held on the date hereof (the "Closing") incident to the funding of the initial loans made under the Credit Agreements. We have reviewed the forms of the Credit Agreements and the respective exhibits thereto, including the forms of the promissory notes annexed thereto (the "Notes"), and the opinions of Kirkland & Ellis and Calfee, Halter & Griswold LLP (collectively, the "Opinions") and the officers' certificates and other documents delivered at the Closing. We have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals or copies and the due authority of all persons executing the same, and we have relied as to factual matters on the documents that we have reviewed. Although we have not independently considered all of the matters covered by the Opinions to the extent necessary to enable us to express the conclusions therein stated, we believe that the Credit Agreements and the respective exhibits thereto are in substantially acceptable legal form and that the Opinions and the officers' certificates and other documents delivered in connection with the execution and delivery of, and as conditions to the making of the initial loans under, the Credit Agreements and the Notes are substantially responsive to the respective requirements of the Credit Agreements. Respectfully submitted, IX-2 EXHIBIT X [FORM OF ASSIGNMENT AGREEMENT] ASSIGNMENT AGREEMENT This ASSIGNMENT AGREEMENT (this "AGREEMENT") is entered into by and between the parties designated as Assignor ("ASSIGNOR") and Assignee ("ASSIGNEE") above the signatures of such parties on the Schedule of Terms attached hereto and hereby made an integral part hereof (the "SCHEDULE OF TERMS") and relates to that certain Credit Agreement described in the Schedule of Terms (said Credit Agreement, as amended, supplemented or otherwise modified to the date hereof and as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined). IN CONSIDERATION of the agreements, provisions and covenants herein contained, the parties hereto hereby agree as follows: SECTION 1. ASSIGNMENT AND ASSUMPTION. ------------------------- (a) Effective upon the Settlement Date specified in Item 4 of the Schedule of Terms (the "SETTLEMENT DATE"), Assignor hereby sells and assigns to Assignee, without recourse, representation or warranty (except as expressly set forth herein), and Assignee hereby purchases and assumes from Assignor, that percentage interest in all of Assignor's rights and obligations as a Lender arising under the Credit Agreement and the other Loan Documents with respect to Assignor's Commitments and outstanding Loans, if any, which represents, as of the Settlement Date, the percentage interest specified in Item 3 of the Schedule of Terms of all rights and obligations of Lenders arising under the Credit Agreement and the other Loan Documents with respect to the Commitments and any outstanding Loans (the "ASSIGNED SHARE"). Without limiting the generality of the foregoing, the parties hereto hereby expressly acknowledge and agree that any assignment of all or any portion of Assignor's rights and obligations relating to Assignor's Revolving Loan Commitment shall include (i) in the event Assignor is an Issuing Lender with respect to any outstanding Letters of Credit (any such Letters of Credit being "ASSIGNOR LETTERS OF CREDIT"), the sale to Assignee of a participation in the Assignor Letters of Credit and any drawings thereunder as contemplated by subsection 3.1C of the Credit Agreement and (ii) the sale to Assignee of a ratable portion of any participations previously purchased by Assignor pursuant to said subsection 3.1C with respect to any Letters of Credit other than the Assignor Letters of Credit. X-1 (b) In consideration of the assignment described above, Assignee hereby agrees to pay to Assignor, on the Settlement Date, the principal amount of any outstanding Loans included within the Assigned Share, such payment to be made by wire transfer of immediately available funds in accordance with the applicable payment instructions set forth in Item 5 of the Schedule of Terms. (c) Assignor hereby represents and warrants (i) that Item 3 of the Schedule of Terms correctly sets forth the amount of the Commitments, the outstanding Term Loan and the Pro Rata Share corresponding to the Assigned Share and (ii) that the assignment complies with clause (a) or (b), as applicable, of subsection 10.1B(i). (d) Assignor and Assignee hereby agree that, upon giving effect to the assignment and assumption described above, (i) Assignee shall be a party to the Credit Agreement and shall have all of the rights and obligations under the Loan Documents, and shall be deemed to have made all of the covenants and agreements contained in the Loan Documents, arising out of or otherwise related to the Assigned Share, and (ii) Assignor shall be absolutely released from any of such obligations, covenants and agreements assumed or made by Assignee in respect of the Assigned Share. Assignee hereby acknowledges and agrees that the agreement set forth in this Section 1(d) is expressly made for the benefit of Company, Agents, Assignor and the other Lenders and their respective successors and permitted assigns. (e) Assignor and Assignee hereby acknowledge and confirm their understanding and intent that (i) this Agreement shall effect the assignment by Assignor and the assumption by Assignee of Assignor's rights and obligations with respect to the Assigned Share, (ii) any other assignments by Assignor of a portion of its rights and obligations with respect to the Commitments and any outstanding Loans shall have no effect on the Commitments, the outstanding Term Loan and the Pro Rata Share corresponding to the Assigned Share as set forth in Item 3 of the Schedule of Terms or on the interest of Assignee in any outstanding Revolving Loans corresponding thereto, and (iii) from and after the Settlement Date, Administrative Agent shall make all payments under the Credit Agreement in respect of the Assigned Share (including without limitation all payments of principal and accrued but unpaid interest, commitment fees and letter of credit fees with respect thereto) (A) in the case of any such interest and fees that shall have accrued prior to the Settlement Date, to Assignor, and (B) in all other cases, to Assignee; provided that Assignor and Assignee shall make -------- payments directly to each other to the extent necessary to effect any appropriate adjustments in any amounts distributed to Assignor and/or Assignee by Administrative Agent under the Loan Documents in respect of the Assigned Share in the event that, for any reason whatsoever, the payment of consideration contemplated by Section 1(b) occurs on a date other than the Settlement Date. X-2 SECTION 2. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS. -------------------------------------------------- (a) Assignor represents and warrants that it is the legal and beneficial owner of the Assigned Share, free and clear of any adverse claim. (b) Assignor shall not be responsible to Assignee for the execution, effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of any of the Loan Documents or for any representations, warranties, recitals or statements made therein or made in any written or oral statements or in any financial or other statements, instruments, reports or certificates or any other documents furnished or made by Assignor to Assignee or by or on behalf of Company or any of its Subsidiaries to Assignor or Assignee in connection with the Loan Documents and the transactions contemplated thereby or for the financial condition or business affairs of Company or any other Person liable for the payment of any Obligations, nor shall Assignor be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained in any of the Loan Documents or as to the use of the proceeds of the Loans or the use of the Letters of Credit or as to the existence or possible existence of any Event of Default or Potential Event of Default. (c) Assignee represents and warrants that it is an Eligible Assignee; that it has experience and expertise in the making of loans such as the Loans; that it has acquired the Assigned Share for its own account in the ordinary course of its business and without a view to distribution of the Loans within the meaning of the Securities Act or the Exchange Act or other federal securities laws (it being understood that, subject to the provisions of subsection 10.1 of the Credit Agreement, the disposition of the Assigned Share or any interests therein shall at all times remain within its exclusive control); and that it has received, reviewed and approved a copy of the Credit Agreement (including all Exhibits and Schedules thereto). (d) Assignee represents and warrants that it has received from Assignor such financial information regarding Company and its Subsidiaries as is available to Assignor and as Assignee has requested, that it has made its own independent investigation of the financial condition and affairs of Company and its Subsidiaries in connection with the assignment evidenced by this Agreement, and that it has made and shall continue to make its own appraisal of the creditworthiness of Company and its Subsidiaries. Assignor shall have no duty or responsibility, either initially or on a continuing basis, to make any such investigation or any such appraisal on behalf of Assignee or to provide Assignee with any other credit or other information with respect thereto, whether coming into its possession before the making of the initial Loans or at any time or times thereafter, and Assignor shall not have any responsibility with respect to the accuracy of or the completeness of any information provided to Assignee. X-3 (e) Each party to this Agreement represents and warrants to the other party hereto that it has full power and authority to enter into this Agreement and to perform its obligations hereunder in accordance with the provisions hereof, that this Agreement has been duly authorized, executed and delivered by such party and that this Agreement constitutes a legal, valid and binding obligation of such party, enforceable against such party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity. SECTION 3. MISCELLANEOUS. ------------- (a) Each of Assignor and Assignee hereby agrees from time to time, upon request of the other such party hereto, to take such additional actions and to execute and deliver such additional documents and instruments as such other party may reasonably request to effect the transactions contemplated by, and to carry out the intent of, this Agreement. (b) Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated, except by an instrument in writing signed by the party (including, if applicable, any party required to evidence its consent to or acceptance of this Agreement) against whom enforcement of such change, waiver, discharge or termination is sought. (c) Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed. For the purposes hereof, the notice address of each of Assignor and Assignee shall be as set forth on the Schedule of Terms or, as to either such party, such other address as shall be designated by such party in a written notice delivered to the other such party. In addition, the notice address of Assignee set forth on the Schedule of Terms shall serve as the initial notice address of Assignee for purposes of subsection 10.8 of the Credit Agreement. (d) In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. (e) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION X-4 SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. (f) This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns. (g) This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. (h) This Agreement shall become effective upon the date (the "EFFECTIVE DATE") upon which all of the following conditions are satisfied: (i) the execution of a counterpart hereof by each of Assignor and Assignee, (ii) the execution of a counterpart hereof by Company as evidence of its consent hereto to the extent required under subsection 10.1B(i) of the Credit Agreement, (iii) the receipt by Administrative Agent of the processing and recordation fee referred to in subsection 10.1B(i) of the Credit Agreement, (iv) in the event Assignee is a Non-US Lender (as defined in subsection 2.7B(iii)(a) of the Credit Agreement), the delivery by Assignee to Administrative Agent of such forms, certificates or other evidence with respect to United States federal income tax withholding matters as Assignee may be required to deliver to Administrative Agent pursuant to said subsection 2.7B(iii)(a), (v) the execution of a counterpart hereof by Administrative Agent as evidence of its acceptance hereof in accordance with subsection 10.1B(ii) of the Credit Agreement, and (vi) the receipt by Administrative Agent of originals or telefacsimiles of the counterparts described above and authorization of delivery thereof, and (vii) the recordation by Administrative Agent in the Register of the pertinent information regarding the assignment effected hereby in accordance with subsection 10.1B(ii) of the Credit Agreement. [Remainder of page intentionally left blank] X-5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized, such execution being made as of the Effective Date in the applicable spaces provided on the Schedule of Terms. X-6 SCHEDULE OF TERMS 31. BORROWER: Sealy Mattress Company, an Ohio corporation -------- 32. NAME AND DATE OF CREDIT AGREEMENT: Credit Agreement dated as of December --------------------------------- 18, 1997 by and among the Borrower, Sealy Corporation, a Delaware corporation, as guarantor, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, the financial institutions listed therein, Morgan Guaranty Trust Company of New York, as administrative agent, and Bankers Trust Company, as documentation agent. AMOUNTS: ------- RE: REVOLVING RE: TERM LOANS LOAN -------------- ------- (a) Aggregate Commitments of all all Lenders: $______ $_____ (b) Assigned Share/Pro Rata Share: ______% _____% (c) Amount of Assigned Share of Commitments: $______ $_____ (d) Amount of Assigned Share of Term Loans: $______ 34. SETTLEMENT DATE: ____________, [199_][200_] --------------- 35. PAYMENT INSTRUCTIONS: -------------------- ASSIGNOR: ASSIGNEE: See Annex A See Annex B 36. NOTICE ADDRESSES: ---------------- ASSIGNOR: ASSIGNEE: See Annex A See Annex B X-7 37. SIGNATURES: ---------- [NAME OF ASSIGNOR], [NAME OF ASSIGNEE], as Assignor as Assignee By: _____________________ By: _______________________ Name: Name: Title: Title: Consented to and accepted in accor- dance with subsections 10.1B(i) and (ii) of the Credit Agreement MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By: _____________________ Name: Title: [Consented to and accepted in accordance with subsection 10.1B(i) of the Credit Agreement SEALY MATTRESS COMPANY By: _____________________________ Name: Title:] X-8 ANNEX A ------- ASSIGNOR PAYMENT INSTRUCTIONS: - ----------------------------- _____________________________ _____________________________ _____________________________ Attention:___________________ Reference:___________________ ASSIGNOR NOTICE ADDRESSES: - ------------------------- _____________________________ _____________________________ _____________________________ Attention:___________________ Reference:___________________ X-9 ANNEX B ------- ASSIGNEE PAYMENT INSTRUCTIONS: - ----------------------------- _____________________________ _____________________________ _____________________________ Attention:___________________ Reference:___________________ ASSIGNEE NOTICE ADDRESSES: - ------------------------- _____________________________ _____________________________ _____________________________ Attention:___________________ Reference:___________________ X-10 EXHIBIT XI [FORM OF CERTIFICATE RE NON-BANK STATUS] CERTIFICATE RE NON-BANK STATUS Reference is hereby made to that certain Credit Agreement dated as of December 18, 1997, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among Sealy Mattress Company, an Ohio corporation, as borrower, Sealy Corporation, a Delaware corporation, as guarantor, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, the financial institutions listed therein as Lenders, Morgan Guaranty Trust Company of New York, as administrative agent, and Bankers Trust Company, as documentation agent. Pursuant to subsection 2.7B(iii) of the Credit Agreement, the undersigned hereby certifies that it is not a "bank" or other Person described in Section 881(c)(3) of the Internal Revenue Code of 1986, as amended. DATED: __________________________ [NAME OF LENDER] By: ____________________________________ Name: Title: XI-1 EXHIBIT XII [FORM OF FINANCIAL CONDITION CERTIFICATE] This FINANCIAL CONDITION CERTIFICATE (this "CERTIFICATE") is delivered in connection with that certain Credit Agreement dated as of December 18, 1997 (the "CREDIT AGREEMENT"), by and among Sealy Mattress Company, an Ohio corporation ("COMPANY"), Sealy Corporation, a Delaware corporation ("HOLDINGS"), the financial institutions referred to therein as lenders (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent, Morgan Guaranty Trust Company of New York ("MORGAN GUARANTY"), as administrative agent (the "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO"), as documentation agent, and that certain AXEL Credit Agreement dated as of December 18, 1997 ("AXEL CREDIT AGREEMENT") by and among Company, Holdings, the financial institutions listed therein as lenders (the"AXEL LENDERS"), GSCP as arranger and syndication agent, Morgan Guaranty, as administrative agent (the "AXEL ADMINISTRATIVE AGENT"), and BTCo, as documentation agent. Capitalized terms used herein without definition have the same meanings as in the Credit Agreement. A. I am, and at all pertinent times mentioned herein have been, the duly qualified and acting vice president, controller and principal accounting officer of Holdings. I am familiar with the terms and conditions of the Credit Agreement and the AXEL Credit Agreement. B. I have carefully reviewed the contents of this Certificate, and I have conferred with counsel for Holdings for the purpose of discussing the meaning of its contents. C. In connection with preparing for the consummation of the transactions and financings contemplated by the Credit Agreement and the AXEL Credit Agreement (the "PROPOSED TRANSACTIONS"), I have participated in the preparation of, and I have reviewed, pro forma projections of net income and cash flows for Holdings and its Subsidiaries for the fiscal years of Holdings ending November 30, 1998 through November 30, 2008, inclusive (the "PROJECTED FINANCIAL STATEMENTS"). The Projected Financial Statements, attached hereto as Exhibit A, give effect to the consummation of the Proposed Transactions and - --------- assume that the debt obligations of Holdings will be paid from the cash flow generated by the operations of Holdings and its Subsidiaries and other cash resources. The Projected Financial Statements were prepared on the basis of information available at August 31, 1997. I know of no facts that have occurred since such date that would lead me to believe that the Projected Financial Statements are inaccurate in any material respect. The Projected Financial Statements do not reflect (i) any potential changes in interest rates from those assumed in the Projected Financial Statements, (ii) any potential material, adverse changes in general business conditions, or (iii) any potential changes in income tax laws. D. In connection with the preparation of the Projected Financial Statements, I have made such investigations and inquiries as I have deemed necessary and prudent therefor and, specifically, have relied on historical information with respect to revenues, expenses and other relevant items supplied by the supervisory personnel of Holdings and its Subsidiaries directly responsible for the various operations involved. The assumptions upon which the Projected Financial Statements are based are stated therein. Although any assumptions and any projections by necessity involve uncertainties and approximations, I believe, based on my discussions with other members of management, that the assumptions on which the Projected Financial Statements are based are reasonable. Based thereon, I believe that the projections for Holdings and its Subsidiaries, taken as a whole, reflected in the Projected Financial Statements provide reasonable estimations of future performance, subject, as stated above, to the uncertainties and approximations inherent in any projections. Based on the foregoing, I have, in my capacity as vice president, controller and principal accounting officer of Holdings, reached the following conclusions: 1. Holdings and its Subsidiaries are not now, nor will the incurrence of the Obligations under the Credit Agreement and the Obligations (as such term is defined in the AXEL Credit Agreement) under the AXEL Credit Agreement, and the incurrence of the other obligations contemplated by the Proposed Transactions render Holdings and its Subsidiaries "insolvent" as defined in this paragraph 1. The recipients of this Certificate and I have agreed that, in this context, "insolvent" means that the present fair saleable value of assets (on a going concern basis based on the valuation procedures performed by Valuation Research Corporation in their letter of even date herewith (the "VRC OPINION")) is less than the amount that will be required to pay the probable liability on existing debts as they become absolute and matured. We have also agreed that the term "debts" includes any legal liability, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent. My conclusion expressed above is supported by the VRC Opinion. The assumptions on which the VRC Opinion is based are stated therein. I believe that the assumptions on which the VRC Opinion is based are reasonable. 2. By the incurrence of the Obligations under the Credit Agreement, the Obligations (as such term is defined in the AXEL Credit Agreement) under the AXEL Credit Agreement, and the incurrence of the other obligations contemplated by the Proposed Transactions, Holdings and its Subsdiaries will not incur debts beyond its ability to pay as such debts mature. I have based my conclusion in part on the Projected Financial Statements, which demonstrate that Holdings and its Subsidiaries will have positive cash flow after paying all of its scheduled anticipated indebtedness (including scheduled payments under the Credit Agreement, the AXEL Credit Agreement, the other obligations contemplated by the Proposed Transactions and other permitted indebtedness). I have concluded that the realization of current assets in the ordinary course of business will be sufficient to pay recurring current debt and short-term and long-term debt service as such debts mature, and that the cash flow (including earnings plus non-cash charges to earnings) will be sufficient to provide cash necessary to repay the Loans and other Obligations under the Credit Agreement and the Loans (as such term is defined in the AXEL Credit Agreement) and other Obligations (as such term is defined in the AXEL Credit Agreement) under the AXEL Credit Agreement, the other obligations contemplated by the Proposed Transactions and other long-term indebtedness as such debt matures. The foregoing conclusion also assumes that Holdings and its Subsidiaries will refinance their outstanding debt in the year in which the Senior Subordinated Notes and the Discount Notes mature. XII-2 3. As of the Closing Date, the incurrence of the Obligations under the Credit Agreement, the Obligations (as such term is defined in the AXEL Credit Agreement) under the AXEL Credit Agreement, and the incurrence of the other obligations contemplated by the Proposed Transactions will not leave Holdings and its Subsidiaries with property remaining in their hands constituting "unreasonably small capital." In reaching this conclusion, I understand that "unreasonably small capital" depends upon the nature of the particular business or businesses conducted or to be conducted, and I have reached my conclusion based on the needs and anticipated needs for capital of the businesses conducted or anticipated to be conducted by Holdings and its Subsidiaries in light of the Projected Financial Statements and available credit capacity. 4. To the best of my knowledge, Holdings and its Subsidiaries have not executed the Credit Agreement, the AXEL Credit Agreement, or any documents mentioned therein, or made any transfer or incurred any obligations thereunder, with actual intent to hinder, delay or defraud either present or future creditors. I understand that Administrative Agent, AXEL Administrative Agent, Credit Agreement Lenders, and AXEL Lenders are relying on the truth and accuracy of the foregoing in connection with the extension of credit to Company pursuant to the Credit Agreement and the AXEL Credit Agreement. On behalf of Holdings, in my capacity as vice president, controller and principal accounting officer, I represent the foregoing information to be, to the best of my knowledge and belief, true and correct and execute this Certificate this ___ day of December, 1997. SEALY CORPORATION By: ____________________________ Name: Vice President, Controller and Principal Accounting Officer XII-3 EXHIBIT XIII [FORM OF] INTERCREDITOR AGREEMENT This Intercreditor Agreement is dated as of December 18, 1997, and entered into by and among Morgan Guaranty Trust Company of New York, as administrative agent (in such capacity, the "Revolving Facility Agent") for the lenders and the issuer of letters of credit under the Revolving Credit Agreement referred to below, Morgan Guaranty Trust Company of New York, as administrative agent (in such capacity, the "AXEL Facility Agent") for the lenders under the AXEL Credit Agreement referred to below, and Morgan Guaranty Trust Company of New York, as collateral agent (in such capacity, together with its successors in such capacity, the "Collateral Agent") under each of the Security Documents, the Subsidiary Guaranty and the Holdings Guaranty dated of even date herewith referred to below. RECITALS WHEREAS, Sealy Mattress Company (the "Company"), as the borrower, the several lenders from time to time parties thereto (the "Revolving Facility Lenders"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent, and the Revolving Facility Agent have entered into a Credit Agreement dated as of December 18, 1997 (said agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "Revolving Credit Agreement"; the terms defined therein and not otherwise defined herein being used herein as therein defined); WHEREAS, the Company, the various financial institutions parties thereto (the "AXEL Facility Lenders"), GSCP, as arranger and syndication agent, and the AXEL Facility Agent have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "AXEL Credit Agreement"); WHEREAS, the Company may from time to time enter into one or more Interest Rate Agreements (collectively, the "Lender Interest Rate Agreements") with one or more Lenders (in such capacity, collectively, "Interest Rate Exchangers") in accordance with the terms of the Financing Agreements (as hereinafter defined); WHEREAS, the terms of the Revolving Credit Agreement and the AXEL Credit Agreement require that the Company execute and deliver to the Collateral Agent the Company Security Agreement, the Company Pledge Agreement and the Company Patent and Trademark XIII-1 Security Agreement securing the Company's obligations to the Revolving Facility Lenders, the AXEL Facility Lenders, the Revolving Facility Agent and the AXEL Facility Agent as provided therein; WHEREAS, the terms of the Revolving Credit Agreement and the AXEL Credit Agreement also require that all of the Domestic Subsidiaries of the Company execute and deliver to the Collateral Agent a guaranty (the "Subsidiary Guaranty") guaranteeing the Company's obligations to the Revolving Facility Lenders (including the obligations of the Company to the Issuing Lender in respect of any Letters of Credit), the AXEL Facility Lenders, the Revolving Facility Agent and the AXEL Facility Agent as provided therein (such Domestic Subsidiaries and any future Domestic Subsidiaries executing the Subsidiary Guaranty being referred to herein as the "Subsidiary Guarantors"; the Subsidiary Guarantors and Holdings collectively being referred to herein as the "Guarantors"), and that all Domestic Subsidiaries of the Company execute and deliver to the Collateral Agent the Subsidiary Pledge Agreement, the Subsidiary Security Agreement and the Subsidiary Patent and Trademark Security Agreement securing the obligations of such Subsidiaries under the Subsidiary Guaranty; WHEREAS, the terms of the Revolving Credit Agreement and the AXEL Credit Agreement also require that Holdings execute and deliver to the Collateral Agent a guaranty (the "Holdings Guaranty"; together with the Subsidiary Guaranty, the "Guaranties") guaranteeing the Company's obligations to the Revolving Facility Lenders (including the obligations of the Company to the Issuing Lender in respect of any Letters of Credit), the AXEL Facility Lenders, the Revolving Facility Agent and the AXEL Facility Agent as provided therein, and that Holdings execute and deliver to the Collateral Agent the Holdings Pledge Agreement and the Holdings Security Agreement securing the obligations of Holdings under the Holdings Guaranty (the Holdings Pledge Agreement, the Holdings Security Agreement, together with the Subsidiary Pledge Agreement, the Subsidiary Security Agreement, the Subsidiary Patent and Trademark Security Agreement, the Company Security Agreement, the Company Pledge Agreement and the Company Patent and Trademark Security Agreement and any other security agreements, mortgages and deeds of trust entered into by any Loan Party (as hereinafter defined) for the benefit of any Secured Parties and any other security agreements, mortgages and deeds of trust entered into by any Loan Party (as hereinafter defined) for the benefit of any Secured Parties (hereinafter defined), being collectively referred to herein as the "Security Documents"); WHEREAS, the Revolving Facility Agent, the AXEL Facility Agent and the Collateral Agent (such parties collectively referred to as the "Parties") desire to set forth certain provisions regarding the appointment, duties and responsibilities of the Collateral Agent and to set forth certain other provisions concerning the obligations of the Company, Holdings and the Subsidiaries of Holdings executing the Guaranties and the Security Documents (collectively, the "Loan Parties") to the Parties, the Revolving Facility Lenders, the AXEL Facility Lenders and any Interest Rate Exchangers (collectively, together with the Parties, the "Secured Parties") under the agreements referred to in the foregoing recitals; and XIII-2 WHEREAS, the Parties wish to set forth their agreement as to the decisions relating to the exercise of remedies under the Security Documents, the Guaranties and certain limitations on the exercise of such remedies. NOW, THEREFORE, the Parties and, by their acceptance of the benefits hereof and of the Guaranties and the Security Documents, the Interest Rate Exchangers agree as follows: Appointment As Collateral Agent. The Revolving Facility Agent on behalf ------------------------------- of the Revolving Facility Lenders, the AXEL Facility Agent on behalf of the AXEL Facility Lenders, and the Interest Rate Exchangers hereby severally appoint Morgan Guaranty Trust Company of New York to serve as the Collateral Agent and representative of the Secured Parties, and each such Party and Interest Rate Exchanger authorizes the Collateral Agent to act as agent for the Secured Parties (a) for the purposes of executing and delivering on its behalf the Security Documents to be executed and delivered by the Loan Parties and, subject to the provisions of this Agreement, enforcing the Secured Parties' rights in respect of the Collateral and the obligations of the Loan Parties under the Security Documents, and (b) for the purpose of enforcing the Secured Parties' rights under the Guaranties and the obligations of the Guarantors under the Guaranties. The Collateral Agent hereby accepts such appointment and agrees to act as Collateral Agent hereunder and to enter into and act as Collateral Agent under each of the Security Documents and the Guaranties in accordance with the terms thereof and of this Agreement. Decisions Relating to Exercise of Remedies Vested in Requisite Obligees. ----------------------------------------------------------------------- The Collateral Agent agrees to make such demands, to give such notices and to take such other actions under this Agreement, the Guaranties and the Security Documents as are expressly required under the terms hereof and thereof or as Requisite Obligees may request, and to take such action to enforce the Guaranties and the Security Documents and to foreclose upon, collect and dispose of the Collateral or any portion thereof as may be expressly required under the terms of this Agreement, the Guaranties or the Security Documents or as Collateral Agent may be directed by Requisite Obligees. The Collateral Agent shall not be required to take any action that is in its opinion contrary to law or to the terms of this Agreement, any or all of the Security Documents or the Guaranties or that would in its opinion subject it or any of its officers, employees, agents or directors to liability, and the Collateral Agent shall not be required to take any action under this Agreement, any or all of the Security Documents or the Guaranties unless and until the Collateral Agent shall be indemnified to its satisfaction by the Secured Parties against any and all loss, cost, expense or liability in connection therewith. Each Party executing this Agreement agrees that the Collateral Agent may act as Requisite Obligees may request (regardless of whether any individual Party or any other Secured Party agrees, disagrees or abstains with respect to such request), that the Collateral Agent shall have no liability for acting in accordance with such request and that no Party or Secured Party shall have any liability to any other Party or Secured Party for any such request. The Collateral XIII-3 Agent shall give prompt notice to all Parties of actions taken pursuant to the instructions of Requisite Obligees; provided, however, that the failure to give -------- ------- any such notice shall not impair the right of the Collateral Agent to take any such action or the validity or enforceability under this Agreement of the action so taken. The Collateral Agent may at any time request directions from the Requisite Obligees as to any course of action or other matters relating hereto or to the Security Documents or the Guaranties. Directions given by Requisite Obligees to the Collateral Agent shall be binding on the Parties, the Revolving Facility Lenders, the AXEL Facility Lenders and all Secured Parties for all purposes. Each Party, on behalf of the Secured Parties, and each Interest Rate Exchanger, agrees not to take any action whatsoever to enforce any term or provision of the Security Documents or the Guaranties or to enforce any of its rights in respect of the Collateral, except through the Collateral Agent in accordance with this Agreement. Application of Proceeds of Security, Guaranty Payments, Etc. ----------------------------------------------------------- The Collateral Agent shall establish and maintain two accounts into which it shall deposit (i) all amounts received by it in its capacity as the Collateral Agent in respect of any Security Document or the Guaranties (including all monies received on account of any sale of or other realization upon any of the Collateral pursuant to any Security Document or pursuant to Section 5(b) hereof and all monies received by it on account of the enforcement of the Guaranties), and (ii) all amounts received by it as a result of payments described in Section 5(c). One of the two accounts referred to in the preceding sentence shall be established and maintained for the benefit of all Secured Parties (other than with respect to L/C Obligations) (the "General Collateral Account") and the second such account shall be established and maintained solely for the benefit of the Issuing Lender (the "L/C Collateral Account", and together with the General Collateral Account, the "Collateral Accounts"). The Collateral Agent shall have exclusive dominion and control over the Collateral Accounts. All amounts which the Collateral Agent is required at any time to deposit in the respective Collateral Accounts pursuant to Section 3(a) shall be allocated between, and deposited in, such General Collateral Account and such L/C Collateral Account, respectively, pro rata in accordance with (i) the aggregate amount of such Secured Obligations (other than L/C Obligations) then outstanding and (ii) the aggregate amount of the L/C Obligations then outstanding. If any amounts are delivered to the Collateral Agent as cash collateral for the Letters of Credit pursuant to Section 8 of the Revolving Credit Agreement or as collateral for the liability of the Issuing Lender under outstanding Letters of Credit, they shall be deposited in the L/C Collateral Account. If after giving effect to such deposit or at any other time the balance in the L/C Collateral Account exceeds all L/C Obligations then outstanding, the excess shall be transferred to the General Collateral Account. After giving effect to any such deposit to the L/C XIII-4 Collateral Account, subsequent allocations pursuant to the first sentence of this Section 3(b) shall be adjusted to the extent necessary to cause the ratio of the aggregate amount of the Secured Obligations (other than L/C Obligations) then outstanding to the balance in the General Collateral Account to be equal to the ratio of the aggregate amount of the L/C Obligations then outstanding to the balance in the L/C Collateral Account. Prior to the delivery of a Notice of Acceleration any amounts deposited in the Collateral Accounts may be disbursed from the Collateral Accounts only upon the prior written consent of the Requisite Obligees. After the occurrence of a Notice of Acceleration and until such Notice is rescinded, the Collateral Agent shall disburse funds from the Collateral Accounts only as provided in this Section 3. When a Notice of Acceleration is in effect, all amounts deposited in the General Collateral Account shall be applied in the following order of priority: First, to the extent not theretofore paid by or on behalf of ----- any Loan Party, to pay all fees, costs, expenses of the Collateral Agent incurred in connection with the performance of its duties hereunder or under the Security Documents or the Guaranties, as the case may be, including reasonable attorneys' fees and expenses and all Collateral Agent Obligations and any other amounts payable to the Collateral Agent hereunder or under any of the Security Documents or the Guaranties in respect of any indemnities or other obligations of the Loan Parties with such application made pro rata from the General Collateral Account and the L/C Collateral Account based on the amounts on deposit therein; Second, to the other Secured Parties pro rata in accordance ------ --- ---- with the aggregate amount of all Secured Obligations (other than L/C Obligations) held by such Secured Parties; Third, if any L/C Obligations shall remain unpaid, to the L/C ----- Collateral Account to the extent the aggregate amount in such L/C Collateral Account does not exceed the aggregate amount of such L/C Obligations; and Fourth, the balance, if any, to the Company or such other ------ person or persons as are entitled thereto. When a Notice of Acceleration is in effect, all amounts deposited in the L/C Collateral Account shall be applied in the following order of priority (provided that an amount not to exceed all L/C Obligations which are not then L/C Current Obligations shall not be so applied, and shall instead be held by Collateral Agent in the L/C Collateral Account as collateral for such L/C Obligations, until they become L/C Current Obligations): First, to the extent not theretofore paid by or on behalf of ----- any Loan Party, to pay all fees, costs, expenses of the Collateral Agent incurred in connection with the XIII-5 performance of its duties hereunder or under the Security Documents or the Guaranties, as the case may be, including reasonable attorneys' fees and expenses and all Collateral Agent Obligations and any other amounts payable to the Collateral Agent hereunder or under any of the Security Documents or the Guaranties in respect of any indemnities or other obligations of the Loan Parties with such application made pro rata from the General Collateral Account and the L/C Collateral Account based on the amounts on deposit therein; Second, to the holders of any L/C Current Obligations pro rata ------ in accordance with the aggregate amount of all L/C Current Obligations) held by them, Third, if any Secured Obligations (other than L/C Obligations) ----- shall remain unpaid, to the General Collateral Account to the extent the aggregate amount in the General Collateral Account does not exceed the aggregate amount of such Secured Obligations; and Fourth, the balance, if any, to the Company or such other ------ person or persons as are entitled thereto. Unless the Collateral Agent shall have received instructions from the Requisite Obligees as to the times at which any amounts are to be distributed pursuant to Sections 3(c) or 3(d), all distributions or transfers pursuant to Sections 3(c) or 3(d) shall be made at such times and as promptly as the Collateral Agent shall in its good faith discretion determine to be reasonable and practicable under the circumstances, given the amount available for distribution or transfer in the relevant Collateral Account, the time at which the next addition to such Collateral Account is expected to be made, and the cost of distributing funds to the Secured Parties entitled to receive the same. The Collateral Agent shall at all times have the right to request distribution instructions as contemplated by the preceding sentence. Pending the disbursement thereof pursuant to the terms of this Agreement, all amounts in the Collateral Accounts shall be invested by the Collateral Agent in such Cash Equivalents as it shall determine from time to time or such other investments as shall be approved by Requisite Obligees; provided that so long as no Event of Default shall have occurred and be - -------- continuing, the Collateral Agent shall make such other investments at the direction of the Company. All reasonable commissions and other reasonable costs and expenses incurred by the Collateral Agent in connection with the acquisition or disposition by it of Cash Equivalents or such other investments may be deducted by the Collateral Agent from the income received by the Collateral Agent with respect thereto. Payments by the Collateral Agent in respect of the Revolving Credit Agreement Obligations (other than L/C Obligations) shall be made to the Revolving Facility Agent for XIII-6 distribution to the Revolving Facility Lenders in accordance with the terms of the Revolving Credit Agreement; payments with respect to the L/C Obligations shall be made to the Revolving Facility Agent for distribution to the Issuing Lender in accordance with the terms of the Revolving Credit Agreement; payments by the Collateral Agent in respect of the AXEL Credit Agreement Obligations shall be made to the AXEL Facility Agent for distribution to the AXEL FacilityLenders in accordance with the terms of the AXEL Credit Agreement; and payments by the Collateral Agent in respect of the Lender Interest Rate Agreement Obligations shall be distributed to the Interest Rate Exchangers pro --- rata in accordance with the aggregate amount of Lender Interest Rate Agreement - ---- Obligations held by such Interest Rate Exchanger. Information. ----------- Upon the request of the Collateral Agent, each Party and Interest Rate Exchanger agrees to promptly inform the Collateral Agent of the existence and amount of the Secured Obligations owing to such Party or such Interest Rate Exchanger and such other Secured Parties for whom such Party is acting as agent, trustee or other representative and of any commitments to extend additional credit which will constitute Secured Obligations by such Party or other Secured Parties. Upon request of the Collateral Agent, each Party (other than the Collateral Agent) and each Interest Rate Exchanger will inform the Collateral Agent of such payments on the Secured Obligations as may be received from time to time by such Party and such other Secured Parties for whom such Party is acting as agent, trustee or other representative. If, notwithstanding the request of the Collateral Agent, any Party or Interest Rate Exchanger shall fail or refuse reasonably promptly to certify as to the existence or amount of any Secured Obligation or such other information concerning the Secured Obligations as the Collateral Agent may reasonably request, the Collateral Agent shall be entitled to determine such existence or amount of such Secured Obligations by such method as the Collateral Agent may, in its sole discretion, determine in good faith, including by reliance upon a certificate of an officer of the Company. The Collateral Agent may rely conclusively, and shall be fully protected in so relying, on any determination made by it in good faith in accordance with the provisions of this Section (or as otherwise directed by a court of competent jurisdiction after notice and hearing on the merits) and, in the absence of gross negligence, shall have no liability to Company, any Subsidiary, any holder of any Secured Obligation or any other person as a result of such determination. If the Collateral Agent receives any Notice of Acceleration or certificate rescinding a Notice of Acceleration or any request by the Company for any consent, waiver or amendment with respect hereto or any Security Document or the Guaranties, it shall give prompt notice thereof to each Party at the address for such Party provided for in Section 8 hereof. A Notice of Acceleration shall be deemed to have been given only when the Notice of Acceleration has actually been received by the Collateral Agent and to have been rescinded XIII-7 when the Collateral Agent has actually received from the creditor or creditor group which gave such Notice of Acceleration a notice withdrawing such Notice of Acceleration. A Notice of Acceleration shall be deemed to be outstanding at all times after such Notice of Acceleration has been given until such time, if any, as such Notice of Acceleration has been rescinded. The Collateral Agent shall keep executed counterparts of this Agreement, the Security Documents and the Guaranties at the Collateral Agent's address as set forth under Collateral Agent's signature on the signature page to this Agreement and shall permit any Secured Party to inspect this Agreement, the Security Documents and the Guaranties upon request and to take copies thereof. Intercreditor Arrangements. -------------------------- Each of the Collateral Agent, each of the other Parties (on behalf of the respective Secured Parties) and each Interest Rate Exchanger hereby agrees, and each of the Loan Parties hereby acknowledges, that the liens and security interests granted to the Collateral Agent under the Security Documents shall be treated as having equal priority and shall at all times be shared by the Secured Parties as provided herein. If any Secured Party acquires custody, control or possession of any Collateral or proceeds therefrom, or payments with respect to the Guaranties, other than by distribution from the Collateral Agent pursuant to the terms of this Agreement, such Secured Party shall promptly cause such Collateral, proceeds or payments to be delivered to or put in the custody, possession or control of the Collateral Agent for disposition or distribution in accordance with the provisions of Section 3. Until such time as the provisions of the immediately preceding sentence have been complied with, such Secured Party shall be deemed to hold all such Collateral, proceeds and payments in trust for the parties entitled thereto hereunder. Nothing in this Section shall prevent a Secured Party from receiving and retaining payments (a) for the provision of services to any Loan Party, or (b) in connection with any extension of credit or other financial accommodation to any Loan Party if the obligations of such Loan Party incurred in connection with such extension of credit or other financial accommodation do not constitute Secured Obligations, or (c) as security for any such extension of credit or other financial accommodation if the obligations of such Loan Party incurred in connection with such services, extension of credit or other financial accommodation do not constitute Secured Obligations, and if such obligations are not incurred and such security is not given in breach of the Financing Agreements (as defined in Section 6). If (a) at any time after the occurrence of an Acceleration and for so long as such Acceleration is continuing, any Secured Party shall receive payment (voluntary or involuntary) on account of any Secured Obligation (i) from or on behalf of the Company or any Subsidiary or any guarantor of payment or performance of any of the Secured Obligations, or (ii) pursuant to any turnover or similar provision contained in any agreement evidencing or relating to XIII-8 subordinated indebtedness of the Company or any Loan Party or other obligor, or (b) at any time any Secured Party shall receive payment (voluntary or involuntary) on account of any Secured Obligation by way of the exercise of any right of setoff (or similar right) with respect to any assets (whether or not such assets shall constitute Collateral) of any Loan Party or as a result of any counterclaim, purchase of any participation by any Loan Party or otherwise, then such payment, prepayment or repayment (herein, a "Secured Obligation Payment") shall be deemed to be the proceeds of Collateral and shall be delivered to or put in the custody, possession or control of the Collateral Agent by the Secured Party receiving such Secured Obligation Payment for disposition or distribution by the Collateral Agent in accordance with Section 3. Any Secured Party receiving a Secured Obligation Payment that is required pursuant to this Section to be turned over to the Collateral Agent for application under Section 3 is deemed to have received such Secured Obligation Payment solely as agent for the Secured Parties and the Collateral Agent, and will immediately turn such Secured Obligation Payment, in the form received except for the endorsement of such receiving party where appropriate, over to the Collateral Agent, and until so turned over, will hold such Secured Obligation Payment in trust for the Secured Parties and the Collateral Agent. Each Party shall execute and deliver such other documents and instruments, in form and substance reasonably satisfactory to the other Parties, and shall take such other action, in each case as any other Party may reasonably have requested (at the cost and expense of the Company which, by countersigning this Agreement, agrees to pay such reasonable costs and expenses), to effectuate and carry out the provisions of this Agreement, including by recording or filing in such places as the requesting party may deem desirable, this Agreement or such other documents or instruments. In no event will the Revolving Facility Lenders or the AXEL Facility Lenders consent to any amendment of the provisions of the Revolving Credit Agreement or the AXEL Credit Agreement, respectively, or to any payment consistent with an amendment thereof or a change thereto, or enter into any other agreement with the Company or any of its Subsidiaries that would have the effect of (i) changing (to earlier dates) any dates upon which payments of principal or interest are due on loans or letter of credit reimbursement obligations, (ii) reducing the percentage specified in the definition of "Requisite Lenders" in the Revolving Credit Agreement or the AXEL Credit Agreement, or (iii) changing any mandatory prepayments or commitment reductions of the Revolving Credit Agreement or the AXEL Credit Agreement in a manner that disproportionately disadvantages one Class relative to the other Class, or confers additional rights on one Class which would be adverse to the other Class, in each case without the prior written consent of Requisite Obligees. Each Secured Party agrees that to the extent either Credit Agreement is amended in accordance with the terms of this Agreement and the Credit Agreements to increase the commitments and/or Secured Obligations outstanding thereunder, such Secured Obligations shall be entitled to share in the benefits of the Guaranties and the Security Documents on a pro rata basis. XIII-9 The Revolving Facility Agent agrees to deliver to the AXEL Facility Agent upon execution thereof any amendment, waiver or modification of the Revolving Credit Agreement, and the AXEL Facility Agent agrees to deliver to the Revolving Facility Agent any amendment, waiver or modification of the AXEL Credit Agreement. Subject to clause (h) below, without further written consent or authorization from Secured Parties, Collateral Agent may execute any documents or instruments necessary to (a) release any Lien encumbering any item of Collateral that is the subject of a sale or other disposition of assets permitted by the Revolving Credit Agreement and the AXEL Credit Agreement, or to which Requisite Obligees have otherwise consented, or (b) release any Subsidiary Guarantor from the Subsidiary Guaranty if all the capital stock of such Subsidiary Guarantor is sold to any Person pursuant to a sale or other disposition permitted hereunder or to which Requisite Obligees have otherwise consented; provided, however, that nothing herein shall require or permit -------- ------- Collateral Agent to release any such entity which prior to such sale is a Subsidiary Guarantor from the Subsidiary Guaranty if any of the Financing Agreements require that such entity be party to the Subsidiary Guaranty after such sale. Such termination and release shall be without prejudice to the rights of the Collateral Agent to charge and be reimbursed for any expenditure which it may incur in connection therewith. The proceeds of any disposition of Collateral released in accordance with this Section are not required to be delivered to the Collateral Agent or deposited in the Collateral Accounts pursuant to Section 3. Any release of the Collateral by the Collateral Agent from the Liens created by the Security Documents (other than in connection with the exercise of remedies with respect to such Collateral under a Security Document pursuant to instructions from Requisite Obligees) that is not permitted pursuant to the Revolving Credit Agreement and the AXEL Credit Agreement, or any release of a New Subsidiary by the Collateral Agent from the Subsidiary Guaranty that is not permitted pursuant to the Revolving Credit Agreement and the AXEL Credit Agreement, shall require the prior written consent of the Requisite Obligees (except for the release of all or substantially all of the Collateral, in which case the prior written consent of all of the Revolving Facility Lenders and all of the AXEL Facility Lenders are required; it being understood that an increase in the amount of any Indebtedness of the Company secured ratably by the Collateral shall not be deemed to be a release of the Collateral). Each of the Parties on its own behalf and on behalf of other Secured Parties, and each of the Interest Rate Exchangers, hereby covenants and agrees that it (a) will not accept any guarantee of any of the Secured Obligations by any Subsidiary or Affiliate of the Company unless such Subsidiary or Affiliate guarantees the payment of all the Secured Obligations and (b) will not take any security interest in or lien on any assets of the Company or any of its Subsidiaries to secure the payment or performance of any of the Secured Obligations unless all the Secured Parties are granted a pari passu security interest in or lien on such assets and the instrument creating such lien becomes a Security Document for all purposes of this Agreement. XIII-10 No Secured Party may require the Collateral Agent to take or refrain from taking any action hereunder or under any of the Security Documents or with respect to any of the Collateral except as and to the extent expressly set forth in this Agreement. Disclaimers, Indemnity, Etc. --------------------------- The Collateral Agent shall have no duties or responsibilities to the Secured Parties except those expressly set forth in this Agreement, the Security Documents and the Guaranties and the Collateral Agent shall not by reason of this Agreement, the Security Documents or the Guaranties be a trustee for any Secured Party or have any other fiduciary obligation to any Secured Party (including any obligation under the Trust Indenture Act of 1939, as amended). The Collateral Agent shall not be responsible to any Secured Party for any recitals, statements, representations or warranties contained in this Agreement, the Revolving Credit Agreement, the AXEL Credit Agreement and the Loan Documents (as defined in each of the Revolving Credit Agreement and the AXEL Credit Agreement; collectively, the "Financing Agreements") or in any certificate or other document referred to or provided for in, or received by any of them under, any of the Financing Agreements, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of any of the Financing Agreements or any other document referred to or provided for therein or any Lien under the Security Documents or the perfection or priority of any such Lien or the value or condition of the Collateral or the title of the Loan Parties to the Collateral or for any failure by any Loan Party to perform any of its obligations under any of the Financing Agreements. The Collateral Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Neither the Collateral Agent nor any of its directors, officers, employees or agents shall be liable or responsible for any action taken or omitted to be taken by it or them hereunder or in connection herewith, except for its or their own gross negligence or willful misconduct. The Collateral Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telex, telecopy, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company or any Subsidiary of the Company), independent accountants and other experts selected by the Collateral Agent. The Collateral Agent shall not be deemed to have actual, constructive, direct or indirect notice or knowledge of the occurrence of any Acceleration unless and until the Collateral Agent shall have received a Notice of Acceleration. The Collateral Agent shall have no obligation whatsoever either prior to or after receiving a Notice of Acceleration to inquire whether an Acceleration has, in fact, occurred and shall be entitled to rely conclusively, and shall be fully protected in so relying, on any Notice of Acceleration certificate so furnished to it. As to any matters not expressly provided for by this Agreement, the Collateral Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with XIII-11 instructions signed by Requisite Obligees, and such instructions of Requisite Obligees, and any action taken or failure to act pursuant thereto, shall be binding on all of the Secured Parties. The Revolving Facility Lenders and the AXEL Facility Lenders (collectively, the "Paying Indemnifying Parties") agree that such Secured Parties shall indemnify the Collateral Agent, its Affiliates and their respective directors, officers, employees and agents in its capacity as Collateral Agent, ratably in accordance with the amount of the Secured Obligations held by such Secured Parties to the extent neither reimbursed by any Loan Party nor reimbursed out of any proceeds, recoveries or payments under any Security Documents or the Guaranties, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Collateral Agent in any way relating to or arising out of any of the Financing Agreements or any other document contemplated by or referred to therein or the transactions contemplated thereby or the enforcement of any of the terms of any thereof; provided, however, that no such Secured Party shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Collateral Agent. The Collateral Agent shall, notwithstanding anything to the contrary in Section 6(c) hereof, in all cases be fully justified in failing or refusing to act hereunder unless it shall be further indemnified to its satisfaction by the Parties against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. The Collateral Agent may deem and treat the payee of any promissory note or other evidence of indebtedness relating to the Secured Obligations as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof, signed by such payee and in form satisfactory to the Collateral Agent, shall have been filed with the Collateral Agent. Any request, authority or consent of any Person who at the time of making such request or giving such authority or consent is the holder of any such note or other evidence of indebtedness shall be conclusive and binding on any subsequent holder, transferee or assignee of such note or other evidence of indebtedness and of any note or notes or other evidences of indebtedness issued in exchange therefor. Except as expressly provided herein, in the Security Documents or in the Guaranties, the Collateral Agent shall have no duty to take any affirmative steps with respect to the collection of amounts payable in respect of the Collateral or under the Guaranties. The Collateral Agent shall incur no liability (absent gross negligence or willful misconduct) as a result of any sale of any Collateral at any private sale. (i) The Collateral Agent may resign at any time by giving at least 30 days notice thereof to the Parties (such resignation to take effect as hereinafter provided) and the Collateral Agent may be removed as Collateral Agent at any time by Requisite Obligees. In the event of any such resignation or removal of the Collateral Agent, Requisite Obligees shall XIII-12 thereupon have the right to appoint a successor Collateral Agent which appointment shall, unless an Event of Default has occurred and is continuing, be subject to the approval of the Company. If no successor Collateral Agent shall have been so appointed by Requisite Obligees and shall have accepted such appointment within 30 days after the notice of the intent of the Collateral Agent to resign, then the retiring Collateral Agent may, on behalf of the other Parties, appoint a successor Collateral Agent. Any successor Collateral Agent appointed pursuant to this clause (i) shall be a bank party to the Revolving Credit Agreement or the AXEL Credit Agreement or a commercial bank organized under the laws of the United States of America or any state thereof and having a combined capital and surplus of at least $250,000,000. (ii) Upon the acceptance of any appointment as Collateral Agent hereunder by a successor Collateral Agent, such successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent, and the retiring or removed Collateral Agent shall thereupon be discharged from its duties and obligations hereunder. After any retiring or removed Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Section 6 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Collateral Agent. Definitions. ----------- "Acceleration" shall mean any of the Revolving Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Revolving Facility Lenders or the AXEL Facility Lenders shall have been terminated under Section 8 or Section 7 of the Revolving Credit Agreement or the AXEL Credit Agreement, respectively. "Actionable Default" shall mean (i) any failure of the Company to pay upon its final stated maturity, the Revolving Credit Agreement Obligations or the AXEL Credit Agreement Obligations or (ii) any breach or default by the Company under the Revolving Credit Agreement or the AXEL Credit Agreement if the effect of such breach or default is to cause, or to permit the Revolving Facility Lenders or the AXEL Facility Lenders then to cause the Revolving Credit Agreement Obligations or the AXEL Credit Agreement Obligations to become or be declared due prior to their stated maturity. "AXEL Credit Agreement Obligations" shall mean all obligations of every nature of Company and its Subsidiaries from time to time owed to the AXEL Facility Lenders, the AXEL Facility Agent or any of them under the Loan Documents (as defined in the AXEL Credit Agreement). "Class" shall mean each class of lenders under the Revolving Credit Agreement and the AXEL Credit Agreement, with there being two separate classes of lenders, i.e., (i) lenders under ---- XIII-13 the Revolving Credit Agreement and (ii) the lenders under the AXEL Credit Agreement. "Collateral" shall mean all the properties and assets of whatever nature, tangible or intangible, now owned or existing or hereafter acquired or arising, of any of the Loan Parties on or in which the Collateral Agent has been granted a Lien pursuant to any of the Security Documents. "Collateral Agent Obligations" shall mean all indemnity, reimbursement and payment obligations of the Company and any Subsidiary to the Collateral Agent under this Agreement, any Security Document or the Guaranties. "Event of Default" shall mean any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. "L/C Current Obligations" shall mean, at any time of determination, the sum of the amounts referred to in clauses (b) and (c) of the definition of L/C Obligations. "L/C Obligations" shall mean, at any time of determination, the sum of (a) the aggregate then undrawn and unexpired amount of then outstanding Letters of Credit, (b) the aggregate amount of drawings under Letters of Credit which have not then been reimbursed pursuant to the Revolving Credit Agreement, and (c) all interest which has accrued in respect of drawings that have been made under Letters of Credit and which is then unpaid. "Lender Interest Rate Agreement Obligations" shall mean all obligations of every nature of Company from time to time owed to Interest Rate Exchangers or any of them under the Lender Interest Rate Agreements, including without limitation payments for early termination thereof. "Letter of Credit" shall mean a letter of credit issued by the Issuing Lender under the Revolving Credit Agreement. "Notice of Acceleration" shall mean a notice by the Revolving Facility Agent in the case of the Revolving Facility Lenders or the AXEL Facility Agent in case of AXEL Facility Lenders, in each case delivered to the Collateral Agent stating that an Acceleration has occurred. "Requisite AXEL Facility Lenders" shall mean "Requisite Lenders" as defined in the AXEL Credit Agreement. XIII-14 "Requisite Obligees" shall mean (i) (A) unless an Acceleration shall have occurred and be continuing, the Requisite Revolving Facility Lenders and the Requisite AXEL Facility Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% in amount of the Revolving Credit Agreement Obligations and the AXEL Credit Agreement Obligations or (ii) after payment in full of all Revolving Credit Agreement Obligations and all AXEL Credit Agreement Obligations, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements.. "Requisite Revolving Facility Lenders" shall mean "Requisite Lenders" as defined in the Revolving Credit Agreement. "Revolving Credit Agreement Obligations" shall mean all obligations of every nature of Company and its Subsidiaries from time to time owed to Revolving Facility Agent, the Revolving Facility Lenders, the Issuing Lender or any of them under the Loan Documents (as defined in the Revolving Credit Agreement), including, without limitation, the L/C Obligations. "Secured Obligations" shall mean the Revolving Credit Agreement Obligations, the AXEL Credit Agreement Obligations and the Lender Interest Rate Agreement Obligations. Miscellaneous. ------------- All notices and other communications provided for herein shall be in writing and may be personally served, telecopied, telexed or sent by United States mail and shall be deemed to have been given when delivered in person, upon receipt of telecopy or telex, or four Business Days after deposit in the United States mail, registered or certified, with postage prepaid and properly addressed. For the purposes hereof, the addresses of the parties hereto (until notice of a change thereof is delivered as provided in this Section 8(a)) shall be as set forth under each party's name on the signature pages hereof. This Agreement, the Security Documents and the Guaranties may be modified or waived only by an instrument or instruments in writing signed by Collateral Agent and Requisite Obligees and, if applicable, the Loan Party signatory to this Agreement or any such Collateral Document. This Agreement shall be binding upon and inure to the benefit of the Collateral Agent, each other Party and each Secured Party and their respective successors and assigns. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute XIII-15 this Agreement by signing any such counterpart. This Agreement shall become effective as to the Revolving Facility Lenders and the Revolving Facility Agent upon execution thereof by Revolving Facility Agent and as to the AXEL Facility Lenders and the AXEL Facility Agent upon execution by AXEL Facility Agent thereof. Upon receipt by the Collateral Agent of evidence satisfactory to it of the termination of all commitments to extend credit which would constitute Secured Obligations and the indefeasible payment in full of all Secured Obligations (including, without limitation, the reasonable compensation, expenses and disbursements of the Collateral Agent) and expiration or cancellation of all Letters of Credit, this Agreement shall terminate and the Collateral Agent, at the request and expense of the Company, will execute and deliver to the Company a proper instrument or instruments acknowledging the satisfaction and termination of the Collateral Documents and of this Agreement, and will duly assign, transfer and deliver to the Company all of the rights and moneys at the time held by the Collateral Agent under the Collateral Documents and hereunder, provided that Section 6(c) of this Agreement shall survive, and -------- remain operative and in full force and effect, regardless of the termination of this Agreement. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. By countersigning or otherwise accepting the terms of this Agreement, the Company and each other Loan Party acknowledges and consents to and agrees to perform and be bound by each of the provisions hereof stated to be applicable to it. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY LOAN PARTY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY OBLIGATIONS THEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH LOAN PARTY, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO SUCH LOAN PARTY AT ITS ADDRESSES PROVIDED ON THE APPLICABLE SIGNATURE PAGE HERETO; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER SUCH LOAN PARTY IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE XIII-16 CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT COLLATERAL AGENT RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST SUCH LOAN PARTY IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREE THAT THE PROVISIONS OF THIS SECTION 8(i) RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5- 1402 OR OTHERWISE. EACH LOAN PARTY, COLLATERAL AGENT AND EACH PARTY HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each Loan Party, Collateral Agent and each Party acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already relied on this waiver in entering into this Agreement, and that each will continue to rely on this waiver in their related future dealings. Each Loan Party, Collateral Agent and each Party further warrants and represents that it has reviewed this waiver with its legal counsel and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 8(j) AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. XIII-17 Each Loan Party, by its execution of this Agreement in the space provided below, hereby accepts and agrees to be bound by the foregoing provisions of this Agreement. COMPANY: SEALY MATTRESS COMPANY By: Name: Title: Notice Address: HOLDINGS: SEALY CORPORATION By: Name: Title: Notice Address: SUBSIDIARIES: [NAME OF SUBSIDIARY] By: Name: Title: Notice Address: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Collateral Agent, Revolving Facility Agent and AXEL Facility Agent By: Name: Title: Notice Address: EXHIBIT XIV [FORM OF COMPANY PLEDGE AGREEMENT] COMPANY PLEDGE AGREEMENT This COMPANY PLEDGE AGREEMENT (this "AGREEMENT") is dated as of December 18, 1997 and entered into by and between SEALY MATTRESS COMPANY, an Ohio corporation ("PLEDGOR"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as Collateral Agent for and representative of (in such capacity herein called "COLLATERAL AGENT") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined). RECITALS A. Pledgor is the legal and beneficial owner of (i) the shares of stock (the "PLEDGED SHARES") described in Part A of Schedule I annexed hereto and ---------- issued by the corporations named therein and (ii) the indebtedness (the "PLEDGED DEBT") described in Part B of said Schedule I and issued by the ---------- obligors named therein. B. Sealy Corporation, a Delaware Corporation ("HOLDINGS"), the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO"), as documentation agent (in such capacity, "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT") with Pledgor pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Pledgor. C. Pledgor, Holdings, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity, "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "AXEL ADMINISTRATIVE AGENT"), and BTCo., as documentation agent (in such capacity, "AXEL DOCUMENTATION AGENT") and have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, the CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL Lenders have made certain commitments, subject to XIV-1 the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Pledgor. D. Pledgor may from time to time enter into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more Credit Agreement Lenders or their Affiliates or AXEL Lenders or their Affiliates (in such capacity, collectively, "INTEREST RATE EXCHANGERS") in accordance with the terms of the Financing Agreements (as hereinafter defined), and it is desired that the obligations of Pledgor under the Lender Interest Rate Agreements, including without limitation the obligation of Pledgor to make payments, if any, thereunder in the event of early termination thereof, together with all obligations of Pledgor under the Financing Agreements and any other Loan Documents (as hereinafter defined), be secured hereunder. E. It is a condition precedent to the initial extensions of credit by Secured Parties under the Financing Agreements that Pledgor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of, the Pledgor, (iii) the AXEL Administrative Agent, the AXEL Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement, (iv) the AXEL Lenders to make their respective loans to the Pledgor and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor hereby agrees with Collateral Agent as follows: SECTION 1. DEFINED TERMS ------------- (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. "ADDITIONAL PLEDGED SHARES" has the meaning assigned to that term in Section 2(c) of this Agreement. "AGREEMENT" means this Company Pledge Agreement dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. XIV-2 "AXEL COMMITMENTS" means the "Commitments" as defined in the AXEL Credit Agreement. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "AXEL OBLIGATIONS" shall mean "Obligations" as defined in the AXEL Credit Agreement. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. "FINANCING AGREEMENT" means the Credit Agreement or the AXEL Credit Agreement, and "Financing Agreements" means the Credit Agreement and the AXEL Credit Agreement, collectively. "FINANCING AGREEMENT OBLIGATIONS" means Credit Agreement Obligations and AXEL Obligations. "HOLDINGS" has the meaning assigned to that term in the recitals to this Agreement. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. XIV-3 "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "NEW PLEDGED SHARES" has the meaning assigned to that term in Section 2(e) of this Agreement. "PLEDGE AMENDMENT" has the meaning assigned to that term in Section 7 of this Agreement. "PLEDGED COLLATERAL" has the meaning assigned to that term in Section 2 of this Agreement. "PLEDGED DEBT" has the meaning assigned to that term in the recitals of this Agreement. "PLEDGED SHARES" has the meaning assigned to that term in the recitals to this Agreement. "PLEDGOR" has the meaning assigned to that term in the introduction of this Agreement. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. "REQUISITE OBLIGEES" has the meaning assigned to that term in Section 17(a) of this Agreement. "SECURED OBLIGATIONS" has the meaning assigned to that term in Section 3 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. XIV-4 SECTION 2. PLEDGE OF SECURITY ------------------ Pledgor hereby pledges and assigns to Collateral Agent, and hereby grants to Collateral Agent a security interest in, all of Pledgor's right, title and interest in and to the following (the "PLEDGED COLLATERAL"): (a) the Pledged Shares and the certificates representing the Pledged Shares and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to the Pledged Shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; provided, however, that to -------- ------- the extent the issuer of any of the Pledged Shares is a controlled foreign corporation (used hereinafter as such term is defined in Section 957(a) or a successor provision of the Internal Revenue Code), Pledgor shall only be required to pledge Pledged Shares of, certificates representing Pledged Shares of, and such interests pertaining to Pledged Shares of such issuer possessing up to but not exceeding 65% of the voting power of all classes of capital stock entitled to vote of such issuer, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Pledged Shares; (b) the Pledged Debt and the instruments evidencing the Pledged Debt, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Debt; (c) all additional shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any issuer of the Pledged Shares from time to time acquired by Pledgor in any manner (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such additional shares, securities, warrants, options or other rights and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such additional shares (all such shares, securities, warrants, options, rights, certificates, instruments and interests collectively being "ADDITIONAL PLEDGED SHARES"), and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Additional Pledged Shares; provided, however, that to the extent that the -------- ------- issuer of any Additional Pledged Shares is a controlled foreign corporation, Pledgor shall only be required to pledge Additional Pledged Shares of such issuer possessing up to but not exceeding 65% of the voting power of all classes of capital stock entitled to vote of such issuer, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Additional Pledged Shares; (d) all additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt and the instruments evidencing such indebtedness, and all interest, cash, XIV-5 instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; (e) all shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of Pledgor (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such shares, securities, warrants, options or other rights and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such shares (all such shares, securities, warrants, options, rights, certificates, instruments and interests collectively being "NEW PLEDGED SHARES"), and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares, securities, warrants, options or other rights; provided, however, that in the event that any such direct -------- ------- Subsidiary is a controlled foreign corporation, Pledgor shall only be required to pledge New Pledged Shares of such Subsidiary possessing up to but not exceeding 65% of the voting power of all classes of capital stock entitled to vote of such Subsidiary, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such New Pledged Shares; (f) all indebtedness from time to time owed to Pledgor by any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a Subsidiary of Pledgor, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; and (g) to the extent not covered by clauses (a) through (f) above, all proceeds of any or all of the foregoing Pledged Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Pledged Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, proceeds of any indemnity or guaranty payable to Pledgor or Collateral Agent from time to time with respect to any of the Pledged Collateral. SECTION 3. SECURITY FOR OBLIGATIONS. ------------------------ This Agreement secures, and the Pledged Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all obligations and liabilities of every nature of Pledgor now or hereafter existing under or arising out of or in connection with any Financing Agreements and any other Loan Documents and the Lender Interest Rate Agreements and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Pledgor, would accrue on such obligations), reimbursement XIV-6 of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Collateral Agent or any Secured Party or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise, and all obligations of every nature of Pledgor now or hereafter existing under this Agreement (all such obligations of Pledgor being the "SECURED OBLIGATIONS"). SECTION 4. DELIVERY OF PLEDGED COLLATERAL. ------------------------------ All certificates or instruments representing or evidencing the Pledged Collateral shall be delivered to and held by or on behalf of Collateral Agent pursuant hereto and shall be in suitable form for transfer by delivery or, as applicable, shall be accompanied by Pledgor's endorsement, where necessary, or duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to Collateral Agent. Upon the occurrence and during the continuance of an Event of Default, Collateral Agent shall have the right, without notice to Pledgor, to transfer to or to register in the name of Collateral Agent or any of its nominees any or all of the Pledged Collateral, subject only to the revocable rights specified in Section 8(a). In addition, upon the occurrence and during the continuance of an Event of Default, Collateral Agent shall have the right at any time to exchange certificates or instruments representing or evi dencing Pledged Collateral for certificates or instruments of smaller or larger denominations. SECTION 5. REPRESENTATIONS AND WARRANTIES. ------------------------------ Pledgor represents and warrants as follows: (a) Due Authorization, etc. of Pledged Collateral. All of the Pledged --------------------------------------------- Shares have been duly authorized and validly issued and are fully paid and non-assessable. All of the Pledged Debt has been duly authorized, authenticated or issued, and delivered and is the legal, valid and binding obligation of the issuers thereof and is not in default. (b) Description of Pledged Collateral. The Pledged Shares constitute --------------------------------- the percentage of the issued and outstanding shares of stock of each issuer thereof set forth on Schedule I annexed hereto, and there are no outstanding ---------- warrants, options or other rights to purchase, or other agreements outstanding with respect to, or property that is now or hereafter convertible into, or that requires the issuance or sale of, any Pledged Shares. The Pledged Debt constitutes all of the issued and outstanding intercompany indebtedness evidenced by a promissory note of the respective issuers thereof owing to Pledgor. (c) Ownership of Pledged Collateral. Pledgor is the legal, record and ------------------------------- beneficial owner of the Pledged Collateral free and clear of any Lien except for the security interest created by this Agreement. SECTION 6. TRANSFERS AND OTHER LIENS; ADDITIONAL PLEDGED COLLATERAL; ETC. -------------------------------------------------------------- XIV-7 Pledgor shall: (a) not, except as expressly permitted by the Financing Agreements, (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral, (ii) create or suffer to exist any Lien upon or with respect to any of the Pledged Collateral, except for the security interest under this Agreement, or (iii) permit any issuer of Pledged Shares to merge or consolidate unless all the outstanding capital stock of the surviving or resulting corporation is, upon such merger or consolidation, pledged hereunder and no cash, securities or other property is distributed in respect of the outstanding shares of any other constituent corporation provided that if the surviving or resulting -------- corporation upon any such merger or consolidation involving an issuer of Pledged Shares which is a controlled foreign corporation is a controlled foreign corporation, then Pledgor shall only be required to pledge outstanding capital stock of such surviving or resulting corporation possessing up to but not exceeding 65% of the voting power of all classes of capital stock of such issuer entitled to vote; provided that in the event -------- Pledgor makes an Asset Sale permitted by the Financing Agreements and the assets subject to such Asset Sale are Pledged Shares, Collateral Agent shall release the Pledged Shares that are the subject of such Asset Sale to Pledgor free and clear of the lien and security interest under this Agreement concurrently with the consummation of such Asset Sale; provided, -------- further that, as a condition precedent to such release, Collateral Agent ------- shall have received evidence reasonably satisfactory to it that arrangements reasonably satisfactory to it have been made for delivery to Collateral Agent of the Net Asset Sale Proceeds of such Asset Sale in the event and to the extent that all or any portion of such Net Asset Sale Proceeds are required to be applied to prepay the Loans under the Financing Agreements; (b) (i) cause each issuer of Pledged Shares not to issue any stock or other securities in addition to or in substitution for the Pledged Shares issued by such issuer, except to Pledgor, (ii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities of each issuer of Pledged Shares, and (iii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all shares of stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of Pledgor; provided, that notwithstanding -------- anything contained in this clause (b) to the contrary, Pledgor shall only be required to pledge the outstanding capital stock of a foreign controlled corporation possessing up to but not exceeding 65% of the voting power of all classes of capital stock of such controlled foreign corporation entitled to vote; (c) (i) pledge hereunder, immediately upon their issuance, any and all instruments or other evidences of additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt, and (ii) pledge hereunder, immediately upon their issuance, any and all instruments or other evidences of indebtedness from time to time owed to Pledgor by any Person that after the date of this Agreement becomes, as a result of any occurrence, a Subsidiary of Pledgor; and XIV-8 (d) pay promptly when due all taxes, assessments and governmental charges or levies imposed upon, and all claims against, the Pledged Collateral, except to the extent the validity thereof is being contested in good faith. SECTION 7. FURTHER ASSURANCES; PLEDGE AMENDMENTS. ------------------------------------- (a) Pledgor agrees that from time to time, at the expense of Pledgor, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Without limiting the generality of the foregoing, Pledgor will: (i) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices as Collateral Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby and (ii) at Collateral Agent's reasonable request, appear in and defend any action or proceeding that may affect Pledgor's title to or Collateral Agent's security interest in all or any part of the Pledged Collateral. (b) Pledgor further agrees that it will, upon obtaining any additional shares of stock or other securities required to be pledged hereunder as provided in Section 6(b) or (c), promptly (and in any event within five Business Days) deliver to Collateral Agent a Pledge Amendment, duly executed by Pledgor, in substantially the form of Schedule II annexed hereto (a "PLEDGE AMENDMENT"), ----------- in respect of the additional Pledged Shares or Pledged Debt to be pledged pursuant to this Agreement. Pledgor hereby authorizes Collateral Agent to attach each Pledge Amendment to this Agreement and agrees that all Pledged Shares or Pledged Debt listed on any Pledge Amendment delivered to Collateral Agent shall for all purposes hereunder be considered Pledged Collateral; provided that the failure of Pledgor to execute a Pledge Amendment with respect - -------- to any additional Pledged Shares or Pledged Debt pledged pursuant to this Agreement shall not impair the security interest of Collateral Agent therein or otherwise adversely affect the rights and remedies of Collateral Agent hereunder with respect thereto. SECTION 8. VOTING RIGHTS; DIVIDENDS; ETC. ------------------------------ (a) So long as no Event of Default shall have occurred and be continuing: (i) Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Financing Agreements; (ii) Pledgor shall be entitled to receive and retain, and to utilize free and clear of the lien of this Agreement, any and all dividends and interest paid in respect of the Pledged Collateral; provided, however, that -------- ------- any and all dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral, shall be, and shall forthwith be delivered to Collateral Agent to hold as, Pledged Collateral and shall, if received by Pledgor, be received in trust for the benefit of Collateral Agent, be segregated XIV-9 from the other property or funds of Pledgor and be forthwith delivered to Collateral Agent as Pledged Collateral in the same form as so received (with all necessary endorsements); provided, that Pledgor shall not be required to -------- deliver the outstanding capital stock of a foreign controlled corporation paid as a dividend or interest to the Pledgor, if Collateral Agent would hold as Pledged Collateral outstanding capital stock of such controlled foreign corporation possessing greater than 65% of the voting power of all classes of capital stock of such controlled foreign corporation entitled to vote; and (iii) Collateral Agent shall promptly execute and deliver (or cause to be executed and delivered) to Pledgor all such proxies, dividend payment orders and other instruments as Pledgor may from time to time reasonably request for the purpose of enabling Pledgor to exercise the voting and other consensual rights which it is entitled to exercise pursuant to paragraph (i) above and to receive the dividends, principal or interest payments which it is authorized to receive and retain pursuant to paragraph (ii) above. (b) Upon the occurrence and during the continuation of an Event of Default: (i) upon written notice from Collateral Agent to Pledgor, all rights of Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 8(a)(i) shall cease, and all such rights shall thereupon become vested in Collateral Agent who shall thereupon have the sole right to exercise such voting and other consensual rights; (ii) all rights of Pledgor to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 8(a)(ii) shall cease, and all such rights shall thereupon become vested in Collateral Agent who shall thereupon have the sole right to receive and hold as Pledged Collateral such dividends and interest payments; and (iii) all dividends, principal and interest payments which are received by Pledgor contrary to the provisions of paragraph (ii) of this Section 8(b) shall be (A) forthwith (and in any event within two Business Days) deposited by the Pledgor to the exact form received, duly endorsed by the Pledgor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent for the account of the Secured Parties only as provided in Section 15, (B) until so turned over in accordance with the preceding subsection (A), all such amounts and proceeds received by Grantor shall be received in trust for the benefit of Collateral Agent hereunder -- and shall be segregated from other funds of Pledgor. (c) In order to permit Collateral Agent to exercise the voting and other consensual rights which it may be entitled to exercise pursuant to Section 8(b)(i) and to receive all dividends and other distributions which it may be entitled to receive under Section 8(a)(ii) or Section 8(b)(ii), (i) Pledgor shall promptly execute and deliver (or cause to be executed and delivered) to Collateral Agent all such proxies, dividend payment orders and other instruments as Collateral Agent may from time to time reasonably request and (ii) without limiting the effect of the immediately preceding clause (i), Pledgor hereby grants to Collateral Agent an irrevocable proxy to vote the Pledged Shares and to XIV-10 exercise all other rights, powers, privileges and remedies to which a holder of the Pledged Shares would be entitled (including, without limitation, giving or withholding written consents of shareholders, calling special meetings of shareholders and voting at such meetings), which proxy shall be effective, automatically and without the necessity of any action (including any transfer of any Pledged Shares on the record books of the issuer thereof) by any other Person (including the issuer of the Pledged Shares or any officer or agent thereof), upon the occurrence and during the continuance of an Event of Default and which proxy shall only terminate upon the payment in full of the Secured Obligations. SECTION 9. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. ------------------------------------------- Pledgor hereby irrevocably appoints Collateral Agent as Pledgor's attorney- in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor, Collateral Agent or otherwise, from time to time, upon the occurrence and during the continuance of an Event of Default, in Collateral Agent's reasonable discretion to take any action and to execute any instrument that Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) to file one or more financing or continuation statements, or amendments thereto, relative to all or any part of the Pledged Collateral without the signature of Pledgor to the extent allowed under applicable law; (b) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Pledged Collateral; (c) to receive, endorse and collect any instruments made payable to Pledgor representing any dividend, principal or interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same; and (d) to file any claims or take any action or institute any proceedings that Collateral Agent may reasonably deem necessary or desirable for the collection of any of the Pledged Collateral or otherwise to enforce the rights of Collateral Agent with respect to any of the Pledged Collateral. SECTION 10. COLLATERAL AGENT MAY PERFORM. ---------------------------- If Pledgor fails to perform any agreement contained herein, Collateral Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of Collateral Agent incurred in connection therewith shall be payable by Pledgor under Section 16(b). SECTION 11. STANDARD OF CARE. ---------------- The powers conferred on Collateral Agent hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Pledged Collateral in its possession and the XIV-11 accounting for moneys actually received by it hereunder, Collateral Agent shall have no duty as to any Pledged Collateral, it being understood that Collateral Agent shall have no responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Pledged Collateral, whether or not Collateral Agent has or is deemed to have knowledge of such matters, (b) taking any necessary steps (other than steps taken in accordance with the standard of care set forth above to maintain possession of the Pledged Collateral) to preserve rights against any parties with respect to any Pledged Collateral, (c) taking any necessary steps to collect or realize upon the Secured Obligations or any guarantee therefor, or any part thereof, or any of the Pledged Collateral, or (d) initiating any action to protect the Pledged Collateral against the possibility of a decline in market value. Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equal to that which Collateral Agent accords its own property consisting of negotiable securities. XIV-12 SECTION 12. REMEDIES. -------- (a) If any Event of Default shall have occurred and be continuing, Collateral Agent may exercise in respect of the Pledged Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Pledged Collateral), and Collateral Agent may also in its sole discretion, without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange or broker's board or at any of Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Collateral Agent may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Pledged Collateral. Collateral Agent or any Secured Party or Interest Rate Exchanger may be the purchaser of any or all of the Pledged Collateral at any such sale and Collateral Agent, as agent for and representative of Secured Parties and Interest Rate Exchangers (but not any Secured Party or Secured Parties or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Obligees shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Pledged Collateral payable by Collateral Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Pledgor, and Pledgor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Collateral Agent shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Pledgor hereby waives any claims against Collateral Agent arising by reason of the fact that the price at which any Pledged Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Collateral Agent accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Pledged Collateral are insufficient to pay all the Secured Obligations, Pledgor shall be liable for the deficiency and the reasonable fees of any attorneys employed by Collateral Agent to collect such deficiency. (b) Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws, Collateral Agent may be compelled, with respect to any sale of all or any part of the Pledged Collateral conducted without prior registration or qualification of such Pledged Collateral under the Securities Act and/or such state securities laws, to limit purchasers to those who will agree, among other things, to acquire the Pledged Collateral for their own account, for investment and not with a view to the distribution or resale thereof. Pledgor acknowledges that any such private sales may be at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including, without limitation, a public XIV-13 offering made pursuant to a registration statement under the Securities Act) and, notwithstanding such circumstances, Pledgor agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that Collateral Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Pledged Collateral for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would, or should, agree to so register it. (c) If Collateral Agent determines to exercise its right to sell any or all of the Pledged Collateral, upon written request, Pledgor shall and shall cause each issuer of any Pledged Shares to be sold hereunder from time to time to furnish to Collateral Agent all such information as Collateral Agent may reasonably request in order to determine the number of shares and other instruments included in the Pledged Collateral which may be sold by Collateral Agent in exempt transactions under the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder, as the same are from time to time in effect. SECTION 13. PROCEEDS TO BE TURNED OVER TO COLLATERAL AGENT. ---------------------------------------------- In addition to the rights of the Collateral Agent and the Secured Parties specified in Section 8(b) with respect to payment of Accounts, if an Event of Default shall occur and be continuing, upon request of the Collateral Agent, all proceeds received by the Pledgor consisting of cash, checks and other near-cash items shall be held by the Pledgor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of the Pledgor, and shall, forthwith upon receipt by the Pledgor, be turned over to the Collateral Agent in the exact form received by the Pledgor (duly indorsed by the Pledgor to the Collateral Agent, if required) and held by the Collateral Agent in a Collateral Account maintained under the Intercreditor Agreement. All proceeds while held by the Collateral Agent in a Collateral Account (or by the Pledgor in trust for the Collateral Agent and the Secured Parties) shall continue to be held as collateral security for all the Secured Obligations and shall not constitute payment thereof until applied as provided in Section 15. SECTION 14. APPLICATION OF PROCEEDS. ----------------------- All proceeds held in any Collateral Account and all other proceeds received by Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral shall be applied as provided in subsection 3 of the Intercreditor Agreement. SECTION 15. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. ----------------------------------------------- This Agreement shall create a continuing security interest in the Pledged Collateral and shall (a) remain in full force and effect until the payment in full of all Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Pledgor, its successors and assigns, and (c) inure, together with the rights and remedies of Collateral Agent XIV-14 hereunder, to the benefit of Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement and subsection 10.1 of the AXEL Credit Agreement, any Secured Party may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to herein or otherwise. Upon the payment in full of all Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Pledged Collateral shall revert to Pledgor. Upon any such termination Collateral Agent will, at Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination in accordance with the terms of the Intercreditor Agreement and Pledgor shall be entitled to the return, upon its request and at its expense, against receipt and without recourse to Collateral Agent, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 16. COLLATERAL AGENT AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Collateral Agent has been appointed to act as Collateral Agent hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and AXEL Administrative Agent on behalf of the AXEL Lenders pursuant to Intercreditor Agreement and, by their acceptance of the benefits hereof, Interest Rate Exchangers and shall be entitled to the benefits of the Intercreditor Agreement. Collateral Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Pledged Collateral), solely in accordance with this Agreement and the Intercreditor Agreement; provided that Collateral Agent shall -------- exercise, or refrain from exercising, any remedies provided for in Section 12 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 18(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Pledged Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Collateral Agent for the benefit of and Interest Rate Exchangers in accordance with the terms of this Section 18(a). (b) Collateral Agent shall at all times be the same Person that is appointed Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, XIV-15 privileges and duties of the retiring or removed Collateral Agent under this Agreement, and the retiring or removed Collateral Agent under this Agreement shall promptly (i) transfer to such successor Collateral Agent all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Collateral Agent under this Agreement, and (ii) execute and deliver to such successor Collateral Agent such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Collateral Agent of the security interests created hereunder, whereupon such retiring or removed Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Collateral Agent hereunder. SECTION 17. AMENDMENTS; ETC. --------------- No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Pledgor therefrom, shall in any event be effective unless the same shall be in writing and signed by Collateral Agent and, in the case of any such amendment or modification, by Pledgor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 18. NOTICES. ------- Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex (with received answerback), or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices to Collateral Agent or Pledgor shall not be -------- effective until received. For the purposes hereof, the address of each party hereto shall be as provided in subsection 10.8 of the Credit Agreement or subsection 10.8 of the AXEL Credit Agreement, as applicable, or as set forth under such party's name on the signature pages hereof or such other address as shall be designated by such party in a written notice delivered to the other parties hereto. SECTION 19. SEVERABILITY. ------------ In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 20. HEADINGS. -------- XIV-16 Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 21. GOVERNING LAW; TERMS. -------------------- THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5- 1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Financing Agreements, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 22. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] XIV-17 IN WITNESS WHEREOF, Pledgor and Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. SEALY MATTRESS COMPANY By: ________________________________ Name: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Collateral Agent By: ________________________________ Name: Title: XIV-18 SCHEDULE I Attached to and forming a part of the Company Pledge Agreement dated as of December 18, 1997 between Sealy Mattress Company, as Pledgor, and Morgan Guaranty Trust Company of New York, as Collateral Agent. PART A
================================================================================ PERCENTAGE OF STOCK NUMBER OUTSTANDING CLASS OF CERTIFICATE PAR OF SHARES STOCK ISSUER STOCK NOS. VALUE SHARES PLEDGED - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
PART B
============================================================ AMOUNT OF DEBT ISSUER INDEBTEDNESS ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ ============================================================
XIV-19 SCHEDULE II PLEDGE AMENDMENT This Pledge Amendment, dated ____________, [199_][200_], is delivered pursuant to Section 6(b) of the Pledge Agreement referred to below. The undersigned hereby agrees that this Pledge Amendment may be attached to the Company Pledge Agreement dated as of December 18, 1997, between the undersigned and Morgan Guaranty Trust Company of New York, as Collateral Agent (the "PLEDGE AGREEMENT," capitalized terms defined therein being used herein as therein defined), and that the [Pledged Shares] [Pledged Debt] listed on this Pledge Amendment shall be deemed to be part of the [Pledged Shares] [Pledged Debt] and shall become part of the Pledged Collateral and shall secure all Secured Obligations. SEALY MATTRESS COMPANY By: ___________________________________ Name: Title:
================================================================================ PERCENTAGE OF CLASS STOCK NUMBER OUTSTANDING OF CERTIFICATE PAR OF SHARES PLEDGED STOCK ISSUER STOCK NOS. VALUE SHARES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
============================================================ AMOUNT OF DEBT ISSUER INDEBTEDNESS ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ ============================================================
XIV-20 EXHIBIT XV [FORM OF COMPANY SECURITY AGREEMENT] COMPANY SECURITY AGREEMENT This COMPANY SECURITY AGREEMENT (this "AGREEMENT") is dated as of December 18, 1997 and entered into by and between SEALY MATTRESS COMPANY, an Ohio corporation ("GRANTOR"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as Collateral Agent for and representative of (in such capacity, herein called "COLLATERAL AGENT") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined). RECITALS A. Grantor, Sealy Corporation, a Delaware Corporation ("HOLDINGS") the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO."), as documentation agent (in such capacity, "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the ("CREDIT AGREEMENT") pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Grantor. B. Grantor, Holdings, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity the "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity "AXEL ADMINISTRATIVE AGENT"), and BTCo., as documentation agent (in such capacity "AXEL DOCUMENTATION AGENT") have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, the CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL Lenders have made certain commitments, subject to the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Grantor. C. Grantor may from time to time enter into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more CA Lenders or their Affiliates or AXEL Lenders or their Affiliates (in such capacity, collectively, "INTEREST RATE EXCHANGERS") in accordance with the terms of the Financing Agreements (as hereinafter defined), XV-1 and it is desired that the obligations of Grantor under the Lender Interest Rate Agreements, including without limitation the obligation of Grantor to make payments, if any, thereunder in the event of early termination thereof, together with all obligations of Grantor under the Financing Agreements and any other Loan Documents (as hereinafter defined), be secured hereunder. D. It is a condition precedent to the initial extensions of credit by Secured Parties under the Financing Agreements that Grantor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of, the Grantor, (iii) the AXEL Administrative Agent, the AXEL Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement, (iv) the AXEL Lenders to make their respective loans to the Grantor and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Grantor hereby agrees with the Collateral Agent as follows: 1. DEFINED TERMS. ------------- (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. "ACCOUNTS" has the meaning assigned to that term in Section 2 of this Agreement. "AGREEMENT" means this Company Security Agreement dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. "ASSIGNED AGREEMENT" has the meaning assigned to that term in Section 2 of this Agreement. "AXEL COMMITMENTS" shall mean the "Commitments" as defined in the AXEL Credit Agreement. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. XV-2 "AXEL OBLIGATIONS" shall mean the "Obligations" as defined in the AXEL Credit Agreement. "COLLATERAL" has the meaning assigned to that term in Section 2 of this Agreement. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EQUIPMENT" has the meaning assigned to that term in Section 2 of this Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. "FINANCING AGREEMENT" means either the Credit Agreement or the AXEL Credit Agreement, and "Financing Agreements" means the Credit Agreement and the AXEL Credit Agreement, collectively. "FINANCING AGREEMENT OBLIGATIONS" means Credit Agreement Obligations and AXEL Obligations. "GRANTOR" has the meaning assigned to that term in the introduction of this Agreement. "HOLDINGS" has the meaning assigned to that term in the recitals to this Agreement. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. XV-3 "INVENTORY" has the meaning assigned to that term in Section 2 of this Agreement. "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "NEGOTIABLE DOCUMENT OF TITLE" has the meaning assigned to that term in Section 2 of this Agreement. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "RELATED CONTRACTS" has the meaning assigned to that term in Section 2 of this Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. "REQUISITE OBLIGEES" has the meaning assigned to that term in Section 23 of this Agreement. "SECURED OBLIGATIONS" has the meaning assigned to that term in Section 2 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. 2. GRANT OF SECURITY. ----------------- Grantor hereby assigns to Collateral Agent and hereby grants to Collateral Agent, a security interest in, all of Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Grantor now has or hereafter acquires an interest and wherever the same may be located (the "COLLATERAL"): XV-4 (a) all equipment in all of its forms, all parts thereof and all accessions thereto (any and all such equipment, parts and accessions being the "EQUIPMENT"); (b) all inventory in all of its forms (including, but not limited to, (i) all goods held by Grantor for sale or lease or to be furnished under contracts of service or so leased or furnished, (ii) all raw materials, work in process, finished goods, and materials used or consumed in the manufacture, packing, shipping, advertising, selling, leasing, furnishing or production of such inventory or otherwise used or consumed in Grantor's business, (iii) all goods in which Grantor has an interest in mass or a joint or other interest or right of any kind, and (iv) all goods which are returned to or repossessed by Grantor) and all accessions thereto and products thereof (all such inventory, accessions and products being the "INVENTORY") and all negotiable and non-negotiable documents of title (including without limitation warehouse receipts, dock receipts and bills of lading) issued by any Person covering any Inventory (any such negotiable document of title being a "NEGOTIABLE DOCUMENT OF TITLE"); (c) all accounts, contract rights, chattel paper, documents, instruments, general intangibles and other rights and obligations of any kind and all rights in, to and under all security agreements, leases and other contracts securing or otherwise relating to any such accounts, contract rights, chattel paper, documents, instruments, general intangibles or other obligations (any and all such accounts, contract rights, chattel paper, documents, instruments, general intangibles and other obligations being the "ACCOUNTS", and any and all such security agreements, leases and other contracts being the "RELATED CONTRACTS"); (d) all agreements and contracts to which Grantor is a party as of the date hereof or becomes a party after the date hereof, as each such agreement may be amended, supplemented or otherwise modified from time to time (said agreements, as so amended, supplemented or otherwise modified, being referred to herein individually as an "ASSIGNED AGREEMENT" and collectively as the "ASSIGNED AGREEMENTS"), including (i) all rights of Grantor to receive moneys due or to become due under or pursuant to the Assigned Agreements, (ii) all rights of Grantor to receive proceeds of any insurance, indemnity, warranty or guaranty with respect to the Assigned Agreements, (iii) all claims of Grantor for damages arising out of any breach of or default under the Assigned Agreements, and (iv) all rights of Grantor to terminate, amend, supplement, modify or exercise rights or options under the Assigned Agreements, to perform thereunder and to compel performance and otherwise exercise all remedies thereunder; (e) all deposit accounts, including without limitation all deposit accounts maintained with Collateral Agent; (f) all tradesecrets, licenses, copyrights, registrations and franchise rights, and all goodwill associated with any of the foregoing; (g) to the extent not included in any other paragraph of this Section 2, all other general intangibles (including without limitation tax refunds, rights to payment or XV-5 performance, choses in action and judgments taken on any rights or claims included in the Collateral); (h) all plant fixtures, business fixtures and other fixtures and storage and office facilities, and all accessions thereto and products thereof; (i) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; and (j) all proceeds, products, rents and profits of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Collateral Agent is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. Notwithstanding anything herein to the contrary, in no event shall the Collateral include, and Grantor shall not be deemed to have granted a security interest in, any of Grantor's rights or interests in any license, contract or agreement to which Grantor is a party or any of its rights or interests thereunder to the extent, but only to the extent, that such a grant would, under the terms of such license, contract or agreement or otherwise, result in a breach of the terms of, or constitute a default under any license, contract or agreement to which Grantor is a party (other than to the extent that any such term would be rendered ineffective pursuant to Section 9-318(4) of the Uniform Commercial Code of any relevant jurisdiction or any other applicable law (including the Bankruptcy Code) or principles of equity); provided, that -------- immediately upon the ineffectiveness, lapse or termination of any such provision, the Collateral shall include, and Grantor shall be deemed to have granted a security interest in, all such rights and interests as if such provision had never been in effect. 3. SECURITY FOR OBLIGATIONS. ------------------------ This Agreement secures, and the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all obligations and liabilities of every nature, of Grantor now or hereafter existing under or arising out of or in connection with any Financing Agreement and any other Loan Documents and the Lender Interest Rate Agreements and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Grantor, would accrue on such obligations), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or XV-6 contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Collateral Agent or any Secured Party or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise and all obligations of every nature of Grantor now or hereafter existing under this Agreement (all such obligations of Grantor being the "SECURED OBLIGATIONS"). 4. GRANTOR REMAINS LIABLE. ---------------------- Anything contained herein to the contrary notwithstanding, (a) Grantor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Collateral Agent of any of its rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Collateral Agent shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Collateral Agent be obligated to perform any of the obligations or duties of Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. 5. REPRESENTATIONS AND WARRANTIES. ------------------------------ Grantor represents and warrants as follows: (a) Ownership of Collateral. Except for the security interest created ----------------------- by this Agreement, Grantor owns the Collateral free and clear of any Lien subject to Liens permitted by the Financing Agreements. (b) Location of Equipment and Inventory. All of the Equipment and ----------------------------------- Inventory is, as of the date hereof, located at the places specified in Schedule 5(b) annexed hereto. ------------- (c) Negotiable Documents of Title. No Negotiable Documents of Title ----------------------------- are outstanding with respect to any of the Inventory (other than in respect of (i) Inventory with an aggregate value not in excess of $1,000,000 or (ii) Inventory which, in the ordinary course of business, is in transit either (A) from a supplier to Grantor, (B) between the locations specified in Schedule 5(b) hereto, or (C) to customers of Grantor). ------------- (d) Office Locations; Other Names. The chief place of business, the ----------------------------- chief executive office and the office where Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts is, and has been for the four month period preceding the date hereof, located at the places indicated on Schedule 5d. Grantor has not in ----------- the past done, and does not now do, business under any other name (including any trade-name or fictitious business name) except for those names set forth on Schedule 5d. ----------- XV-7 6. FURTHER ASSURANCES. ------------------ (a) Grantor agrees that from time to time, at the expense of Grantor, Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Grantor will: (i) mark conspicuously each item of chattel paper included in the Accounts, each Related Contract and, at the reasonable request of Collateral Agent, each of its records pertaining to the Collateral, with a legend, in form and substance reasonably satisfactory to Collateral Agent, indicating that such Collateral is subject to the security interest granted hereby, (ii) at the reasonable request of Collateral Agent, deliver and pledge to Collateral Agent hereunder all promissory notes and other instruments (excluding checks) and all original counterparts of chattel paper constituting Collateral, duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance reasonably satisfactory to Collateral Agent, (iii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as Collateral Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iv) after the acquisition by Grantor of any item of Equipment which is covered by a certificate of title under a statute of any jurisdiction under the law of which indication of a security interest on such certificate is required as a condition of perfection thereof, upon the reasonable request of Collateral Agent, execute and file with the registrar of motor vehicles or other appropriate authority in such jurisdiction an application or other document requesting the notation or other indication of the security interest created hereunder on such certificate of title, (v) upon the reasonable request of Collateral Agent, deliver to Collateral Agent copies of all such applications or other documents filed during such calendar quarter and copies of all such certificates of title issued during such calendar quarter indicating the security interest created hereunder in the items of Equipment covered thereby, and (vi) at Collateral Agent's reasonable request, appear in and defend any action or proceeding that may affect Grantor's title to or Collateral Agent's security interest in all or any part of the Collateral. (b) Grantor hereby authorizes Collateral Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Grantor to the extent permitted by applicable law. Grantor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by Grantor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. 7. CERTAIN COVENANTS OF GRANTOR. ---------------------------- Grantor shall: (a) notify Collateral Agent of any change in Grantor's name, identity or corporate structure within 30 days of such change; XV-8 (b) give Collateral Agent 30 days' written notice following any change in Grantor's chief place of business, chief executive office or residence or the office where Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts; (c) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent the validity thereof is being contested in good faith. 8. SPECIAL COVENANTS WITH RESPECT TO EQUIPMENT AND INVENTORY. --------------------------------------------------------- Grantor shall: (a) keep the Equipment and Inventory at the places therefor specified on Schedule 5(b) annexed hereto or, upon 30 days' written notice to ------------- Collateral Agent following any change in location, at such other places in jurisdictions where all action that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder, with respect to such Equipment and Inventory shall have been taken; (b) cause the Equipment to be maintained and preserved in working order, ordinary wear and tear and damage by casualty excepted, and in accordance with Grantor's past practices, and shall forthwith make or cause to be made all repairs, replacements and other improvements in connection therewith that are necessary in the Grantor's reasonable business judgment to such end; (c) keep correct and accurate records of the Inventory, itemizing and describing the kind, type and quantity of Inventory, Grantor's cost therefor and (where applicable) the current list prices for the Inventory; (d) if any Inventory is in possession or control of any of Grantor's agents or processors, upon the occurrence of an Event of Default, instruct such agent or processor to hold all such Inventory for the account of Collateral Agent and subject to the instructions of Collateral Agent; and (e) promptly upon the issuance and delivery to Grantor of any Negotiable Document of Title (other than any one or more Negotiable Documents of Title covering (i) Inventory with an aggregate value not in excess of $1,000,000 or (ii) Inventory which, in the ordinary course of business, is in transit either (A) from a supplier to Grantor, (B) between the locations specified in Schedule 5(b) hereto, or (C) to customers of ------------- Grantor), deliver such Negotiable Document of Title to Collateral Agent. XV-9 9. INSURANCE. --------- Grantor shall, at its own expense, maintain insurance with respect to the Equipment and Inventory in accordance with the terms of the Financing Agreements. 10. SPECIAL COVENANTS WITH RESPECT TO ACCOUNTS AND RELATED CONTRACTS. ---------------------------------------------------------------- (a) Grantor shall keep its chief place of business and chief executive office and the office where it keeps its records concerning the Accounts and Related Contracts, and all originals of all chattel paper that evidence Accounts, at the location therefor specified in Section 5 or, upon 30 days' written notice to Collateral Agent following any change in location, at such other location in a jurisdiction where all action that Collateral Agent may request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder, with respect to such Accounts and Related Contracts shall have been taken. Promptly upon the reasonable request of Collateral Agent, Grantor shall deliver to Collateral Agent complete and correct copies of each Related Contract. (b) Grantor shall, maintain (i) complete records of each Account, including records of all payments received, credits granted and merchandise returned, and (ii) all documentation relating thereto in accordance with prudent business practices. (c) Except as otherwise provided in this subsection (c), Grantor shall continue to collect, at its own expense, all amounts due or to become due to Grantor under the Accounts and Related Contracts. In connection with such collections, Grantor shall take such action as Grantor or Collateral Agent may deem necessary or advisable to enforce collection of amounts due or to become due under the Accounts; provided, however, that Collateral Agent shall have the -------- ------- right at any time, upon the occurrence and during the continuation of an Event of Default and upon written notice to Grantor of its intention to do so, to notify the account debtors or obligors under any Accounts of the assignment of such Accounts to Collateral Agent and to direct such account debtors or obligors to make payment of all amounts due or to become due to Grantor thereunder directly to Collateral Agent, to notify each Person maintaining a lockbox or similar arrangement to which account debtors or obligors under any Accounts have been directed to make payment to remit all amounts representing collections on checks and other payment items from time to time sent to or deposited in such lockbox or other arrangement directly to Collateral Agent and, upon such notification and at the expense of Grantor, to enforce collection of any such Accounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Grantor might have done. After receipt by Grantor of the notice from Collateral Agent referred to in the proviso to ------- the preceding sentence, (i) any payments of Accounts, received by the Grantor shall be forthwith (and in any event within two Business Days) deposited by the Grantor in the exact form received, duly indorsed by the Grantor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of the Secured Parties only as provided in Section 21, (ii) until so turned over in accordance with the preceding subsection (i), all amounts and proceeds (including checks and other instruments) received by Grantor in respect of the Accounts and the Related XV-10 Contracts shall be received in trust for the benefit of Collateral Agent hereunder and shall be segregated from other funds of Grantor and (iii) Grantor shall not adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon. 11. DEPOSIT ACCOUNTS. ---------------- Upon the occurrence and during the continuation of an Event of Default, Collateral Agent may exercise dominion and control over, and refuse to permit further withdrawals (whether of money, securities, instruments or other property) from any deposit accounts maintained with Collateral Agent constituting part of the Collateral. 12. LICENSE OF COPYRIGHTS, ETC. -------------------------- Grantor hereby assigns, transfers and conveys to Collateral Agent, effective upon the occurrence of any Event of Default, the nonexclusive right and license to use all copyrights or technical processes owned or used by Grantor that relate to the Collateral and any other collateral granted by Grantor as security for the Secured Obligations, together with any goodwill associated therewith, all to the extent necessary to enable Collateral Agent to use, possess and realize on the Collateral and to enable any successor or assign to enjoy the benefits of the Collateral. This right and license shall inure to the benefit of all successors, assigns and transferees of Collateral Agent and its successors, assigns and transferees, whether by voluntary conveyance, operation of law, assignment, transfer, foreclosure, deed in lieu of foreclosure or otherwise. Such right and license is granted free of charge, without requirement that any monetary payment whatsoever be made to Grantor. 13. TRANSFERS AND OTHER LIENS. ------------------------- Grantor shall not: (a) sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Financing Agreements; or (b) except for the security interest created by this Agreement and Liens permitted by the Financing Agreements, create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person. 14. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. ------------------------------------------- Grantor hereby irrevocably appoints Collateral Agent as Grantor's attorney- in-fact, with full authority in the place and stead of Grantor and in the name of Grantor, Collateral Agent or otherwise, from time to time, upon the occurrence and continuance of an Event of Default, in Collateral Agent's reasonable discretion to take any action and to execute any instrument that Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: XV-11 (a) to obtain and adjust insurance required to be maintained by Grantor or paid to Collateral Agent pursuant to Section 9; (b) to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (c) to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clauses (a) and (b) above; (d) to file any claims or take any action or institute any proceedings that Collateral Agent may reasonably deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Collateral Agent with respect to any of the Collateral; (e) to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Financing Agreements) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Collateral Agent in its reasonable discretion, any such payments made by Collateral Agent to become obligations of Grantor to Collateral Agent, due and payable immediately without demand; (f) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with Accounts and other documents relating to the Collateral; and (g) upon the occurrence and during the continuation of an Event of Default, generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Collateral Agent were the absolute owner thereof for all purposes, and to do, at Collateral Agent's option and Grantor's expense, at any time or from time to time, all acts and things that Collateral Agent reasonably deems necessary to protect, preserve or realize upon the Collateral and Collateral Agent's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as Grantor might do. 15. COLLATERAL AGENT MAY PERFORM. ---------------------------- If Grantor fails to perform any agreement contained herein, Collateral Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of Collateral Agent incurred in connection therewith shall be payable by Grantor under Section 17. XV-12 16. INDEMNITY AND EXPENSES. ---------------------- (a) Grantor agrees to indemnify Collateral Agent, each Secured Party and each Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including without limitation enforcement of this Agreement), except to the extent such claims, losses or liabilities result from Collateral Agent's or such Secured Party's or Interest Rate Exchanger's gross negligence or willful misconduct as determined by a court of competent jurisdiction. (b) Grantor agrees to pay to Collateral Agent promptly following written demand the amount of any and all reasonable costs and reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Collateral Agent hereunder, or (iv) the failure by Grantor to perform or observe any of the provisions hereof. (c) The obligations of Grantor in this Section 17 shall survive the termination of this Agreement and the discharge of Grantor's other obligations under this Agreement, the Interest Rate Agreements, the Financing Agreements and any other Loan Documents. 17. STANDARD OF CARE. ---------------- The powers conferred on Collateral Agent hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Collateral Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Collateral Agent accords its own property. XV-13 18. REMEDIES. -------- If any Event of Default shall have occurred and be continuing, Collateral Agent may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Collateral), and also may (a) require Grantor to, and Grantor hereby agrees that it will at its expense and upon request of Collateral Agent forthwith, assemble all or part of the Collateral as directed by Collateral Agent and make it available to Collateral Agent at a place to be designated by Collateral Agent that is reasonably convenient to both parties, (b) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (c) prior to the disposition of the Collateral, store, process, repair or recondition the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Collateral Agent deems appropriate, (d) take possession of Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same and any of Grantor's equipment for the purpose of completing any work in process, taking any actions described in the preceding clause (c) and collecting any Secured Obligation, and (e) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Collateral Agent may deem commercially reasonable. Collateral Agent or any Secured Party or Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Collateral Agent, as agent for and representative of Secured Parties and Interest Rate Exchangers (but not any Secured Party or Secured Parties or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Obligees shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Collateral Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Grantor, and Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Collateral Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Grantor hereby waives any claims against Collateral Agent arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Collateral Agent accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantor shall be liable for the deficiency and the reasonable fees of any attorneys employed by Collateral Agent to collect such deficiency. 19. PROCEEDS TO BE TURNED OVER TO COLLATERAL AGENT. ---------------------------------------------- XV-14 In addition to the rights of the Collateral Agent and the Secured Parties specified in Section 10 with respect to payments of Accounts, if an Event of Default shall occur and be continuing, upon request of the Collateral Agent, all proceeds received by the Grantor consisting of cash, checks and other near-cash items shall be held by the Grantor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of the Grantor, and shall, forthwith upon receipt by the Grantor, be turned over to the Collateral Agent in the exact form received by the Grantor (duly indorsed by the Grantor to the Collateral Agent, if required) and held by the Collateral Agent in a Collateral Account maintained under the Intercreditor Agreement. All proceeds while held by the Collateral Agent in a Collateral Account (or by the Borrower in trust for the Collateral Agent and the Secured Parties) shall continue to be held as collateral security for all the Obligations and shall not constitute payment thereof until applied as provided in subsection 21. 20. APPLICATION OF PROCEEDS. ----------------------- Except as expressly provided elsewhere in this Agreement, all proceeds held in any Collateral Account and all other proceeds received by Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in subsection 3 of the Intercreditor Agreement. 21. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. ----------------------------------------------- This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of the Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantor, its successors and assigns, and (c) inure, together with the rights and remedies of Collateral Agent hereunder, to the benefit of Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement and subsection 10.1 of the AXEL Credit Agreement, any Secured Party may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Secured Parties herein or otherwise. Upon the payment in full of all Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to Grantor. Upon any such termination Collateral Agent will, at Grantor's expense, execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination in accordance with the terms of the Intercreditor Agreement. XV-15 22. COLLATERAL AGENT AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Collateral Agent has been appointed to act as Collateral Agent hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and AXEL Administrative Agent on behalf of the AXEL Lenders pursuant to the Intercreditor Agreement and, by their acceptance of the benefits hereof, Interest Rate Exchangers, and shall be entitled to the benefits of the Intercreditor Agreement. Collateral Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Collateral), solely in accordance with this Agreement and the Intercreditor Agreement; provided that -------- Collateral Agent shall exercise, or refrain from exercising, any remedies provided for in Section 21 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 23(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Collateral Agent for the benefit of Secured Parties and Interest Rate Exchangers in accordance with the terms of this Section 23(a). (b) Collateral Agent shall at all times be the same Person that is appointed Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent under this Agreement, and the retiring or removed Collateral Agent under this Agreement shall promptly (i) transfer to such successor Collateral Agent all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Collateral Agent under this Agreement, and (ii) execute and deliver to such successor Collateral Agent such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Collateral Agent of the security interests created hereunder, whereupon such retiring or removed Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Collateral Agent hereunder. XV-16 23. AMENDMENTS; ETC. --------------- No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Grantor therefrom, shall in any event be effective unless the same shall be in writing and signed by Collateral Agent and, in the case of any such amendment or modification, by Grantor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. 24. NOTICES. ------- Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex (with received answerback), or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices to Collateral Agent and Grantor shall not be -------- effective until received. For the purposes hereof, the address of each party hereto shall be as provided in subsection 10.8 of the Credit Agreement or subsection 10.8 of the AXEL Credit Agreement, as applicable, or as set forth under such party's name on the signature pages hereof or such other address as shall be designated by such party in a written notice delivered to the other parties hereto. 25. SEVERABILITY. ------------ In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. XV-17 26. HEADINGS. -------- Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. 27. GOVERNING LAW; TERMS. -------------------- THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5- 1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 26. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] XV-18 IN WITNESS WHEREOF, Grantor and Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. SEALY MATTRESS COMPANY By: ---------------------------------- Name: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Collateral Agent By: ---------------------------------- Name: Title: XV-19 SCHEDULE 5(b) TO COMPANY SECURITY AGREEMENT Locations of Equipment: Locations of Inventory: XV-20 EXHIBIT XVI [FORM OF COMPANY PATENT AND TRADEMARK SECURITY AGREEMENT] COMPANY PATENT AND TRADEMARK SECURITY AGREEMENT This COMPANY PATENT AND TRADEMARK SECURITY AGREEMENT (this "AGREEMENT") is dated as of December 18, 1997 and entered into by and among SEALY MATTRESS COMPANY, an Ohio corporation ("COMPANY")(Company being referred to herein as a "GRANTOR"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as Collateral Agent for and representative of (in such capacity herein called "COLLATERAL AGENT") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined). RECITALS (A) Grantor, Sealy Corporation, a Delaware Corporation ("HOLDINGS"), the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO."), as documentation agent (in such capacity, "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT") pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Grantor. B. Grantor, Holdings, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity, "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "AXEL ADMINISTRATIVE AGENT"), and BTCo. as documentation agent (in such capacity, "AXEL DOCUMENTATION AGENT") have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, the CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL Lenders have made certain commitments, subject to the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Grantor. C. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more CA Lenders or their Affiliates or AXEL Lenders or their Affiliates (in such XVI-1 capacity, collectively, "INTEREST RATE EXCHANGERS") in accordance with the terms of the Financing Agreements (as hereinafter defined), and it is desired that the obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments thereunder in the event of early termination thereof (all such obligations being the "INTEREST RATE OBLIGATIONS"), together with all obligations of Company under the Financing Agreements and any other Loan Documents (as hereinafter defined), be secured hereunder. D. Grantor has and may in the future have rights, title and interests in and to various Patents and other related Collateral (as such terms are hereinafter defined). E. Grantor owns and uses in its business, and will in the future adopt and so use, various intangible assets, including trademarks, service marks, designs, logos, indicia, tradenames, corporate names, company names, business names, fictitious business names, trade styles and/or other source and/or business identifiers and applications pertaining thereto (collectively, the "TRADEMARKS"). F. Collateral Agent desires Grantor to grant to it a lien on and security interest in all of Grantor's existing and future Patents, existing and future Trademarks, all registrations that have been or may hereafter be issued or applied for thereon in the United States and any state thereof (the "REGISTRATIONS"), all common law and other rights in and to the Trademarks in the United States and any state thereof (the "TRADEMARK RIGHTS"), all goodwill of Grantor's business symbolized by the Trademarks and associated therewith, including without limitation the documents and things described in Section 2(b) (the "ASSOCIATED GOODWILL"), any other Collateral and all proceeds of the Patents, the Trademarks, the Registrations, the Trademark Rights, the Associated Goodwill and any other Collateral, and Grantor agrees to grant to Collateral Agent a secured and protected interest in the Trademarks, the Registrations, the Trademark Rights, the Associated Goodwill, any other Collateral and all the proceeds thereof as provided herein. G. Pursuant to the Company Security Agreement, Grantor has granted to Collateral Agent a lien on and security interest in, among other assets, all Grantor's equipment, inventory, accounts and general intangibles relating to the products and services sold or delivered under or in connection with the Trademarks such that, upon the occurrence and during the continuation of an Event of Default, Collateral Agent would be able to exercise its remedies consistent with the Security Agreement, this Agreement and applicable law to foreclose upon Grantor's business and use the Trademarks, the Registrations and the Trademark Rights in conjunction with the continued operation of such business, maintaining substantially the same product and service specifications and quality as maintained by Grantor, and benefit from the Associated Goodwill. H. It is a condition precedent to the initial extensions of credit by Secured Parties under the Credit Agreement that Grantor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of, the Grantor, (iii) the AXEL Administrative Agent, the AXEL XVI-2 Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement, (iv) the AXEL Lenders to make their respective loans to the Grantor, and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Grantor hereby agrees with the Collateral Agent as follows: 1. DEFINED TERMS. ------------- (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. "AGREEMENT" means this Company Security Agreement dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. "ASSOCIATED GOODWILL" has the meaning assigned to that term in the recitals to this Agreement. "AXEL COMMITMENTS" shall mean the "Commitments" as defined in the AXEL Credit Agreement. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "AXEL LENDERS" has the meaning assigned to that term in the recitals to this Agreement. "AXEL OBLIGATIONS" shall mean the "Obligations" as defined in the AXEL Credit Agreement. "AXEL SYNDICATION AGENT" has the meaning assigned to that term in the recitals to this Agreement. "COLLATERAL" has the meaning assigned to that term in Section 5 of this Agreement. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COLLATERAL AGENT" has the meaning assigned to that term in the introduction. XVI-3 "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. "FINANCING AGREEMENT" means the Credit Agreement or the AXEL Credit Agreement, and "FINANCING AGREEMENTS" means the Credit Agreement and the AXEL Credit Agreement, collectively. "FINANCING AGREEMENT OBLIGATIONS" means Credit Agreement Obligations and AXEL Obligations. "GRANTOR" has the meaning assigned to that term in the introduction of this Agreement. "HOLDINGS" has the meaning assigned to that term in the recitals to this Agreement. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. "INTEREST RATE OBLIGATIONS" has the meaning assigned to that term in the recitals to this Agreement. "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. XVI-4 "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "MATERIAL PATENT" has the meaning assigned to that term in Section 5 of this Agreement. "MATERIAL TRADEMARK PROPERTY" has the meaning assigned to that term in Section 5 of this Agreement. "PATENTS" has the meaning assigned to that term in Section 2 of this Agreement. "PERMITTED PATENT LIENS" has the meaning assigned to that term in Section 5 of this Agreement. "PERMITTED TRADEMARK LIENS" has the meaning assigned to that term in Section 5 of this Agreement. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "REGISTRATIONS" has the meaning assigned to that term in the recitals to this Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. "REQUISITE OBLIGEES" has the meaning assigned to that term in Section 19 of this Agreement. "SECURED OBLIGATIONS" has the meaning assigned to that term in Section 3 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. "TRADEMARKS" has the meaning assigned to that term in the recitals to this Agreement. "TRADEMARK RIGHTS" has the meaning assigned to that term in the recitals to this Agreement. XVI-5 2. GRANT OF SECURITY. ----------------- Grantor hereby grants to Collateral Agent a security interest in all of Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Grantor now has or hereafter acquires an interest and wherever the same may be located (the "COLLATERAL"): A. each of the U.S. Trademarks and rights and interests in Trademarks which are presently, or in the future may be, owned, held (whether pursuant to a license or otherwise) or used by Grantor, in whole or in part (including without limitation the U.S. Trademarks specifically identified in Schedule I), and including all Trademark Rights with respect thereto and all ---------- federal and state Registrations therefor heretofore or hereafter granted or applied for, the right (but not the obligation) to file for registration claims under any state or federal trademark law or regulation and to apply for, renew and extend the Trademarks, Registrations and Trademark Rights, the right (but not the obligation) to sue or bring opposition or cancellation proceedings in the name of Grantor or in the name of Collateral Agent or otherwise for past, present and future infringements of the Trademarks, Registrations or Trademark Rights and all rights (but not obligations) corresponding thereto in the United States, and the Associated Goodwill; it being understood that the rights and interests included herein shall include, without limitation, all rights and interests pursuant to licensing or other contracts in favor of Grantor pertaining to any Trademarks, Registrations or Trademark Rights presently or in the future owned, held or used by third parties but, in the case of third parties which are not Affiliates of Grantor, only to the extent permitted by such licensing or other contracts or otherwise permitted by applicable law and, if not so permitted under any such contracts and applicable law, only with the consent of such third parties; B. the following documents and things in Grantor's possession, or subject to Grantor's right to possession, related to (Y) the production, sale and delivery by Grantor, or by any Affiliate, licensee or subcontractor of Grantor, of products or services sold or delivered by or under the authority of Grantor in connection with the Trademarks, Registrations or Trademark Rights (which products and services shall, for purposes of this Agreement, be deemed to include, without limitation, products and services sold or delivered pursuant to merchandising operations utilizing any Trademarks, Registrations or Trademark Rights); or (Z) any retail or other merchandising operations conducted under the name of or in connection with the Trademarks, Registrations or Trademark Rights by Grantor or any Affiliate, licensee or subcontractor of Grantor: i. all lists and ancillary documents that identify and describe any of Grantor's customers, or those of its Affiliates, licensees or subcontractors, for products sold and services delivered under or in connection with the Trademarks or Trademark Rights, including without limitation any lists and ancillary documents that contain a customer's name and address, the name and address of any of its warehouses, branches or other places of business, the identity of the Person or Persons having the principal responsibility on a customer's behalf for ordering XVI-6 products or services of the kind supplied by Grantor, or the credit, payment, discount, delivery or other sale terms applicable to such customer, together with information setting forth the total purchases, by brand, product, service, style, size or other criteria, and the patterns of such purchases; ii. all product and service specification documents and production and quality control manuals used in the manufacture or delivery of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights; iii. all documents which reveal the name and address of any source of supply, and any terms of purchase and delivery, for any and all materials, components and services used in the production of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights; and iv. all documents constituting or concerning the then current or proposed advertising and promotion by Grantor or its Affiliates, licensees or subcontractors of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights including, without limitation, all documents which reveal the media used or to be used and the cost for all such advertising conducted within the described period or planned for such products and services; and (c) all patents and patent applications and rights and interests in U.S. patents and patent applications that are presently, or in the future may be, owned, held (whether pursuant to a license or otherwise) or used by Grantor in whole or in part (including, without limitation, the U.S. patents and patent applications listed in Schedule II annexed hereto, all rights ----------- (but not obligations) corresponding thereto (including without limitation the right (but not the obligation) to sue for past, present and future infringements in the name of Grantor or in the name of Collateral Agent), and all re-issues, divisions, continuations, renewals, extensions and continuations-in-part thereof (all of the foregoing being collectively referred to as the "PATENTS"); it being understood that the rights and interests granted hereby shall include, without limitation, all rights and interests pursuant to licensing or other contracts in favor of Grantor pertaining to any Patent presently or in the future owned, held or used by third parties but, in the case of third parties which are not Affiliates of Grantor, only to the extent permitted by such licensing or other contracts or otherwise permitted by applicable law and, if not so permitted under any such contracts and applicable law, only with the consent of such third parties; (d) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; (e) to the extent not included in the foregoing clauses (a) - (d), all general intangibles relating to the Collateral; and XVI-7 (f) all proceeds, products, and profits (including without limitation license royalties and proceeds of infringement suits) of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Collateral Agent is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. 3. SECURITY FOR OBLIGATIONS. ------------------------ This Agreement secures, and the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including without limitation the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all Secured Obligations with respect to Grantor. "SECURED OBLIGATIONS" means all obligations and liabilities of every nature of Company now or hereafter existing under or arising out of or in connection with any Financing Agreements and any other Loan Documents and any Lender Interest Rate Agreement, and in each case together with all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Grantor, would accrue on such obligations), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Collateral Agent or any Secured Party or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise, and all obligations of every nature of Grantor now or hereafter existing under this Agreement. 4. GRANTOR REMAINS LIABLE. ---------------------- Anything contained herein to the contrary notwithstanding, (a) Grantor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Collateral Agent of any of its rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Collateral Agent shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Collateral Agent be obligated to perform any of the obligations or duties of Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. XVI-8 5. REPRESENTATIONS AND WARRANTIES. ------------------------------ Grantor represents and warrants as follows: (a) OWNERSHIP OF COLLATERAL. Except as expressly permitted by the Financing Agreements and for the security interest and conditional assignment created by this Agreement (other than ownership and other rights reserved by third party owners with respect to each Material Trademark Property and each Material Patent that Grantor is licensed to use), Grantor is the legal and beneficial owner of the entire right, title and interest in and to (i) each Material Trademark Property, free and clear of any Lien other than Liens of mechanics, materialmen, attorneys and other similar liens imposed by laws in the ordinary course of business in connection with the establishment, creation or application for registration of any Trademarks, Registrations or Trademark Rights for sums not yet delinquent or being contested in good faith (such Liens being referred to herein as "PERMITTED TRADEMARK LIENS"), and (ii) each Material Patent, free and clear of any Lien other than Liens of mechanics, materialmen, attorneys and other similar liens imposed by law in the ordinary course of business in connection with the establishment, creation or application for any Patent for sums not yet delinquent or being contested in good faith (such Liens being referred to herein as "PERMITTED PATENT LIENS"). Except such as may have been filed in favor of Collateral Agent relating to this Agreement or except as permitted by the Financing Agreements, no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office, including the United States Patent and Trademark Office. (b) DESCRIPTION OF COLLATERAL. A true and complete list of all Registrations, tradenames, corporate names, fictitious business names and Trademark license agreements owned, held (whether pursuant to a license or otherwise) or used by Grantor, in whole or in part, as of the date of this Agreement is set forth in Schedule I annexed hereto. Each Registration, ---------- tradename, corporate name, fictitious business name and Trademark license designated on Schedule I annexed hereto as a Material Trademark Property, ---------- and each other Trademark, Registration or Trademark Right hereafter arising or otherwise owned, held or used by Grantor that is material to any of Grantor's business or operations is referred to herein as a "MATERIAL TRADEMARK PROPERTY". A true and complete list of all Patents owned or held (whether pursuant to a license or otherwise) by Grantor, in whole or in part, as of the date of this Agreement is set forth in Schedule II annexed ----------- hereto. Each Patent designated on Schedule II annexed hereto as a Material ----------- Patent and each other Patent hereafter arising or otherwise owned or held by Grantor that is material to any of Grantor's business or operations is referred to herein as a "MATERIAL PATENT". (c) VALIDITY AND ENFORCEABILITY OF COLLATERAL. Each Material Trademark Property and each Material Patent is subsisting and had not been adjudged invalid or unenforceable, in whole or in part and Grantor is not aware of any pending or threatened claim by any third party that any Material Trademark Property or any Material Patent is invalid or unenforceable or that the use of any Material Trademark Property or any Material Patent violates the rights of any third person. XVI-9 (d) PERFECTION. This Agreement together with the filing of UCC financing statements naming Grantor as "debtor", naming secured party as "Collateral Agent" and describing the Collateral in the filing offices set forth on Schedule III annexed hereto and the recording of this Agreement ------------ with the United States Patent and Trademark Office, creates a valid, perfected and First Priority security interest in the U.S. Collateral (subject only to Permitted Patent Liens and Permitted Trademark Liens) securing the payment of the Secured Obligations, and all filings and other actions necessary to perfect and protect such security interest under the laws of the United States or any State thereof have been or will promptly following execution hereof be duly made or taken. (e) OTHER INFORMATION. All information hereto, herein or hereafter supplied to Collateral Agent by or on behalf of Grantor with respect to the Collateral is accurate and complete in all material respects. 6. FURTHER ASSURANCES; NEW TRADEMARKS, REGISTRATIONS AND TRADEMARK RIGHTS; NEW --------------------------------------------------------------------------- PATENTS AND PATENT APPLICATIONS; CERTAIN INSPECTION RIGHTS. - ---------------------------------------------------------- (a) Grantor agrees that from time to time, at the expense of Grantor, Grantor will promptly execute and deliver all further instruments and documents, and take all further action that Collateral Agent may reasonably request, in order to perfect and protect any security interest or conditional assignment granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Grantor will: (i) at the reasonable request of Collateral Agent, mark conspicuously each of its records pertaining to the Collateral with a legend, in form and substance reasonably satisfactory to Collateral Agent indicating that such Collateral is subject to the security interest granted hereby, (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as Collateral Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iii) use its best efforts to obtain any necessary consents of third parties to the grant and perfection of a security interest to Collateral Agent with respect to any Collateral, and (iv) at Collateral Agent's request, appear in and defend any action or proceeding that would reasonably be expected to affect Grantor's title to or Collateral Agent's security interest in all or any part of the Collateral. (b) Grantor hereby authorizes Collateral Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Grantor to the extent permitted by applicable law. Grantor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by Grantor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. (c) Grantor will furnish to Collateral Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Collateral Agent may reasonably request, all in reasonable detail. XVI-10 (d) If Grantor shall obtain rights to any new Trademarks, Registrations or Trademark Rights, or to any patentable inventions, or become entitled to the benefit of any U.S. patent application or patent or any reissue, division, continuation, renewal, extension, or continuation-in-part of any Patent or any improvement in any Patent, the provisions of this Agreement shall automatically apply thereto. Once per calendar year, Grantor shall notify Collateral Agent in writing of any Registrations or Patents acquired by Grantor during such calendar year and of any Registrations or Patents issued or applications for Registration or Patents made during such calendar year, which notice shall state whether such Registration constitutes a Material Trademark Property or whether such Patent constitutes a Material Patent. Concurrently with the filing of an application for Registration for any Trademark, or an application for any Patent the Grantor shall execute, deliver and record in all places where this Agreement is recorded an appropriate Patent and Trademark Security Agreement, substantially in the form hereof, with appropriate insertions, or an amendment to this Agreement, in form and substance reasonably satisfactory to Collateral Agent, pursuant to which Grantor shall grant a security interest to the extent of its interest in such Registration or Patent as provided herein to Collateral Agent unless so doing would, in the reasonable judgment of Grantor, after due inquiry, result in the grant of a Patent or Registration in the name of Collateral Agent, in which event Grantor shall give written notice to Collateral Agent as soon as reasonably practicable and the filing shall instead be undertaken as soon as practicable but in no case later than immediately following the grant of such Patent or Registration. (e) No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the grant by Grantor of the security interest and conditional assignment granted hereby, (ii) the execution, delivery or performance of this Agreement by grantor, or (iii) the perfection of or the exercise by Collateral Agent of its rights and remedies hereunder (except as may have been taken by or at the direction of Grantor). 7. CERTAIN COVENANTS OF GRANTOR. ---------------------------- Grantor shall: (a) notify Collateral Agent of any change in Grantor's name, identity or corporate structure within 30 days of such change; (b) give Collateral Agent 30 days' written notice following any change in Grantor's chief place of business or chief executive office or the office where Grantor keeps its records regarding the Collateral; (c) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent the validity thereof is being contested in good faith; (d) not sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Financing Agreements; XVI-11 (e) except for Permitted Patent Liens and Permitted Trademark Liens and the security interest and conditional assignment created by this Agreement, not create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person other than Liens permitted by the Financing Agreements; (f) diligently keep reasonable records respecting the Collateral and at all times keep at least one complete set of its records concerning substantially all of the Patents and Registrations at its chief executive office or principal place of business; (g) take all steps reasonably necessary in Grantor's business judgment to protect the secrecy of all trade secrets relating to the products and services sold or delivered under or in connection with the Patents, Trademarks and Trademark Rights; (h) use proper statutory notice in connection with its use of each Material Patent and Material Trademark Property to the extent reasonably necessary for the protection of such Material Patent or Material Trademark Property; and (i) use consistent standards of high quality (which may be consistent with Grantor's past practices or with Grantor's business judgment) in the manufacture, sale and delivery of products and services sold or delivered under or in connection with the Patents, Trademarks, Registrations and Trademark Rights, including, to the extent applicable, in the operation and maintenance of its merchandising operations. 8. AMOUNTS PAYABLE IN RESPECT OF THE COLLATERAL. -------------------------------------------- Except as otherwise provided in this Section 8, Grantor shall continue to collect, at its own expense, all amounts due or to become due to Grantors in respect of the Collateral or any portion thereof. In connection with such collections, each Grantor may take (and, at Collateral Agent's direction, shall take) such action as Grantor may deem necessary or advisable to enforce collection of such amounts; provided, however, that Collateral Agent shall have -------- ------- the right at any time, upon the occurrence and during the continuation of an Event of Default and upon written notice to Grantor of its intention to do so, to notify the obligors with respect to any such amounts of the existence of the security interest and the conditional assignment created hereby, and to direct such obligors to make payment of all such amounts directly to Collateral Agent, and, upon such notification and at the expense of Grantor, to enforce collection of any such amounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Grantor might have done. After receipt by Grantor of the notice from Collateral Agent referred to in the proviso to the preceding sentence, (i) all amounts and proceeds (including checks and other instruments) received by Grantor in respect of amounts due to Grantor in respect of Collateral or any portion thereof received by the Grantor shall be forthwith (and in any event within two Business Days) deposited by the Grantor in the exact form received, duly indorsed by the Grantor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of Secured Parties only as provided in Section 16, (ii) until so turned over in accordance with the preceding subsection (i), all such amounts and proceeds received by Grantor shall be received in trust for the benefit of Collateral Agent hereunder- and shall be segregated from other funds of Grantor and (iii) Grantor shall not XVI-12 adjust, settle or compromise the amount or payment of any such amount or release wholly or partly any obligor with respect thereto or allow any credit or discount thereon. 9. PATENT OR TRADEMARK APPLICATIONS AND LITIGATION. ----------------------------------------------- (a) Grantor shall have the duty diligently, to prosecute any trademark application relating to any Material Trademark Property that is pending as of the date of this Agreement, to make federal application on any existing or future registerable but unregistered Material Trademark Property (whenever it is commercially reasonable in the reasonable judgement of Grantor to do so), and to file and prosecute opposition and cancellation proceedings, renew Registrations and do any and all acts which are necessary or desirable to preserve and maintain all rights in all Material Trademark Properties; provided, however, -------- ------- that Grantor shall not be obligated to prosecute or apply for registration of any Trademark or Registration that Grantor determines in its reasonable business judgment is no longer necessary or desirable in the conduct of its business. Any expenses incurred in connection therewith shall be borne solely by Grantor. Grantor shall not abandon any Material Trademark Property; provided, however, -------- ------- that Grantor shall not be obligated to maintain any Trademark or Registration that Grantor determines in its reasonable business judgment is no longer necessary or desirable in the conduct of its business. (b) Grantor shall have the duty diligently to prosecute any patent application relating to any Material Patent that is pending as of the date of this Agreement and to do any and all acts which are necessary or desirable to preserve and maintain all rights in all Material Patents; provided, however, -------- ------- that Grantor shall not be obligated to prosecute or maintain any Patent that Grantor determines in its reasonable business judgment is no longer necessary or desirable in the conduct of its business. Any expenses incurred in connection therewith shall be borne solely by Grantor. Grantor shall not, as to any patentable invention or Patent that constitutes or could constitute a Material Patent, abandon any pending patent application or any Patent without the prior written consent of Collateral Agent; provided, however, that Grantor shall not -------- ------- be obligated to prosecute or maintain any Patent that Grantor determines in its reasonable business judgment is no longer necessary or desirable in the conduct of its business. (c) Except as provided in Section 9(e), Grantor shall have the right to commence and prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions for infringement, unfair competition, dilution or other damage as are in its reasonable business judgment necessary to protect the Collateral. Collateral Agent shall provide, at Grantor's expense, all reasonable and necessary cooperation in connection with any such suit, proceeding or action including, without limitation, joining as a necessary party. (d) Grantor shall promptly, following its becoming aware thereof, notify Collateral Agent of the institution of, or of any adverse determination in, any proceeding (whether in the United States Patent and Trademark Office or any federal, state, local or foreign court) described in subsection 9(a), 9(b) or 9(c) or regarding Grantor's claim of ownership in or right to use any of the Trademarks, Registrations or Trademark Rights, its right to register the same, or its right to keep and maintain such Registration. Grantor shall provide to Collateral Agent any information with respect thereto requested by Collateral Agent. XVI-13 (e) Anything contained herein to the contrary notwithstanding, upon the occurrence and during the continuation of an Event of Default, Collateral Agent shall have the right (but not the obligation) to bring suit, in the name of Grantor, Collateral Agent or otherwise, to enforce any Patent, Trademark, Registration, Trademark Right, Associated Goodwill and any license thereunder, in which event Grantor shall, at the request of Collateral Agent, do any and all lawful acts and execute any and all documents required by Collateral Agent in aid of such enforcement and Grantor shall promptly, upon demand, reimburse and indemnify Collateral Agent as provided in Section 17 in connection with the exercise of its rights under this Section 9. To the extent that Collateral Agent shall elect not to bring suit to enforce any Patent, Trademark, Registration, Trademark Right Associated Goodwill or any license thereunder as provided in this Section 9(e), Grantor agrees to use all reasonable measures, whether by action, suit, proceeding or otherwise, to prevent the infringement of any of the Patents, Trademarks, Registrations, Trademark Rights or Associated Goodwill by others and for that purpose agrees to diligently maintain in accordance with reasonable business practice any action, suit or proceeding against any Person so infringing necessary to prevent such infringement. 10. NON-DISTURBANCE AGREEMENTS, ETC. -------------------------------- If and to the extent that Grantor is permitted to license the Collateral, Collateral Agent shall enter into a non-disturbance agreement or other similar arrangement, at Grantor's request and expense, with Grantor and any licensee of any Collateral permitted hereunder in form and substance reasonably satisfactory to Collateral Agent pursuant to which (a) Collateral Agent shall agree not to disturb or interfere with such licensee's rights under its license agreement with Grantor so long as such licensee is not in default thereunder and (b) such licensee shall acknowledge and agree that the Collateral licensed to it is subject to the security interest and conditional assignment created in favor of Collateral Agent and the other terms of this Agreement. 11. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. ------------------------------------------- Grantor hereby irrevocably appoints Collateral Agent as Grantor's attorney- in-fact, with full authority in the place and stead of Grantor and in the name of Grantor, Collateral Agent or otherwise, from time to time, upon the occurrence and during the continuance of an Event of Default, in Collateral Agent's reasonable discretion to take any action and to execute any instrument that Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) to endorse Grantor's name on all applications, documents, papers and instruments necessary for Collateral Agent in the use or maintenance of the Collateral; (b) to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (c) to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (b) above; XVI-14 (d) to file any claims or take any action or institute any proceedings that Collateral Agent may reasonably deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Collateral Agent with respect to any of the Collateral; (e) to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Financing Agreements) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Collateral Agent in its sole discretion, any such payments made by Collateral Agent to become obligations of Grantor to Collateral Agent, due and payable immediately without demand; and (f) upon the occurrence and during the continuance of an Event of Default, (i) to execute and deliver any of the assignments or documents requested by Collateral Agent pursuant to Section 14(b), (ii) to grant or issue an exclusive or non-exclusive license to the Collateral or any portion thereof to any Person, and (iii) otherwise generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Collateral Agent were the absolute owner thereof for all purposes, and to do, at Collateral Agent's option and Grantor's expense, at any time or from time to time, all acts and things that Collateral Agent deems necessary to protect, preserve or realize upon the Collateral and Collateral Agent's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as Grantor might do. 12. COLLATERAL AGENT MAY PERFORM. ---------------------------- If Grantor fails to perform any agreement contained herein, Collateral Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of Collateral Agent incurred in connection therewith shall be payable by Grantor under Section 17. 13. STANDARD OF CARE. ---------------- The powers conferred on Collateral Agent hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for monies actually received by it hereunder, Collateral Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Collateral Agent accords its own property. XVI-15 14. REMEDIES. -------- If any Event of Default shall have occurred and be continuing: XVI-16 (a) Collateral Agent may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Collateral), and also may (i) require Grantor to, and Grantor hereby agrees that it will at its expense and upon request of Collateral Agent forthwith, assemble all or part of the Collateral as directed by Collateral Agent and make it available to Collateral Agent at a place to be designated by Collateral Agent that is reasonably convenient to both parties, (ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (iii) prior to the disposition of the Collateral, store the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Collateral Agent deems appropriate, (iv) take possession of Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same for the purpose of taking any actions described in the preceding clause (iii) and collecting any Secured Obligation, (v) exercise any and all rights and remedies of Grantor under or in connection with the contracts related to the Collateral or otherwise in respect of the Collateral, including without limitation any and all rights of Grantor to demand or otherwise require payment of any amount under, or performance of any provision of, such contracts, and (vi) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Collateral Agent may deem commercially reasonable. Collateral Agent or any Secured Party or Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Collateral Agent, as agent for and representative of Secured Parties and Interest Rate Exchangers (but not any Secured Party or Secured Parties or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Obligees, (shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Collateral Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Grantor, and Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Collateral Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Grantor hereby waives any claims against Collateral Agent arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Collateral Agent accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantor shall be liable for the XVI-17 deficiency and the reasonable fees of any attorneys employed by Collateral Agent to collect such deficiency. (b) Upon written demand from Collateral Agent, Grantor shall execute and deliver to Collateral Agent an assignment or assignments of the Patents, Trademarks, Registrations, Trademark Rights and the Associated Goodwill and such other documents as are requested by Collateral Agent. Grantor agrees that such an assignment and/or recording shall be applied to reduce the Secured Obligations outstanding only to the extent that Collateral Agent (or any Secured Party) receives cash proceeds in respect of the sale of, or other realization upon, the Collateral. (c) Within five Business Days after written notice from Collateral Agent, Grantor shall make available to Collateral Agent, to the extent within Grantor's power and authority, such personnel in Grantor's employ on the date of such Event of Default as Collateral Agent may reasonably designate, by name, title or job responsibility, to permit Grantor to continue, directly or indirectly, to produce, advertise and sell the products and services sold or delivered by Grantor under or in connection with the Patents, Trademarks, Registrations and Trademark Rights, such persons to be available to perform their prior functions on Collateral Agent's behalf and to be compensated by Collateral Agent at Grantor's expense on a per diem, pro-rata basis consistent with the salary and benefit structure applicable to each as of the date of such Event of Default. 15. PROCEEDS TO BE TURNED OVER TO COLLATERAL AGENT. ---------------------------------------------- In addition to the rights of the Collateral Agent and the Secured Parties specified in Section 8 with respect to payments of Accounts, if an Event of Default shall occur and be continuing, upon request of the Collateral Agent, all proceeds received by the Grantor consisting of cash, checks and other near-cash items shall be held by the Grantor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of the Grantor, and shall, forthwith upon receipt by the Grantor, be turned over to the Collateral Agent in the exact form received by the Grantor (duly indorsed by the Grantor to the Collateral Agent, if required) and held by the Collateral Agent in a Collateral Account maintained under the Intercreditor Agreement. All proceeds while held by the Collateral Agent in a Collateral Account (or by the Grantor in trust for the Collateral Agent and the Secured Parties) shall continue to be held as collateral security for all the Obligations and shall not constitute payment thereof until applied as provided in Section 16. 16. APPLICATION OF PROCEEDS. ----------------------- Except as expressly provided elsewhere in this Agreement, all proceeds held in any Collateral Account and all other proceeds received by Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in subsection 3 of the Intercreditor Agreement. XVI-18 17. INDEMNITY AND EXPENSES. ---------------------- (a) Grantor agrees to indemnify Collateral Agent, each Secured Party and each Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including without limitation enforcement of this Agreement), except to the extent such claims, losses or liabilities result from Collateral Agent's or such Secured Party's or Interest Rate Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Grantor agrees to pay to Collateral Agent promptly following written demand the amount of any and all costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Collateral Agent hereunder, or (iv) the failure by Grantor to perform or observe any of the provisions hereof. (c) The obligations of Grantor in this Section 17 shall survive the termination of this Agreement and the discharge of Grantor's other obligations under this Agreement, the Interest Rate Agreements, the Credit Agreement and the other Loan Documents. 18. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. ----------------------------------------------- This Agreement shall create a continuing security interest in, and a conditional assignment of the Collateral effective upon the occurrence and during the continuance of an Event of Default and shall (a) remain in full force and effect until the payment in full of the Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantor and its respective successors and assigns, and (c) inure, together with the rights and remedies of Collateral Agent hereunder, to the benefit of Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement and subsection 10.1 of the AXEL Credit Agreement, any Secured Party may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Secured Parties herein or otherwise. Upon the payment in full of all Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest and conditional assignment granted hereby shall terminate and all rights to the Collateral shall revert to Grantor. Upon any such termination Collateral Agent will, at Grantor's expense, execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination in accordance with the terms of the Intercreditor Agreement. XVI-19 19. COLLATERAL AGENT AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Collateral Agent has been appointed to act as Collateral Agent hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and AXEL Administrative Agent on behalf of the AXEL Lenders pursuant to the Intercreditor Agreement and, by their acceptance of the benefits hereof, Interest Rate Exchangers, and shall be entitled to the benefits of the Intercreditor Agreement. Collateral Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including without limitation the release or substitution of Collateral), solely in accordance with this Agreement and the Intercreditor Agreement; provided that -------- Collateral Agent shall exercise, or refrain from exercising, any remedies provided for in Section 14 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 19(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Collateral Agent for the benefit of Secured Parties and Interest Rate Exchangers in accordance with the terms of this Section 19(a). (b) Collateral Agent shall at all times be the same Person that is appointed Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent under this Agreement, and the retiring or removed Collateral Agent under this Agreement shall promptly (i) transfer to such successor Collateral Agent all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Collateral Agent under this Agreement, and (ii) execute and deliver to such successor Collateral Agent such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Collateral Agent of the security interests created hereunder, whereupon such retiring or removed Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Collateral Agent hereunder. XVI-20 20. AMENDMENTS; ETC. --------------- No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Grantor therefrom, shall in any event be effective unless the same shall be in writing and signed by Collateral Agent and, in the case of any such amendment or modification, by Grantor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. 21. NOTICES. ------- Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex (with received answerback), or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices to Collateral Agent or Grantor shall not be -------- effective until received. For the purposes hereof, the address of each party hereto shall be provided in subsection 10.8 of the Credit Agreement or subsection 10.8 of the AXEL Credit Agreement, as applicable, or as set forth under such party's name on the signature pages hereof or such other address as shall be designated by such party in a written notice delivered to the other parties hereto. 22. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. ----------------------------------------------------- No failure or delay on the part of Collateral Agent in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. 23. SEVERABILITY. ------------ In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 24. HEADINGS. -------- Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. XVI-21 25. GOVERNING LAW; TERMS. -------------------- THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5- 1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. 26. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] XVI-22 IN WITNESS WHEREOF, Grantor and Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. SEALY MATTRESS COMPANY By: ________________________________ Name: __________________________ Title:__________________________ MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Collateral Agent By: ________________________________ Name: __________________________ Title:__________________________ XVI-23 SCHEDULE I TO COMPANY PATENT AND TRADEMARK SECURITY AGREEMENT REGISTERED UNITED STATES TRADEMARK REGISTRATION REGISTRATION OWNER DESCRIPTION NUMBER DATE - ------------- ----------------------- ------------ ------------ XVI-24 SCHEDULE II TO COMPANY PATENT AND SECURITY AGREEMENT PATENTS ISSUED -------------- Patent No. Issue Date Invention ---------- ---------- --------- PATENTS PENDING --------------- Applicant's Date Application Name Filed No. Invention Inventor - ----------- ----- ----------- --------- -------- XVI-25 SCHEDULE III TO COMPANY PATENT AND TRADEMARK SECURITY AGREEMENT FILING OFFICES -------------- XVI-26 EXHIBIT XVII [FORM OF SUBSIDIARY GUARANTY] SUBSIDIARY GUARANTY This SUBSIDIARY GUARANTY is entered into as of December 18, 1997 by THE UNDERSIGNED (each a "GUARANTOR" and collectively, "GUARANTORS") in favor of and for the benefit of MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as collateral agent for and representative of (in such capacity herein called "GUARANTIED PARTY") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined), and, subject to subsection 3.12, for the benefit of the other Beneficiaries (as hereinafter defined). RECITALS A. Sealy Mattress Company, an Ohio corporation ("COMPANY"), Sealy Corporation, a Delaware corporation ("HOLDINGS"), the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO."), as documentation agent (in such capacity, "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the ("CREDIT AGREEMENT") pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. B. Company, Holdings, the financial institutions from time to time parties thereto(the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity, "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "AXEL ADMINISTRATIVE AGENT"), and BTCo., as documentation agent (in such capacity, "AXEL DOCUMENTATION AGENT") have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL Lenders have made certain commitments, subject to the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Company. C. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with or one or more Credit Agreement Lenders or their Affiliates or AXEL Lenders XVII-1 or their Affiliates (in such capacity, collectively, "INTEREST RATE EXCHANGERS") in accordance with the terms of the Financing Agreements (as hereinafter defined), and it is desired that the obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments thereunder in the event of early termination thereof (all such obligations being the "INTEREST RATE OBLIGATIONS"), together with all obligations of Company under the Financing Agreements and any other Loan Documents (as hereinafter defined), be guarantied hereunder. D. A portion of the proceeds of the Loans (as hereinafter defined) may be advanced to Guarantors and thus the Guarantied Obligations (as hereinafter defined) are being incurred for and will inure to the benefit of Guarantors (which benefits are hereby acknowledged). E. It is a condition precedent to the making of the initial Loans under the Financing Agreements that Company's obligations thereunder be guarantied by Guarantors. F. Guarantors are willing irrevocably and unconditionally to guaranty such obligations of Company. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of, the Company, (iii) the AXEL Administrative Agent, the AXEL Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement and (iv) the AXEL Lenders to make their respective loans to the Company, and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Guarantors hereby agree as follows: SECTION 1. DEFINITIONS 1.1 CERTAIN DEFINED TERMS. --------------------- (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. XVII-2 "ADDITIONAL GUARANTOR" has the meaning assigned to that term ins subsection 3.12. "ADJUSTED MAXIMUM AMOUNT" has the meaning assigned to that term ins subsection 2.2. "AGGREGATE PAYMENTS" has the meaning assigned to that term ins subsection 2.2. "AXEL COMMITMENTS" shall mean the "Commitments" as defined in the AXEL Credit Agreement. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "AXEL OBLIGATIONS" shall mean the "Obligations" as defined in the AXEL Credit Agreement. "BENEFICIARIES" means Guarantied Party, Secured Parties and any Interest Rate Exchangers. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CONTRIBUTING GUARANTORS" has the meaning assigned to that term ins subsection 2.2. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. XVII-3 "FAIR SHARE" has the meaning assigned to that term ins subsection 2.2. "FINANCING AGREEMENT" means either the Credit Agreement or the AXEL Credit Agreement, and "Financing Agreements" means the Credit Agreement and the AXEL Credit Agreement, collectively. "FINANCING AGREEMENT OBLIGATIONS" means Credit Agreement Obligations and AXEL Obligations. "FRAUDULENT TRANSFER LAWS" has the meaning assigned to that term ins subsection 2.2. "FAIR SHARE SHORTFALL" has the meaning assigned to that term ins subsection 2.2. "FUNDING GUARANTOR" has the meaning assigned to that term ins subsection 2.2. "GUARANTIED OBLIGATIONS" has the meaning assigned to that term in subsection 2.1. "GUARANTY" means this Subsidiary Guaranty dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. "GRANTOR" has the meaning assigned to that term in the introduction of this Agreement. "HOLDINGS" has the meaning assigned to that term in the recitals to this Agreement. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. XVII-4 "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. "REQUISITE OBLIGEES" has the meaning assigned to that term in subsection 3.14 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. "PAYMENT IN FULL", "PAID IN FULL" or any similar term means payment in full of the Guarantied Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), including without limitation all principal, interest, costs, fees and expenses (including, without limitation, reasonable legal fees and expenses) of Beneficiaries as required under the Loan Documents and the Lender Interest Rate Agreements. 1.2 INTERPRETATION. References to "Sections" and "subsections" -------------- shall be to Sections and subsections, respectively, of this Guaranty unless otherwise specifically provided. SECTION 2. THE GUARANTY 2.1 GUARANTY OF THE GUARANTIED OBLIGATIONS. Subject to the -------------------------------------- provisions of subsection 2.2(a), Guarantors jointly and severally hereby irrevocably and unconditionally guaranty, as primary obligors and not merely as sureties, the due and punctual payment in full of all Guarantied Obligations when the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S) 362(a)). The term "GUARANTIED OBLIGATIONS" is used herein in its most comprehensive sense and includes: XVII-5 (a) any and all Financing Agreement Obligations of Company and any and all Interest Rate Obligations, in each case now or hereafter made, incurred or created, whether absolute or contingent, liquidated or unliquidated, whether due or not due, and however arising under or in connection with any Financing Agreement and any other Loan Documents and the Lender Interest Rate Agreements, including those arising under successive borrowing transactions under any Financing Agreement which shall either continue the Financing Agreement Obligations of Company or from time to time renew them after they have been satisfied and including interest which, but for the filing of a petition in bankruptcy with respect to Company, would have accrued on any Guarantied Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding; and (b) those expenses set forth in subsection 2.9 hereof. 2.2 LIMITATION ON AMOUNT GUARANTIED; CONTRIBUTION BY GUARANTORS. ----------------------------------------------------------- (a) Anything contained in this Guaranty to the contrary notwithstanding, if any Fraudulent Transfer Law (as hereinafter defined) is determined by a court of competent jurisdiction to be applicable to the obligations of any Guarantor under this Guaranty, such obligations of such Guarantor hereunder shall be limited to a maximum aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any applicable provisions of comparable state law (collectively, the "FRAUDULENT TRANSFER LAWS"), in each case after giving effect to all other liabilities of such Guarantor, contingent or otherwise, that are relevant under the Fraudulent Transfer Laws (specifically excluding, however, any liabilities of such Guarantor (x) in respect of intercompany indebtedness to Company or other affiliates of Company to the extent that such indebtedness would be discharged in an amount equal to the amount paid by such Guarantor hereunder and (y) under any guaranty of Subordinated Indebtedness which guaranty contains a limitation as to maximum amount similar to that set forth in this subsection 2.2(a), pursuant to which the liability of such Guarantor hereunder is included in the liabilities taken into account in determining such maximum amount) and after giving effect as assets to the value (as determined under the applicable provisions of the Fraudulent Transfer Laws) of any rights to subrogation, reimbursement, indemnification or contribution of such Guarantor pursuant to applicable law or pursuant to the terms of any agreement (including without limitation any such right of contribution under subsection 2.2(b) or under the Holdings Guaranty as contemplated by subsection 2.2(b)). (b) Guarantors under this Guaranty, and Holdings under the Holdings Guaranty, together desire to allocate among themselves (collectively, the "CONTRIBUTING GUARANTORS"), in a fair and equitable manner, their obligations arising under this Guaranty and the Holdings Guaranty. Accordingly, in the event any payment or distribution is made on any date by any Guarantor under this Guaranty or Holdings under the Holdings Guaranty (a "FUNDING GUARANTOR") that exceeds its Fair Share (as defined below) as of such date, that Funding Guarantor shall be entitled to a contribution from each of the other Contributing Guarantors in the amount of such other Contributing Guarantor's Fair Share Shortfall (as defined below) as of such date, with the result that all such contributions will cause each Contributing Guarantor's Aggregate Payments (as defined below) to XVII-6 equal its Fair Share as of such date. "FAIR SHARE" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the ratio of (x) the Adjusted Maximum Amount (as defined below) with respect to such Contributing Guarantor to (y) the aggregate of the Adjusted Maximum Amounts with respect to all Contributing Guarantors multiplied by (ii) the aggregate ---------- -- amount paid or distributed on or before such date by all Funding Guarantors under this Guaranty and the Holdings Guaranty in respect of the obligations guarantied. "FAIR SHARE SHORTFALL" means, with respect to a Contributing Guarantor as of any date of determination, the excess, if any, of the Fair Share of such Contributing Guarantor over the Aggregate Payments of such Contributing Guarantor. "ADJUSTED MAXIMUM AMOUNT" means, with respect to a Contributing Guarantor as of any date of determination, the maximum aggregate amount of the obligations of such Contributing Guarantor under this Guaranty or the Holdings Guaranty, as applicable, determined as of such date, in the case of any Guarantor, in accordance with subsection 2.2(a); provided that, solely for -------- purposes of calculating the "Adjusted Maximum Amount" with respect to any Contributing Guarantor for purposes of this subsection 2.2(b), any assets or liabilities of such Contributing Guarantor arising by virtue of any rights to subrogation, reimbursement or indemnification or any rights to or obligations of contribution hereunder or under subsection 2.2 of the Holdings Guaranty shall not be considered as assets or liabilities of such Contributing Guarantor. "AGGREGATE PAYMENTS" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the aggregate amount of all payments and distributions made on or before such date by such Contributing Guarantor in respect of this Guaranty or the Holdings Guaranty, as applicable (including, without limitation, in respect of this subsection 2.2(b) or subsection 2.2 of the Holdings Guaranty) minus (ii) the aggregate amount of all ----- payments received on or before such date by such Contributing Guarantor from the other Contributing Guarantors as contributions under this subsection 2.2(b) or subsection 2.2 of the Holdings Guaranty. The amounts payable as contributions hereunder and under subsection 2.2 of the Holdings Guaranty shall be determined as of the date on which the related payment or distribution is made by the applicable Funding Guarantor. The allocation among Contributing Guarantors of their obligations as set forth in this subsection 2.2(b) and subsection 2.2 of the Holdings Guaranty shall not be construed in any way to limit the liability of any Contributing Guarantor hereunder or under the Holdings Guaranty. Holdings is a third party beneficiary to the contribution agreement set forth in this subsection 2.2(b). 2.3 PAYMENT BY GUARANTORS; APPLICATION OF PAYMENTS. Subject to the ---------------------------------------------- provisions of subsection 2.2(a), Guarantors hereby jointly and severally agree, in furtherance of the foregoing and not in limitation of any other right which any Beneficiary may have at law or in equity against any Guarantor by virtue hereof, that upon the failure of Company to pay any of the Guarantied Obligations when and as the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S) 362(a)), Guarantors will promptly following written demand pay, or cause to be paid, in cash, to Guarantied Party for the ratable benefit of Beneficiaries, an amount equal to the sum of the unpaid principal amount of all Guarantied Obligations then due as aforesaid, accrued and unpaid interest on such Guarantied Obligations (including, without limitation, interest which, but for the filing of a petition in bankruptcy with respect to Company, would have accrued on such Guarantied Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding) and all other Guarantied Obligations then owed to Beneficiaries as XVII-7 aforesaid. All such payments shall be applied promptly from time to time by Guarantied Party as provided in subsection 3 of the Intercreditor Agreement. 2.4 LIABILITY OF GUARANTORS ABSOLUTE. Each Guarantor agrees that its -------------------------------- obligations hereunder are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than payment in full of the Guarantied Obligations. In furtherance of the foregoing and without limiting the generality thereof, each Guarantor agrees as follows: A. This Guaranty is a guaranty of payment when due and not of collectibility. B. The obligations of each Guarantor hereunder are independent of the obligations of Company under the Loan Documents or the Lender Interest Rate Agreements and the obligations of any other guarantor (including any other Guarantor) of the obligations of Company under the Loan Documents or the Lender Interest Rate Agreements, and a separate action or actions may be brought and prosecuted against such Guarantor whether or not any action is brought against Company or any of such other guarantors and whether or not Company is joined in any such action or actions. C. Payment by any Guarantor of a portion, but not all, of the Guarantied Obligations shall in no way limit, affect, modify or abridge any Guarantor's liability for any portion of the Guarantied Obligations which has not been paid. Without limiting the generality of the foregoing, if Guarantied Party is awarded a judgment in any suit brought to enforce any Guarantor's covenant to pay a portion of the Guarantied Obligations, such judgment shall not be deemed to release such Guarantor from its covenant to pay the portion of the Guarantied Obligations that is not the subject of such suit, and such judgment shall not, except to the extent satisfied by such Guarantor, limit, affect, modify or abridge any other Guarantor's liability hereunder in respect of the Guarantied Obligations. D. Any Beneficiary, upon such terms as it deems appropriate, without notice or demand and without affecting the validity or enforceability of this Guaranty or giving rise to any reduction, limitation, impairment, discharge or termination of any Guarantor's liability hereunder, from time to time may (i) renew, extend, accelerate, increase the rate of interest on, or otherwise change the time, place, manner or terms of payment of the Guarantied Obligations, (ii) settle, compromise, release or discharge, or accept or refuse any offer of performance with respect to, or substitutions for, the Guarantied Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations; (iii) request and accept other guaranties of the Guarantied Obligations and take and hold security for the payment of this Guaranty or the Guarantied Obligations; (iv) release, surrender, exchange, substitute, compromise, settle, rescind, waive, alter, subordinate or modify, with or without consideration, any security for payment of the Guarantied Obligations, any other guaranties of the Guarantied XVII-8 Obligations, or any other obligation of any Person (including any other Guarantor) with respect to the Guarantied Obligations; (v) enforce and apply any security now or hereafter held by or for the benefit of such Beneficiary in respect of this Guaranty or the Guarantied Obligations and direct the order or manner of sale thereof, or exercise any other right or remedy that such Beneficiary may have against any such security, in each case as such Beneficiary in its discretion may determine consistent with the applicable Financing Agreement or the applicable Lender Interest Rate Agreement and any applicable security agreement, including foreclosure on any such security pursuant to one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, and even though such action operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of any Guarantor against Company or any security for the Guarantied Obligations; and (vi) exercise any other rights available to it under the Loan Documents or the Lender Interest Rate Agreements. E. This Guaranty and the obligations of Guarantors hereunder shall be valid and enforceable and shall not be subject to any reduction, limitation, impairment, discharge or termination for any reason (other than payment in full of the Guarantied Obligations), including without limitation the occurrence of any of the following, whether or not any Guarantor shall have had notice or knowledge of any of them: (i) any failure or omission to assert or enforce or agreement or election not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy (whether arising under the Loan Documents or the Lender Interest Rate Agreements, at law, in equity or otherwise) with respect to the Guarantied Obligations or any agreement relating thereto, or with respect to any other guaranty of or security for the payment of the Guarantied Obligations; (ii) any rescission, waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including without limitation provisions relating to events of default) of any Financing Agreement, any of the other Loan Documents, any of the Lender Interest Rate Agreements or any agreement or instrument executed pursuant thereto, or of any other guaranty or security for the Guarantied Obligations, in each case whether or not in accordance with the terms of such Financing Agreement or such Loan Document, such Lender Interest Rate Agreement or any agreement relating to such other guaranty or security; (iii) the application of payments received from any source (other than payments received pursuant to the other Loan Documents or any of the Lender Interest Rate Agreements or from the proceeds of any security for the Guarantied Obligations, except to the extent such security also serves as collateral for indebtedness other than the Guarantied Obligations) to the payment of indebtedness other than the Guarantied Obligations, even though any Beneficiary might have elected to apply such payment to any part or all of the Guarantied Obligations; (iv) any Beneficiary's consent to the change, reorganization or termination of the corporate structure or existence of Holdings or any of its Subsidiaries and to any corresponding restructuring of the Guarantied Obligations; (v) any failure to perfect or continue perfection of a security interest in any collateral which secures any of the Guarantied Obligations; (vi) any defenses, set-offs or XVII-9 counterclaims which Company may allege or assert against any Beneficiary in respect of the Guarantied Obligations, including but not limited to failure of consideration, breach of warranty, payment, statute of frauds, statute of limitations, accord and satisfaction and usury; and (vii) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of any Guarantor as an obligor in respect of the Guarantied Obligations. 2.5 WAIVERS BY GUARANTORS. Each Guarantor hereby waives, for the --------------------- benefit of Beneficiaries: (a) any right to require any Beneficiary, as a condition of payment or performance by such Guarantor, to (i) proceed against Company, any other guarantor (including any other Guarantor) of the Guarantied Obligations or any other Person, (ii) proceed against or exhaust any security held from Company, any such other guarantor or any other Person, (iii) proceed against or have resort to any balance of any deposit account or credit on the books of any Beneficiary in favor of Company or any other Person, or (iv) pursue any other remedy in the power of any Beneficiary whatsoever; (b) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of Company including, without limitation, any defense based on or arising out of the lack of validity or the unenforceability of the Guarantied Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of Company from any cause other than payment in full of the Guarantied Obligations; (c) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (d) any defense based upon any Beneficiary's errors or omissions in the administration of the Guarantied Obligations, except behavior which amounts to bad faith, gross negligence or willful misconduct; (e) (i) any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of this Guaranty, (ii) the benefit of any statute of limitations affecting such Guarantor's liability hereunder or the enforcement hereof, (iii) any rights to set-offs, recoupments and counterclaims, and (iv) promptness, diligence and any requirement that any Beneficiary protect, secure, perfect or insure any security interest or lien or any property subject thereto; and (f) notices, demands, presentments, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance of this Guaranty, notices of default under the Financing Agreements, the Lender Interest Rate Agreements or any agreement or instrument related thereto, notices of any XVII-10 renewal, extension or modification of the Guarantied Obligations or any agreement related thereto, notices of any extension of credit to Company and notices of any of the matters referred to in subsection 2.4 and any right to consent to any thereof. 2.6 CERTAIN CALIFORNIA LAW WAIVERS. As used in this subsection 2.6, ------------------------------ any reference to "the principal" includes Company, and any reference to "the creditor" includes each Beneficiary. In accordance with Section 2856 of the California Civil Code: (a) each Guarantor agrees (i) to waive any and all rights of subrogation and reimbursement against Company or against any collateral or security granted by Company for any of the Guarantied Obligations and (ii) to withhold the exercise of any and all rights of contribution against any other guarantor of any of the Guarantied Obligations and against any collateral or security granted by any such other guarantor for any of the Guarantied Obligations until the Guarantied Obligations shall have been paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, all as more fully set forth in subsection 2.7; (b) each Guarantor waives any and all other rights and defenses available to such Guarantor by reason of Sections 2787 to 2855, inclusive, 2899 and 3433 of the California Civil Code, including without limitation any and all rights or defenses such Guarantor may have by reason of protection afforded to the principal with respect to any of the Guarantied Obligations, or to any other guarantor (including any other Guarantor) of any of the Guarantied Obligations with respect to any of such guarantor's obligations under its guaranty, in either case pursuant to the antideficiency or other laws of the State of California limiting or discharging the principal's indebtedness or such guarantor's obligations, including without limitation Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure; and (c) each Guarantor waives all rights and defenses arising out of an election of remedies by the creditor, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for any Guarantied Obligation, has destroyed such Guarantor's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the Code of Civil Procedure or otherwise; and even though that election of remedies by the creditor, such as nonjudicial foreclosure with respect to security for an obligation of any other guarantor (including any other Guarantor) of any of the Guarantied Obligations, has destroyed such Guarantor's rights of contribution against such other guarantor. No other provision of this Guaranty shall be construed as limiting the generality of any of the covenants and waivers set forth in this subsection 2.6. In accordance with subsection 3.6 below, this Guaranty shall be governed by, and shall be construed and enforced in accordance with, the internal laws of the State of New York, without regard to conflicts of laws principles. This subsection 2.6 is included solely out of an abundance of caution, and shall not be construed to mean that any of the above-referenced provisions of California law are in any way applicable to this Guaranty or to any of the Guarantied Obligations. XVII-11 2.7 GUARANTORS' RIGHTS OF SUBROGATION, CONTRIBUTION, ETC. Each ---------------------------------------------------- Guarantor hereby waives any claim, right or remedy, direct or indirect, that such Guarantor now has or may hereafter have against Company or any of its assets in connection with this Guaranty or the performance by such Guarantor of its obligations hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by statute (including without limitation under California Civil Code Section 2847, 2848 or 2849), under common law or otherwise and including without limitation (a) any right of subrogation, reimbursement or indemnification that such Guarantor now has or may hereafter have against Company with respect to the Guarantied Obligations, (b) any right to enforce, or to participate in, any claim, right or remedy that any Beneficiary now has or may hereafter have against Company, and (c) any benefit of, and any right to participate in, any collateral or security now or hereafter held by any Beneficiary. In addition, until the Guarantied Obligations shall have been indefeasibly paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, each Guarantor shall withhold exercise of any right of contribution such Guarantor may have against any other guarantor (including any other Guarantor) of the Guarantied Obligations (including without limitation any such right of contribution under California Civil Code Section 2848 or under subsection 2.2(b) or under the Holdings Guaranty as contemplated by subsection 2.2(b). Each Guarantor further agrees that, to the extent the waiver or agreement to withhold the exercise of its rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification such Guarantor may have against Company or against any collateral or security, and any rights of contribution such Guarantor may have against any such other guarantor, shall be junior and subordinate to any rights any Beneficiary may have against Company, to all right, title and interest any Beneficiary may have in any such collateral or security, and to any right any Beneficiary may have against such other guarantor. If any amount shall be paid to any Guarantor on account of any such subrogation, reimbursement, indemnification or contribution rights at any time when all Guarantied Obligations shall not have been paid in full, such amount shall be held in trust for Guarantied Party on behalf of Beneficiaries and shall forthwith be paid over to Guarantied Party for the benefit of Beneficiaries to be credited and applied against the Guarantied Obligations, whether matured or unmatured, in accordance with the terms hereof. 2.8 SUBORDINATION OF OTHER OBLIGATIONS. Any indebtedness of Company ---------------------------------- now or hereafter held by any Guarantor is hereby subordinated in right of payment to the Guarantied Obligations, and any such indebtedness of Company to such Guarantor collected or received by such Guarantor after an Event of Default has occurred and is continuing shall be held in trust for Guarantied Party on behalf of Beneficiaries and shall forthwith be paid over to Guarantied Party for the benefit of Beneficiaries to be credited and applied against the Guarantied Obligations but without affecting, impairing or limiting in any manner the liability of such Guarantor under any other provision of this Guaranty. 2.9 EXPENSES. Guarantors jointly and severally agree to pay, or -------- cause to be paid, promptly upon written demand, and to save Beneficiaries harmless against liability for, any and all reasonable costs and reasonable expenses (including reasonable fees and reasonable disbursements of counsel and allocated costs of internal counsel) incurred or expended by any Beneficiary in connection with the enforcement of or preservation of any rights under this Guaranty. XVII-12 2.10 CONTINUING GUARANTY. This Guaranty is a continuing guaranty and ------------------- shall remain in effect until all of the Guarantied Obligations shall have been paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled. Each Guarantor hereby irrevocably waives any right (including without limitation any such right arising under California Civil Code Section 2815) to revoke this Guaranty as to future transactions giving rise to any Guarantied Obligations. 2.11 AUTHORITY OF GUARANTORS OR COMPANY. It is not necessary for any ---------------------------------- Beneficiary to inquire into the capacity or powers of any Guarantor or Company or the officers, directors or any agents acting or purporting to act on behalf of any of them. 2.12 FINANCIAL CONDITION OF COMPANY. Any Loans may be granted to ------------------------------ Company or continued from time to time, and any Lender Interest Rate Agreements may be entered into from time to time, in each case without notice to or authorization from any Guarantor regardless of the financial or other condition of Company at the time of any such grant or continuation or at the time such Lender Interest Rate Agreement is entered into, as the case may be. No Beneficiary shall have any obligation to disclose or discuss with any Guarantor its assessment, or any Guarantor's assessment, of the financial condition of Company. Each Guarantor has adequate means to obtain information from Company on a continuing basis concerning the financial condition of Company and its ability to perform its obligations under the Loan Documents and the Lender Interest Rate Agreements, and each Guarantor assumes the responsibility for being and keeping informed of the financial condition of Company and of all circumstances bearing upon the risk of nonpayment of the Guarantied Obligations. Each Guarantor hereby waives and relinquishes any duty on the part of any Beneficiary to disclose any matter, fact or thing relating to the business, operations or conditions of Company now known or hereafter known by any Beneficiary. 2.13 RIGHTS CUMULATIVE. The rights, powers and remedies given to ----------------- Beneficiaries by this Guaranty are cumulative and shall be in addition to and independent of all rights, powers and remedies given to Beneficiaries by virtue of any statute or rule of law or in any of the other Loan Documents, any of the Lender Interest Rate Agreements or any agreement between any Guarantor and any Beneficiary or Beneficiaries or between Company and any Beneficiary or Beneficiaries. Any forbearance or failure to exercise, and any delay by any Beneficiary in exercising, any right, power or remedy hereunder shall not impair any such right, power or remedy or be construed to be a waiver thereof, nor shall it preclude the further exercise of any such right, power or remedy. 2.14 BANKRUPTCY; POST-PETITION INTEREST; REINSTATEMENT OF GUARANTY. ------------------------------------------------------------- (a) So long as any Guarantied Obligations remain outstanding, no Guarantor shall, without the prior written consent of Guarantied Party acting pursuant to the instructions of Requisite Obligees (as defined in subsection 3.12), commence or join with any other Person in commencing any bankruptcy, reorganization or insolvency proceedings against Company. The obligations of Guarantors under this Guaranty shall not be reduced, limited, impaired, discharged, deferred, suspended or terminated by any proceeding, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement of Company or by any defense which Company may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding. XVII-13 (b) Each Guarantor acknowledges and agrees that any interest on any portion of the Guarantied Obligations which accrues after the commencement of any proceeding referred to in clause (a) above (or, if interest on any portion of the Guarantied Obligations ceases to accrue by operation of law by reason of the commencement of said proceeding, such interest as would have accrued on such portion of the Guarantied Obligations if said proceedings had not been commenced) shall be included in the Guarantied Obligations because it is the intention of Guarantors and Beneficiaries that the Guarantied Obligations which are guarantied by Guarantors pursuant to this Guaranty should be determined without regard to any rule of law or order which may relieve Company of any portion of such Guarantied Obligations. Guarantors will permit any trustee in bankruptcy, receiver, debtor in possession, assignee for the benefit of creditors or similar person to pay Guarantied Party, or allow the claim of Guarantied Party in respect of, any such interest accruing after the date on which such proceeding is commenced. (c) In the event that all or any portion of the Guarantied Obligations are paid by Company, the obligations of Guarantors hereunder shall continue and remain in full force and effect or be reinstated, as the case may be, in the event that all or any part of such payment(s) are rescinded or recovered directly or indirectly from any Beneficiary as a preference, fraudulent transfer or otherwise, and any such payments which are so rescinded or recovered shall constitute Guarantied Obligations for all purposes under this Guaranty until indefeasibly paid in full. 2.15 SET OFF. In addition to any other rights any Beneficiary may ------- have under law or in equity, if any amount shall at any time be due and owing by any Guarantor to any Beneficiary under this Guaranty, such Beneficiary is authorized at any time or from time to time, without notice (any such notice being hereby expressly waived), to set off and to appropriate and to apply any and all deposits (general or special, including but not limited to indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness of such Beneficiary owing to such Guarantor and any other property of such Guarantor held by any Beneficiary to or for the credit or the account of such Guarantor against and on account of the Guarantied Obligations and liabilities of such Guarantor to any Beneficiary under this Guaranty. 2.16 DISCHARGE OF GUARANTY UPON SALE OF GUARANTOR. If all of the -------------------------------------------- stock of any Guarantor or any of its successors in interest under this Guaranty shall be sold or otherwise disposed of (including by merger or consolidation) in an Asset Sale not prohibited by subsection 7.7 of the Credit Agreement or otherwise consented to by Requisite Lenders, the Guaranty of such Guarantor or such successor in interest, as the case may be, hereunder shall automatically be discharged and released without any further action by any Beneficiary or any other Person effective as of the time of such Asset Sale; provided that, as a -------- condition precedent to such discharge and release, Guarantied Party shall have received evidence satisfactory to it that arrangements satisfactory to it have been made for disposition of the applicable Net Asset Sale Proceeds in accordance with the requirements of the Credit Agreement. SECTION 3. MISCELLANEOUS 3.1 SURVIVAL OF WARRANTIES. All agreements, representations and ---------------------- warranties made herein shall survive the execution and delivery of this Guaranty and the other Loan Documents XVII-14 and the Lender Interest Rate Agreements and any increase in the Commitments under any Financing Agreement. 3.2 NOTICES. Any communications between Guarantied Party and any ------- Guarantor and any notices or requests provided herein to be given may be given by mailing the same, postage prepaid, or by telex, facsimile transmission or cable to each such party at its addresses set forth in the Financing Agreements, on the signature pages hereof or to such other addresses as each such party may in writing hereafter indicate. Any notice, request or demand to or upon Guarantied Party or any Guarantor shall not be effective until received. 3.3 SEVERABILITY. In case any provision in or obligation under this ------------ Guaranty shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 3.4 AMENDMENTS AND WAIVERS. No amendment, modification, termination ---------------------- or waiver of any provision of this Guaranty, and no consent to any departure by any Guarantor therefrom, shall in any event be effective without the written concurrence of Guarantied Party and, in the case of any such amendment or modification, each Guarantor against whom enforcement of such amendment or modification is sought. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. 3.5 HEADINGS. Section and subsection headings in this Guaranty are -------- included herein for convenience of reference only and shall not constitute a part of this Guaranty for any other purpose or be given any substantive effect. 3.6 APPLICABLE LAW. THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF -------------- GUARANTORS AND BENEFICIARIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. 3.7 SUCCESSORS AND ASSIGNS. This Guaranty is a continuing guaranty ---------------------- and shall be binding upon each Guarantor and its respective successors and assigns. This Guaranty shall inure to the benefit of Beneficiaries and their respective successors and assigns. No Guarantor shall assign this Guaranty or any of the rights or obligations of such Guarantor hereunder without the prior written consent of all Secured Parties. Any Beneficiary may, without notice or consent, assign its interest in this Guaranty in whole or in part. The terms and provisions of this Guaranty shall inure to the benefit of any transferee or assignee of any Loan, and in the event of such transfer or assignment the rights and privileges herein conferred upon such Beneficiary shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. 3.8 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL JUDICIAL ---------------------------------------------- PROCEEDINGS BROUGHT AGAINST ANY GUARANTOR ARISING OUT OF OR XVII-15 RELATING TO THIS GUARANTY, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH GUARANTOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO SUCH GUARANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SUBSECTION 3.2; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER SUCH GUARANTOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT BENEFICIARIES RETAIN THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST SUCH GUARANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SUBSECTION 3.8 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. 3.9 WAIVER OF TRIAL BY JURY. EACH GUARANTOR AND, BY ITS ACCEPTANCE ----------------------- OF THE BENEFITS HEREOF, EACH BENEFICIARY EACH HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS GUARANTY. The scope of this waiver is intended to be all encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each Guarantor and, by its acceptance of the benefits hereof, each Beneficiary, each (i) acknowledges that this waiver is a material inducement for such Guarantor and Beneficiaries to enter into a business relationship, that such Guarantor and Beneficiaries have already relied on this waiver in entering into this Guaranty or accepting the benefits thereof, as the case may be, and that each will continue to rely on this waiver in their related future dealings and (ii) further warrants and XVII-16 represents that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SUBSECTION 3.9 AND EXECUTED BY GUARANTIED PARTY AND EACH GUARANTOR), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTY. In the event of litigation, this Guaranty may be filed as a written consent to a trial by the court. 3.10 NO OTHER WRITING. This writing is intended by Guarantors and ---------------- Beneficiaries as the final expression of this Guaranty and is also intended as a complete and exclusive statement of the terms of their agreement with respect to the matters covered hereby. No course of dealing, course of performance or trade usage, and no parol evidence of any nature, shall be used to supplement or modify any terms of this Guaranty. There are no conditions to the full effectiveness of this Guaranty. 3.11 FURTHER ASSURANCES. At any time or from time to time, upon the ------------------ request of Guarantied Party, Guarantors shall execute and deliver such further documents and do such other acts and things as Guarantied Party may reasonably request in order to effect fully the purposes of this Guaranty. 3.12 ADDITIONAL GUARANTORS. The initial Guarantors hereunder --------------------- shall be such of the Subsidiaries of Company as are signatories hereto on the date hereof. From time to time subsequent to the date hereof, additional Subsidiaries of Company may become parties hereto, as additional Guarantors (each an "ADDITIONAL GUARANTOR"), by executing a counterpart of this Guaranty. Upon delivery of any such counterpart to Collateral Agent, notice of which is hereby waived by Guarantors, each such Additional Guarantor shall be a Guarantor and shall be as fully a party hereto as if such Additional Guarantor were an original signatory hereof. Each Guarantor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Guarantor hereunder, nor by any election of Collateral Agent not to cause any Subsidiary of Company to become an Additional Guarantor hereunder. This Guaranty shall be fully effective as to any Guarantor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Guarantor hereunder. 3.13 COUNTERPARTS; EFFECTIVENESS. This Guaranty may be executed in --------------------------- any number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original for all purposes; but all such counterparts together shall constitute but one and the same instrument. This Guaranty shall become effective as to each Guarantor upon the execution of a counterpart hereof by such Guarantor (whether or not a counterpart hereof shall have been executed by any other Guarantor) and receipt by Guarantied Party of written or telephonic notification of such execution and authorization of delivery thereof. 3.14 GUARANTIED PARTY AS COLLATERAL AGENT. ------------------------------------ XVII-17 (a) Guarantied Party has been appointed to act as Guarantied Party hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and by AXEL Administrative Agent on behalf of the AXEL Lenders pursuant to the Intercreditor Agreement, and, by their acceptance of the benefits hereof, Interest Rate Exchangers and shall be entitled to the benefits of the Intercreditor Agreement. Guarantied Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action, solely in accordance with this Guaranty and the Intercreditor Agreements; provided that Guarantied Party shall exercise, or refrain from exercising, any - -------- remedies hereunder in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this subsection 3.14, each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to enforce this Guaranty, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Guarantied Party for the benefit of Beneficiaries in accordance with the terms of this subsection 3.14. (b) Guarantied Party shall at all times be the same Person that is Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Written notice of resignation by Collateral Agent pursuant to the Intercreditor Agreement shall also constitute notice of resignation as Guarantied Party under this Guaranty; removal of Collateral Agent pursuant to the Intercreditor Agreement shall also constitute removal as Guarantied Party under this Guaranty; and appointment of a successor Collateral Agent pursuant to the Intercreditor Agreement shall also constitute appointment of a successor Guarantied Party under this Guaranty. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Guarantied Party under this Guaranty, and the retiring or removed Guarantied Party under this Guaranty shall promptly (i) transfer to such successor Guarantied Party all sums held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Guarantied Party under this Guaranty, and (ii) take such other actions as may be necessary or appropriate in connection with the assignment to such successor Guarantied Party of the rights created hereunder, whereupon such retiring or removed Guarantied Party shall be discharged from its duties and obligations under this Guaranty. After any retiring or removed Guarantied Party's resignation or removal hereunder as Guarantied Party, the provisions of this Guaranty shall inure to its benefit as to any actions taken or omitted to be taken by it under this Guaranty while it was Guarantied Party hereunder. [Remainder of page intentionally left blank] XVII-18 IN WITNESS WHEREOF, each of the undersigned Guarantors has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of the date first written above. [NAMES OF GUARANTORS] By: ----------------- Name: Title: Notice Address: _____________________ _____________________ _____________________ XVII-19 IN WITNESS WHEREOF, the undersigned Additional Guarantor has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of ______________, [199_][200_]. [NAME OF ADDITIONAL GUARANTOR] By:___________________________ Name: Title: Notice Address: _____________________ _____________________ _____________________ XVII-20 EXHIBIT XVIII [FORM OF SUBSIDIARY PLEDGE AGREEMENT] SUBSIDIARY PLEDGE AGREEMENT This SUBSIDIARY PLEDGE AGREEMENT (this "AGREEMENT") is dated as of December 18, 1997 and entered into by and among THE UNDERSIGNED DIRECT AND INDIRECT SUBSIDIARIES (each of such undersigned Subsidiaries being a "PLEDGOR" and collectively "PLEDGORS"; provided that after the Closing Date, -------- "Pledgors" shall be deemed to include any Additional Pledgors (as hereinafter defined)) of Sealy Mattress Company, an Ohio corporation ("COMPANY"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as Collateral Agent for and representative of (in such capacity herein called "COLLATERAL AGENT") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined). RECITALS A. Pledgors are the legal and beneficial owners of (i) the shares of stock (the "PLEDGED SHARES") described in Part A of Schedule I annexed hereto ---------- and issued by the corporations named therein and (ii) the indebtedness (the "PLEDGED DEBT") described in Part B of said Schedule I and issued by the ---------- obligors named therein. B. Sealy Corporation, a Delaware Corporation ("HOLDINGS"), the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent ( in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO."), as documentation agent (in such capacity "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT") with Company pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. C. Company, Holdings, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity the "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity "AXEL ADMINISTRATIVE AGENT"), and BTCo., as documentation agent (in such capacity, "AXEL DOCUMENTATION AGENT")have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT XVIII-1 AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, the CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL Lenders have made certain commitments, subject to the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Company. D. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more CA Lenders and their Affiliates or AXEL Lenders and their Affiliates (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). E. Pledgors have executed and delivered that certain Subsidiary Guaranty dated as of December 18, 1997 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "GUARANTY") in favor of Collateral Agent for the benefit of Secured Parties and any Interest Rate Exchangers, pursuant to which Pledgors have guarantied the prompt payment and performance when due of all obligations of Company under the Financing Agreements and all obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments, if any, thereunder in the event of early termination thereof. F. It is a condition precedent to the initial extensions of credit by Secured Parties under the Financing Agreements that each Pledgor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of, Company, (iii) the AXEL Administrative Agent, the AXEL Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement, (iv) the AXEL Lenders to make their respective loans to Company and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, each Pledgor hereby agrees with Collateral Agent as follows: SECTION 1. DEFINED TERMS ------------- (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the XVIII-2 AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. "ADDITIONAL PLEDGED SHARES" has the meaning assigned to that term in Section 2(c) of this Agreement. "AGREEMENT" means this Company Pledge Agreement dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. "AXEL COMMITMENTS" shall mean the "Commitments" as defined in the AXEL Credit Agreement. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "AXEL OBLIGATIONS" shall mean "Obligations" as defined in the AXEL Credit Agreement. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which the Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. "FINANCING AGREEMENT" means the Credit Agreement or the AXEL Credit Agreement, and "Financing Agreements" means the Credit Agreement and the AXEL Credit Agreement, collectively. XVIII-3 "FINANCING AGREEMENT OBLIGATIONS" means Credit Agreement Obligations and AXEL Obligations. "HOLDINGS" has the meaning assigned to that term in the recitals to this Agreement. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "NEW PLEDGED SHARES" has the meaning assigned to that term in Section 2(e) of this Agreement. "PLEDGE AMENDMENT" has the meaning assigned to that term in Section 7 of this Agreement. "PLEDGED COLLATERAL" has the meaning assigned to that term in Section 2 of this Agreement. "PLEDGED DEBT" has the meaning assigned to that term in the recitals to this Agreement. "PLEDGED SHARES" has the meaning assigned to that term in the recitals to this Agreement. "PLEDGOR" has the meaning assigned to that term in the introduction of this Agreement. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. XVIII-4 "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. "REQUISITE OBLIGEES" has the meaning assigned to that term in Section 17(a) of this Agreement. "SECURED OBLIGATIONS" has the meaning assigned to that term in Section 3 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. SECTION 2. PLEDGE OF SECURITY. ------------------ Each Pledgor hereby pledges and assigns to Collateral Agent, and hereby grants to Collateral Agent a security interest in, all of such Pledgor's right, title and interest in and to the following (the "PLEDGED COLLATERAL"): (a) the Pledged Shares and the certificates representing the Pledged Shares and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to the Pledged Shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; (b) the Pledged Debt and the instruments evidencing the Pledged Debt, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Debt; (c) all additional shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any issuer of the Pledged Shares from time to time acquired by such Pledgor in any manner (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such additional shares, securities, warrants, options or other rights and any interest of such Pledgor in the entries on the books of any financial intermediary pertaining to such additional shares (all such shares, securities, warrants, options, rights, certificates, instruments and interests collectively being "ADDITIONAL PLEDGED SHARES"), and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or XVIII-5 in exchange for any or all of such Additional Pledged Shares; provided, however, that to the extent that the issuer of any ------- ------- Additional Pledged Shares is a controlled foreign corporation, such Pledgor shall only be required to pledge Additional Pledged Shares of such issuer possessing up to but not exceeding 65% of the voting power of all classes of capital stock entitled to vote of such issuer, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Additional Pledged Shares; (d) all additional indebtedness from time to time owed to such Pledgor by any obligor on the Pledged Debt and the instruments evidencing such indebtedness, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; (e) all shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of such Pledgor (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such shares (all such shares, securities, warrants, options, rights, certificates, instruments and interests collectively being "NEW PLEDGED SHARES"), securities, warrants, options or other rights and any interest of such Pledgor in the entries on the books of any financial intermediary pertaining to such shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares, securities, warrants, options or other rights; provided, however, that in the event that any such direct -------- ------- Subsidiary is a controlled foreign corporation, such Pledgor shall only be required to pledge New Pledged Shares of such Subsidiary possessing up to but not exceeding 65% of the voting power of all classes of capital stock entitled to vote of such Subsidiary, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such New Pledged Shares; (f) all indebtedness from time to time owed to such Pledgor by any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a Subsidiary of such Pledgor, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; and (g) to the extent not covered by clauses (a) through (f) above, all proceeds of any or all of the foregoing Pledged Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Pledged Collateral or proceeds are sold, exchanged, collected or otherwise XVIII-6 disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, proceeds of any indemnity or guaranty payable to such Pledgor or Collateral Agent from time to time with respect to any of the Pledged Collateral. SECTION 3. SECURITY FOR OBLIGATIONS. ------------------------ This Agreement secures, and the Pledged Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all obligations and liabilities of every nature of Pledgors now or hereafter existing under or arising out of or in connection with the Guaranty and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Company, would accrue on such obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Collateral Agent or any Secured Party or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise, and all obligations of every nature of Pledgors now or hereafter existing under this Agreement (all such obligations of Pledgors being the "SECURED OBLIGATIONS"). SECTION 4. DELIVERY OF PLEDGED COLLATERAL. ------------------------------ All certificates or instruments representing or evidencing the Pledged Collateral shall be delivered to and held by or on behalf of Collateral Agent pursuant hereto and shall be in suitable form for transfer by delivery or, as applicable, shall be accompanied by the applicable Pledgor's endorsement, where necessary, or duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to Collateral Agent. Upon the occurrence and during the continuation of an Event of Default, Collateral Agent shall have the right, without notice to any Pledgor, to transfer to or to register in the name of Collateral Agent or any of its nominees any or all of the Pledged Collateral, subject only to the revocable rights specified in Section 8(a). In addition, upon the occurrence and during the continuance of an Event of Default, Collateral Agent shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Collateral for certificates or instruments of smaller or larger denominations. SECTION 5. REPRESENTATIONS AND WARRANTIES. ------------------------------ Each Pledgor represents and warrants as follows: XVIII-7 (a) Due Authorization, etc. of Pledged Collateral. All of the --------------------------------------------- Pledged Shares have been duly authorized and validly issued and are fully paid and non-assessable. All of the Pledged Debt has been duly authorized, authenticated or issued, and delivered and is the legal, valid and binding obligation of the issuers thereof and is not in default. (b) Description of Pledged Collateral. The Pledged Shares --------------------------------- constitute the percentage of the issued and outstanding shares of stock of each issuer thereof set forth on Schedule I annexed hereto, ---------- and there are no outstanding warrants, options or other rights to purchase, or other agreements outstanding with respect to, or property that is now or hereafter convertible into, or that requires the issuance or sale of, any Pledged Shares. The Pledged Debt consti tutes all of the issued and outstanding intercompany indebtedness evidenced by a promissory note of the respective issuers thereof owing to Pledgor. (c) Ownership of Pledged Collateral. Pledgors are the legal, ------------------------------- record and beneficial owners of the Pledged Collateral free and clear of any Lien except for the security interest created by this Agreement. SECTION 6. TRANSFERS AND OTHER LIENS; ADDITIONAL PLEDGED COLLATERAL; ETC. -------------------------------------------------------------- Each Pledgor shall: (a) not, except as expressly permitted by the Financing Agreements, (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral, (ii) create or suffer to exist any Lien upon or with respect to any of the Pledged Collateral, except for the security interest under this Agreement, or (iii) permit any issuer of Pledged Shares to merge or consolidate unless all the outstanding capital stock of the surviving or resulting corporation is, upon such merger or consolidation, pledged hereunder and no cash, securities or other property is distributed in respect of the outstanding shares of any other constituent corporation; provided that if the surviving or -------- resulting corporation upon any such merger or consolidation involving an issuer of Pledged Shares which is a controlled foreign corporation is a controlled foreign corporation, then such Pledgor shall only be required to pledge outstanding capital stock of such surviving or resulting corporation possessing up to but not exceeding 65% of the voting power of all classes of capital stock of such issuer entitled to vote; provided that in the event a Pledgor makes an Asset Sale -------- permitted by the Financing Agreements and the assets subject to such Asset Sale are Pledged Shares, Collateral Agent shall release the Pledged Shares that are the subject of such Asset Sale to Pledgor free and clear of the lien and security interest under this Agreement concurrently with the consummation of such Asset Sale; provided, -------- further that, as a condition precedent to such release, Collateral ------- Agent shall have received evidence reasonably satisfactory to it that arrangements reasonably satisfactory to it have been made for delivery to Collateral Agent of the Net Asset Sale Proceeds of XVIII-8 such Asset Sale in the event and to the extent that all or any portion of such Net Asset Sale Proceeds are required to be applied to prepay the Loans under the Financing Agreements; (b) (i) cause each issuer of Pledged Shares not to issue any stock or other securities in addition to or in substitution for the Pledged Shares issued by such issuer, except to a Pledgor, (ii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities of each issuer of Pledged Shares, and (iii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all shares of stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of such Pledgor; provided, that notwithstanding anything contained in this -------- clause (b) to the contrary, such Pledgor shall only be required to pledge the outstanding capital stock of a foreign controlled corporation possessing up to but not exceeding 65% of the voting power of all classes of capital stock of such controlled foreign corporation entitled to vote; (c) (i) pledge hereunder, immediately upon their issuance, any and all instruments or other evidences of additional indebtedness from time to time owed to such Pledgor by any obligor on the Pledged Debt, and (ii) pledge hereunder, immediately upon their issuance, any and all instruments or other evidences of indebtedness from time to time owed to such Pledgor by any Person that after the date of this Agreement becomes, as a result of any occurrence, a Subsidiary of such Pledgor; and (d) pay promptly when due all taxes, assessments and governmental charges or levies imposed upon, and all claims against, the Pledged Collateral, except to the extent the validity thereof is being contested in good faith. SECTION 7. FURTHER ASSURANCES; PLEDGE AMENDMENTS; ADDITIONAL PLEDGORS. ---------------------------------------------------------- (a) Each Pledgor agrees that from time to time, at the expense of Pledgors, such Pledgor will promptly execute and deliver all further instruments and documents, and take all further action that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Without limiting the generality of the foregoing, each Pledgor will: (i) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices as Collateral Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby and (ii) at Collateral Agent's reasonable request, appear in and defend any action or proceeding that may affect such Pledgor's title to or Collateral Agent's security interest in all or any part of the Pledged Collateral. (b) Each Pledgor further agrees that it will, upon obtaining any additional shares of stock or other securities required to be pledged hereunder as provided in Section 6(b) XVIII-9 or (c), promptly (and in any event within five Business Days) deliver to Collateral Agent a Pledge Amendment, duly executed by such Pledgor, in substantially the form of Schedule II annexed hereto (a "PLEDGE AMENDMENT"), ----------- in respect of the additional Pledged Shares or Pledged Debt to be pledged pursuant to this Agreement. Each Pledgor hereby authorizes Collateral Agent to attach each Pledge Amendment to this Agreement and agrees that all Pledged Shares or Pledged Debt listed on any Pledge Amendment delivered to Collateral Agent shall for all purposes hereunder be considered Pledged Collateral; provided that the failure of any Pledgor to execute a Pledge Amendment with - -------- respect to any additional Pledged Shares or Pledged Debt pledged pursuant to this Agreement shall not impair the security interest of Collateral Agent therein or otherwise adversely affect the rights and remedies of Collateral Agent hereunder with respect thereto. (c) The initial Pledgors hereunder shall be those Subsidiaries of Company as are signatories hereto on the date hereof. From time to time subsequent to the date hereof, additional Subsidiaries of Company may become parties hereto, as additional Pledgors (each an "ADDITIONAL PLEDGOR"), by executing a counterpart of this Agreement substantially in the form of Schedule -------- III annexed hereto. Upon delivery of any such counterpart to the Collateral - --- Agent, notice of which is hereby waived by the Pledgors, each Additional Pledgor shall be a Pledgor and shall be as fully a party hereto as if such Additional Pledgor were an original signatory hereof. Each Pledgor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Pledgor hereunder, nor by any election of Collateral Agent not to cause any Subsidiary to become an Additional Pledgor hereunder. This Agreement shall be fully effective as to any Pledgor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Pledgor hereunder. Each Additional Pledgor shall execute and file such financing statements and such other instruments or notices as may be necessary or desirable, or as Collateral Agent may reasonably request, in order to perfect the security interests granted or purported to be granted hereunder. SECTION 8. VOTING RIGHTS; DIVIDENDS; ETC. ------------------------------ (a) So long as no Event of Default shall have occurred and be continuing: (i) Each Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Financing Agreements; (ii) Each Pledgor shall be entitled to receive and retain, and to utilize free and clear of the lien of this Agreement, any and all dividends and interest paid in respect of the Pledged Collateral; provided, however, that any and all dividends and interest paid -------- ------- or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral, shall be, and shall forthwith be delivered to Collateral Agent to hold as, Pledged Collateral and shall, if received by such Pledgor, be received in trust for the benefit of XVIII-10 Collateral Agent, be segregated from the other property or funds of such Pledgor and be forthwith delivered to Collateral Agent as Pledged Collateral in the same form as so received (with all necessary endorsements); provided, that such Pledgor shall not be required -------- to deliver the outstanding capital stock of a foreign controlled corporation paid as a dividend or interest to such Pledgor, if Collateral Agent would hold as Pledged Collateral outstanding capital stock of such controlled foreign corporation possessing greater than 65% of the voting power of all classes of capital stock of such controlled foreign corporation entitled to vote; and (iii) Collateral Agent shall promptly execute and deliver (or cause to be executed and delivered) to each Pledgor all such proxies, dividend payment orders and other instruments as such Pledgor may from time to time reasonably request for the purpose of enabling such Pledgor to exercise the voting and other consensual rights which it is entitled to exercise pursuant to paragraph (i) above and to receive the dividends, principal or interest payments which it is authorized to receive and retain pursuant to paragraph (ii) above. (b) Upon the occurrence and during the continuation of an Event of Default: (i) upon written notice from Collateral Agent to a Pledgor, all rights of such Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 8(a)(i) shall cease, and all such rights shall thereupon become vested in Collateral Agent who shall thereupon have the sole right to exercise such voting and other consensual rights; (ii) all rights of such Pledgor to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 8(a)(ii) shall cease, and all such rights shall thereupon become vested in Collateral Agent who shall thereupon have the sole right to receive and hold as Pledged Collateral such dividends and interest payments; and (iii) all dividends, principal and interest payments which are received by such Pledgor contrary to the provisions of paragraph (ii) of this Section 8(b) shall be (A) forthwith (and in any event within two Business Days) deposited by the Grantor in the exact form received, duly indorsed by the Pledgor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of the Secured Parties only as provided in Section 15, (B) until turned over in accordance with the preceding subsection (A), all such amounts and proceeds received by Pledgor shall be received in trust for the benefit of Collateral Agent hereunder and shall be segregated from other funds of Pledgor. (c) In order to permit Collateral Agent to exercise the voting and other consensual rights which it may be entitled to exercise pursuant to Section 8(b)(i) and to receive XVIII-11 all dividends and other distributions which it may be entitled to receive under Section 8(a)(ii) or Section 8(b)(ii), (i) each Pledgor shall promptly execute and deliver (or cause to be executed and delivered) to Collateral Agent all such proxies, dividend payment orders and other instruments as Collateral Agent may from time to time reasonably request and (ii) without limiting the effect of the immediately preceding clause (i), each Pledgor hereby grants to Collateral Agent an irrevocable proxy to vote the Pledged Shares and to exercise all other rights, powers, privileges and remedies to which a holder of the Pledged Shares would be entitled (including, without limitation, giving or withholding written consents of shareholders, calling special meetings of shareholders and voting at such meetings), which proxy shall be effective, automatically and without the necessity of any action (including any transfer of any Pledged Shares on the record books of the issuer thereof) by any other Person (including the issuer of the Pledged Shares or any officer or agent thereof), upon the occurrence and during the continuance of an Event of Default and which proxy shall only terminate upon the payment in full of the Secured Obligations. SECTION 9. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. ------------------------------------------- Each Pledgor hereby irrevocably appoints Collateral Agent as such Pledgor's attorney-in-fact, with full authority in the place and stead of such Pledgor and in the name of such Pledgor, Collateral Agent or otherwise, from time to time, upon the occurrence and during the continuance of an Event of Default, in Collateral Agent's reasonable discretion to take any action and to execute any instrument that Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) to file one or more financing or continuation statements, or amendments thereto, relative to all or any part of the Pledged Collateral without the signature of such Pledgor; (b) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Pledged Collateral; (c) to receive, endorse and collect any instruments made payable to such Pledgor representing any dividend, principal or interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same; and (d) to file any claims or take any action or institute any proceedings that Collateral Agent may reasonably deem necessary or desirable for the collection of any of the Pledged Collateral or otherwise to enforce the rights of Collateral Agent with respect to any of the Pledged Collateral. SECTION 10. COLLATERAL AGENT MAY PERFORM. ---------------------------- If any Pledgor fails to perform any agreement contained herein, Collateral Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of XVIII-12 Collateral Agent incurred in connection therewith shall be payable by Pledgors under Section 16(b). SECTION 11. STANDARD OF CARE. ---------------- The powers conferred on Collateral Agent hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Pledged Collateral in its possession and the accounting for moneys actually received by it hereunder, Collateral Agent shall have no duty as to any Pledged Collateral, it being understood that Collateral Agent shall have no responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Pledged Collateral, whether or not Collateral Agent has or is deemed to have knowledge of such matters, (b) taking any necessary steps (other than steps taken in accordance with the standard of care set forth above to maintain possession of the Pledged Collateral) to preserve rights against any parties with respect to any Pledged Collateral, (c) taking any necessary steps to collect or realize upon the Secured Obligations or any guarantee therefor, or any part thereof, or any of the Pledged Collateral, or (d) initiating any action to protect the Pledged Collateral against the possibility of a decline in market value. Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equal to that which Collateral Agent accords its own property consisting of negotiable securities. XVIII-13 SECTION 12. REMEDIES. -------- (a) If any Event of Default shall have occurred and be continuing, Collateral Agent may exercise in respect of the Pledged Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Pledged Collateral), and Collateral Agent may also in its sole discretion, without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange or broker's board or at any of Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Collateral Agent may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Pledged Collateral. Collateral Agent or any Secured Party or Interest Rate Exchanger may be the purchaser of any or all of the Pledged Collateral at any such sale and Collateral Agent, as administrative agent for and representative of Secured Parties and Interest Rate Exchangers (but not any Secured Party or Secured Parties or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Obligees shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Pledged Collateral payable by Collateral Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of any Pledgor, and each Pledgor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Each Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to such Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Collateral Agent shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Each Pledgor hereby waives any claims against Collateral Agent arising by reason of the fact that the price at which any Pledged Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Collateral Agent accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Pledged Collateral are insufficient to pay all the Secured Obligations, Pledgors shall be jointly and severally liable for the deficiency and the reasonable fees of any attorneys employed by Collateral Agent to collect such deficiency. (b) Each Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws, Collateral Agent may be compelled, with respect to any sale of all or any part of the Pledged Collateral conducted without prior registration or qualification of such Pledged Collateral under the Securities Act and/or such state securities laws, to limit purchasers to those who will agree, among other things, to acquire XVIII-14 the Pledged Collateral for their own account, for investment and not with a view to the distribution or resale thereof. Each Pledgor acknowledges that any such private sales may be at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including, without limitation, a public offering made pursuant to a registration statement under the Securities Act) and, notwithstanding such circumstances, Pledgor agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that Collateral Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Pledged Collateral for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would, or should, agree to so register it. (c) If Collateral Agent determines to exercise its right to sell any or all of the Pledged Collateral, upon written request, such Pledgor shall and shall cause each issuer of any Pledged Shares to be sold hereunder from time to time to furnish to Collateral Agent all such information as Collateral Agent may reasonably request in order to determine the number of shares and other instruments included in the Pledged Collateral which may be sold by Collateral Agent in exempt transactions under the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder, as the same are from time to time in effect. SECTION 13. PROCEEDS TO BE TURNED OVER TO COLLATERAL AGENT. ---------------------------------------------- In addition to the rights of the Collateral Agent and the Secured Parties specified in Section 8, if an Event of Default shall occur and be continuing, upon request of the Collateral Agent, all proceeds received by the Grantor consisting of cash, checks and other near-cash items shall be held by the Grantor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of the Grantor, and shall, forthwith upon receipt by the Grantor, be turned over to the Collateral Agent in the exact form received by the Grantor (duly indorsed by the Grantor to the Collateral Agent, if required) and held by the Collateral Agent in a Collateral Account maintained under the Intercreditor Agreement. All proceeds while held by the Collateral Agent in a Collateral Account (or by the Grantor in trust for the Collateral Agent and the Secured Parties) shall continue to be held as collateral security for all the Secured Obligations and shall not constitute payment thereof until applied as provided in Section 15. SECTION 14. APPLICATION OF PROCEEDS. ----------------------- All proceeds held in any Collateral Account and all other proceeds received by Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral shall be applied as provided in subsection 3 of the Intercreditor Agreement. SECTION 15. INDEMNITY AND EXPENSES. ---------------------- (a) Pledgors jointly and severally agree to indemnify Collateral Agent, each Lender and each Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the XVIII-15 transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Collateral Agent's or such Secured Party's or Interest Rate Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Pledgors jointly and severally agree to pay to Collateral Agent promptly following written demand the amount of any and all reasonable costs and reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Pledged Collateral, (iii) the exercise or enforcement of any of the rights of Collateral Agent hereunder, or (iv) the failure by any Pledgor to perform or observe any of the provisions hereof. SECTION 16. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. ----------------------------------------------- This Agreement shall create a continuing security interest in the Pledged Collateral and shall (a) remain in full force and effect until the payment in full of all Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon each Pledgor, its successors and assigns, and (c) inure, together with the rights and remedies of Collateral Agent hereunder, to the benefit of Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement and subsection 10.1 of the AXEL Credit Agreement, any Secured Party may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Pledged Collateral shall revert to the applicable Pledgors. Upon any such termination Collateral Agent will, at the joint and several expense of Pledgors, execute and deliver to Pledgors such documents as Pledgors shall reasonably request to evidence such termination in accordance with the terms of the Intercreditor Agreement and Pledgors shall be entitled to the return, upon its request and at its expense, against receipt and without recourse to Collateral Agent, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 17. COLLATERAL AGENT AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Collateral Agent has been appointed to act as Collateral Agent hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and AXEL Administrative Agent on behalf of the AXEL Lenders pursuant to the Intercreditor Agreement and, by their acceptance of the benefits hereof, Interest Rate Exchangers and shall be entitled to XVIII-16 the benefits of the Intercreditor Agreement. Collateral Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Pledged Collateral), solely in accordance with this Agreement and the Intercreditor Agreement; provided that Collateral Agent shall exercise, or -------- refrain from exercising, any remedies provided for in Section 12 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 18(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Pledged Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Collateral Agent for the benefit of Lenders and Interest Rate Exchangers in accordance with the terms of this Section 18(a). (b) Collateral Agent shall at all times be the same Person that is appointed Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent under this Agreement, and the retiring or removed Collateral Agent under this Agreement shall promptly (i) transfer to such successor Collateral Agent all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Collateral Agent under this Agreement, and (ii) execute and deliver to such successor Collateral Agent such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Collateral Agent of the security interests created hereunder, whereupon such retiring or removed Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Collateral Agent hereunder. SECTION 18. AMENDMENTS; ETC. --------------- No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by any Pledgor therefrom, shall in any event be effective unless the same shall be in writing and signed by Collateral Agent and, in the case of any such amendment or modification, by Pledgors; provided that any Pledge Amendment in the form of Schedule II annexed -------- ----------- hereto or any amendment hereto pursuant to Section 6(c) shall be XVIII-17 effective upon execution by any Pledgor and Pledgors hereby waive any requirement of notice or of consent to any such Pledge Amendment or amendment. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 19. NOTICES. ------- Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex (with received answerback), or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices to Collateral Agent and Pledgors shall not be -------- effective until received. For the purposes hereof, the address of each party hereto shall be as provided in subsection 10.8 of the Credit Agreement and subsection 10.8 AXEL Credit Agreement, as applicable, or as set forth under such party's name on the signature pages hereof or such other address as shall be designated by such party in a written notice delivered to the other parties hereto. SECTION 20. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. ----------------------------------------------------- No failure or delay on the part of Collateral Agent in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 21. SEVERABILITY. ------------ In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 22. HEADINGS. -------- Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 23. GOVERNING LAW; TERMS. THIS AGREEMENT AND THE RIGHTS AND -------------------- OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT XVIII-18 LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Financing Agreements, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 24. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ---------------------------------------------- ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY PLEDGOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH PLEDGOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO SUCH PLEDGOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 20; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER SUCH PLEDGOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT COLLATERAL AGENT RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST SUCH PLEDGOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION 25 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. XVIII-19 SECTION 25. WAIVER OF JURY TRIAL. -------------------- EACH PLEDGOR AND COLLATERAL AGENT HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all- encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Pledgors and Collateral Agent each acknowledge that this waiver is a material induce ment for Pledgors and Collateral Agent to enter into a business relationship, that each Pledgor and Collateral Agent have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Each Pledgor and Collateral Agent further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 26 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 26. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] XVIII-20 IN WITNESS WHEREOF, Pledgors and Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. SEALY, INC. THE STEARNS & FOSTER BEDDING COMPANY THE STEARNS & FOSTER UPHOLSTERY FURNITURE COMPANY ADVANCED SLEEP PRODUCTS SEALY MATTRESS COMPANY OF SAN DIEGO SEALY MATTRESS COMPANY OF PUERTO RICO OHIO-SEALY MATTRESS MANUFACTURING CO. INC. OHIO-SEALY MATTRESS MANUFACTURING CO. -- FORT WORTH OHIO-SEALY MATTRESS MANUFACTURING CO. OHIO-SEALY MATTRESS MANUFACTURING CO. -- HOUSTON [OTHER PLEDGORS] By: _________________________ Name: Title: Notice Address: _____________________ _____________________ _____________________ XVIII-21 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: _________________________ Name: Title: Notice Address: _____________________ _____________________ _____________________ XVIII-22 SCHEDULE I Attached to and forming a part of the Subsidiary Pledge Agreement dated as of December 18, 1997 between the subsidiaries of Sealy Mattress Company party thereto from time to time, as Pledgors, and Morgan Guaranty Trust Company of New York, as Collateral Agent. PART A
================================================================================= PERCENTAGE STOCK NUMBER OF OF CLASS OF CERTIFI- PAR SHARES OUTSTANDING PLEDGOR STOCK ISSUER STOCK CATE VALUE SHARES NOS. PLEDGED ================================================================================= - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- =================================================================================
Part B
========================================================= AMOUNT OF PLEDGOR DEBT ISSUER INDEBTEDNESS ========================================================= --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- =========================================================
XVIII-23 SCHEDULE II PLEDGE AMENDMENT This Pledge Amendment, dated ____________, [199_][200_], is delivered pursuant to Section 6(b) of the Pledge Agreement referred to below. The undersigned hereby agrees that this Pledge Amendment may be attached to the Subsidiary Pledge Agreement dated as of December 18, 1997, between the undersigned, the other Pledgors party thereto from time to time, and Morgan Guaranty Trust Company of New York, as Collateral Agent (the "PLEDGE AGREEMENT," capitalized terms defined therein being used herein as therein defined), and that the [Pledged Shares] [Pledged Debt] listed on this Pledge Amendment shall be deemed to be part of the [Pledged Shares] [Pledged Debt] and shall become part of the Pledged Collateral and shall secure all Secured Obligations. [NAME OF PLEDGOR] By: ____________________ Name: Title:
=========================================================================== PERCENTAGE OF STOCK NUM- OUTSTANDING CLASS OF CERTIFICATE PAR BER OF SHARES PLEDGED STOCK ISSUER STOCK NOS. VALUE SHARES =========================================================================== - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- ===========================================================================
==================================== AMOUNT OF DEBT ISSUER INDEBTEDNESS ==================================== ------------------------------------ ------------------------------------ ------------------------------------ ====================================
XVIII-24 SCHEDULE III [FORM OF COUNTERPART TO SUBSIDIARY PLEDGE AGREEMENT] This counterpart, dated ___________, [199_][200_] is delivered pursuant to Section 6(c) of that certain Subsidiary Pledge Agreement dated as of December 18, 1997, among the Pledgors party thereto from time to time, and Morgan Guaranty Trust Company of New York, as Collateral Agent (the "PLEDGE AGREEMENT," capitalized terms defined therein being used herein as therein defined). The undersigned hereby agrees (i) that this counterpart may be attached to the Pledge Agreement, (ii) that the undersigned will comply with all the terms and conditions of the Pledge Agreement as if it were an original signatory thereto, and (iii) that the [Pledged Shares] [Pledged Debt] listed below shall be deemed to be part of the [Pledged Shares] [Pledged Debt] and shall become part of the Pledged Collateral and shall secure all Secured Obligations. [NAME OF ADDITIONAL PLEDGOR] By: ________________________ Name: Title:
========================================================================== PERCENTAGE OF STOCK NUM- OUTSTANDING CLASS OF CERTIFICATE PAR BER OF SHARES STOCK ISSUER STOCK NOS. VALUE SHARES PLEDGED ========================================================================== - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- ==========================================================================
======================================== AMOUNT OF DEBT ISSUER INDEBTEDNESS ======================================== ---------------------------------------- ---------------------------------------- ---------------------------------------- ========================================
XVIII-25 EXHIBIT XIX [FORM OF SUBSIDIARY SECURITY AGREEMENT] SUBSIDIARY SECURITY AGREEMENT This SUBSIDIARY SECURITY AGREEMENT (this "AGREEMENT") is dated as of December 18, 1997 and entered into by and among THE UNDERSIGNED DIRECT AND INDIRECT SUBSIDIARIES (each of such undersigned Subsidiaries being a "GRANTOR" and collectively "GRANTORS"; provided that after the Closing Date, -------- "Grantors" shall be deemed to include any Additional Grantors (as hereinafter defined)) of Sealy Mattress Company, an Ohio corporation ("COMPANY"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as Collateral Agent for and representative of (in such capacity herein called "COLLATERAL AGENT") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined). RECITALS A. Company, Sealy Corporation, a Delaware Corporation ("HOLDINGS"), the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO."), as documentation agent (in such capacity, "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the ("CREDIT AGREEMENT") pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. B. Company, Holdings, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity, "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "AXEL ADMINISTRATIVE AGENT"), and BTCo., as documentation agent (in such capacity, "AXEL DOCUMENTATION AGENT") have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, the CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL Lenders have made certain commitments, subject to the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Company. XIX-1 C. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more CA Lenders or their Affiliates or AXEL Lenders or their Affiliates (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). D. Grantors have executed and delivered that certain Subsidiary Guaranty dated as of December 18, 1997 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "GUARANTY") in favor of Collateral Agent for the benefit of Secured Parties and any Interest Rate Exchangers, pursuant to which Grantors have guarantied the prompt payment and performance when due of all obligations of Company under the Financing Agreements and any other Loan Documents and all obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments, if any, thereunder in the event of early termination thereof. E. It is a condition precedent to the initial extensions of credit by Secured Parties under the Financing Agreements that each Grantor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of, Company, (iii) the AXEL Administrative Agent, the AXEL Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement, (iv) the AXEL Lenders to make their respective loans to Company and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, each Grantor hereby agrees with the Collateral Agent as follows: 1. DEFINED TERMS. ------------- (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. "ACCOUNTS" has the meaning assigned to that term in Section 2 of this Agreement. XIX-2 "AGREEMENT" means this Company Security Agreement dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. "ASSIGNED AGREEMENT" has the meaning assigned to that term in Section 2 of this Agreement. "AXEL COMMITMENTS" shall mean the "Commitments" as defined in the AXEL Credit Agreement. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "AXEL OBLIGATIONS" shall mean the "Obligations" as defined in the AXEL Credit Agreement. "COLLATERAL" has the meaning assigned to that term in Section 2 of this Agreement. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EQUIPMENT" has the meaning assigned to that term in Section 2 of this Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. XIX-3 "FINANCING AGREEMENT" means either the Credit Agreement or the AXEL Credit Agreement, and "Financing Agreements" means the Credit Agreement and the AXEL Credit Agreement, collectively. "FINANCING AGREEMENT OBLIGATIONS" means Credit Agreement Obligations and AXEL Obligations. "GRANTOR" has the meaning assigned to that term in the introduction of this Agreement. "HOLDINGS" has the meaning assigned to that term in the recitals to this Agreement. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. "INVENTORY" has the meaning assigned to that term in Section 2 of this Agreement. "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "NEGOTIABLE DOCUMENT OF TITLE" has the meaning assigned to that term in Section 2 of this Agreement. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "RELATED CONTRACTS" has the meaning assigned to that term in Section 2 of this Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. XIX-4 "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. "REQUISITE OBLIGEES" has the meaning assigned to that term in Section 23 of this Agreement. "SECURED OBLIGATIONS" has the meaning assigned to that term in Section 2 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. SECTION 2. GRANT OF SECURITY. ----------------- Each Grantor hereby assigns to Collateral Agent, and hereby grants to Collateral Agent a security interest in, all of such Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which such Grantor now has or hereafter acquires an interest and wherever the same may be located (the "COLLATERAL"): (a) all equipment in all of its forms, all parts thereof and all accessions thereto (any and all such equipment, parts and accessions being the "EQUIPMENT"); (b) all inventory in all of its forms (including, but not limited to, (i) all goods held by such Grantor for sale or lease or to be furnished under contracts of service or so leased or furnished, (ii) all raw materials, work in process, finished goods, and materials used or consumed in the manufacture, packing, shipping, advertising, selling, leasing, furnishing or production of such inventory or otherwise used or consumed in such Grantor's business, (iii) all goods in which such Grantor has an interest in mass or a joint or other interest or right of any kind, and (iv) all goods which are returned to or repossessed by such Grantor) and all accessions thereto and products thereof (all such inventory, accessions and products being the "INVENTORY") and all negotiable and non-negotiable documents of title (including without limitation warehouse receipts, dock receipts and bills of lading) issued by any Person covering any Inventory (any such negotiable document of title being a "NEGOTIABLE DOCUMENT OF TITLE"); (c) all accounts, contract rights, chattel paper, documents, instruments, general intangibles and other rights and obligations of any kind and all rights in, to and under all security agreements, leases and other contracts securing or otherwise relating to any such accounts, contract rights, chattel paper, XIX-5 documents, instruments, general intangibles or other obligations (any and all such accounts, contract rights, chattel paper, documents, instruments, general intangibles and other obligations being the "ACCOUNTS", and any and all such security agreements, leases and other contracts being the "RELATED CONTRACTS"); (d) all agreements and contracts to which such Grantor is a party as of the date hereof or becomes a party after the date hereof, as each such agreement may be amended, supplemented or otherwise modified from time to time (said agreements, as so amended, supplemented or otherwise modified, being referred to herein individually as an "ASSIGNED AGREEMENT" and collectively as the "ASSIGNED AGREEMENTS"), including (i) all rights of such Grantor to receive moneys due or to become due under or pursuant to the Assigned Agreements, (ii) all rights of such Grantor to receive proceeds of any insurance, indemnity, warranty or guaranty with respect to the Assigned Agreements, (iii) all claims of such Grantor for damages arising out of any breach of or default under the Assigned Agreements, and (iv) all rights of such Grantor to terminate, amend, supplement, modify or exercise rights or options under the Assigned Agreements, to perform thereunder and to compel performance and otherwise exercise all remedies thereunder; (e) all deposit accounts, including without limitation all deposit accounts maintained with Collateral Agent; (f) all tradesecrets, licenses, copyrights, registrations and franchise rights, and all goodwill associated with any of the foregoing; (g) to the extent not included in any other paragraph of this Section 2, all other general intangibles (including without limitation tax refunds, rights to payment or performance, choses in action and judgments taken on any rights or claims included in the Collateral); (h) all plant fixtures, business fixtures and other fixtures and storage and office facilities, and all accessions thereto and products thereof; (i) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; and (j) all proceeds, products, rents and profits of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Collateral Agent is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received XIX-6 when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. Notwithstanding anything herein to the contrary, in no event shall the Collateral include, and each Grantor shall not be deemed to have granted a security interest in, any of such Grantor's rights or interests in any license, contract or agreement to which such Grantor is a party or any of its rights or interests thereunder to the extent, but only to the extent, that such a grant would, under the terms of such license, contract or agreement or otherwise, result in a breach of the terms of, or constitute a default under any license, contract or agreement to which such Grantor is a party (other than to the extent that any such term would be rendered ineffective pursuant to Section 9-318(4) of the Uniform Commercial Code of any relevant jurisdiction or any other applicable law (including the Bankruptcy Code) or principles of equity); provided, that -------- immediately upon the ineffectiveness, lapse or termination of any such provision, the Collateral shall include, and each Grantor shall be deemed to have granted a security interest in, all such rights and interests as if such provision had never been in effect. SECTION 3. SECURITY FOR OBLIGATIONS. ------------------------ This Agreement secures, and the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all obligations and liabilities of every nature of Grantors now or hereafter existing under or arising out of or in connection with the Guaranty and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Company, would accrue on such obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Collateral Agent or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise and all obligations of every nature of Grantors now or hereafter existing under this Agreement (all such obligations of Grantors being the "SECURED OBLIGATIONS"). SECTION 4. GRANTORS REMAIN LIABLE. ---------------------- Anything contained herein to the contrary notwithstanding, (a) each Grantor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Collateral Agent of any of its rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and XIX-7 agreements included in the Collateral, and (c) Collateral Agent shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Collateral Agent be obligated to perform any of the obligations or duties of any Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 5. REPRESENTATIONS AND WARRANTIES. ------------------------------ Each Grantor represents and warrants as follows: (a) Ownership of Collateral. Except for the security interest created ----------------------- by this Agreement, Grantors own the Collateral free and clear of any Lien subject to liens permitted by the Financing Agreements. (b) Location of Equipment and Inventory. All of the Equipment and ----------------------------------- Inventory is, as of the date hereof, located at the places specified in Schedule -------- 5(b) annexed hereto. - ---- (c) Negotiable Documents of Title. No Negotiable Documents of Title ----------------------------- are outstanding with respect to any of the Inventory (other than in respect of (i) Inventory with an aggregate value not in excess of $1,000,000 or (ii) Inventory which, in the ordinary course of business, is in transit either (A) from a supplier to Grantor, (B) between the locations specified in Schedule 5(b) ------------- hereto, or (C) to customers of Grantor). (d) Office Locations; Other Names. The chief place of business, the ----------------------------- chief executive office and the office where such Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts is, and has been for the four month period preceding the date hereof, located at the offices set forth on Schedule 5(d) annexed hereto. Grantors have ------------- not in the past done, and do not now do, business under any other name (including any trade-name or fictitious business name) except as set forth on Schedule 5(d) annexed hereto. - ------------- XIX-8 SECTION 6. FURTHER ASSURANCES; ADDITIONAL GRANTORS. --------------------------------------- (a) Each Grantor agrees that from time to time, at the expense of Grantors, such Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, each Grantor will: (i) mark conspicuously each item of chattel paper included in the Accounts, each Related Contract and, at the reasonable request of Collateral Agent, each of its records pertaining to the Collateral, with a legend, in form and substance reasonable satisfactory to Collateral Agent, indicating that such Collateral is subject to the security interest granted hereby, (ii) at the reasonable request of Collateral Agent, deliver and pledge to Collateral Agent hereunder all promissory notes and other instruments (excluding checks) and all original counterparts of chattel paper constituting Collateral, duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Collateral Agent, (iii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, or as Collateral Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iv) after the acquisition by such Grantor of any item of Equipment which is covered by a certificate of title under a statute of any jurisdiction under the law of which indication of a security interest on such certificate is required as a condition of perfection thereof, upon the reasonable request of Collateral Agent, execute and file with the registrar of motor vehicles or other appropriate authority in such jurisdiction an application or other document requesting the notation or other indication of the security interest created hereunder on such certificate of title, (v) upon the reasonable request of Collateral Agent, deliver to Collateral Agent copies of all such applications or other documents filed during such calendar quarter and copies of all such certificates of title issued during such calendar quarter indicating the security interest created hereunder in the items of Equipment covered thereby, and (vi) at Collateral Agent's reasonable request, appear in and defend any action or proceeding that may affect such Grantor's title to or Collateral Agent's security interest in all or any part of the Collateral. (b) Each Grantor hereby authorizes Collateral Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of such Grantor to the extent permitted by applicable law. Each Grantor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by such Grantor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. XIX-9 (c) The initial Grantors hereunder shall be those Subsidiaries of Company as are signatories hereto on the date hereof. From time to time subsequent to the date hereof, additional Subsidiaries of Company may become parties hereto, as additional Grantors (each an "ADDITIONAL GRANTOR"), by executing a counterpart of this Agreement substantially in the form of Schedule -------- 6(d) annexed hereto. Upon delivery of any such counterpart to the Collateral - ---- Agent, notice of which is hereby waived by the Grantors, each Additional Grantor shall be a Grantor and shall be as fully a party hereto as if such Additional Grantor were an original signatory hereof. Each Grantor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Grantor hereunder, nor by any election of Collateral Agent not to cause any Subsidiary to become an Additional Grantor hereunder. This Agreement shall be fully effective as to any Grantor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Grantor hereunder. Each Additional Grantor shall execute and file such financing statements and such other instruments or notices or as Collateral Agent may reasonably request, in order to perfect the security interests granted or purported to be granted hereunder. SECTION 7. CERTAIN COVENANTS OF GRANTORS. ----------------------------- Each Grantor shall: (a) notify Collateral Agent of any change in such Grantor's name, identity or corporate structure within 30 days of such change; (b) give Collateral Agent 30 days' written notice following any change in such Grantor's chief place of business, chief executive office or residence or the office where such Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts; (c) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent the validity thereof is being contested in good faith. SECTION 8. SPECIAL COVENANTS WITH RESPECT TO EQUIPMENT AND INVENTORY. --------------------------------------------------------- Each Grantor shall: (a) keep the Equipment and Inventory at the places therefor specified on Schedule 5(b) annexed hereto or, upon 30 days' written notice to Collateral ------------- Agent following any change in location, at such other places in jurisdictions where all action, or that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder, with respect to such Equipment and Inventory shall have been taken; XIX-10 (b) cause the Equipment to be maintained and preserved working order as when new, ordinary wear and tear and damage by casualty excepted, and in accordance with such Grantor's past practices, and shall forthwith make or cause to be made all repairs, replacements and other improvements in connection therewith that are necessary in the Grantor's reasonable business judgment to such end; (c) keep correct and accurate records of the Inventory, itemizing and describing the kind, type and quantity of Inventory, such Grantor's cost therefor and (where applicable) the current list prices for the Inventory; (d) if any Inventory is in possession or control of any of such Grantor's agents or processors, upon the occurrence of an Event of Default, instruct such agent or processor to hold all such Inventory for the account of Collateral Agent and subject to the instructions of Collateral Agent; and (e) promptly upon the issuance and delivery to such Grantor of any Negotiable Document of Title (other than any one or more Negotiable Documents of Title covering (i) Inventory with an aggregate value not in excess of $1,000,000 or (ii) Inventory which, in the ordinary course of business, is in transit either (A) from a supplier to such Grantor, (B) between the locations specified in Schedule 5(b) hereto, or (C) to customers of such Grantor), deliver such ------------- Negotiable Document of Title to Collateral Agent. SECTION 9. SPECIAL COVENANTS WITH RESPECT TO ACCOUNTS AND RELATED CONTRACTS. ---------------------------------------------------------------- (a) Each Grantor shall keep its chief place of business and chief executive office and the office where it keeps its records concerning the Accounts and Related Contracts, and all originals of all chattel paper that evidence Accounts, at the location therefor specified in Section 5 or, upon 30 days' written notice to Collateral Agent following any change in location, at such other location in a jurisdiction where all action that Collateral Agent may request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder, with respect to such Accounts and Related Contracts shall have been taken. Promptly upon the reasonable request of Collateral Agent, Grantors shall deliver to Collateral Agent complete and correct copies of each Related Contract. (b) Grantors shall, maintain (i) complete records of each Account, including records of all payments received, credits granted and merchandise returned, and (ii) all documentation relating thereto in accordance with prudent business practices. (c) Except as otherwise provided in this subsection (c), each Grantor shall continue to collect, at its own expense, all amounts due or to become due to each Grantor under the Accounts and Related Contracts. In connection with such collections, each Grantor shall XIX-11 take such action as such Grantor or Collateral Agent may deem necessary or advisable to enforce collection of amounts due or to become due under the Accounts; provided, however, that Collateral Agent shall have the right at any -------- ------- time, upon the occurrence and during the continuation of an Event of Default and upon written notice to such Grantor of its intention to do so, to notify the account debtors or obligors under any Accounts of the assignment of such Accounts to Collateral Agent and to direct such account debtors or obligors to make payment of all amounts due or to become due to such Grantor thereunder directly to Collateral Agent, to notify each Person maintaining a lockbox or similar arrangement to which account debtors or obligors under any Accounts have been directed to make payment to remit all amounts representing collections on checks and other payment items from time to time sent to or deposited in such lockbox or other arrangement directly to Collateral Agent and, upon such notification and at the expense of Grantors, to enforce collection of any such Accounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as such Grantors might have done. After receipt by a Grantor of the notice from Collateral Agent referred to in the proviso to the preceding sentence, (i) any payments of Accounts, received by the - ------- Grantor shall be forthwith (and in any event within two Business Days) deposited by the Grantor in the exact form received, duly indorsed by the Grantor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of the Secured Parties only as provided in subsection 19, (ii) until so turned over in accordance with the proceeding subsection (i), all amounts and proceeds (including checks and other instruments) received by Grantor in respect of the Accounts and the Related Contracts shall be received in trust for the benefit of Collateral Agent hereunder and shall be segregated from other funds of Grantor and (iii) Grantor shall not adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon. SECTION 10. DEPOSIT ACCOUNTS. ---------------- Upon the occurrence and during the continuation of an Event of Default, Collateral Agent may exercise dominion and control over, and refuse to permit further withdrawals (whether of money, securities, instruments or other property) from any deposit accounts maintained with Collateral Agent constituting part of the Collateral. SECTION 11. LICENSE OF COPYRIGHTS, ETC. -------------------------- Each Grantor hereby assigns, transfers and conveys to Collateral Agent, effective upon the occurrence of any Event of Default, the nonexclusive right and license to use all copyrights or technical processes owned or used by such Grantor that relate to the Collateral and any other collateral granted by such Grantor as security for the Secured Obligations, together with any goodwill associated therewith, all to the extent necessary to enable Collateral Agent to use, possess and realize on the Collateral and to enable any successor or assign to enjoy the benefits of the Collateral. This right and license shall inure to the benefit of all successors, assigns and transferees of Collateral Agent and its successors, assigns and transferees, whether by voluntary conveyance, operation of law, assignment, transfer, foreclosure, deed in lieu of foreclosure or otherwise. Such right and license is granted free of charge, without requirement that any monetary payment whatsoever be made to any Grantor. XIX-12 SECTION 12. TRANSFERS AND OTHER LIENS. ------------------------- Each Grantor shall not: (a) sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Financing Agreements; or (b) except for the security interest created by this Agreement and Liens permitted by the Financing Agreements, create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person. SECTION 13. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. ------------------------------------------- Each Grantor hereby irrevocably appoints Collateral Agent as such Grantor's attorney-in-fact, with full authority in the place and stead of such Grantor and in the name of such Grantor, Collateral Agent or otherwise, from time to time upon the occurrence and during the continuance of an Event of Default in Collateral Agent's reasonable discretion to take any action and to execute any instrument that Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) to obtain and adjust insurance required to be maintained on the Collateral or paid to Collateral Agent under the Financing Agreements; (b) to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (c) to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clauses (a) and (b) above; (d) to file any claims or take any action or institute any proceedings that Collateral Agent may reasonably deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Collateral Agent with respect to any of the Collateral; (e) to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Credit Agreement) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Collateral Agent in its reasonable discretion, any such payments made by Collateral Agent to become obligations of such Grantor to Collateral Agent, due and payable immediately without demand; XIX-13 (f) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with Accounts and other documents relating to the Collateral; and (g) upon the occurrence and during the continuation of an Event of Default, generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Collateral Agent were the absolute owner thereof for all purposes, and to do, at Collateral Agent's option and Grantors' expense, at any time or from time to time, all acts and things that Collateral Agent reasonably deems necessary to protect, preserve or realize upon the Collateral and Collateral Agent's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as any Grantor might do. SECTION 14. COLLATERAL AGENT MAY PERFORM. ---------------------------- If any Grantor fails to perform any agreement contained herein, Collateral Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of Collateral Agent incurred in connection therewith shall be payable by Grantors under Section 20. SECTION 15. STANDARD OF CARE. ---------------- The powers conferred on Collateral Agent hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Collateral Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Collateral Agent accords its own property. SECTION 16. REMEDIES. -------- If any Event of Default shall have occurred and be continuing, Collateral Agent may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Collateral), and also may (a) require Grantors to, and each Grantor hereby agrees that it will at its expense and upon request of Collateral Agent forthwith, assemble all or part of the Collateral as directed by Collateral Agent and make it available to Collateral Agent at a place to be designated by Collateral Agent that is reasonably convenient to both parties, (b) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (c) prior to the disposition of the Collateral, XIX-14 store, process, repair or recondition the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Collateral Agent deems appropriate, (d) take possession of any or each Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same and any of such Grantor's equipment for the purpose of completing any work in process, taking any actions described in the preceding clause (c) and collecting any Secured Obligation, and (e) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Collateral Agent may deem commercially reasonable. Collateral Agent or any Secured Party or Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Collateral Agent, as agent for and representative of Secured Parties and Interest Rate Exchangers (but not any Secured Party or Secured Parties or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Obligees shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Collateral Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of any Grantor, and each Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Each Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to such Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Collateral Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Each Grantor hereby waives any claims against Collateral Agent arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Collateral Agent accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantors shall be jointly and severally liable for the deficiency and the reasonable fees of any attorneys employed by Collateral Agent to collect such deficiency. SECTION 17. PROCEEDS TO BE TURNED OVER TO COLLATERAL AGENT. ---------------------------------------------- In addition to the rights of the Collateral Agent and the Secured Parties specified in Section 9 with respect to payments of Accounts, if an Event of Default shall occur and be continuing, upon request of the Collateral Agent, all proceeds received by the Grantor consisting of cash, checks and other near- cash items shall be held by the Grantor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of the Grantor, and shall, forthwith upon receipt by the Grantor, be turned over to the Collateral Agent in the exact form received by the Grantor (duly indorsed by the Grantor to the Collateral Agent, if required) and held by the Collateral Agent in a Collateral Account maintained under the Intercreditor XIX-15 Agreement. All proceeds while held by the Collateral Agent in a Collateral Account (or by the Borrower in trust for the Collateral Agent and the Secured Parties) shall continue to be held as collateral security for all the Secured Obligations and shall not constitute payment thereof until applied as provided in Section 19. SECTION 18. APPLICATION OF PROCEEDS. ----------------------- Except as expressly provided elsewhere in this Agreement, all proceeds held in any Collateral Account and all other proceeds received by Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in subsection 3 of the Intercreditor Agreement. SECTION 19. INDEMNITY AND EXPENSES. ---------------------- (a) Grantors jointly and severally agree to indemnify Collateral Agent, each Lender and each Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result from Collateral Agent's or such Lender's or Interest Rate Exchanger's gross negligence or willful misconduct as determined by a court of competent jurisdiction. (b) Grantors jointly and severally agree to pay to Collateral Agent, promptly following written upon demand the amount of any and all reasonable costs and reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Collateral Agent hereunder, or (iv) the failure by Grantor to perform or observe any of the provisions hereof. SECTION 20. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. ----------------------------------------------- This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of the Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon each Grantor, its successors and assigns, and (c) inure, together with the rights and remedies of Collateral Agent hereunder, to the benefit of Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement and subsection 10.1 of the AXEL Credit Agreement, any Secured Party may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Secured Parties herein or otherwise. Upon the payment in full of all Secured Obligations (other than inchoate indemnification obligations with XIX-16 respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the applicable Grantors. Upon any such termination Collateral Agent will, at the joint and several expense of Grantors, expense, execute and deliver to Grantors such documents as Grantors shall reasonably request to evidence such termination in accordance with the terms of the Intercreditor Agreement. SECTION 21. COLLATERAL AGENT AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Collateral Agent has been appointed to act as Collateral Agent hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and AXEL administrative agent on behalf of the AXEL Lenders pursuant to the Intercreditor Agreement and, by their acceptance of the benefits hereof, Interest Rate Exchangers, and shall be entitled to the benefits of the Intercreditor Agreement. Collateral Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Collateral), solely in accordance with this Agreement and the Credit Agreement; provided that -------- Collateral Agent shall exercise, or refrain from exercising, any remedies provided for in Section 17 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 22(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Collateral Agent for the benefit of Lenders and Interest Rate Exchangers in accordance with the terms of this Section 22(a). (b) Collateral Agent shall at all times be the same Person that is appointed Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent under this Agreement, and the retiring or removed Collateral Agent under this Agreement shall promptly (i) transfer to such successor Collateral Agent all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Collateral Agent under this Agreement, and (ii) execute and deliver to such successor Collateral Agent such amendments to financing statements, and take such other actions, as may be necessary or XIX-17 appropriate in connection with the assignment to such successor Collateral Agent of the security interests created hereunder, whereupon such retiring or removed Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Collateral Agent hereunder. SECTION 23. AMENDMENTS; ETC. --------------- No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by any Grantor therefrom, shall in any event be effective unless the same shall be in writing and signed by Collateral Agent and, in the case of any such amendment or modification, by Grantors; provided that any amendment hereto pursuant to Section 5(d) shall be -------- effective upon execution by any Grantor and Grantors hereby waive any requirement of notice or of consent to any such amendment. SECTION 23. NOTICES. ------- Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex (with received answerback), or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices to Collateral Agent and Grantor shall not be -------- effective until received. For the purposes hereof, the address of each party hereto shall be as provided in subsection 10.8 of the Credit Agreement or subsection 10.8 of the AXEL Credit Agreement, as applicable, or as set forth under such party's name on the signature pages hereof or such other address as shall be designated by such party in a written notice delivered to the other parties hereto. SECTION 24. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. ----------------------------------------------------- No failure or delay on the part of Collateral Agent in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 25. SEVERABILITY. ------------ In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. XIX-18 SECTION 26. HEADINGS. -------- Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 27. GOVERNING LAW; TERMS. -------------------- THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 28. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ---------------------------------------------- ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY GRANTOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH GRANTOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO SUCH GRANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 24; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER SUCH GRANTOR IN ANY SUCH PROCEEDING IN ANY SUCH XIX-19 COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT COLLATERAL AGENT RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST SUCH GRANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION 29 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. SECTION 29. WAIVER OF JURY TRIAL. -------------------- EACH GRANTOR AND COLLATERAL AGENT HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all- encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Grantors and Collateral Agent each acknowledge that this waiver is a material inducement for Grantors and Collateral Agent to enter into a business relationship, that each Grantor and Collateral Agent have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Each Grantor and Collateral Agent further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 28 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 30. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] XIX-20 IN WITNESS WHEREOF, Grantors and Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. SEALY, INC. THE STEARNS & FOSTER BEDDING COMPANY THE STEARNS & FOSTER UPHOLSTERY FURNITURE COMPANY ADVANCED SLEEP PRODUCTS SEALY MATTRESS COMPANY OF SAN DIEGO SEALY MATTRESS COMPANY OF PUERTO RICO OHIO-SEALY MATTRESS MANUFACTURING CO. INC. OHIO-SEALY MATTRESS MANUFACTURING CO. -- FORT WORTH OHIO-SEALY MATTRESS MANUFACTURING CO. OHIO-SEALY MATTRESS MANUFACTURING CO. -- HOUSTON [OTHER GRANTORS] By: ------------------- Name: Title: Notice Address: -------------------------- -------------------------- -------------------------- XIX-21 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, AS COLLATERAL AGENT By: --------------------------------- Name: Title: Notice Address: - -------------------------- - -------------------------- - -------------------------- XIX-22 SCHEDULE 5(b) TO SUBSIDIARY SECURITY AGREEMENT Locations of Equipment: Locations of Inventory: XIX-23 SCHEDULE 5(d) TO SUBSIDIARY SECURITY AGREEMENT Office Locations; Other Names XIX-24 SCHEDULE 6(d) TO SUBSIDIARY SECURITY AGREEMENT [FORM OF COUNTERPART TO SUBSIDIARY SECURITY AGREEMENT] This counterpart, dated ___________, [199__][200__] is delivered pursuant to Section 5(d) of that certain Subsidiary Security Agreement dated as of December 18, 1997, among the Grantors party thereto from time to time, and Morgan Guaranty Trust Company of New York, as Collateral Agent (the "SECURITY AGREEMENT," capitalized terms defined therein being used herein as therein defined). The undersigned hereby agrees (i) that this counterpart may be attached to the Security Agreement, and (ii) that the undersigned will comply with all the terms and conditions of the Pledge Agreement as if it were an original signatory thereto. [NAME OF ADDITIONAL GRANTOR] By: --------------------------------- Name: Title: XIX-25 EXHIBIT XX [FORM OF SUBSIDIARY PATENT AND TRADEMARK SECURITY AGREEMENT] SUBSIDIARY PATENT AND TRADEMARK SECURITY AGREEMENT This SUBSIDIARY PATENT AND TRADEMARK SECURITY AGREEMENT (this "AGREEMENT") is dated as of December 18, 1997 and entered into by and among THE UNDERSIGNED DIRECT AND INDIRECT SUBSIDIARIES (each of such undersigned Subsidiaries being a "GRANTOR" and collectively "GRANTORS"; provided that after -------- the Closing Date, "Grantors" shall be deemed to include any Additional Grantors (as hereinafter defined)) of Sealy Mattress Company, an Ohio corporation ("COMPANY"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as Collateral Agent for and representative of (in such capacity herein called "COLLATERAL AGENT") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined). RECITALS A. Sealy Corporation, a Delaware Corporation ("HOLDINGS"), the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO."), as documentation agent (in such capacity, "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT"), with Company pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. B. Company, Holdings, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity, "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "AXEL ADMINISTRATIVE AGENT"), and BTCo., as documentation agent (in such capacity, "AXEL DOCUMENTATION AGENT") have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, the CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL Lenders have made certain commitments, subject to the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Company. XX-1 C. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more CA Lenders or their Affiliates or AXEL Lenders or their Affiliates (in such capacity, collectively, "INTEREST RATE EXCHANGERS") in accordance with the terms of the Financing Agreements (as hereinafter defined), and it is desired that the obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments thereunder in the event of early termination thereof (all such obligations being the "INTEREST RATE OBLIGATIONS"), together with all obligations of Company under the Financing Agreements and the any other Loan Documents, be secured hereunder. D. Grantors have executed and delivered that certain Subsidiary Guaranty dated as of December 18, 1997 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "SUBSIDIARY GUARANTY") in favor of Collateral Agent for the benefit of Secured Parties and any Interest Rate Exchangers, pursuant to which Grantors have guarantied the prompt payment and performance when due of all obligations of Company under the Financing Agreements and any other Loan Documents and all obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments thereunder in the event of early termination thereof. E. Additional Grantors shall execute and deliver counterparts to the Subsidiary Guaranty in favor of Collateral Agent for the benefit of Secured Parties and any Interest Rate Exchangers, pursuant to which each Additional Grantor shall guaranty the prompt payment and performance when due of all obligations of Company under the Financing Agreements and any other Loan Documents and all obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments thereunder in the event of early termination thereof. F. Grantors have and may in the future have rights, title and interests in and to various Patents and other related Collateral (as such terms are hereinafter defined). G. Grantors own and use in their business, and will in the future adopt and so use, various intangible assets, including trademarks, service marks, designs, logos, indicia, tradenames, corporate names, company names, business names, fictitious business names, trade styles and/or other source and/or business identifiers and applications pertaining thereto (collectively, the "TRADEMARKS"). G. Collateral Agent desires Grantors to grant to it a lien on and security interest in all of Grantors' existing and future Patents, existing and future Trademarks, all registrations that have been or may hereafter be issued or applied for thereon in the United States and any state thereof (the "REGISTRATIONS"), all common law and other rights in and to the Trademarks in the United States and any state thereof (the "TRADEMARK RIGHTS"), all goodwill of Grantors' business symbolized by the Trademarks and associated therewith, including without limitation the documents and things described in Section 2(b) (the "ASSO- XX-2 CIATED GOODWILL") and any other Collateral, and all proceeds of the Patents, Trademarks, the Registrations, the Trademark Rights, the Associated Goodwill and any other Collateral, and Grantors agree to grant to Collateral Agent a secured and protected interest in the Trademarks, the Registrations, the Trademark Rights, the Associated Goodwill and all the proceeds thereof as provided herein. I. Pursuant to the Subsidiary Security Agreement, each Grantor has granted to Collateral Agent a lien on and security interest in, among other assets, all Grantors' equipment, inventory, accounts and general intangibles relating to the products and services sold or delivered under or in connection with the Trademarks such that, upon the occurrence and during the continuation of an Event of Default (as hereinafter defined) Collateral Agent would be able to exercise its remedies consistent with the Security Agreement, this Agreement and applicable law to foreclose upon Grantors' business and use the Trademarks, the Registrations and the Trademark Rights in conjunction with the continued operation of such business, maintaining substantially the same product and service specifications and quality as maintained by Grantors, and benefit from the Associated Goodwill. J. It is a condition precedent to the initial extensions of credit by Lenders under the Financing Agreements that Grantors shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of, Company, (iii) the AXEL Administrative Agent, the AXEL Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement, (iv) the AXEL Lenders to make their respective loans to Company, and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, each Grantor hereby agrees with the Collateral Agent as follows: 1. DEFINED TERMS. ------------- (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. "AGREEMENT" means this Company Security Agreement dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. XX-3 "ASSOCIATED GOODWILL" has the meaning assigned to that term in the recitals to this Agreement. "AXEL COMMITMENTS" shall mean the "Commitments" as defined in the AXEL Credit Agreement. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "AXEL LENDERS" has the meaning assigned to that term in the recitals to this Agreement. "AXEL OBLIGATIONS" shall mean "Obligations" as defined in the AXEL Credit Agreement. "AXEL SYNDICATION AGENT" has the meaning assigned to that term in the recitals to this Agreement. "COLLATERAL" has the meaning assigned to that term in Section 5 of this Agreement. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COLLATERAL AGENT" has the meaning assigned to that term in the introduction. "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company in the Defaulting Party and which results in the designation of an Early Termination Date (as defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. XX-4 "HOLDINGS" has the meaning assigned to that term in the recitals to this Agreement. "FINANCING AGREEMENT" means the Credit Agreement or the AXEL Credit Agreement, and "Financing Agreements" means the Credit Agreement and the AXEL Credit Agreement, collectively. "FINANCING AGREEMENT OBLIGATIONS" means "Credit Agreement Obligations and AXEL Obligations. "GRANTOR" has the meaning assigned to that term in the introduction of this Agreement. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. "INTEREST RATE OBLIGATIONS" has the meaning assigned to that term in the recitals to this Agreement. "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "MATERIAL PATENT" has the meaning assigned to that term in Section 5 of this Agreement. "MATERIAL TRADEMARK PROPERTY" has the meaning assigned to that term in Section 5 of this Agreement. "PATENTS" has the meaning assigned to that term in Section 2 of this Agreement. "PERMITTED PATENT LIENS" has the meaning assigned to that term in Section 5 of this Agreement. XX-5 "PERMITTED TRADEMARK LIENS" has the meaning assigned to that term in Section 5 of this Agreement. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "REGISTRATIONS" has the meaning assigned to that term in the recitals to this Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. "REQUISITE OBLIGEES" has the meaning assigned to that term in Section 19 of this Agreement. "SECURED OBLIGATIONS" has the meaning assigned to that term in Section 3 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. "TRADEMARKS" has the meaning assigned to that term in the recitals to this Agreement. "TRADEMARK RIGHTS" has the meaning assigned to that term in the recitals to this Agreement. 2. GRANT OF SECURITY. ----------------- Each Grantor hereby grants to Collateral Agent a security interest in all of such Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Grantor now has or hereafter acquires an interest and wherever the same may be located (the "COLLATERAL"): A. each of the U.S. Trademarks and rights and interests in Trademarks which are presently, or in the future may be, owned, held (whether pursuant to a license or otherwise) or used by such Grantor, in whole or in part (including without limitation the U.S. Trademarks specifically identified in Schedule I ---------- XX-6 annexed hereto) and including all Trademark Rights with respect thereto and all federal and state Registrations heretofore or hereafter granted or applied for, the right (but not the obligation) to file for registration claims under any state or federal trademark law or regulation and to apply for, renew and extend the Trademarks, Registrations and Trademark Rights, the right (but not the obligation) to sue or bring opposition or cancellation proceedings in the name of such Grantor or in the name of Collateral Agent or otherwise for past, present and future infringements of the Trademarks, Registrations or Trademark Rights and all rights (but not obligations) corresponding thereto in the United States, and the Associated Goodwill; it being understood that the rights and interests included herein shall include, without limitation, all rights and interests pursuant to licensing or other contracts in favor of such Grantor pertaining to any Trademarks, Registrations or Trademark Rights presently or in the future owned, held or used by third parties but, in the case of third parties which are not Affiliates of such Grantor, only to the extent permitted by such licensing or other contracts or otherwise permitted by applicable law and, if not so permitted under any such contracts and applicable law, only with the consent of such third parties; B. the following documents and things in such Grantor's possession, or subject to such Grantor's right to possession, related to (Y) the production, sale and delivery by such Grantor, or by any Affiliate, licensee or subcontractor of such Grantor, of products or services sold or delivered by or under the authority of such Grantor in connection with the Trademarks, Registrations or Trademark Rights (which products and services shall, for purposes of this Agreement, be deemed to include, without limitation, products and services sold or delivered pursuant to merchandising operations utilizing any Trademarks, Registrations or Trademark Rights); or (Z) any retail or other merchandising operations conducted under the name of or in connection with the Trademarks, Registrations or Trademark Rights by such Grantor or any Affiliate, licensee or subcontractor of such Grantor: 1. all lists and ancillary documents that identify and describe any of such Grantor's customers, or those of their Affiliates, licensees or subcontractors, for products sold and services delivered under or in connection with the Trademarks or Trademark Rights, including without limitation any lists and ancillary documents that contain a customer's name and address, the name and address of any of its warehouses, branches or other places of business, the identity of the Person or Persons having the principal responsibility on a customer's behalf for ordering products or services of the kind supplied by such Grantor, or the credit, payment, discount, delivery or other sale terms applicable to such customer, together with information setting forth the total purchases, by brand, product, service, style, size or other criteria, and the patterns of such purchases; XX-7 2. all product and service specification documents and production and quality control manuals used in the manufacture or delivery of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights; 3. all documents which reveal the name and address of any source of supply, and any terms of purchase and delivery, for any and all materials, components and services used in the production of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights; and 4. all documents constituting or concerning the then current or proposed advertising and promotion by such Grantor or its Affiliates, licensees or subcontractors of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights including, without limitation, all documents which reveal the media used or to be used and the cost for all such advertising conducted within the described period or planned for such products and services; and C. all patents and patent applications and rights and interests in U.S. patents and patent applications that are presently, or in the future may be, owned, held (whether pursuant to a license or otherwise) or used by such Grantor in whole or in part (including, without limitation, the U.S. patents and patent applications listed in Schedule -------- II annexed hereto, all rights (but not obligations) corresponding thereto -- (including without limitation the right (but not the obligation) to sue for past, present and future infringements in the name of such Grantor or in the name of Secured Party), and all re-issues, divisions, continuations, renewals, extensions and continuations-in-part thereof (all of the foregoing being collectively referred to as the "PATENTS"); it being understood that the rights and interests granted hereby shall include, without limitation, all rights and interests pursuant to licensing or other contracts in favor of such Grantor pertaining to any Patent presently or in the future owned, held or used by third parties but, in the case of third parties which are not Affiliates of such Grantor, only to the extent permitted by such licensing or other contracts or otherwise permitted by applicable law and, if not so permitted under any such contracts and applicable law, only with the consent of such third parties; D. all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; E. to the extent not included in the foregoing clauses (a) -(d), all general intangibles relating to the Collateral; and XX-8 F. all proceeds, products, and profits (including without limitation license royalties and proceeds of infringement suits) of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Collateral Agent is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. 3. SECURITY FOR OBLIGATIONS. ------------------------ This Agreement secures, and the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including without limitation the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all Secured Obligations with respect to such Grantor. "SECURED OBLIGATIONS" means all obligations and liabilities of every nature of Grantors now or hereafter existing under or arising out of or in connection with the Subsidiary Guaranty, in each case together with all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Grantor, would accrue on such obligations), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Collateral Agent or any Secured Party or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise, and all obligations of every nature of Grantors now or hereafter existing under this Agreement. 4. GRANTORS REMAINS LIABLE. ----------------------- Anything contained herein to the contrary notwithstanding, (a) each Grantor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Collateral Agent of any of its rights hereunder shall not release any Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Collateral Agent shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Collateral Agent be obligated to perform any of the obligations or duties of any Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. XX-9 5. REPRESENTATIONS AND WARRANTIES. ------------------------------ Each Grantor represents and warrants as follows: (a) OWNERSHIP OF COLLATERAL. Except as expressly permitted by the Financing Agreements and for the security interest and conditional assignment created by this Agreement (and other than ownership and other rights reserved by third party owners with respect to each Material Trademark Property and each Material Patent that Grantor is licensed to use), such Grantor is the legal and beneficial owner of the entire right, title and interest in and to (i) each Material Trademark Property, free and clear of any Lien other than Liens of mechanics, materialmen, attorneys and other similar liens imposed by laws in the ordinary course of business in connection with the establishment, creation or application for registration of any Trademarks, Registrations or Trademark Rights for sums not yet delinquent or being contested in good faith (such Liens being referred to herein as "PERMITTED TRADEMARK LIENS"), and (ii) each Material Patent, free and clear of any Lien other than Liens of mechanics, materialmen, attorneys and other similar liens imposed by law in the ordinary course of business in connection with the establishment, creation or application for any Patent for sums not yet delinquent or being contested in good faith (such Liens being referred to herein as "PERMITTED PATENT LIENS"). Except such as may have been filed in favor of Collateral Agent relating to this Agreement except as permitted by the Financing Agreements, no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office, including the United States Patent and Trademark Office. (b) DESCRIPTION OF COLLATERAL. A true and complete list of all Registrations, trade names, corporate names, fictitious business names and Trademark license agreements owned, held (whether pursuant to a license or otherwise) or used by such Grantor, in whole or in part, as of the date such Grantor has entered into this Agreement is set forth in Schedule I annexed hereto. Each Registration, trade name, corporate ---------- name, fictitious business name and Trademark license designated on Schedule I annexed hereto as a Material Trademark Property, and each other Trademark, Registration or Trademark Right hereafter arising or otherwise owned, held or used by any Grantor that is material to any of such Grantor's business or operations is referred to herein as a "MATERIAL TRADEMARK PROPERTY". A true and complete list of all Patents owned or held (whether pursuant to a license or otherwise) by such Grantor, in whole or in part, as of the date such Grantor has entered into this Agreement is set forth in Schedule II annexed hereto. Each ----------- Patent designated on Schedule II annexed hereto as a Material Patent ----------- and each other Patent hereafter arising or otherwise owned or held by such Grantor that is material to any of such Grantor's business or operations is referred to herein as a "MATERIAL PATENT". XX-10 (c) VALIDITY AND ENFORCEABILITY OF COLLATERAL. Each Material Trademark Property and each Material Patent is subsisting and has not been adjudged invalid or unenforceable, in whole or in part, and Grantor has entered into this Agreement, such Grantor is not aware of any pending or threatened claim by any third party that any Material Trademark Property or any Material Patent is invalid or unenforceable or that the use of any Material Trademark Property or any Material Patent violates the rights of any third person. (d) PERFECTION. This Agreement together with the filing of UCC financing statements naming each Grantor as "debtor", naming Collateral Agent as "secured party" and describing the U.S. Collateral in the filing offices set forth on Schedule III annexed hereto and the ------------ recording of this Agreement with the United States Patent and Trademark Office, creates a valid, perfected and First Priority security interest in the Collateral (subject only to Permitted Patent Liens and Permitted Trademark Liens) securing the payment of the Secured Obligations, and all filings and other actions necessary to perfect and protect such security interests under the laws of the United States or any State thereunder have been or will promptly be following execution hereof duly made or taken. (e) OTHER INFORMATION. All information hereto, herein or hereafter supplied to Collateral Agent by or on behalf of each Grantor with respect to the Collateral is accurate and complete in all material respects. 6. FURTHER ASSURANCES; NEW TRADEMARKS, REGISTRATIONS AND ----------------------------------------------------- TRADEMARK RIGHTS; NEW PATENTS AND PATENT APPLICATIONS; CERTAIN INSPECTION - ------------------------------------------------------------------------- RIGHTS. - ------ (a) Each Grantor agrees that from time to time, at the expense of Grantors, such Grantor will promptly execute and deliver all further instruments and documents, and take all further action, or that Collateral Agent may reasonably request, in order to perfect and protect any security interest or conditional assignment granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, each Grantor will: (i) at the reasonable request of Collateral Agent, mark conspicuously each of its records pertaining to the Collateral with a legend, in form and substance reasonably satisfactory to Collateral Agent indicating that such Collateral is subject to the security interest granted hereby, (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, or as Collateral Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iii) use its best efforts to obtain any necessary consents of third parties to the grant and perfection of a security interest to Collateral Agent with respect to any Collateral, and (iv) at Collateral Agent's request, appear in and defend any action or proceeding that would reasonably be expected to affect such Grantor's title to or Collateral Agent's security interest in all or any part of the Collateral. XX-11 (b) Each Grantor hereby authorizes Collateral Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of any Grantor to the extent permitted by applicable law. Each Grantor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by such Grantor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. (c) Each Grantor will furnish to Collateral Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Collateral Agent may reasonably request, all in reasonable detail. (d) If any Grantor shall obtain rights to any new Trademarks, Registrations or Trademark Rights, or to any patentable inventions, or become entitled to the benefit of any U.S. patent application or patent or any reissue, division, continuation, renewal, extension, or continuation-in-part of any Patent or any improvement in any Patent, the provisions of this Agreement shall automatically apply thereto. Once per calendar year, each Grantor shall notify Collateral Agent in writing of any Registrations or Patents acquired by such Grantor during such calendar year and of any Registrations issued or applications for Registration made during such calendar year, which notice shall state whether such Registration constitutes a Material Trademark Property or whether such Patent constitutes a Material Patent. Concurrently with the filing of an application for Registration for any Trademark, or an application for any Patent the applicable Grantor shall execute, deliver and record in all places where this Agreement is recorded an appropriate Patent and Trademark Security Agreement, substantially in the form hereof, with appropriate insertions, or an amendment to this Agreement, in form and substance reasonably satisfactory to Collateral Agent, pursuant to which such Grantor shall grant a security interest to the extent of its interest in such Registration or Patent as provided herein to Collateral Agent unless so doing would, in the reasonable judgment of such Grantor, after due inquiry, result in the grant of a Patent or Registration in the name of Collateral Agent, in which event such Grantor shall give written notice to Collateral Agent as soon as reasonably practicable and the filing shall instead be undertaken as soon as practicable but in no case later than immediately following the grant of such Patent or Registration. 7. CERTAIN COVENANTS OF GRANTORS. ----------------------------- Each Grantor shall: (a) notify Collateral Agent of any change in such Grantor's name, identity or corporate structure within 30 days of such change; (b) give Collateral Agent 30 days' written notice following any change in such Grantor's chief place of business or chief executive office or the office where such Grantor keeps its records regarding the Collateral; (c) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including XX-12 claims for labor, materials and supplies) against, the Collateral, except to the extent the validity thereof is being contested in good faith; (d) not sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Financing Agreements; (e) except for Permitted Patent Liens and Permitted Trademark Liens and the security interest and conditional assignment created by this Agreement, not create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person other than Lien permitted by the Financing Agreements; (f) diligently keep reasonable records respecting the Collateral and at all times keep at least one complete set of its records concerning substantially all of the Patents and Registrations at its chief executive office or principal place of business; (g) take all steps reasonably necessary in such Grantor's business judgment to protect the secrecy of all trade secrets relating to the products and services sold or delivered under or in connection with the Patents, Trademarks and Trademark Rights; (h) use proper statutory notice in connection with its use of each Material Patent and Material Trademark Property to the extent reasonably necessary for the protection of such Material Patent or Material Trademark Property; and (i) use consistent standards of high quality (which may be consis tent with such Grantor's past practices or with such Grantor's business judgment) in the manufacture, sale and delivery of products and services sold or delivered under or in connection with the Trademarks, Registrations and Trademark Rights, including, to the extent applicable, in the operation and maintenance of its merchandising operations. 8. AMOUNTS PAYABLE IN RESPECT OF THE COLLATERAL. -------------------------------------------- Except as otherwise provided in this Section 8, each Grantor shall continue to collect, at its own expense, all amounts due or to become due to Grantors in respect of the Collateral or any portion thereof. In connection with such collections, each Grantor may take (and, at Collateral Agent's direction, shall take) such action as such Grantor may deem necessary or advisable to enforce collection of such amounts; provided, however, that -------- ------- Collateral Agent shall have the right at any time, upon the occurrence and during the continuation of an Event of Default and upon written notice to such Grantor of its intention to do so, to notify the obligors with respect to any such amounts of the existence of the security interest and the conditional assignment created hereby, and to direct such obligors to make XX-13 payment of all such amounts directly to Collateral Agent, and, upon such notification and at the expense of Grantors, to enforce collection of any such amounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as such Grantor might have done. After receipt by such Grantor of the notice from Collateral Agent referred to in the proviso to the preceding sentence, (i) all amounts and proceeds (including checks and other instruments) received by such Grantor in respect of amounts due to such Grantor in respect of the Collateral or any portion thereof shall be forthwith (and in any event within two Business Days) deposited by the Grantor in the exact form received, duly indorsed by the Grantor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of Secured Parties only as provided in Section 16, (ii) until so turned over in accordance with the preceding subsection (i), all such amounts and proceeds received by such Grantor shall be received in trust for the benefit of Collateral Agent hereunder- and shall be segregated from other funds of Grantor and (iii)such Grantor shall not adjust, settle or compromise the amount or payment of any such amount or release wholly or partly any obligor with respect thereto or allow any credit or discount thereon. 9. PATENT OR TRADEMARK APPLICATIONS AND LITIGATION. ----------------------------------------------- (a) Each Grantor shall have the duty diligently, to prosecute any trademark application relating to any Material Trademark Property that is pending as of the date of this Agreement, to make federal application on any existing or future registerable but unregistered Material Trademark Property (whenever it is commercially reasonable in the reasonable judgement of such Grantor to do so), and to file and prosecute opposition and cancellation proceedings, renew Registrations and do any and all reasonable acts which are necessary or desirable to preserve and maintain all rights in all Material Trademark Properties; provided, however, that Grantor shall not be obligated to -------- ------- prosecute or apply for registration of any Trademark or Registration that Grant determines in its reasonable business judgment is no longer necessary or desirable in the conduct of its business. Any expenses incurred in connection therewith shall be borne solely by Grantors. No Grantor shall abandon any Material Trademark Property; provided, however, that Grantor shall not be -------- ------- obligated to maintain any Trademark or Registration that Grantor determines in its reasonable business judgment is no longer necessary or desirable in the conduct of its business. (b) Each Grantor shall have the duty diligently, through counsel reasonably acceptable to Collateral Agent, to prosecute any patent application relating to any Material Patent that is pending as of the date of this Agreement and to do any and all acts which are necessary or desirable to preserve and maintain all rights in all Material Patents; provided, however, that Grantor -------- ------- shall not be obligated to prosecute or maintain any Patent that Grantor determines in its reasonable business judgment is no longer necessary or desirable in the conduct of its business. Any expenses incurred in connection therewith shall be borne solely by Grantors. Each Grantor shall not, as to any patentable invention or Patent that constitutes or could constitute a Material Patent, abandon any pending patent application or any Patent without the prior written consent of Collateral Agent; provided, however, that Grantor shall not -------- ------- be obligated to prosecute or maintain any Patent that Grantor determines in its reasonable business judgment is no longer necessary or desirable in the conduct of its business. XX-14 (c) Except as provided in Section 9(e), each Grantor shall have the right to commence and prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions for infringement, unfair competition, dilution or other damage as are in its reasonable business judgment necessary to protect the Collateral. Collateral Agent shall provide, at Grantor's expense, all reasonable and necessary cooperation in connection with any such suit, proceeding or action including, without limitation, joining as a necessary party. (d) Each Grantor shall promptly, following its becoming aware thereof, notify Collateral Agent of the institution of, or of any adverse determination in, any proceeding (whether in the United States Patent and Trademark Office or any federal, state, local or foreign court) described in subsection 9(a), 9(b) or 9(c) or regarding such Grantor's claim of ownership in or right to use any of the Trademarks, Registrations or Trademark Rights, its right to register the same, or its right to keep and maintain such Registration. Such Grantor shall provide to Collateral Agent any information with respect thereto requested by Collateral Agent. (e) Anything contained herein to the contrary notwithstanding, upon the occurrence and during the continuation of an Event of Default, Collateral Agent shall have the right (but not the obligation) to bring suit, in the name of any Grantor, Collateral Agent or otherwise, to enforce any Patent, Trademark, Registration, Trademark Right, Associated Goodwill and any license thereunder, in which event each Grantor shall, at the request of Collateral Agent, do any and all lawful acts and execute any and all documents required by Collateral Agent in aid of such enforcement and each Grantor shall promptly, upon demand, reimburse and indemnify Collateral Agent as provided in Section 17 in connection with the exercise of its rights under this Section 9. To the extent that Collateral Agent shall elect not to bring suit to enforce any Patent, Trademark, Registration, Trademark Right, Associated Goodwill or any license thereunder as provided in this Section 9(e), each Grantor agrees to use all reasonable measures, whether by action, suit, proceeding or otherwise, to prevent the infringement of any of the Patents, Trademarks, Registrations, Trademark Rights or Associated Goodwill by others and for that purpose agrees to diligently maintain in accordance with reasonable business practice any action, suit or proceeding against any Person so infringing necessary to prevent such infringement. 10. NON-DISTURBANCE AGREEMENTS, ETC. -------------------------------- If and to the extent that any Grantor is permitted to license the Collateral, Collateral Agent shall enter into a non-disturbance agreement or other similar arrangement, at Grantors' request and expense, with such Grantor and any licensee of any Collateral permitted hereunder in form and substance reasonably satisfactory to Collateral Agent pursuant to which (a) Collateral Agent shall agree not to disturb or interfere with such licensee's rights under its license agreement with such Grantor so long as such licensee is not in default thereunder and (b) such licensee shall acknowledge and agree that the Collateral licensed to it is subject to the security interest and conditional assignment created in favor of Collateral Agent and the other terms of this Agreement. XX-15 11. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. ------------------------------------------- Each Grantor hereby irrevocably appoints Collateral Agent as such Grantor's attorney-in-fact, with full authority in the place and stead of such Grantor and in the name of such Grantor, Collateral Agent or otherwise, from time to time, upon the occurrence during the continuance of an Event of Default, in Collateral Agent's reasonable discretion to take any action and to execute any instrument that Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: A. to endorse such Grantor's name on all applications, documents, papers and instruments necessary for Collateral Agent in the use or maintenance of the Collateral; B. to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; C. to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (b) above; D. upon the occurrence and during the continuance of an Event of Default, to file any claims or take any action or institute any proceedings that Collateral Agent may reasonably deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Collateral Agent with respect to any of the Collateral; E. to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Financing Agreements) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Collateral Agent in its sole discretion, any such payments made by Collateral Agent to become obligations of such Grantor to Collateral Agent, due and payable immediately without demand; and F. upon the occurrence and during the continuance of an Event of Default, (i) to execute and deliver any of the assignments or documents requested by Collateral Agent pursuant to Section 14(b), (ii) to grant or issue an exclusive or non-exclusive license to the Collateral or any portion thereof to any Person, and (iii) otherwise generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Collateral Agent were the absolute owner thereof for all purposes, and to do, at Collateral Agent's option and Grantors' expense, at any time or from time to time, all acts and things that Collateral Agent deems necessary to protect, preserve or realize upon the Collateral and Collateral Agent's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as such Grantor might do. XX-16 12. COLLATERAL AGENT MAY PERFORM. ---------------------------- If any Grantor fails to perform any agreement contained herein, Collateral Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of Collateral Agent incurred in connection therewith shall be payable by such Grantor under Section 17. 13. STANDARD OF CARE. ---------------- The powers conferred on Collateral Agent hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for monies actually received by it hereunder, Collateral Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Collateral Agent accords its own property. XX-17 14. REMEDIES. -------- If any Event of Default shall have occurred and be continuing: XX-18 A. Collateral Agent may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a collateral agent on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Collateral), and also may (i) require each Grantor to, and each Grantor hereby agrees that it will at its expense and upon request of Collateral Agent forthwith, assemble all or part of the Collateral as directed by Collateral Agent and make it available to Collateral Agent at a place to be designated by Collateral Agent that is reasonably convenient to both parties, (ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (iii) prior to the disposition of the Collateral, store the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Collateral Agent deems appropriate, (iv) take possession of any Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same for the purpose of taking any actions described in the preceding clause (iii) and collecting any Secured Obligation, (v) exercise any and all rights and remedies of Grantors under or in connection with the contracts related to the Collateral or otherwise in respect of the Collateral, including without limitation any and all rights of Grantors to demand or otherwise require payment of any amount under, or performance of any provision of, such contracts, and (vi) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Collateral Agent may deem commercially reasonable. Collateral Agent or any Secured Party or Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Collateral Agent, as agent for and representative of Secured Parties and Interest Rate Exchangers (but not any Secured Party or Secured Parties or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Obligees shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Collateral Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of any Grantor, and each Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Each Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to such Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Collateral Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Collateral Agent may adjourn any public or private sale from time to time by announcement at the XX-19 time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Each Grantor hereby waives any claims against Collateral Agent arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Collateral Agent accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantors shall be jointly and severally liable for the deficiency and the reasonable fees of any attorneys employed by Collateral Agent to collect such deficiency. B. Upon written demand from Secured Party, each Grantor shall execute and deliver to Collateral Agent an assignment or assignments of the Patents, Trademarks, Registrations, Trademark Rights and the Associated Goodwill and such other documents as are requested by Collateral Agent. Each Grantor agrees that such an assignment and/or recording shall be applied to reduce the Secured Obligations outstanding only to the extent that Collateral Agent (or any Secured) receives cash proceeds in respect of the sale of, or other realization upon, the Collateral. C. Within five Business Days after written notice from Collateral Agent, each Grantor shall make available to Collateral Agent, to the extent within each applicable Grantor's power and authority, such personnel in such Grantor's employ on the date of such Event of Default as Collateral Agent may reasonably designate, by name, title or job responsibility, to permit such Grantor to continue, directly or indirectly, to produce, advertise and sell the products and services sold or delivered by such Grantor under or in connection with the Patents, Trademarks, Registrations and Trademark Rights, such persons to be available to perform their prior functions on Collateral Agent's behalf and to be compensated by Collateral Agent at Grantors' expense on a per diem, pro-rata basis consistent with the salary and benefit structure applicable to each as of the date of such Event of Default. XX-20 15. PROCEEDS TO BE TURNED OVER TO COLLATERAL AGENT. ---------------------------------------------- In addition to the rights of the Collateral Agent and the Secured Parties specified in Section 8 with respect to payments of Accounts, if an Event of Default shall occur and be continuing, upon request of the Collateral Agent, all proceeds received by the Grantor consisting of cash, checks and other near- cash items shall be held by the Grantor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of the Grantor, and shall, forthwith upon receipt by the Grantor, be turned over to the Collateral Agent in the exact form received by the Grantor (duly indorsed by the Grantor to the Collateral Agent, if required) and held by the Collateral Agent in a Collateral Account maintained under the Intercreditor Agreement. All proceeds while held by the Collateral Agent in a Collateral Account (or by the Grantor in trust for the Collateral Agent and the Secured Parties) shall continue to be held as collateral security for all the Secured Obligations and shall not constitute payment thereof until applied as provided in Section 16. 16. APPLICATION OF PROCEEDS. ----------------------- Except as expressly provided elsewhere in this Agreement, all proceeds held in any Collateral Account and all other proceeds received by Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in subsection 3 of the Intercreditor Agreement. 17. INDEMNITY AND EXPENSES. ---------------------- (a) Grantors jointly and severally agree to indemnify Collateral Agent, each Secured Party and each Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including without limitation enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Collateral Agent's or such Secured Party's or Interest Rate Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Grantors jointly and severally agree to pay to Collateral Agent promptly following written demand the amount of any and all costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Collateral Agent hereunder, or (iv) the failure by any Grantor to perform or observe any of the provisions hereof. (c) The obligations of Grantors in this Section 17 shall survive the termination of this Agreement and the discharge of Grantors' other obligations under this Agreement, the Interest Rate Agreements, the Credit Agreement and the other Loan Documents. XX-21 18. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. ----------------------------------------------- This Agreement shall create a continuing security interest in and conditional assignment of the Collateral effective only upon the occurrence and during the continuance of an Event of Default and shall (a) remain in full force and effect until the payment in full of the Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantors and their respective successors and assigns, and (c) inure, together with the rights and remedies of Collateral Agent hereunder, to the benefit of Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement and subsection 10.1 of the AXEL Credit Agreement, any Secured Party may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Secured Parties herein or otherwise. Upon the payment in full of all Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest and conditional assignment granted hereby shall terminate and all rights to the Collateral shall revert to the applicable Grantors. Upon any such termination Collateral Agent will, at Grantors' expense, execute and deliver to Grantors such documents as Grantors shall reasonably request to evidence such termination in accordance with the terms of the Intercreditor Agreement. XX-22 19. COLLATERAL AGENT AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Collateral Agent has been appointed to act as Collateral Agent hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and AXEL Administrative Agent on behalf of the AXEL Lenders pursuant to the Intercreditor Agreement and, by their acceptance of the benefits hereof, Interest Rate Exchangers, and shall be entitled to the benefits of the Intercreditor Agreement. Collateral Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including without limitation the release or substitution of Collateral), solely in accordance with this Agreement and the Intercreditor Agreement; provided that -------- Collateral Agent shall exercise, or refrain from exercising, any remedies provided for in Section 14 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 19(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Collateral Agent for the benefit of Secured Parties and Interest Rate Exchangers in accordance with the terms of this Section 19(a). (b) Collateral Agent shall at all times be the same Person that is appointed Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent under this Agreement, and the retiring or removed Collateral Agent under this Agreement shall promptly (i) transfer to such successor Collateral Agent all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Collateral Agent under this Agreement, and (ii) execute and deliver to such successor Collateral Agent such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Collateral Agent of the security interests created hereunder, whereupon such retiring or removed Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Collateral Agent hereunder. XX-23 20. AMENDMENTS; ETC. --------------- No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by any Grantor therefrom, shall in any event be effective unless the same shall be in writing and signed by Collateral Agent and, in the case of any such amendment or modification, by Grantors; provided that any amendment hereto pursuant to Section 22 or Section -------- 6(c) shall be effective upon execution by any Additional Grantor and Grantors hereby waive any requirement of notice of or consent to any such amendment. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. 21. NOTICES. ------- Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex (with received answerback), or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices to Collateral Agent or Grantor shall not be -------- effective until received. For the purposes hereof, the address of each party hereto shall be provided in subsection 10.8 of the Credit Agreement or subsection 10.8 of the AXEL Credit Agreement, or as set forth under such party's name on the signature pages hereof or such other address as shall be designated by such party in a written notice delivered to the other parties hereto. 22. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. ----------------------------------------------------- No failure or delay on the part of Collateral Agent in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. XX-24 23. ADDITIONAL GRANTORS. ------------------- From time to time subsequent to the date hereof, Subsidiaries of Company may become parties hereto as additional Grantors (each an "ADDITIONAL GRANTOR") by executing an acknowledgement to this Agreement substantially in the form of Schedule IV annexed hereto. Upon delivery of any such ----------- acknowledgment to Collateral Agent and Secured Party, notice of which is hereby waived by Grantors, each such Additional Grantor shall be a Grantor and shall be as fully a party hereto as if such Additional Grantor were an original signatory hereto. Each Grantor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Grantor hereunder, nor by any election of Collateral Agent not to cause any Subsidiary of Company to become an Additional Grantor hereunder. This Agreement shall be fully effective as to any Grantor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Grantor hereunder. 24. SEVERABILITY. ------------ In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 25. HEADINGS. -------- Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. 26. GOVERNING LAW; TERMS. -------------------- THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. XX-25 27. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ---------------------------------------------- ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY GRANTOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH GRANTOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY a) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; b) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; c) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO SUCH GRANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 21; d) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER SUCH GRANTOR IN ANY SUCH PROCEED ING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; e) AGREES THAT COLLATERAL AGENT RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST SUCH GRANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND f) AGREES THAT THE PROVISIONS OF THIS SECTION 25 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5- 1402 OR OTHERWISE. XX-26 28. WAIVER OF JURY TRIAL. -------------------- GRANTORS AND COLLATERAL AGENT HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Each Grantor and Collateral Agent acknowledge that this waiver is a material inducement for Grantors and Collateral Agent to enter into a business relationship, that Grantors and Collateral Agent have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Each Grantor and Collateral Agent further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 28 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. 29. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] XX-27 IN WITNESS WHEREOF, Grantors and Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. SEALY, INC. THE STEARNS & FOSTER BEDDING COMPANY THE STEARNS & FOSTER UPHOLSTERY FURNITURE COMPANY ADVANCED SLEEP PRODUCTS SEALY MATTRESS COMPANY OF SAN DIEGO SEALY MATTRESS COMPANY OF PUERTO RICO OHIO-SEALY MATTRESS MANUFACTURING CO. INC. OHIO-SEALY MATTRESS MANUFACTURING CO. -- FORT WORTH OHIO-SEALY MATTRESS MANUFACTURING CO. OHIO-SEALY MATTRESS MANUFACTURING CO. -- HOUSTON [OTHER GRANTORS] By: __________________ Name: Title: Notice Address: _____________________ _____________________ _____________________ XX-28 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Secured Party By: ----------------- Name: Title: XX-29 SCHEDULE I TO SUBSIDIARY PATENT AND TRADEMARK SECURITY AGREEMENT
REGISTERED UNITED STATES TRADEMARK REGISTRATION REGISTRATION OWNER DESCRIPTION NUMBER DATE - ------------- ----------------------- ------------ ------------
XX-30 SCHEDULE II TO SUBSIDIARY PATENT AND SECURITY AGREEMENT PATENTS ISSUED -------------- Patent No. Issue Date Invention ---------- ---------- --------- PATENTS PENDING --------------- Applicant's Date Application Name Filed No. Invention Inventor - ----------- ----- ----------- --------- -------- XX-31 SCHEDULE III TO SUBSIDIARY PATENT AND TRADEMARK SECURITY AGREEMENT FILING OFFICES -------------- XX-32 SCHEDULE IV TO SUBSIDIARY PATENT AND TRADEMARK SECURITY AGREEMENT [FORM OF ACKNOWLEDGEMENT] This Acknowledgement, dated _______________, [199_] [200_], is delivered pursuant to Section 23 of the Patent and Trademark Security Agreement referred to below. The undersigned hereby agrees that this Acknowledgement may be attached to the Patent and Trademark Security Agreement dated December 18, 1996, by and among the Grantors referred to therein and Morgan Guaranty Trust Company of New York, as Collateral Agent (the "PATENT AND TRADEMARK SECURITY AGREEMENT", capitalized terms defined therein being used herein as therein defined), that the undersigned by executing and delivering this Acknowledgement hereby becomes a Grantor under the Patent and Trademark Security Agreement in accordance with Section 20 thereof and agrees to be bound by all of the terms thereof, and that the Patents, Registrations and Trademark Rights described on this Acknowledgement shall be deemed to be part of the and shall become part of the Collateral and shall secure all Secured Obligations. [NAME OF ADDITIONAL GRANTOR] By: ___________________________________ Name: Title: Notice Address: ----------------------------- ----------------------------- ----------------------------- ----------------------------- TRADEMARK REGISTRATIONS -----------------------
REGISTERED TRADEMARK REGISTRATION REGISTRATION OWNER DESCRIPTION NUMBER DATE JURISDICTION - ------------- ----------- ------------ ------------ ------------
PATENTS ISSUED -------------- XX-33 PATENT NO. ISSUE DATE INVENTION INVENTOR ---------- ---------- --------- -------- PATENTS PENDING --------------- APPLICANT'S NAME DATE FILED APPLICATION NO. INVENTION INVENTOR - ---------------- ---------- --------------- --------- -------- XX-34 EXHIBIT XXI [FORM OF HOLDINGS GUARANTY] HOLDINGS GUARANTY This HOLDINGS GUARANTY is entered into as of December 18, 1997 and entered into by and between SEALY CORPORATION, a Delaware corporation ("GUARANTOR"), in favor and for the benefit of MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as collateral for and representative of (in such capacity herein called "GUARANTIED PARTY") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined), and, subject to subsection 3.12, for the benefit of the other Beneficiaries (as hereinafter defined). RECITALS A. Sealy Mattress Company, an Ohio corporation and a wholly-owned subsidiary of Guarantor ("COMPANY"), Guarantor, the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO."), as documentation agent (in such capacity, "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the ("CREDIT AGREEMENT") pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. B. Company, Guarantor, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity, "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "AXEL ADMINISTRATIVE AGENT"), and BTCo., as documentation agent (in such capacity, "AXEL DOCUMENTATION AGENT") have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, the CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL Lenders have made certain commitments, subject to the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Company. C. Company may from time to time enter into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with or one or more Credit Agreement Lenders or their Affiliates or AXEL Lenders or their Affiliates (in such XXI-1 capacity, collectively, "INTEREST RATE EXCHANGERS") in accordance with the terms of the Financing Agreements (as hereinafter defined), and it is desired that the obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments thereunder in the event of early termination thereof (all such obligations being the "INTEREST RATE OBLIGATIONS"), together with all obligations of Company under the Financing Agreements and any other Loan Documents, be guarantied hereunder. D. It is a condition precedent to the making of the initial Loans under the Financing Agreements that Company's obligations thereunder be guarantied by Guarantor. E. Guarantor is willing irrevocably and unconditionally to guaranty such obligations of Company. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of, the Company, (iii) the AXEL Administrative Agent, the AXEL Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement and (iv) the AXEL Lenders to make their respective loans to the Company, and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Guarantor hereby agrees as follows: SECTION 1. DEFINITIONS (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. "AGGREGATE PAYMENTS" has the meaning assigned to that term ins subsection 2.2. "AXEL COMMITMENTS" shall mean the "Commitments" as defined in the AXEL Credit Agreement. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. XXI-2 "AXEL OBLIGATIONS" shall mean the "Obligations" as defined in the AXEL Credit Agreement. "BENEFICIARIES" means Guarantied Party, Secured Parties and any Interest Rate Exchangers. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CONTRIBUTING GUARANTORS" has the meaning assigned to that term ins subsection 2.2. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. "FAIR SHARE" has the meaning assigned to that term ins subsection 2.2. "FAIR SHARE CONTRIBUTION AMOUNT" has the meaning assigned to that term ins subsection 2.2. "FINANCING AGREEMENT" means either the Credit Agreement or the AXEL Credit Agreement, and "Financing Agreements" means the Credit Agreement and the AXEL Credit Agreement, collectively. "FINANCING AGREEMENT OBLIGATIONS" means Credit Agreement Obligations and AXEL Obligations. XXI-3 "FRAUDULENT TRANSFER LAWS" has the meaning assigned to that term ins subsection 2.2. "FAIR SHARE SHORTFALL" has the meaning assigned to that term ins subsection 2.2. "FUNDING GUARANTOR" has the meaning assigned to that term ins subsection 2.2. "GUARANTIED OBLIGATIONS" has the meaning assigned to that term in subsection 2.1. "GUARANTY" means this Holdings Guaranty dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. "GRANTOR" has the meaning assigned to that term in the introduction of this Agreement. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL XXI-4 Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. "REQUISITE OBLIGEES" has the meaning assigned to that term in subsection 3.14 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. "PAYMENT IN FULL", "PAID IN FULL" or any similar term means payment in full of the Guarantied Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), including without limitation all principal, interest, costs, fees and expenses (including, without limitation, reasonable legal fees and expenses) of Beneficiaries as required under the Loan Documents and the Lender Interest Rate Agreements. 1.2 INTERPRETATION. References to "Sections" and "subsections" -------------- shall be to Sections and subsections, respectively, of this Guaranty unless otherwise specifically provided. SECTION 2. THE GUARANTY 2.1 GUARANTY OF THE GUARANTIED OBLIGATIONS. Guarantor hereby -------------------------------------- irrevocably and unconditionally guaranties, as primary obligor and not merely as surety, the due and punctual payment in full of all Guarantied Obligations when the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S) 362(a)). The term "GUARANTIED OBLIGATIONS" is used herein in its most comprehensive sense and includes: (a) any and all Financing Agreement Obligations of Company and any and all Interest Rate Obligations, in each case now or hereafter made, incurred or created, whether absolute or contingent, liquidated or unliquidated, whether due or not due, and however arising under or in connection with any Financing Agreement and any other Loan Documents and the Lender Interest Rate Agreements, including those arising under successive borrowing transactions under any Financing Agreement which shall either continue the Financing Agreement Obligations of Company or from time to time renew them after they have been satisfied and including interest which, but for the filing of a petition in bankruptcy with respect to Company, would have accrued on any Guarantied Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding; and (b) those expenses set forth in subsection 2.9 hereof. 2.2 CONTRIBUTION BY GUARANTOR. Guarantor under this Guaranty, and each ------------------------- Subsidiary Guarantor under the Subsidiary Guaranty, together desire to allocate among XXI-5 themselves (collectively, the "CONTRIBUTING GUARANTORS"), in a fair and equitable manner, their obligations arising under this Guaranty and the Subsidiary Guaranty. Accordingly, in the event any payment or distribution is made on any date by Guarantor under this Guaranty or a Subsidiary Guarantor under the Subsidiary Guaranty (a "FUNDING GUARANTOR") that exceeds its Fair Share (as defined below) as of such date, that Funding Guarantor shall be entitled to a contribution from each of the other Contributing Guarantors in the amount of such other Contributing Guarantor's Fair Share Shortfall (as defined below) as of such date, with the result that all such contributions will cause each Contributing Guarantor's Aggregate Payments (as defined below) to equal its Fair Share as of such date. "FAIR SHARE" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the ratio of (x) the Fair Share Contribution Amount (as defined below) with respect to such Contributing Guarantor to (y) the aggregate of the Fair Share Contribution Amounts with respect to all Contributing Guarantors multiplied by (ii) the ---------- -- aggregate amount paid or distributed on or before such date by all Funding Guarantors under this Guaranty and the Subsidiary Guaranty in respect of the obligations guarantied. "FAIR SHARE SHORTFALL" means, with respect to a Contributing Guarantor as of any date of determination, the excess, if any, of the Fair Share of such Contributing Guarantor over the Aggregate Payments of such Contributing Guarantor. "FAIR SHARE CONTRIBUTION AMOUNT" means, with respect to a Contributing Guarantor as of any date of determination, the maximum aggregate amount of the obligations of such Contributing Guarantor under this Guaranty or the Subsidiary Guaranty, as applicable, that would not render its obligations hereunder or thereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any applicable provisions of comparable state law; provided that, solely for -------- purposes of calculating the "Fair Share Contribution Amount" with respect to any Contributing Guarantor for purposes of this subsection 2.2, any assets or liabilities of such Contributing Guarantor arising by virtue of any rights to subrogation, reimbursement or indemnification or any rights to or obligations of contribution hereunder or under subsection 2.2(b) of the Subsidiary Guaranty shall not be considered as assets or liabilities of such Contributing Guarantor. "AGGREGATE PAYMENTS" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the aggregate amount of all payments and distributions made on or before such date by such Contributing Guarantor in respect of this Guaranty or the Subsidiary Guaranty, as applicable (including, without limitation, in respect of this subsection 2.2 or subsection 2.2(b) of the Subsidiary Guaranty), minus (ii) the aggregate amount of all ----- payments received on or before such date by such Contributing Guarantor from the other Contributing Guarantors as contributions under this subsection 2.2 or subsection 2.2(b) of the Subsidiary Guaranty. The amounts payable as contributions hereunder and under subsection 2.2(b) of the Subsidiary Guaranty shall be determined as of the date on which the related payment or distribution is made by the applicable Funding Guarantor. The allocation among Contributing Guarantors of their obligations as set forth in this subsection 2.2 and subsection 2.2(b) of the Subsidiary Guaranty shall not be construed in any way to limit the liability of any Contributing Guarantor hereunder or under the Subsidiary Guaranty. Each Subsidiary Guarantor is a third party beneficiary to the contribution agreement set forth in this subsection 2.2. 2.3 PAYMENT BY GUARANTOR; APPLICATION OF PAYMENTS. Guarantor hereby --------------------------------------------- agrees, in furtherance of the foregoing and not in limitation of any other right which any Beneficiary may have at law or in equity against Guarantor by virtue hereof, that upon the XXI-6 failure of Company to pay any of the Guarantied Obligations when and as the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S) 362(a)), Guarantor will promptly following written demand pay, or cause to be paid, in cash, to Guarantied Party for the ratable benefit of Beneficiaries, an amount equal to the sum of the unpaid principal amount of all Guarantied Obligations then due as aforesaid, accrued and unpaid interest on such Guarantied Obligations (including, without limitation, interest which, but for the filing of a petition in bankruptcy with respect to Company, would have accrued on such Guarantied Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding) and all other Guarantied Obligations then owed to Beneficiaries as aforesaid. All such payments shall be applied promptly from time to time by Guarantied Party as provided in subsection 3 of the Intercreditor Agreement. 2.4 LIABILITY OF GUARANTOR ABSOLUTE. Guarantor agrees that its ------------------------------- obligations hereunder are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than payment in full of the Guarantied Obligations. In furtherance of the foregoing and without limiting the generality thereof, Guarantor agrees as follows: (a) This Guaranty is a guaranty of payment when due and not of collectibility. (b) The obligations of Guarantor hereunder are independent of the obligations of Company under the Loan Documents or the Lender Interest Rate Agreements and the obligations of any other guarantor (including any Subsidiary Guarantor) of the obligations of Company under the Loan Documents or the Lender Interest Rate Agreements, and a separate action or actions may be brought and prosecuted against Guarantor whether or not any action is brought against Company or any of such other guarantors and whether or not Company is joined in any such action or actions. (c) Guarantor's payment of a portion, but not all, of the Guarantied Obligations shall in no way limit, affect, modify or abridge Guarantor's liability for any portion of the Guarantied Obligations which has not been paid. Without limiting the generality of the foregoing, if Guarantied Party is awarded a judgment in any suit brought to enforce Guarantor's covenant to pay a portion of the Guarantied Obligations, such judgment shall not be deemed to release Guarantor from its covenant to pay the portion of the Guarantied Obligations that is not the subject of such suit. (d) Any Beneficiary, upon such terms as it deems appropriate, without notice or demand and without affecting the validity or enforceability of this Guaranty or giving rise to any reduction, limitation, impairment, discharge or termination of Guarantor's liability hereunder, from time to time may (i) renew, extend, accelerate, increase the rate of interest on, or otherwise change the time, place, manner or terms of payment of the Guarantied Obligations, (ii) settle, compromise, release or discharge, or XXI-7 accept or refuse any offer of performance with respect to, or substitutions for, the Guarantied Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations; (iii) request and accept other guaranties of the Guarantied Obligations and take and hold security for the payment of this Guaranty or the Guarantied Obligations; (iv) release, surrender, exchange, substitute, compromise, settle, rescind, waive, alter, subordinate or modify, with or without consideration, any security for payment of the Guarantied Obligations, any other guaranties (including the Subsidiary Guaranty) of the Guarantied Obligations, or any other obligation of any Person with respect to the Guarantied Obligations; (v) enforce and apply any security now or hereafter held by or for the benefit of such Beneficiary in respect of this Guaranty or the Guarantied Obligations and direct the order or manner of sale thereof, or exercise any other right or remedy that such Beneficiary may have against any such security, in each case as such Beneficiary in its discretion may determine consistent with the applicable Financing Agreement or the applicable Lender Interest Rate Agreement and any applicable security agreement, including foreclosure on any such security pursuant to one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, and even though such action operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of Guarantor against Company or any security for the Guarantied Obligations; and (vi) exercise any other rights available to it under the Loan Documents or the Lender Interest Rate Agreements. (e) This Guaranty and the obligations of Guarantor hereunder shall be valid and enforceable and shall not be subject to any reduction, limitation, impairment, discharge or termination for any reason (other than payment in full of the Guarantied Obligations), including without limitation the occurrence of any of the following, whether or not Guarantor shall have had notice or knowledge of any of them: (i) any failure or omission to assert or enforce or agreement or election not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy (whether arising under the Loan Documents or the Lender Interest Rate Agreements, at law, in equity or otherwise) with respect to the Guarantied Obligations or any agreement relating thereto, or with respect to the Subsidiary Guaranty or any other guaranty of or security for the payment of the Guarantied Obligations; (ii) any rescission , waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including without limitation provisions relating to events of default) of any Financing Agreement, any of the other Loan Documents, any of the Lender Interest Rate Agreements or any agreement or instrument executed pursuant thereto, or of the Subsidiary Guaranty or any other guaranty or security for the Guarantied Obligations, in each case whether or not in accordance with the terms of such Financing Agreement or such Loan Document, such Lender Interest Rate Agreement or any agreement relating to the Subsidiary Guaranty or such other guaranty or security; (iii) the application of payments received from any source (other than payments received pursuant to the other Loan Documents or any of the Lender Interest Rate Agreements or from the proceeds of any security for the Guarantied Obligations, except to the extent such security also serves as collateral for indebtedness other than the Guarantied Obligations) to the XXI-8 payment of indebtedness other than the Guarantied Obligations, even though any Beneficiary might have elected to apply such payment to any part or all of the Guarantied Obligations; (iv) any Beneficiary's consent to the change, reorganization or termination of the corporate structure or existence of Company or any of its Subsidiaries and to any corresponding restructuring of the Guarantied Obligations; (v) any failure to perfect or continue perfection of a security interest in any collateral which secures any of the Guarantied Obligations; (vi) any defenses, set-offs or counterclaims which Company may allege or assert against any Beneficiary in respect of the Guarantied Obligations, including but not limited to failure of consideration, breach of warranty, payment, statute of frauds, statute of limitations, accord and satisfaction and usury; and (vii) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of Guarantor as an obligor in respect of the Guarantied Obligations. 2.5 WAIVERS BY GUARANTOR. Guarantor hereby waives, for the benefit of -------------------- Beneficiaries: (a) any right to require any Beneficiary, as a condition of payment or performance by Guarantor, to (i) proceed against Company, any other guarantor (including any Subsidiary Guarantor) of the Guarantied Obligations or any other Person, (ii) proceed against or exhaust any security held from Company, any such other guarantor or any other Person, (iii) proceed against or have resort to any balance of any deposit account or credit on the books of any Beneficiary in favor of Company or any other Person, or (iv) pursue any other remedy in the power of any Beneficiary whatsoever; (b) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of Company including, without limitation, any defense based on or arising out of the lack of validity or the unenforceability of the Guarantied Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of Company from any cause other than payment in full of the Guarantied Obligations; (c) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (d) any defense based upon any Beneficiary's errors or omissions in the administration of the Guarantied Obligations, except behavior which amounts to bad faith, gross negligence or willful misconduct; (e) (i) any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of this Guaranty, (ii) the benefit of any statute of limitations affecting Guarantor's liability hereunder or the enforcement hereof, (iii) any rights to set-offs, recoupments and counterclaims, and (iv) promptness, XXI-9 diligence and any requirement that any Beneficiary protect, secure, perfect or insure any security interest or lien or any property subject thereto; and (f) notices, demands, presentments, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance of this Guaranty, notices of default under the Financing Agreements, the Lender Interest Rate Agreements or any agreement or instrument related thereto, notices of any renewal, extension or modification of the Guarantied Obligations or any agreement related thereto, notices of any extension of credit to Company and notices of any of the matters referred to in subsection 2.4 and any right to consent to any thereof. 2.6 CERTAIN CALIFORNIA LAW WAIVERS. As used in this subsection 2.6, any ------------------------------ reference to "the principal" includes Company, and any reference to "the creditor" includes each Beneficiary. In accordance with Section 2856 of the California Civil Code: (a) Guarantor agrees (i) to waive any and all rights of subrogation and reimbursement against Company or against any collateral or security granted by Company for any of the Guarantied Obligations and (ii) to withhold the exercise of any and all rights of contribution against any other guarantor (including any Subsidiary Guarantor) of any of the Guarantied Obligations and against any collateral or security granted by any such other guarantor for any of the Guarantied Obligations until the Guarantied Obligations shall have been paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, all as more fully set forth in subsection 2.7; (b) Guarantor waives any and all other rights and defenses available to Guarantor by reason of Sections 2787 to 2855, inclusive, 2899 and 3433 of the California Civil Code, including without limitation any and all rights or defenses Guarantor may have by reason of protection afforded to the principal with respect to any of the Guarantied Obligations, or to any other guarantor (including any Subsidiary Guarantor) of any of the Guarantied Obligations with respect to any of such guarantor's obligations under its guaranty, in either case pursuant to the antideficiency or other laws of the State of California limiting or discharging the principal's indebtedness or such guarantor's obligations, including without limitation Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure; and (c) Guarantor waives all rights and defenses arising out of an election of remedies by the creditor, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for any Guarantied Obligation, has destroyed Guarantor's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the Code of Civil Procedure or otherwise; and even though that election of remedies by the creditor, such as nonjudicial foreclosure with respect to security for an obligation of any other guarantor (including any Subsidiary Guarantor) of any of the Guarantied Obligations, has destroyed Guarantor's rights of contribution against such other guarantor. XXI-10 No other provision of this Guaranty shall be construed as limiting the generality of any of the covenants and waivers set forth in this subsection 2.6. In accordance with subsection 3.6 below, this Guaranty shall be governed by, and shall be construed and enforced in accordance with, the internal laws of the State of New York, without regard to conflicts of laws principles. This subsection 2.6 is included solely out of an abundance of caution, and shall not be construed to mean that any of the above-referenced provisions of California law are in any way applicable to this Guaranty or to any of the Guarantied Obligations. 2.7 GUARANTOR'S RIGHTS OF SUBROGATION, CONTRIBUTION, ETC. Guarantor ---------------------------------------------------- hereby waives any claim, right or remedy, direct or indirect, that Guarantor now has or may hereafter have against Company or any of its assets in connection with this Guaranty or the performance by Guarantor of its obligations hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by statute (including without limitation under California Civil Code Section 2847, 2848 or 2849), under common law or otherwise and including without limitation (a) any right of subrogation, reimbursement or indemnification that Guarantor now has or may hereafter have against Company with respect to the Guarantied Obligations, (b) any right to enforce, or to participate in, any claim, right or remedy that any Beneficiary now has or may hereafter have against Company, and (c) any benefit of, and any right to participate in, any collateral or security now or hereafter held by any Beneficiary. In addition, until the Guarantied Obligations shall have been indefeasibly paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, Guarantor shall withhold exercise of any right of contribution Guarantor may have against any other guarantor of the Guarantied Obligations (including without limitation any such right of contribution under California Civil Code Section 2848 or under the Subsidiary Guaranty as contemplated by subsection 2.2). Guarantor further agrees that, to the extent the waiver or agreement to withhold the exercise of its rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification Guarantor may have against Company or against any collateral or security, and any rights of contribution Guarantor may have against any such other guarantor, shall be junior and subordinate to any rights any Beneficiary may have against Company, to all right, title and interest any Beneficiary may have in any such collateral or security, and to any right any Beneficiary may have against such other guarantor. If any amount shall be paid to Guarantor on account of any such subrogation, reimbursement, indemnification or contribution rights at any time when all Guarantied Obligations shall not have been paid in full, such amount shall be held in trust for Guarantied Party on behalf of Beneficiaries and shall forthwith be paid over to Guarantied Party for the benefit of Beneficiaries to be credited and applied against the Guarantied Obligations, whether matured or unmatured, in accordance with the terms hereof. XXI-11 2.8 SUBORDINATION OF OTHER OBLIGATIONS. Any indebtedness of Company now ---------------------------------- or hereafter held by Guarantor is hereby subordinated in right of payment to the Guarantied Obligations (except for indebtedness of Company arising from tax payments made by Guarantor on behalf of Company), and any such indebtedness of Company to Guarantor collected or received by Guarantor after an Event of Default has occurred and is continuing shall be held in trust for Guarantied Party on behalf of Beneficiaries and shall forthwith be paid over to Guarantied Party for the benefit of Beneficiaries to be credited and applied against the Guarantied Obligations but without affecting, impairing or limiting in any manner the liability of Guarantor under any other provision of this Guaranty. 2.9 EXPENSES. Guarantor agrees to pay, or cause to be paid, promptly -------- upon written demand, and to save Beneficiaries harmless against liability for, any and all reasonable costs and reasonable expenses (including reasonable fees and reasonable disbursements of counsel and allocated costs of internal counsel) incurred or expended by any Beneficiary in connection with the enforcement of or preservation of any rights under this Guaranty. 2.10 CONTINUING GUARANTY; TERMINATION OF GUARANTY. This Guaranty is a -------------------------------------------- continuing guaranty and shall remain in effect until all of the Guarantied Obligations shall have been paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled. Guarantor hereby irrevocably waives any right (including without limitation any such right arising under California Civil Code Section 2815) to revoke this Guaranty as to future transactions giving rise to any Guarantied Obligations. 2.11 AUTHORITY OF GUARANTOR OR COMPANY. It is not necessary for any --------------------------------- Beneficiary to inquire into the capacity or powers of Guarantor or Company or the officers, directors or any agents acting or purporting to act on behalf of any of them. 2.12 FINANCIAL CONDITION OF COMPANY. Any Loans may be granted to Company ------------------------------ or continued from time to time, and any Lender Interest Rate Agreements may be entered into from time to time, in each case without notice to or authorization from Guarantor regardless of the financial or other condition of Company at the time of any such grant or continuation or at the time such Lender Interest Rate Agreement is entered into, as the case may be. No Beneficiary shall have any obligation to disclose or discuss with Guarantor its assessment, or Guarantor's assessment, of the financial condition of Company. Guarantor has adequate means to obtain information from Company on a continuing basis concerning the financial condition of Company and its ability to perform its obligations under the Loan Documents and the Lender Interest Rate Agreements, and Guarantor assumes the responsibility for being and keeping informed of the financial condition of Company and of all circumstances bearing upon the risk of nonpayment of the Guarantied Obligations. Guarantor hereby waives and relinquishes any duty on the part of any Beneficiary to disclose any matter, fact or thing relating to the business, operations or conditions of Company now known or hereafter known by any Beneficiary . 2.13 RIGHTS CUMULATIVE. The rights, powers and remedies given to ----------------- Beneficiaries by this Guaranty are cumulative and shall be in addition to and independent of all rights, powers and remedies given to Beneficiaries by virtue of any statute or rule of law or in any of the other Loan Documents, any of the Lender Interest Rate Agreements or any agreement XXI-12 between Guarantor and any Beneficiary or Beneficiaries or between Company and any Beneficiary or Beneficiaries. Any forbearance or failure to exercise, and any delay by any Beneficiary in exercising, any right, power or remedy hereunder shall not impair any such right, power or remedy or be construed to be a waiver thereof, nor shall it preclude the further exercise of any such right, power or remedy. 2.14 BANKRUPTCY; POST-PETITION INTEREST; REINSTATEMENT OF GUARANTY. (a) ------------------------------------------------------------- So long as any Guarantied Obligations remain outstanding, Guarantor shall not, without the prior written consent of Guarantied Party acting pursuant to the instructions of Requisite Obligees (as defined in subsection 3.12), commence or join with any other Person in commencing any bankruptcy, reorganization or insolvency proceedings of or against Company. The obligations of Guarantor under this Guaranty shall not be reduced, limited, impaired, discharged, deferred, suspended or terminated by any proceeding, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement of Company or by any defense which Company may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding. The agreements of Guarantor in this subsection 2.14(a) shall not alter or impair its rights as a shareholder of Borrower. (b) Guarantor acknowledges and agrees that any interest on any portion of the Guarantied Obligations which accrues after the commencement of any proceeding referred to in clause (a) above (or, if interest on any portion of the Guarantied Obligations ceases to accrue by operation of law by reason of the commencement of said proceeding, such interest as would have accrued on such portion of the Guarantied Obligations if said proceedings had not been commenced) shall be included in the Guarantied Obligations because it is the intention of Guarantor and Beneficiaries that the Guarantied Obligations which are guarantied by Guarantor pursuant to this Guaranty should be determined without regard to any rule of law or order which may relieve Company of any portion of such Guarantied Obligations. Guarantor will permit any trustee in bankruptcy, receiver, debtor in possession, assignee for the benefit of creditors or similar person to pay Guarantied Party, or allow the claim of Guarantied Party in respect of, any such interest accruing after the date on which such proceeding is commenced. (c) In the event that all or any portion of the Guarantied Obligations are paid by Company, the obligations of Guarantor hereunder shall continue and remain in full force and effect or be reinstated, as the case may be, in the event that all or any part of such payment(s) are rescinded or recovered directly or indirectly from any Beneficiary as a preference, fraudulent transfer or otherwise, and any such payments which are so rescinded or recovered shall constitute Guarantied Obligations for all purposes under this Guaranty until indefeasibly paid in full. 2.15 SET OFF. In addition to any other rights any Beneficiary may have ------- under law or in equity, if any amount shall at any time be due and owing by Guarantor to any Beneficiary under this Guaranty, such Beneficiary is authorized at any time or from time to time, without notice (any such notice being hereby expressly waived), to set off and to appropriate and to apply any and all deposits (general or special, including but not limited to indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness of such Beneficiary owing to Guarantor and any other property of Guarantor held by any XXI-13 Beneficiary to or for the credit or the account of Guarantor against and on account of the Guarantied Obligations and liabilities of Guarantor to any Beneficiary under this Guaranty. SECTION 3. MISCELLANEOUS 3.1 SURVIVAL OF WARRANTIES. All agreements, representations and ---------------------- warranties made herein shall survive the execution and delivery of this Guaranty and the other Loan Documents and the Lender Interest Rate Agreements and any increase in the Commitments under any Financing Agreement. 3.2 NOTICES. Any communications between Guarantied Party and Guarantor ------- and any notices or requests provided herein to be given may be given by mailing the same, postage prepaid, or by telex, facsimile transmission or cable to each such party at its addresses set forth in the Financing Agreements, on the signature pages hereof or to such other addresses as each such party may in writing hereafter indicate. Any notice, request or demand to or upon Guarantied Party or Guarantor shall not be effective until received. 3.3 SEVERABILITY. In case any provision in or obligation under this ------------ Guaranty shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 3.4 AMENDMENTS AND WAIVERS. No amendment, modification, termination or ---------------------- waiver of any provision of this Guaranty, and no consent to any departure by Guarantor therefrom, shall in any event be effective without the written concurrence of Guarantied Party and, in the case of any such amendment or modification, Guarantor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. 3.5 HEADINGS. Section and subsection headings in this Guaranty are -------- included herein for convenience of reference only and shall not constitute a part of this Guaranty for any other purpose or be given any substantive effect. 3.6 APPLICABLE LAW. THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF -------------- GUARANTOR AND BENEFICIARIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. 3.7 SUCCESSORS AND ASSIGNS. This Guaranty is a continuing guaranty and ---------------------- shall be binding upon Guarantor and its successors and assigns. This Guaranty shall inure to the benefit of Beneficiaries and their respective successors and assigns. Guarantor shall not assign this Guaranty or any of the rights or obligations of Guarantor hereunder without the prior written consent of all Lenders. Any Beneficiary may, without notice or consent, assign its XXI-14 interest in this Guaranty in whole or in part. The terms and provisions of this Guaranty shall inure to the benefit of any transferee or assignee of any Loan, and in the event of such transfer or assignment the rights and privileges herein conferred upon such Beneficiary shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. 3.8 NO OTHER WRITING. This writing is intended by Guarantor and ---------------- Beneficiaries as the final expression of this Guaranty and is also intended as a complete and exclusive statement of the terms of their agreement with respect to the matters covered hereby. No course of dealing, course of performance or trade usage, and no parol evidence of any nature, shall be used to supplement or modify any terms of this Guaranty. There are no conditions to the full effectiveness of this Guaranty. 3.9 FURTHER ASSURANCES. At any time or from time to time, upon the ------------------ request of Guarantied Party, Guarantor shall execute and deliver such further documents and do such other acts and things as Guarantied Party may reasonably request in order to effect fully the purposes of this Guaranty. 3.10 GUARANTIED PARTY AS COLLATERAL AGENT. ------------------------------------ (a) Guarantied Party has been appointed to act as Guarantied Party hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and by AXEL Administrative Agent on behalf of the AXEL Lenders pursuant to the Intercreditor Agreement, and by their acceptance of the benefits hereof, Interest Rate Exchangers and shall be entitled to the benefits of the Intercreditor Agreement. Guarantied Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action, solely in accordance with this Guaranty and Intercreditor Agreement; provided -------- that Guarantied Party shall exercise, or refrain from exercising, any remedies hereunder in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this subsection 3.12, each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to enforce this Guaranty, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Guarantied Party for the benefit of Beneficiaries in accordance with the terms of this subsection 3.12. (b) Guarantied Party shall at all times be the same Person that is Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Written notice of resignation by Collateral Agent pursuant to the Intercreditor Agreement shall also constitute XXI-15 notice of resignation as Guarantied Party under this Guaranty; removal of Collateral Agent pursuant to the Intercreditor Agreement shall also constitute removal as Guarantied Party under this Guaranty; and appointment of a successor Collateral Agent pursuant to the Intercreditor Agreement shall also constitute appointment of a successor Guarantied Party under this Guaranty. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Guarantied Party under this Guaranty, and the retiring or removed Guarantied Party under this Guaranty shall promptly (i) transfer to such successor Guarantied Party all sums held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Guarantied Party under this Guaranty, and (ii) take such other actions as may be necessary or appropriate in connection with the assignment to such successor Guarantied Party of the rights created hereunder, whereupon such retiring or removed Guarantied Party shall be discharged from its duties and obligations under this Guaranty. After any retiring or removed Guarantied Party's resignation or removal hereunder as Guarantied Party, the provisions of this Guaranty shall inure to its benefit as to any actions taken or omitted to be taken by it under this Guaranty while it was Guarantied Party hereunder. [Remainder of page intentionally left blank] XXI-16 IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of the date first written above. SEALY CORPORATION By: -------------------------------------- Name: Title: XXI-17 EXHIBIT XXII [FORM OF HOLDINGS PLEDGE AGREEMENT] HOLDINGS PLEDGE AGREEMENT This HOLDINGS PLEDGE AGREEMENT (this "AGREEMENT") is dated as of December 18, 1997 and entered into by and between SEALY CORPORATION, a Delaware corporation ("PLEDGOR"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as Collateral Agent for and representative of (in such capacity herein called "COLLATERAL AGENT") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined). RECITALS A. Pledgor is the legal and beneficial owner of (i) the shares of stock (the "PLEDGED SHARES") described in Part A of Schedule I annexed hereto and ---------- issued by the corporations named therein and (ii) the indebtedness (the "PLEDGED DEBT") described in Part B of said Schedule I and issued by the ---------- obligors named therein. B. Sealy Mattress Company, an Ohio Corporation ("COMPANY"), Pledgor, the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO."), as documentation agent (in such capacity, "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the ("CREDIT AGREEMENT") pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. C. Company, Pledgor, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity, "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "AXEL ADMINISTRATIVE AGENT"), and BTCo., as documentation agent (in such capacity, "AXEL DOCUMENTATION AGENT") have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, the CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL XXII-1 Lenders have made certain commitments, subject to the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Company. D. Company may from time to time enter into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more CA Lenders or their Affiliates or AXEL Lenders or their Affiliates (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). E. Pledgor has executed and delivered that certain Holdings Guaranty dated as of December 18, 1997 (said Holdings Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "GUARANTY") in favor of Collateral Agent for the benefit of Secured Parties and any Interest Rate Exchangers, pursuant to which Pledgor has guarantied the prompt payment and performance when due of all obligations of Company under the Financing Agreements and all obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments, if any, thereunder in the event of early termination thereof. F. It is a condition precedent to the initial extensions of credit by Secured Parties under the Financing Agreements that Pledgor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of, the Company, (iii) the AXEL Administrative Agent, the AXEL Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement, (iv) the AXEL Lenders to make their respective loans to the Company and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor hereby agrees with Collateral Agent as follows: SECTION 1. DEFINED TERMS ------------- (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. XXII-2 "ADDITIONAL PLEDGED SHARES" has the meaning assigned to that term in Section 2(c) of this Agreement. "AGREEMENT" means this Company Pledge Agreement dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "AXEL COMMITMENTS" shall mean "Commitments" as defined in the AXEL Credit Agreement. "AXEL OBLIGATIONS" shall mean "Obligations" as defined in the AXEL Credit Agreement. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. "FINANCING AGREEMENT" means the Credit Agreement or the AXEL Credit Agreement, and "Financing Agreements" means the Credit Agreement and the AXEL Credit Agreement, collectively. "FINANCING AGREEMENT OBLIGATIONS" means Credit Agreement Obligations and AXEL Obligations. XXII-3 "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "NEW PLEDGED SHARES" has the meaning assigned to that term in Section 2(e) of this Agreement. "PLEDGE AMENDMENT" has the meaning assigned to that term in Section 7 of this Agreement. "PLEDGED COLLATERAL" has the meaning assigned to that term in Section 2 of this Agreement. "PLEDGED DEBT" has the meaning assigned to that term in the recitals to this Agreement. "PLEDGED SHARES" has the meaning assigned to that term in the recitals to this Agreement. "PLEDGOR" has the meaning assigned to that term in the introduction of this Agreement. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL Lenders, and (B) XXII-4 if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. "REQUISITE OBLIGEES" has the meaning assigned to that term in Section 17(a) of this Agreement. "SECURED OBLIGATIONS" has the meaning assigned to that term in Section 3 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. SECTION 2. PLEDGE OF SECURITY. ------------------ Pledgor hereby pledges and assigns to Secured Party, and hereby grants to Collateral Agent a security interest in, all of Pledgor's right, title and interest in and to the following (the "PLEDGED COLLATERAL"): (a) the Pledged Shares and the certificates representing the Pledged Shares and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to the Pledged Shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; (b) the Pledged Debt and the instruments evidencing the Pledged Debt, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Debt; (c) all additional shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any issuer of the Pledged Shares from time to time acquired by Pledgor in any manner (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such additional shares, securities, warrants, options or other rights and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such additional shares (all such shares, securities, warrants, options, rights, certificates, instruments and interests collectively being "ADDITIONAL PLEDGED SHARES"), and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Additional Pledged Shares; (d) all additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt and the instruments evidencing such indebtedness, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; XXII-5 (e) all shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a Subsidiary of Pledgor (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such shares, securities, warrants, options or other rights and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such shares (all such shares, securities, warrants, options, rights, certificates, instruments and interests collectively being "NEW PLEDGED SHARES"), and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares, securities, warrants, options or other rights; (f) all indebtedness from time to time owed to Pledgor by any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a Subsidiary of Pledgor, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; and (g) to the extent not covered by clauses (a) through (f) above, all proceeds of any or all of the foregoing Pledged Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Pledged Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, proceeds of any indemnity or guaranty payable to Pledgor or Collateral Agent from time to time with respect to any of the Pledged Collateral. SECTION 3. SECURITY FOR OBLIGATIONS. ------------------------ This Agreement secures, and the Pledged Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all obligations and liabilities of every nature of Pledgor now or hereafter existing under or arising out of or in connection with the Guaranty and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Company, would accrue on such obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Collateral Agent or any Secured Party or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise, and all XXII-6 obligations of every nature of Pledgor now or hereafter existing under this Agreement (all such obligations of Pledgor being the "SECURED OBLIGATIONS"). SECTION 4. DELIVERY OF PLEDGED COLLATERAL. ------------------------------ All certificates or instruments representing or evidencing the Pledged Collateral shall be delivered to and held by or on behalf of Collateral Agent pursuant hereto and shall be in suitable form for transfer by delivery or, as applicable, shall be accompanied by Pledgor's endorsement, where necessary, or duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to Collateral Agent. Upon the occurrence and during the continuation of an Event of Default, Collateral Agent shall have the right, without notice to Pledgor, to transfer to or to register in the name of Collateral Agent or any of its nominees any or all of the Pledged Collateral, subject only to the revocable rights specified in Section 8(a). In addition, upon the occurrence and during the continuance of an Event of Default, Collateral Agent shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Collateral for certificates or instruments of smaller or larger denominations. SECTION 5. REPRESENTATIONS AND WARRANTIES. ------------------------------ Pledgor represents and warrants as follows: (a) Due Authorization, etc. of Pledged Collateral. All of the Pledged --------------------------------------------- Shares have been duly authorized and validly issued and are fully paid and non-assessable. All of the Pledged Debt has been duly authorized, authenticated or issued, and delivered and is the legal, valid and binding obligation of the issuers thereof and is not in default. (b) Description of Pledged Collateral. The Pledged Shares constitute the --------------------------------- percentage of the issued and outstanding shares of stock of each issuer thereof set forth on Schedule I annexed hereto, and there are no outstanding ---------- warrants, options or other rights to purchase, or other agreements outstanding with respect to, or property that is now or hereafter convertible into, or that requires the issuance or sale of, any Pledged Shares. The Pledged Debt constitutes all of the issued and outstanding intercompany indebtedness evidenced by a promissory note of the respective issuers thereof owing to Pledgor. (c) Ownership of Pledged Collateral. Pledgor is the legal, record and ------------------------------- beneficial owner of the Pledged Collateral free and clear of any Lien except for the security interest created by this Agreement. XXII-7 SECTION 6. TRANSFERS AND OTHER LIENS; ADDITIONAL PLEDGED COLLATERAL; ETC. -------------------------------------------------------------- Pledgor shall: (a) not, except as expressly permitted by the Financing Agreements (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral, (ii) create or suffer to exist any Lien upon or with respect to any of the Pledged Collateral, except for the security interest under this Agreement, or (iii) permit any issuer of Pledged Shares to merge or consolidate; (b) (i) cause each issuer of Pledged Shares not to issue any stock or other securities in addition to or in substitution for the Pledged Shares issued by such issuer, except to Pledgor, (ii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities of each issuer of Pledged Shares, and (iii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all shares of stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of Pledgor; (c) (i) pledge hereunder, immediately upon their issuance, any and all instruments or other evidences of additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt, and (ii) pledge hereunder, immediately upon their issuance, any and all instruments or other evidences of indebtedness from time to time owed to Pledgor by any Person that after the date of this Agreement becomes, as a result of any occurrence, a Subsidiary of Pledgor; (d) pay promptly when due all taxes, assessments and governmental charges or levies imposed upon, and all claims against, the Pledged Collateral, except to the extent the validity thereof is being contested in good faith. SECTION 7. FURTHER ASSURANCES; PLEDGE AMENDMENTS. ------------------------------------- (a) Pledgor agrees that from time to time, at the expense of Pledgor, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Without limiting the generality of the foregoing, Pledgor will: (i) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, or as Collateral Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby and (ii) at Secured Party's reasonable request, appear in and defend any action or proceeding that may affect Pledgor's title to or Secured Party's security interest in all or any part of the Pledged Collateral. XXII-8 (b) Pledgor further agrees that it will, upon obtaining any additional shares of stock or other securities required to be pledged hereunder as provided in Section 6(b) or (c), promptly (and in any event within five Business Days) deliver to Collateral Agent a Pledge Amendment, duly executed by Pledgor, in substantially the form of Schedule II annexed hereto (a "PLEDGE AMENDMENT"), ----------- in respect of the additional Pledged Shares or Pledged Debt to be pledged pursuant to this Agreement. Pledgor hereby authorizes Collateral Agent to attach each Pledge Amendment to this Agreement and agrees that all Pledged Shares or Pledged Debt listed on any Pledge Amendment delivered to Collateral Agent shall for all purposes hereunder be considered Pledged Collateral; provided that the failure of Pledgor to execute a Pledge Amendment with respect - -------- to any additional Pledged Shares or Pledged Debt pledged pursuant to this Agreement shall not impair the security interest of Collateral Agent therein or otherwise adversely affect the rights and remedies of Collateral Agent hereunder with respect thereto. SECTION 8. VOTING RIGHTS; DIVIDENDS; ETC. ------------------------------ (a) So long as no Event of Default shall have occurred and be continuing: (i) Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Financing Agreements; (ii) Pledgor shall be entitled to receive and retain, and to utilize free and clear of the lien of this Agreement, any and all dividends and interest paid in respect of the Pledged Collateral; provided, however, that any and -------- ------- all dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral, shall be, and shall forthwith be delivered to Collateral Agent to hold as, Pledged Collateral and shall, if received by Pledgor, be received in trust for the benefit of Collateral Agent, be segregated from the other property or funds of Pledgor and be forthwith delivered to Collateral Agent as Pledged Collateral in the same form as so received (with all necessary endorsements); and (iii) Collateral Agent shall promptly execute and deliver (or cause to be executed and delivered) to Pledgor all such proxies, dividend payment orders and other instruments as Pledgor may from time to time reasonably request for the purpose of enabling Pledgor to exercise the voting and other consensual rights which it is entitled to exercise pursuant to paragraph (i) above and to receive the dividends, principal or interest payments which it is authorized to receive and retain pursuant to paragraph (ii) above. (b) Upon the occurrence and during the continuation of an Event of Default: (i) upon written notice from Collateral Agent to Pledgor, all rights of Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 8(a)(i) shall cease, and all such rights shall XXII-9 thereupon become vested in Collateral Agent who shall thereupon have the sole right to exercise such voting and other consensual rights; (ii) all rights of Pledgor to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 8(a)(ii) shall cease, and all such rights shall thereupon become vested in Collateral Agent who shall thereupon have the sole right to receive and hold as Pledged Collateral such dividends and interest payments; and (iii) all dividends, principal and interest payments which are received by Pledgor contrary to the provisions of paragraph (ii) of this Section 8(b) shall be (A) forthwith (and in any event within two Business Days) deposited by the Pledgor to the exact form received, duly endorsed by the Pledgor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent for the account of the Secured Parties only as provided in Section 15, (B) until so turned over in accordance with the preceding subsection (A), all such amounts and proceeds received by Grantor shall be received in trust for the benefit of Collateral Agent hereunder -- and shall be segregated from other funds of Pledgor. (c) In order to permit Collateral Agent to exercise the voting and other consensual rights which it may be entitled to exercise pursuant to Section 8(b)(i) and to receive all dividends and other distributions which it may be entitled to receive under Section 8(a)(ii) or Section 8(b)(ii), (i) Pledgor shall promptly execute and deliver (or cause to be executed and delivered) to Collateral Agent all such proxies, dividend payment orders and other instruments as Collateral Agent may from time to time reasonably request and (ii) without limiting the effect of the immediately preceding clause (i), Pledgor hereby grants to Collateral Agent an irrevocable proxy to vote the Pledged Shares and to exercise all other rights, powers, privileges and remedies to which a holder of the Pledged Shares would be entitled (including, without limitation, giving or withholding written consents of shareholders, calling special meetings of shareholders and voting at such meetings), which proxy shall be effective, automatically and without the necessity of any action (including any transfer of any Pledged Shares on the record books of the issuer thereof) by any other Person (including the issuer of the Pledged Shares or any officer or agent thereof), upon the occurrence and during the continuance of an Event of Default and which proxy shall only terminate upon the payment in full of the Secured Obligations. SECTION 9. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. ------------------------------------------- Pledgor hereby irrevocably appoints Collateral Agent as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor, Collateral Agent or otherwise, from time to time, upon the occurrence and during the continuance of an Event of Default, in Collateral Agents's reasonable discretion to take any action and to execute any instrument that Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: XXII-10 (a) to file one or more financing or continuation statements, or amendments thereto, relative to all or any part of the Pledged Collateral without the signature of Pledgor; (b) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Pledged Collateral; (c) to receive, endorse and collect any instruments made payable to Pledgor representing any dividend, principal or interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same; and (d) to file any claims or take any action or institute any proceedings that Collateral Agent may reasonably deem necessary or desirable for the collection of any of the Pledged Collateral or otherwise to enforce the rights of Collateral Agent with respect to any of the Pledged Collateral. SECTION 10. COLLATERAL AGENT MAY PERFORM. ---------------------------- If Pledgor fails to perform any agreement contained herein, Collateral Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of Collateral Agent incurred in connection therewith shall be payable by Pledgor under Section 16(b). SECTION 11. STANDARD OF CARE. ---------------- The powers conferred on Collateral Agent hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Pledged Collateral in its possession and the accounting for moneys actually received by it hereunder, Collateral Agent shall have no duty as to any Pledged Collateral, it being understood that Collateral Agent shall have no responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Pledged Collateral, whether or not Collateral Agent has or is deemed to have knowledge of such matters, (b) taking any necessary steps (other than steps taken in accordance with the standard of care set forth above to maintain possession of the Pledged Collateral) to preserve rights against any parties with respect to any Pledged Collateral, (c) taking any necessary steps to collect or realize upon the Secured Obligations or any guarantee therefor, or any part thereof, or any of the Pledged Collateral, or (d) initiating any action to protect the Pledged Collateral against the possibility of a decline in market value. Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equal to that which Collateral Agent accords its own property consisting of negotiable securities. XXII-11 SECTION 12. REMEDIES. -------- (a) If any Event of Default shall have occurred and be continuing, Collateral Agent may exercise in respect of the Pledged Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Pledged Collateral), and Collateral Agent may also in its sole discretion, without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange or broker's board or at any of Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Collateral Agent may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Pledged Collateral. Collateral Agent or any Secured Party or Interest Rate Exchanger may be the purchaser of any or all of the Pledged Collateral at any such sale and Secured Party, as agent for and representative of Secured Parties and Interest Rate Exchangers (but not any Secured Party or Secured Parties or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Obligees (shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Pledged Collateral payable by Collateral Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Pledgor, and Pledgor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Collateral Agent shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Pledgor hereby waives any claims against Collateral Agent arising by reason of the fact that the price at which any Pledged Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Collateral Agent accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Pledged Collateral are insufficient to pay all the Secured Obligations, Pledgor shall be liable for the deficiency and the reasonable fees of any attorneys employed by Collateral Agent to collect such deficiency. (b) Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws, Collateral Agent may be compelled, with respect to any sale of all or any part of the Pledged Collateral conducted without prior registration or qualification of such Pledged Collateral under the Securities Act and/or such state securities laws, to limit purchasers to those who will agree, among other things, to acquire the Pledged Collateral for their own account, for investment and not with a view to the XXII-12 distribution or resale thereof. Pledgor acknowledges that any such private sales may be at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including, without limitation, a public offering made pursuant to a registration statement under the Securities Act) and, notwithstanding such circumstances and the registration rights granted to Collateral Agent by Pledgor pursuant to Section 13, Pledgor agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that Collateral Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Pledged Collateral for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would, or should, agree to so register it. (c) If Collateral Agent determines to exercise its right to sell any or all of the Pledged Collateral, upon written request, Pledgor shall and shall cause each issuer of any Pledged Shares to be sold hereunder from time to time to furnish to Collateral Agent all such information as Collateral Agent may reasonably request in order to determine the number of shares and other instruments included in the Pledged Collateral which may be sold by Collateral Agent in exempt transactions under the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder, as the same are from time to time in effect. SECTION 13. REGISTRATION RIGHTS. ------------------- If Collateral Agent shall determine to exercise its right to sell all or any of the Pledged Collateral pursuant to Section 12, Pledgor agrees that, upon request of Collateral Agent (which request may be made by Collateral Agent in its sole discretion), Pledgor will, at its own expense: (a) execute and deliver, and cause each issuer of the Pledged Collateral contemplated to be sold and the directors and officers thereof to execute and deliver, all such instruments and documents, and do or cause to be done all such other acts and things, as may be necessary or, in the opinion of Collateral Agent, advisable to register such Pledged Collateral under the provisions of the Securities Act and to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectus which, in the opinion of Collateral Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto; (b) use its best efforts to qualify the Pledged Collateral under all applicable state securities or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Pledged Collateral, as requested by Collateral Agent; (c) cause each such issuer to make available to its security holders, as soon as practicable, an earnings statement which will satisfy the provisions of Section 11(a) of the Securities Act; XXII-13 (d) do or cause to be done all such other acts and things as may be necessary to make such sale of the Pledged Collateral or any part thereof valid and binding and in compliance with applicable law; and (e) bear all costs and expenses, including reasonable attorneys' fees, of carrying out its obligations under this Section 13. Pledgor further agrees that a breach of any of the covenants contained in this Section 13 will cause irreparable injury to Collateral Agent, that Collateral Agent has no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 13 shall be specifically enforceable against Pledgor, and Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no default has occurred giving rise to the Secured Obligations becoming due and payable prior to their stated maturities. Nothing in this Section 13 shall in any way alter the rights of Collateral Agent under Section 13. SECTION 14. PROCEEDS TO BE TURNED OVER TO COLLATERAL AGENT. ---------------------------------------------- In addition to the rights of the Collateral Agent and the Secured Parties specified in Section 8(b), if an Event of Default shall occur and be continuing, upon request of the Collateral Agent, all proceeds received by the Pledgor consisting of cash, checks and other near-cash items shall be held by the Pledgor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of the Pledgor and shall, forthwith upon receipt by the Pledgor, be turned over to the Collateral Agent in the exact form received by the Pledgor (duly indorsed by the Pledgor to the Collateral Agent, if required) and held by the Collateral Agent in a Collateral Account maintained under the Intercreditor Agreement. All proceeds while held by the Collateral Agent in a Collateral Account (or by the Pledgor in trust for the Collateral Agent and the Secured Parties) shall continue to be held as collateral security for all the Secured Obligations and shall not constitute payment thereof until applied as provided in Section 15. SECTION 15. APPLICATION OF PROCEEDS. ----------------------- All proceeds held in any Collateral Account and all other proceeds received by Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral shall be applied as provided in subsection 3 of the Intercreditor Agreement. SECTION 16. INDEMNITY AND EXPENSES. ---------------------- (a) Pledgor agrees to indemnify Collateral Agent, each Secured Party and each Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Collateral Agents's or such Secured Party's or XXII-14 Interest Rate Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Pledgor shall pay to Collateral Agent promptly following written demand the amount of any and all reasonable costs and reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Pledged Collateral, (iii) the exercise or enforcement of any of the rights of Collateral Agent hereunder, or (iv) the failure by Pledgor to perform or observe any of the provisions hereof. (c) In the event of any public sale described in Section 13, Pledgor agrees to indemnify and hold harmless Collateral Agent, each Secured Party and each Interest Rate Exchanger and each of their respective directors, officers, employees and agents (collectively, called the "INDEMNITEES") from and against any and all Indemnified Liabilities (as hereinafter defined); provided that Pledgor shall not have an obligation to any Indemnitee hereunder with respect to any Indemnified Liabilities to the extent such Indemnified Liabilities arise from the bad faith, gross negligence or wilful misconduct of that Indemnitee as determined by a final, non-appealable judgement of a court of competent jurisdiction. This indemnity shall be in addition to any liability which Pledgor may otherwise have and shall extend upon the same terms and conditions to each Person, if any, that controls Collateral Agent or such Persons within the meaning of the Securities Act. As used herein, "INDEMNIFIED LIABILITIES" means, collectively any and all liabilities, obligations, losses, fees, costs, expenses, damages, or claims, joint or several, to which any such Indemnitee may become subject or for which any Indemnitee may be liable, under the Securities Act or otherwise, insofar as such losses, fees, costs, expenses, damages, liabilities or claims (or any litigation commenced or threatened in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact made by Pledgor or its Subsidiaries or based on information provided by Pledgor or its Subsidiaries, contained in any preliminary prospectus, registration statement, prospectus or other such document published or filed in connection with such public sale, or any amendment or supplement thereto, or arise out of or are based upon an omission or alleged omission by Pledgor or its Subsidiaries or caused by the inaction of Pledgor or its Subsidiaries to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and any legal or other expenses reasonably incurred by any Indemnitee in connection with any litigation, of any nature whatsoever, commenced or threatened in respect thereof (including without limitation any and all fees, costs and expenses whatsoever reasonably incurred by any Indemnitee and counsel for any Indemnitee in investigating, preparing for, defending against or providing evidence, producing documents or taking any other action in respect of, any such commenced or threatened litigation or any claims asserted). SECTION 17. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. ----------------------------------------------- This Agreement shall create a continuing security interest in the Pledged Collateral and shall (a) remain in full force and effect until the payment in full of all Secured Obligations XXII-15 (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Pledgor, its successors and assigns, and (c) inure, together with the rights and remedies of Collateral Agent hereunder, to the benefit of Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement and subsection 10.1 of the AXEL Credit Agreement, any Secured Party may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Pledged Collateral shall revert to Pledgor. Upon any such termination Collateral Agent will, at Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination in accordance with the terms of the Intercreditor Agreement and Pledgor shall be entitled to the return, upon its request and at its expense, against receipt and without recourse to Collateral Agent, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 18. COLLATERAL AGENT AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Collateral Agent has been appointed to act as Collateral Agent hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and AXEL Administrative Agent on behalf of the AXEL Lenders pursuant to Intercreditor Agreement and, by their acceptance of the benefits hereof, Interest Rate Exchangers and shall be entitled to the benefits of the Intercreditor Agreement. Collateral Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Pledged Collateral), solely in accordance with this Agreement and the Intercreditor Agreement; provided that Collateral Agent shall exercise, or refrain from -------- exercising, any remedies provided for in Section 12 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 18(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Pledged Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Collateral Agent for the benefit of Secured Parties and Interest Rate Exchangers in accordance with the terms of this Section 18(a). XXII-16 (b) Collateral Agent shall at all times be the same Person that is appointed Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent under this Agreement, and the retiring or removed Collateral Agent under this Agreement shall promptly (i) transfer to such successor Collateral Agent all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Collateral Agent under this Agreement, and (ii) execute and deliver to such successor Collateral Agent such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Collateral Agent of the security interests created hereunder, whereupon such retiring or removed Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Collateral Agent hereunder. SECTION 19. AMENDMENTS; ETC. --------------- No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Pledgor therefrom, shall in any event be effective unless the same shall be in writing and signed by Collateral Agent and, in the case of any such amendment or modification, by Pledgor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 20. NOTICES. ------- Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notice to -------- Collateral Agent and Pledgor shall not be effective until received. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto. SECTION 21. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. ----------------------------------------------------- No failure or delay on the part of Collateral Agent in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other XXII-17 power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 22. SEVERABILITY. ------------ In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 23. HEADINGS. -------- Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 24. GOVERNING LAW; TERMS. -------------------- THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 25. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] XXII-18 IN WITNESS WHEREOF, Pledgor and Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. SEALY CORPORATION By: ______________________________________ Name: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Collateral Agent By: ______________________________________ Name: Title: XXII-19 SCHEDULE I Attached to and forming a part of the Holdings Pledge Agreement dated as of December 18, 1997 between Sealy Corporation, as Pledgor, and Morgan Guaranty Trust Company of New York, as Collateral Agent. PART A
================================================================================ PERCENTAGE OF STOCK NUMBER OUTSTANDING CLASS OF CERTIFICATE PAR OF SHARES STOCK ISSUER STOCK NOS. VALUE SHARES PLEDGED ================================================================================ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
PART B
============================================ AMOUNT OF DEBT ISSUER INDEBTEDNESS ============================================ -------------------------------------------- -------------------------------------------- -------------------------------------------- -------------------------------------------- ============================================
XXII-20 SCHEDULE II PLEDGE AMENDMENT This Pledge Amendment, dated ____________, [199_][200_], is delivered pursuant to Section 6(b) of the Pledge Agreement referred to below. The undersigned hereby agrees that this Pledge Amendment may be attached to the Holdings Pledge Agreement dated as of December 18, 1997, between the undersigned and Morgan Guaranty Trust Company of New York, as Collateral Agent (the "PLEDGE AGREEMENT," capitalized terms defined therein being used herein as therein defined), and that the [Pledged Shares] [Pledged Debt] listed on this Pledge Amendment shall be deemed to be part of the [Pledged Shares] [Pledged Debt] and shall become part of the Pledged Collateral and shall secure all Secured Obligations. SEALY CORPORATION By: ___________________________________ Name: Title:
================================================================================ PERCENTAGE OF STOCK NUMBER OUTSTANDING CLASS OF CERTIFICATE PAR OF SHARES STOCK ISSUER STOCK NOS. VALUE SHARES PLEDGED ================================================================================ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
PART B
============================================ AMOUNT OF DEBT ISSUER INDEBTEDNESS ============================================ -------------------------------------------- -------------------------------------------- -------------------------------------------- -------------------------------------------- ============================================
XXII-21 EXHIBIT XXIII [FORM OF HOLDINGS SECURITY AGREEMENT] HOLDINGS SECURITY AGREEMENT This HOLDINGS SECURITY AGREEMENT (this "AGREEMENT") is dated as of December 18, 1997 and entered into by and between SEALY CORPORATION, a Delaware corporation ("GRANTOR"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as Collateral Agent, for and representative of (in such capacity herein called "COLLATERAL AGENT") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined). RECITALS A. Sealy Mattress Company, an Ohio Corporation ("COMPANY"), Grantor, the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO."), as documentation agent (in such capacity, "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT") pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. B. Company, Grantor, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity, "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "AXEL ADMINISTRATIVE AGENT"), and BTCo., as documentation agent (in such capacity, "AXEL DOCUMENTATION AGENT") have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, the CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL Lenders have made certain commitments, subject to the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Company. C. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE XXIII-1 AGREEMENTS") with one or more CA Lenders or their Affiliates or AXEL Lenders or their Affiliates (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). D. Grantor has executed and delivered that certain Holdings Guaranty dated as of December 18, 1997 (said Holdings Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "GUARANTY") in favor of Collateral Agent for the benefit of Secured Parties and any Interest Rate Exchangers, pursuant to which Grantor has guarantied the prompt payment and performance when due of all obligations of Company under the Finance Agreements and any other Loan Documents and all obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments, if any, thereunder in the event of early termination thereof. E. It is a condition precedent to the initial extensions of credit by Secured Parties under the Financing Agreements that Grantor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of Company, (iii) the AXEL Administrative Agent, the AXEL Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement, (iv) the AXEL Lenders to make their respective loans to Company and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Grantor hereby agrees with the Collateral Agent as follows: SECTION 1. DEFINED TERMS. ------------- (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. "ACCOUNTS" has the meaning assigned to that term in Section 2 of this Agreement. "AGREEMENT" means this Company Security Agreement dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. XXIII-2 "ASSIGNED AGREEMENT" has the meaning assigned to that term in Section 2 of this Agreement. "AXEL COMMITMENTS" shall mean the "Commitments" as defined in the AXEL Credit Agreement. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "AXEL OBLIGATIONS" shall mean the "Obligations" as defined in the AXEL Credit Agreement. "COLLATERAL" has the meaning assigned to that term in Section 2 of this Agreement. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EQUIPMENT" has the meaning assigned to that term in Section 2 of this Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. "FINANCING AGREEMENT" means either the Credit Agreement or the AXEL Credit Agreement, and "Financing Agreements" means the Credit Agreement and the AXEL Credit Agreement, collectively. "FINANCING AGREEMENT OBLIGATIONS" means Credit Agreement Obligations and AXEL Obligations. XXIII-3 "GRANTOR" has the meaning assigned to that term in the introduction of this Agreement. "HOLDINGS" has the meaning assigned to that term in the recitals to this Agreement. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. "INVENTORY" has the meaning assigned to that term in Section 2 of this Agreement. "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "NEGOTIABLE DOCUMENT OF TITLE" has the meaning assigned to that term in Section 2 of this Agreement. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "RELATED CONTRACTS" has the meaning assigned to that term in Section 2 of this Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. XXIII-4 "REQUISITE OBLIGEES" has the meaning assigned to that term in Section 23 of this Agreement. "SECURED OBLIGATIONS" has the meaning assigned to that term in Section 2 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. SECTION 2. GRANT OF SECURITY. ----------------- Grantor hereby assigns to Collateral Agent, and hereby grants to Collateral Agent a security interest in, all of Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Grantor now has or hereafter acquires an interest and wherever the same may be located (the "COLLATERAL"): (a) all equipment in all of its forms, all parts thereof and all accessions thereto (any and all such equipment, parts and accessions being the "EQUIPMENT"); (b) all inventory in all of its forms (including, but not limited to, (i) all goods held by Grantor for sale or lease or to be furnished under contracts of service or so leased or furnished, (ii) all raw materials, work in process, finished goods, and materials used or consumed in the manufacture, packing, shipping, advertising, selling, leasing, furnishing or production of such inventory or otherwise used or consumed in Grantor's business, (iii) all goods in which Grantor has an interest in mass or a joint or other interest or right of any kind, and (iv) all goods which are returned to or repossessed by Grantor) and all accessions thereto and products thereof (all such inventory, accessions and products being the "INVENTORY") and all negotiable and non-negotiable documents of title (including without limitation warehouse receipts, dock receipts and bills of lading) issued by any Person covering any Inventory (any such negotiable document of title being a "NEGOTIABLE DOCUMENT OF TITLE"); (c) all accounts, contract rights, chattel paper, documents, instruments, general intangibles and other rights and obligations of any kind and all rights in, to and under all security agreements, leases and other contracts securing or otherwise relating to any such accounts, contract rights, chattel paper, documents, instruments, general intangibles or other obligations (any and all such accounts, contract rights, chattel paper, documents, instruments, general intangibles and other obligations being the "ACCOUNTS", and any and all such security agreements, leases and other contracts being the "RELATED CONTRACTS"); (d) all agreements and contracts to which Grantor is a party as of the date hereof or becomes a party after the date hereof, as each such agreement may be amended, supplemented or otherwise modified from time to time (said agreements, as so amended, supplemented or otherwise modified, being referred to herein individually as an "ASSIGNED AGREEMENT" and collectively as the "ASSIGNED AGREEMENTS"), including XXIII-5 (i) all rights of Grantor to receive moneys due or to become due under or pursuant to the Assigned Agreements, (ii) all rights of Grantor to receive proceeds of any insurance, indemnity, warranty or guaranty with respect to the Assigned Agreements, (iii) all claims of Grantor for damages arising out of any breach of or default under the Assigned Agreements, and (iv) all rights of Grantor to terminate, amend, supplement, modify or exercise rights or options under the Assigned Agreements, to perform thereunder and to compel performance and otherwise exercise all remedies thereunder; (e) all deposit accounts, including without limitation all deposit accounts maintained with Collateral Agent; (f) all trademarks, tradenames, tradesecrets, business names, patents, patent applications, licenses, copyrights, registrations and franchise rights, and all goodwill associated with any of the foregoing; (g) to the extent not included in any other paragraph of this Section 2, all other general intangibles (including without limitation tax refunds, rights to payment or performance, choses in action and judgments taken on any rights or claims included in the Collateral); (h) all plant fixtures, business fixtures and other fixtures and storage and office facilities, and all accessions thereto and products thereof; (i) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; and (j) all proceeds, products, rents and profits of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Collateral Agent is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. Notwithstanding anything herein to the contrary, in no event shall the Collateral include, and Grantor shall not be deemed to have granted a security interest in, any of Grantor's rights or interests in any license, contract or agreement to which Grantor is a party or any of its rights or interests thereunder to the extent, but only to the extent, that such a grant would, under the terms of such license, contract or agreement or otherwise, result in a breach of the terms of, or constitute a default under any license, contract or agreement to which Grantor is a party (other than to the extent that any such term would be rendered ineffective pursuant to Section 9-318(4) of the Uniform Commercial Code of any relevant jurisdiction or any other applicable law (including the Bankruptcy Code) or principles of equity); provided, -------- XXIII-6 that immediately upon the ineffectiveness, lapse or termination of any such provision, the Collateral shall include, and Grantor shall be deemed to have granted a security interest in, all such rights and interests as if such provision had never been in effect. SECTION 3. SECURITY FOR OBLIGATIONS. ------------------------ This Agreement secures, and the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all obligations and liabilities of every nature of Grantor now or hereafter existing under or arising out of or in connection with the Guaranty and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Company, would accrue on such obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Collateral Agent or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise and all obligations of every nature of Grantor now or hereafter existing under this Agreement (all such obligations of Grantor being the "SECURED OBLIGATIONS"). SECTION 4. GRANTOR REMAINS LIABLE. ---------------------- Anything contained herein to the contrary notwithstanding, (a) Grantor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Collateral Agent of any of its rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Collateral Agent shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Collateral Agent be obligated to perform any of the obligations or duties of Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 5. REPRESENTATIONS AND WARRANTIES. ------------------------------ Grantor represents and warrants as follows: (a) Ownership of Collateral. Except for the security interest created by ----------------------- this Agreement, Grantor owns the Collateral free and clear of any Lien subject to Liens permitted by the Financing Agreements. XXIII-7 (b) Location of Equipment and Inventory. All of the Equipment and ----------------------------------- Inventory is, as of the date hereof, located at the places specified in Schedule 5(b) annexed hereto. ------------- (c) Negotiable Documents of Title. No Negotiable Documents of Title are ----------------------------- outstanding with respect to any of the Inventory (other than in respect of (i) Inventory with an aggregate value not in excess of $1,000,000 or (ii) Inventory which, in the ordinary course of business, is in transit either (A) from a supplier to Grantor, (B) between the locations specified in Schedule 5(b) hereto, or (C) to customers of Grantor). ------------- (d) Office Locations; Other Names. The chief place of business, the ----------------------------- chief executive office and the office where Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts is, and has been for the four month period preceding the date hereof, located at the places indicated on Schedule 5d. Grantor has not in ----------- the past done, and does not now do, business under any other name (including any trade-name or fictitious business name) except for those names set forth on Schedule 5d. ----------- XXIII-8 SECTION 6. FURTHER ASSURANCES. ------------------ (a) Grantor agrees that from time to time, at the expense of Grantor, Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Grantor will: (i) mark conspicuously each item of chattel paper included in the Accounts, each Related Contract and, at the reasonable request of Collateral Agent, each of its records pertaining to the Collateral, with a legend, in form and substance reasonably satisfactory to Collateral Agent, indicating that such Collateral is subject to the security interest granted hereby, (ii) at the reasonable request of Collateral Agent, deliver and pledge to Collateral Agent hereunder all promissory notes and other instruments (excluding checks) and all original counterparts of chattel paper constituting Collateral, duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance reasonably satisfactory to Collateral Agent, (iii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, or as Collateral Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iv) after the acquisition by Grantor of any item of Equipment which is covered by a certificate of title under a statute of any jurisdiction under the law of which indication of a security interest on such certificate is required as a condition of perfection thereof, upon the reasonable request of Collateral Agent, execute and file with the registrar of motor vehicles or other appropriate authority in such jurisdiction an application or other document requesting the notation or other indication of the security interest created hereunder on such certificate of title, (v) upon the reasonable request of Collateral Agent, deliver to Collateral Agent copies of all such applications or other documents filed during such calendar quarter and copies of all such certificates of title issued during such calendar quarter indicating the security interest created hereunder in the items of Equipment covered thereby, and (vi) at Collateral Agent's reasonable request, appear in and defend any action or proceeding that may affect Grantor's title to or Collateral Agent's security interest in all or any part of the Collateral. (b) Grantor hereby authorizes Collateral Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Grantor to the extent permitted by applicable law. Grantor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by Grantor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. SECTION 7. CERTAIN COVENANTS OF GRANTOR. ---------------------------- Grantor shall: 1. notify Collateral Agent of any change in Grantor's name, identity or corporate structure within 30 days of such change; XXIII-9 2. give Collateral Agent 30 days' written notice following any change in Grantor's chief place of business, chief executive office or residence or the office where Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts; 3. pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent the validity thereof is being contested in good faith. SECTION 8. SPECIAL COVENANTS WITH RESPECT TO EQUIPMENT AND INVENTORY. --------------------------------------------------------- Grantor shall: (a) keep the Equipment and Inventory at the places therefor specified on Schedule 5(b) annexed hereto or, upon 30 days' written notice to Collateral ------------- Agent following any change in location, at such other places in jurisdictions where all action that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder, with respect to such Equipment and Inventory shall have been taken; (b) cause the Equipment to be maintained and preserved in working order, ordinary wear and tear and damage by casualty excepted, and in accordance with Grantor's past practices, and shall forthwith make or cause to be made all repairs, replacements and other improvements in connection therewith that are necessary in the Grantor's reasonable business judgment to such end. (c) keep correct and accurate records of the Inventory, itemizing and describing the kind, type and quantity of Inventory, Grantor's cost therefor and (where applicable) the current list prices for the Inventory; (d) if any Inventory is in possession or control of any of Grantor's agents or processors, upon the occurrence of an Event of Default, instruct such agent or processor to hold all such Inventory for the account of Collateral Agent and subject to the instructions of Collateral Agent; and (e) promptly upon the issuance and delivery to Grantor of any Negotiable Document of Title (other than any one or more Negotiable Documents of Title covering (i) Inventory with an aggregate value not in excess of $1,000,000 or (ii) Inventory which, in the ordinary course of business, is in transit either (A) from a supplier to Grantor, (B) between the locations specified in Schedule 5(b) hereto, or (C) to customers of Grantor), deliver such ------------- Negotiable Document of Title to Collateral Agent. SECTION 9. INSURANCE. --------- XXIII-10 Grantor shall, at its own expense, maintain insurance with respect to the Equipment and Inventory in accordance with the terms of the Financing Agreements. SECTION 10. SPECIAL COVENANTS WITH RESPECT TO ACCOUNTS AND RELATED CONTRACTS. ---------------------------------------------------------------- (a) Grantor shall keep its chief place of business and chief executive office and the office where it keeps its records concerning the Accounts and Related Contracts, and all originals of all chattel paper that evidence Accounts, at the location therefor specified in Section 4 or, upon 30 days' written notice to Collateral Agent following any change in location, at such other location in a jurisdiction where all action that Collateral Agent may request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder, with respect to such Accounts and Related Contracts shall have been taken. Promptly upon the reasonable request of Collateral Agent, Grantor shall deliver to Collateral Agent complete and correct copies of each Related Contract. (b) Grantor shall, maintain (i) complete records of each Account, including records of all payments received, credits granted and merchandise returned, and (ii) all documentation relating thereto in accordance with prudent business practices. (c) Except as otherwise provided in this subsection (c), Grantor shall continue to collect, at its own expense, all amounts due or to become due to Grantor under the Accounts and Related Contracts. In connection with such collections, Grantor shall take such action as Grantor or Collateral Agent may deem necessary or advisable to enforce collection of amounts due or to become due under the Accounts; provided, however, that Collateral Agent shall have the -------- ------- right at any time, upon the occurrence and during the continuation of an Event of Default and upon written notice to Grantor of its intention to do so, to notify the account debtors or obligors under any Accounts of the assignment of such Accounts to Collateral Agent and to direct such account debtors or obligors to make payment of all amounts due or to become due to Grantor thereunder directly to Collateral Agent, to notify each Person maintaining a lockbox or similar arrangement to which account debtors or obligors under any Accounts have been directed to make payment to remit all amounts representing collections on checks and other payment items from time to time sent to or deposited in such lockbox or other arrangement directly to Collateral Agent and, upon such notification and at the expense of Grantor, to enforce collection of any such Accounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Grantor might have done. After receipt by Grantor of the notice from Collateral Agent referred to in the proviso to the preceding sentence, (i) any payments of Accounts, received by the - ------- Grantor shall be forthwith (and in any event within two Business Days) deposited by the Grantor in the exact form received, duly indorsed by the Grantor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of the Secured Parties only as provided in Section 20, (ii) until so turned over in accordance with the proceeding subsection (i), all amounts and proceeds (including checks and other instruments) received by Grantor in respect of the Accounts and the Related Contracts shall be received in trust for the benefit of Collateral Agent hereunder and shall be segregated from other funds of Grantor and (iii) Grantor shall not XXIII-11 adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon. SECTION 11. DEPOSIT ACCOUNTS. ---------------- Upon the occurrence and during the continuation of an Event of Default, Collateral Agent may exercise dominion and control over, and refuse to permit further withdrawals (whether of money, securities, instruments or other property) from any deposit accounts maintained with Collateral Agent constituting part of the Collateral. SECTION 12. LICENSE OF PATENTS, TRADEMARKS, COPYRIGHTS, ETC. ----------------------------------------------- Grantor hereby assigns, transfers and conveys to Collateral Agent, effective upon the occurrence of any Event of Default, the nonexclusive right and license to use all trademarks, tradenames, copyrights, patents or technical processes owned or used by Grantor that relate to the Collateral and any other collateral granted by Grantor as security for the Secured Obligations, together with any goodwill associated therewith, all to the extent necessary to enable Collateral Agent to use, possess and realize on the Collateral and to enable any successor or assign to enjoy the benefits of the Collateral. This right and license shall inure to the benefit of all successors, assigns and transferees of Collateral Agent and its successors, assigns and transferees, whether by voluntary conveyance, operation of law, assignment, transfer, foreclosure, deed in lieu of foreclosure or otherwise. Such right and license is granted free of charge, without requirement that any monetary payment whatsoever be made to Grantor. SECTION 13. TRANSFERS AND OTHER LIENS. ------------------------- Grantor shall not: (a) sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Financing Agreements; or (b) except for the security interest created by this Agreement and Liens permitted by the Financing Agreements, create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person. SECTION 14. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. ------------------------------------------- Grantor hereby irrevocably appoints Collateral Agent as Grantor's attorney-in-fact, with full authority in the place and stead of Grantor and in the name of Grantor, Collateral Agent or otherwise, from time to time, upon the occurrence and during the continuance of an Event of Default, in Collateral Agent's reasonable discretion to take any action and to execute any instrument that Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: XXIII-12 (a) to obtain and adjust insurance required to be maintained by Grantor or paid to Collateral Agent pursuant to Section 9; (b) to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (c) to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clauses (a) and (b) above; (d) to file any claims or take any action or institute any proceedings that Collateral Agent may reasonably deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Collateral Agent with respect to any of the Collateral; (e) to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Credit Agreements) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Collateral Agent in its reasonable discretion, any such payments made by Collateral Agent to become obligations of Grantor to Collateral Agent, due and payable immediately without demand; (f) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with Accounts and other documents relating to the Collateral; and (g) upon the occurrence and during the continuation of an Event of Default, generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Collateral Agent were the absolute owner thereof for all purposes, and to do, at Collateral Agent's option and Grantor's expense, at any time or from time to time, all acts and things that Collateral Agent reasonably deems necessary to protect, preserve or realize upon the Collateral and Collateral Agent's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as Grantor might do. SECTION 15. COLLATERAL AGENT MAY PERFORM. ---------------------------- If Grantor fails to perform any agreement contained herein, Collateral Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of Collateral Agent incurred in connection therewith shall be payable by Grantor under Section 21. XXIII-13 SECTION 16. STANDARD OF CARE. ---------------- The powers conferred on Collateral Agent hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Collateral Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Collateral Agent accords its own property. SECTION 17. REMEDIES. -------- If any Event of Default shall have occurred and be continuing, Collateral Agent may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Collateral), and also may (a) require Grantor to, and Grantor hereby agrees that it will at its expense and upon request of Collateral Agent forthwith, assemble all or part of the Collateral as directed by Collateral Agent and make it available to Collateral Agent at a place to be designated by Collateral Agent that is reasonably convenient to both parties, (b) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (c) prior to the disposition of the Collateral, store, process, repair or recondition the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Collateral Agent deems appropriate, (d) take possession of Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same and any of Grantor's equipment for the purpose of completing any work in process, taking any actions described in the preceding clause (c) and collecting any Secured Obligation, and (e) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Collateral Agent may deem commercially reasonable. Collateral Agent or any Secured Party or Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Collateral Agent, as agent for and representative of Secured Parties and Interest Rate Exchangers (but not any Secured Party or Secured Parties or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Obligees shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Collateral Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Grantor, and Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Grantor agrees that, to the extent notice of sale shall be required by law, at least ten XXIII-14 days' notice to Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Collateral Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Grantor hereby waives any claims against Collateral Agent arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Collateral Agent accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantor shall be liable for the deficiency and the reasonable fees of any attorneys employed by Collateral Agent to collect such deficiency. SECTION 18. PROCEEDS TO BE TURNED OVER TO COLLATERAL AGENT. ---------------------------------------------- In addition to the rights of the Collateral Agent and the Secured Parties specified in Section 10 with respect to payments of Accounts, if an Event of Default shall occur and be continuing, upon request of the Collateral Agent, all proceeds received by the Grantor consisting of cash, checks and other near-cash items shall be held by the Grantor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of the Grantor, and shall, forthwith upon receipt by the Grantor, be turned over to the Collateral Agent in the exact form received by the Grantor (duly indorsed by the Grantor to the Collateral Agent, if required) and held by the Collateral Agent in a Collateral Account maintained under the Intercreditor Agreement. All proceeds while held by the Collateral Agent in a Collateral Account (or by the Grantor in trust for the Collateral Agent and the Secured Parties) shall continue to be held as collateral security for all the Secured Obligations and shall not constitute payment thereof until applied as provided in Section 20. SECTION 19. APPLICATION OF PROCEEDS. ----------------------- Except as expressly provided elsewhere in this Agreement, all proceeds held in any Collateral Account and all other proceeds received by Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in subsection 3 of the Intercreditor Agreement. SECTION 20. INDEMNITY AND EXPENSES. ---------------------- (a) Grantor agrees to indemnify Collateral Agent, each Secured Party Lender and each Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result from Collateral Agent's or such Secured Party's or Interest Rate Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. XXIII-15 (b) Grantor shall pay to Collateral Agent promptly following written demand the amount of any and all reasonable costs and reasonable expenses, including the reasonable fees and reasonable expenses of its counsel and of any experts and agents, that Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Collateral Agent hereunder, or (iv) the failure by Grantor to perform or observe any of the provisions hereof. SECTION 21. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. ----------------------------------------------- This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of the Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantor, its successors and assigns, and (c) inure, together with the rights and remedies of Collateral Agent hereunder, to the benefit of Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement and subsection 10.1 of the AXEL Credit Agreement, any Secured Party may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Secured Parties herein or otherwise. Upon the payment in full of all Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to Grantor. Upon any such termination Collateral Agent will, at Grantor's expense, execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination in accordance with the terms of the Intercreditor Agreement. SECTION 22. COLLATERAL AGENT AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Collateral Agent has been appointed to act as Collateral Agent hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and AXEL Administrative Agent on behalf of the AXEL Lenders pursuant to the Intercreditor Agreement and, by their acceptance of the benefits hereof, Interest Rate Exchangers, and shall be entitled to the benefits of the Intercreditor Agreement. Collateral Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Collateral), solely in accordance with this Agreement and the Intercreditor Agreement; provided that Collateral Agent shall exercise, or refrain from exercising, any - -------- remedies provided for in Section 18 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar XXIII-16 payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 23(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Collateral Agent for the benefit of Secured Parties and Interest Rate Exchangers in accordance with the terms of this Section 23(a). (b) Collateral Agent shall at all times be the same Person that is appointed Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent under this Agreement, and the retiring or removed Collateral Agent under this Agreement shall promptly (i) transfer to such successor Collateral Agent all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Collateral Agent under this Agreement, and (ii) execute and deliver to such successor Collateral Agent such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Collateral Agent of the security interests created hereunder, whereupon such retiring or removed Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Collateral Agent hereunder. SECTION 23. AMENDMENTS; ETC. --------------- No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Grantor therefrom, shall in any event be effective unless the same shall be in writing and signed by Collateral Agent and, in the case of any such amendment or modification, by Grantor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. XXIII-17 SECTION 24. NOTICES. ------- Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices -------- to Collateral Agent and Grantor shall not be effective until received. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto. SECTION 25. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. ----------------------------------------------------- No failure or delay on the part of Collateral Agent in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 26. SEVERABILITY. ------------ In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 27. HEADINGS. -------- Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 28. GOVERNING LAW; TERMS. -------------------- THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined XXIII-18 herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 29. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] XXIII-19 IN WITNESS WHEREOF, Grantor and Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. SEALY CORPORATION By: ------------------------------------- Name: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Collateral Agent By: ------------------------------------- Name: Title: XXIII-20 SCHEDULE 5(b) TO HOLDINGS SECURITY AGREEMENT Locations of Equipment: Locations of Inventory: XXIII-21 EXHIBIT XXIV [FORM OF MORTGAGE] -------------------------------------------------------- MORTGAGE, ASSIGNMENT OF RENTS AND LEASES, SECURITY AGREEMENT AND FIXTURE FILING ([**STATE**]) made from [** SEALY OWNERSHIP ENTITY **], "Mortgagor" to MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent, "Mortgagee" Date: As of December 18, 1997 -------------------------------------------------------- PREPARED BY, RECORDING REQUESTED BY, AND WHEN RECORDED MAIL TO: O'Melveny & Myers LLP 153 East 53rd Street New York, New York 10022-4611 Attention: Francis J. Burgweger, Esq. File #317,790-084[1] - ------------------- [16]NOTE: If this Mortgage or the Notes which this Mortgage secures are in your possession, DO NOT DESTROY THEM. State law may require presentation of this Mortgage and/or the Notes in order to obtain a termination or release of this Mortgage upon satisfaction of the indebtedness secured hereby. The termination or release must be recorded in the city, town, county or parish records for the jurisdiction in which the land described in the Exhibit A is --------- located. XXIV-1 TABLE OF CONTENTS
Page Definition of Mortgaged Property, Granting Clauses......................................................................... 1 SECTION 1 OBLIGATIONS OF BORROWER UNDER THE CREDIT AGREEMENT.......................... 8 SECTION 2 COVENANTS AND AGREEMENTS OF MORTGAGOR....................................... 8 2.1 Payment and Performance of Obligations......................................... 8 2.2 Assignment of Policies Upon Foreclosure........................................ 8 2.3 Inspections.................................................................... 9 2.4 Actions by Mortgagee To Preserve Mortgaged Property............................ 10 2.5 Action by Mortgagee to Protect Interests; Subrogation; Waiver of Offset........ 11 2.6 Restrictions on Transfer of Mortgaged Property by Mortgagor.................... 12 2.7 Incorporation by Reference; Full Performance Required; Survival of Warranties.. 13 2.8 Additional Security............................................................ 13 2.9 Further Acts................................................................... 13 2.10 Offsite Improvements........................................................... 14 2.11 Utilities...................................................................... 15 2.12 Leasehold Estate............................................................... 15 SECTION 3 ASSIGNMENT OF RENTS AND LEASES.............................................. 22 3.1 Assignment of Rents and Leases................................................. 22
XXIV-i
Page 3.2 No Limitation of Rights......................................................... 22 3.3 Sale of Mortgaged Property...................................................... 23 3.4 Term of Assignment.............................................................. 23 3.5 Perfection Upon Recordation..................................................... 24 3.6 Bankruptcy Provisions........................................................... 24 SECTION 4 SECURITY AGREEMENT.......................................................... 24 4.1 Grant of Security; Incorporation by Reference................................... 24 4.2 Fixture Filing Financing Statements............................................. 25 4.3 Mortgagee as Secured Party...................................................... 25 SECTION 5 DEFAULTS AND REMEDIES....................................................... 25 5.1 Events of Default............................................................... 25 5.2 Fixtures........................................................................ 26 5.3 Remedies........................................................................ 26 5.4 Costs and Expenses.............................................................. 32 5.5 Additional Rights of Mortgagee.................................................. 32 5.6 Application of Proceeds......................................................... 32 SECTION 6 INDEMNIFICATION............................................................. 33 SECTION 7 TERMINATION................................................................. 33
XXIV-ii
Page SECTION 8 MISCELLANEOUS COVENANTS AND AGREEMENTS...................................... 34 8.1 Cumulative Rights; Waivers; Modifications....................................... 34 8.2 Partial Releases................................................................ 34 8.3 Severability.................................................................... 34 8.4 Subrogation..................................................................... 35 8.5 Mortgagee's Powers.............................................................. 35 8.6 Enforceability of Mortgage...................................................... 36 8.7 Interest........................................................................ 36 8.8 Choice of Law................................................................... 36 8.9 Counterparts.................................................................... 36 8.10 Recording References............................................................ 37 8.11 Notices......................................................................... 37 8.12 Successors and Assigns.......................................................... 37 8.13 Expenses........................................................................ 38 8.14 Nonforeign Entity............................................................... 38 8.15 Purpose of the Loans............................................................ 38 8.16 No Joint Venture or Partnership................................................. 39 8.17 Amendments and Waivers.......................................................... 39 8.18 Covenants and Agreements Run with Land.......................................... 39
XXIV-iii
Page 8.19 Statements by Mortgagor......................................................... 39 8.20 Non-Waiver...................................................................... 39 8.21 Survival of Obligations......................................................... 40 8.22 Consent to Jurisdiction and Service of Process.................................. 40 8.23 Waiver of Jury Trial............................................................ 41
EXHIBIT A - LEGAL DESCRIPTION OF LAND EXHIBIT B - DESCRIPTION OF ADDITIONAL MORTGAGED PROPERTY EXHIBIT C - UCC INFORMATION SCHEDULE I - MORTGAGEE'S ADDITIONAL RIGHTS XXIV-iv MORTGAGE, ASSIGNMENT OF RENTS AND LEASES, SECURITY AGREEMENT AND FIXTURE FILING ([**STATE**]) THIS MORTGAGE, ASSIGNMENT OF RENTS AND LEASES, SECURITY AGREEMENT AND FIXTURE FILING ([**STATE**]) (this "MORTGAGE") is dated as of December 18, 1997, from [** SEALY OWNERSHIP ENTITY **], a _________ corporation ("MORTGAGOR"), whose address is [** ________ **], to MORGAN GUARANTY TRUST COMPANY OF NEW YORK, a [** ________ **] corporation, as Administrative Agent for the Lenders listed in the Credit Agreement (as hereinafter defined), having an address at [** _____ **] and all successors and assigns as agents (in such capacity, "AGENT"; Agent, together with its successors and assigns, "MORTGAGEE"). All capitalized terms used but not otherwise defined herein shall have the same meanings ascribed to such terms in the Credit Agreement. MORTGAGOR IS THE OWNER OF THE RECORD INTEREST IN THE PARCELS OF LAND AS INDICATED IN EXHIBIT A HERETO. --------- THIS MORTGAGE COVERS GOODS WHICH ARE OR ARE TO BECOME AFFIXED TO OR FIXTURES ON THE LAND DESCRIBED IN EXHIBIT A HERETO. THIS MORTGAGE IS A FIXTURE FILING AND --------- IS TO BE INDEXED, AMONG OTHER PLACES, IN THE REAL ESTATE RECORDS OF EACH COUNTY (OR, TO THE EXTENT SIMILAR RECORDS ARE MAINTAINED AT THE CITY OR TOWN LEVEL INSTEAD OF THE COUNTY LEVEL, EACH SUCH CITY OR TOWN) IN WHICH SAID LAND OR ANY PORTION THEREOF IS LOCATED. NOW, THEREFORE, for good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, and the mutual covenants herein contained, and in order to secure the Obligations (as hereinafter defined), MORTGAGOR HEREBY COVENANTS AND AGREES WITH AND REPRESENTS AND WARRANTS TO MORTGAGEE AS FOLLOWS: A. GRANTING CLAUSES. Mortgagor hereby: (i) grants, bargains, sells, assigns, pledges, transfers, mortgages and conveys, as security for the Obligations, those portions of the following described Mortgaged Property (as hereinafter defined) that constitute real property under the laws of the State wherein located to Mortgagee, WITH POWER OF SALE, pursuant to this Mortgage and Applicable Law, but subject to the Security Agreement (as hereinafter defined) and the assignment made in paragraph (iii) --------------- below, and subject to the Permitted Encumbrances, TO HAVE AND TO HOLD such portions of the Mortgaged Property, to Mortgagee and its successors and assigns forever, subject to all of the terms, conditions, covenants and agreements herein set forth, for the security and benefit of Mortgagee and its successors and assigns; and (ii) grants, as security for the Obligations, a security interest to Mortgagee in that portion of the Mortgaged Property constituting fixtures or personal property; and (iii) assigns and transfers to Mortgagee, as security for the Obligations, all of the Leases (as defined in Exhibit B) and all of the Rents --------- (as hereinafter defined) and other benefits derived from any Leases, whether now existing or hereafter created. All of Mortgagor's right, title and interest in and to the following described property now or hereafter located upon the Premises (as hereinafter defined), or appurtenant thereto, or used or to be used in connection with the present or future use, construction upon, leasing, sale, operation or occupancy of the Premises is herein collectively referred to as the "MORTGAGED PROPERTY": GRANTING CLAUSE FIRST LAND 1. The parcel of land located at ______________ in the City of_______________, County of _______________________ and State of _________________, as more particularly described in Exhibit A attached hereto --------- and by this reference incorporated herein, together with all strips and gores within or adjoining such property, all estate, right, title, interest, claim or demand whatsoever of Mortgagor in the streets, roads, sidewalks, alleys, and ways adjacent thereto (whether or not vacated and whether public or private and whether open or proposed), all vaults or chutes adjoining such land, all of the tenements, hereditaments, easements, reciprocal easement agreements, rights pursuant to any trackage agreement, rights to the use of common drive entries, rights-of-way and other rights, privileges and appurtenances thereunto belonging or in any way pertaining thereto, all reversions, remainders, dower and right of dower, curtesy and right of curtesy, all of the air space and right to use said air space above such property, all transferable development rights arising therefrom or transferred thereto, all water and water rights (whether riparian, appropriative or otherwise, and whether or not appurtenant) and shares of stock evidencing the same, all mineral, mining, gravel, oil, gas, hydrocarbon substances and other rights to produce or share in the production of anything related to such property, all drainage, crop, timber, agricultural, and horticultural rights with respect to such property, and all other appurtenances appurtenant to such property, including without limitation, any now or hereafter belonging or in anywise appertaining thereto, and all claims or demands of Mortgagor, either at law or in equity, in possession or expectancy, now or hereafter acquired, of, in or to the same (all of the foregoing being referred to herein, collectively, as the "LAND"); GRANTING CLAUSE SECOND IMPROVEMENTS 2. The Improvements described in Exhibit B attached hereto and by this --------- reference incorporated herein. The Land and the Improvements are referred to herein, collectively, as the "PREMISES"; XXIV-2 GRANTING CLAUSE THIRD RENTS, LEASES AND LEASE PROVISIONS 3. The Rents, Leases and Lease Provisions described in Exhibit B --------- attached hereto and by this reference incorporated herein, and that certain Subsidiary Pledge Agreement dated as of even date herewith from Mortgagor and the other pledgors listed on the signature pages thereof, as debtors, to Mortgagee, as secured party and as executed by any additional Subsidiary Guarantor from time to time thereafter as the same may hereafter be amended, modified, supplemented, restated or renewed (such Subsidiary Pledge Agreement, together with any and all amendments, modifications, supplements, restatements, extensions, renewals or replacements thereof are collectively referred to herein as the "SUBSIDIARY PLEDGE AGREEMENT" and that certain Subsidiary Security Agreement dated as of even date herewith from Mortgagor and the other grantors listed on the signature pages thereof, as debtors, to Mortgagee, as secured party, as the same may hereafter be amended, modified, supplemented, restated or renewed (such Subsidiary Security Agreement, together with any and all amendments, modifications, supplements, restatements, extensions, renewals or replacements thereof are collectively referred to herein as the "SUBSIDIARY SECURITY AGREEMENT") (the Subsidiary Pledge Agreement and the Subsidiary Security Agreement are collectively referred to as the "SECURITY AGREEMENT"); GRANTING CLAUSE FOURTH VARIOUS COLLATERAL 4. The Equipment, Materials, Specifications, Security Deposits, Financing Commitments, Inventory, Negotiable Documents of Title, Rolling Stock, Payment Rights, Accounts, Related Contracts, Assigned Related Agreements, Deposit Accounts, Deposit Account Collateral, Intellectual Property and General Intangibles described in Exhibit B attached hereto and by this reference --------- incorporated herein and any other property described in Exhibit B and not --------- described in any other Granting Clause (collectively, the "VARIOUS COLLATERAL"), subject to the terms and provisions of the Security Agreement; GRANTING CLAUSE FIFTH REFUNDS 5. The Refunds described in Exhibit B attached hereto and by this --------- reference incorporated herein, subject to the terms and provisions of the Security Agreement; GRANTING CLAUSE SIXTH INSURANCE/CONDEMNATION PROCEEDS 6. The Insurance/Condemnation Proceeds described in Exhibit B --------- attached hereto and by this reference incorporated herein, subject to the terms and provisions of the Security Agreement and Section 6.11 of the Credit ------------ Agreement; XXIV-3 GRANTING CLAUSE SEVENTH RECORDS AND PERMITS 7. The Records and Permits described in Exhibit B attached hereto and --------- by this reference incorporated herein, subject to the terms and provisions of the Security Agreement; GRANTING CLAUSE EIGHTH OPTIONS 8. The Options described in Exhibit B attached hereto and by this --------- reference incorporated herein, subject to the terms and provisions of the Security Agreement; GRANTING CLAUSE NINTH PROCEEDING RIGHTS 9. The Proceeding Rights described in Exhibit B attached hereto and by --------- this reference incorporated herein, subject to the terms and provisions of the Security Agreement; GRANTING CLAUSE TENTH ENCUMBRANCE RIGHTS 10. The Encumbrance Rights described in Exhibit B attached hereto and by --------- this reference incorporated herein, subject to the terms and provisions of the Security Agreement; GRANTING CLAUSE ELEVENTH GREATER ESTATE RIGHTS 11. The Greater Estate Rights described in Exhibit B attached hereto and --------- by this reference incorporated herein, subject to the terms and provisions of the Security Agreement; GRANTING CLAUSE TWELFTH AFTER ACQUIRED PROPERTY 12. All property hereafter acquired or constructed by Mortgagor of the type described in the foregoing Granting Clauses and located upon the Premises, or appurtenant thereto, or used or to be used in connection with the present or future use, construction upon, leasing, sale, operation or occupancy of the Premises, which shall forthwith, upon acquisition or construction thereof by Mortgagor and without any act or deed by Mortgagor or Mortgagee, become subject to the lien and security interest of this Mortgage as if such property were now owned by Mortgagor and were specifically described in this Mortgage and were specifically conveyed or encumbered hereby; and XXIV-4 GRANTING CLAUSE THIRTEENTH ACCESSIONS AND PROCEEDS 13. All accessions, additions, replacements, substitutions, renewals or attachments to, and proceeds of, any of the foregoing, TO HAVE AND TO HOLD the Mortgaged Property unto Mortgagee and its successors and assigns, for the uses and purposes set forth herein, forever. B. OBLIGATIONS. This Mortgage is given to secure ratably and equally the payment and performance of the following obligations (collectively referred to as the "OBLIGATIONS"): 1. Payment of and performance of (a) all "Guarantied Obligations" (the "GUARANTIED OBLIGATIONS") of Mortgagor under, and as defined in, that certain Subsidiary Guaranty dated as of even date herewith (the "SUBSIDIARY GUARANTY") from Mortgagor and other subsidiaries of Company and Holdings (Company and Holdings collectively, "BORROWER") in favor of and for the benefit of Mortgagee, pursuant to which Mortgagor is unconditionally and irrevocably, as a primary obligor and not merely as a surety, guarantying the due and punctual payment in full of the "Obligations" of Borrower under and as defined in that certain Credit Agreement dated as of even date herewith by and among Borrower, as borrower, Goldman Sachs Credit Partners, as syndication agent and arranger, the financial institutions listed on the signature pages thereof (each individually referred to herein as a "LENDER" and collectively as "LENDERS") and Mortgagee, and any and all amendments, modifications, supplements, restatements, extensions, renewals or replacements thereof (such Senior Secured Revolving Credit Agreement and any and all amendments, modifications, supplements, restatements, extensions, renewals or replacements thereof are collectively referred to herein as the "CREDIT AGREEMENT"); and (b) all obligations of Mortgagor under, with respect to or arising in connection with this Mortgage, including, without limitation, all obligations to Mortgagee for fees, costs and expenses (including attorneys' fees and disbursements) as provided therein and herein; 2. Payment and performance of all obligations of Mortgagor to the Lenders and/or Mortgagee for fees, costs and expenses required to be paid by Mortgagor under the other Loan Documents including, without limitation fees, costs and expenses (including attorneys' fees and disbursements), all becoming due as provided therein; XXIV-5 3. Payment of all sums advanced by the Lenders or Mortgagee in accordance with the provisions of this Mortgage or the other Loan Documents to protect the Mortgaged Property, with interest thereon at the rate specified in Section 2.2.E of the Credit Agreement (the "AGREED RATE"); ------------- 4. Payment of all sums advanced and costs and expenses incurred by the Lenders or Mortgagee in accordance with the terms of the Loan Documents in connection with the Obligations or any part thereof, any renewal, extension or change of or substitution for the Obligations or any part thereof, or the acquisition or perfection of the security therefor, whether such advances, costs and expenses were made or incurred at the request of Borrower, Mortgagor, Mortgagee or any Lender; 5. Payment of all other sums, with interest thereon, which may hereafter be loaned to Mortgagor, or its successors or assigns, by the Lenders or Mortgagee, or their respective successors or assigns, or by the holder of any of the Notes, pursuant to an agreement that recites that the repayment of such sums and Mortgagor's other obligations under such agreement are secured by this Mortgage; 6. Payment of all sums with respect to the Obligations that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a), including, without limitation, interest, fees and other charges that, but for the filing of a petition in bankruptcy with respect to Mortgagor would accrue on the Obligations, whether or not a claim is alleged against Mortgagor for such sums in any such bankruptcy proceeding; 7. Due, prompt and complete performance of every obligation, covenant and agreement of Mortgagor contained in any agreement now or hereafter executed by Mortgagor which recites that the obligations thereunder are secured by this Mortgage from and after the date on which all mortgage recording taxes, general intangible taxes or other taxes payable in respect of obligations have been paid; and 8. All renewals, extensions, amendments, modifications and changes and supplements of, or substitutions or replacements for, all or any part of the items described in Paragraphs 1 through 7 above. ---------------------- C. FUTURE ADVANCES. In addition to all other indebtedness secured by this Mortgage, this Mortgage shall also secure and constitute a first Lien on the Mortgaged Property for: XXIV-6 1. Mortgagor's guaranty of all future advances (including all extensions, renewals and modifications of such future advances) that relate directly or indirectly to the Credit Agreement (including advances pursuant to Section 2.1 thereof) or to this Mortgage and are made as provided in any ----------- of the Loan Documents by the Lenders or Mortgagee to Borrower or Mortgagor or otherwise as provided in any of the Loan Documents for any purpose so related after the date of this Mortgage, and Mortgagor acknowledges that the irrevocable and unconditional guaranty of such future advances is among the Obligations; and 2. all sums advanced or paid pursuant to the terms of this Mortgage by Mortgagee upon a default or Event of Default under the terms of this Mortgage (a) for real estate taxes, charges and assessments that may be imposed by law upon the Premises, (b) for premiums on insurance policies covering the Premises, (c) for expenses incurred in upholding the Lien of this Mortgage, including but not limited to the expenses of any litigation to prosecute or defend the rights and Lien created by this Mortgage, (d) to which Mortgagee becomes subrogated, upon payment, under recognized principles of law or equity, or under express statutory authority or (e) for any other purpose, in each case, with interest thereon at the Agreed Rate; and 3. all other sums expended by Mortgagee in accordance with the terms of this Mortgage (including without limitation the amounts advanced pursuant to Sections 2.3, 2.4, 2.5 and 5.5 hereof), ------------ --- --- --- just as if such advances were made on the date of this Mortgage. Any future advances may be made in accordance with the terms of the Credit Agreement, or at the option of Mortgagee, as provided herein or in the other Loan Documents. The total amount of the indebtedness that may be secured by this Mortgage may increase or decrease from time to time. D. DEFINITIONS AND INTERPRETATION. Supplementing the definitions listed below in this Paragraph D, the ----------- definitions set forth in Section 1.1 of the Credit Agreement and the provisions ----------- with respect to interpretation and construction of the Loan Documents as set forth in Sections 1.3 and 9.16 of the Credit Agreement are hereby incorporated ------------ ---- by reference into this Mortgage with the same effect as if set forth in full herein. The following terms used in this Mortgage shall have the following meanings: "APPLICABLE LAW" means, collectively, all statutes, laws, rules, regulations, ordinances, orders, decisions, writs, judgments, decrees and injunctions of governmental authorities (including Environmental Laws) affecting Borrower or the Collateral or any part thereof (including the acquisition, development, construction, renovation, occupancy, use, improvement, alteration, management, operation, maintenance, repair or restoration thereof), whether now or hereafter enacted and in force, and all authorizations relating thereto, and all covenants, conditions and restrictions contained in any instruments, either of record or known to Borrower, at any time in XXIV-7 force affecting any Property or any part thereof, including any such covenants, conditions and restrictions which may (i) require improvements, repairs or alterations in or to such Property or any part thereof or (ii) in any way limit the use and enjoyment thereof; for purposes of usury, Applicable Law means the law of the State of New York applicable to maximum rates of interest. "SECURED PARTY" means Mortgagee, in its capacity as administrative agent for and representative of the Lenders and any Interest Rate Exchangers (as defined in the Security Agreement (defined below)). "SECURITY AGREEMENT" means the Security Agreement executed and delivered by Borrower and the Mortgagee on or before the Closing Date, pursuant to which Borrower will pledge and grant a security interest in the Collateral described therein to Mortgagee for the benefit of the Mortgagee and the Lenders, as such Security Agreement may be amended, restated, supplemented or otherwise modified from time to time in accordance with the terms thereof and hereof. "TRANSFER" means any conveyance, assignment, sale, mortgaging, encumbrance, pledging, hypothecation, granting of a security interest in, granting of options with respect to or other disposition of (directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, and whether or not for consideration or of record) all or any portion of any legal or beneficial interest (i) in all or any portion of any Property or (ii) in any other assets of Borrower or any of Borrower's subsidiaries. Section 1 OBLIGATIONS OF BORROWER UNDER THE CREDIT AGREEMENT The "Obligations" of Borrower under and as defined in the Credit Agreement include, without limitation: (a) the due and punctual payment of the indebtedness, together with interest thereon and other amounts payable with respect thereto, owed under the Notes up to the maximum aggregate principal amount set forth in Section 2.1 of the Credit Agreement; (b) the due and ----------- punctual payment of all reimbursement obligations in respect of Letters of Credit together with interest thereon and other amounts payable with respect thereto; and (c) the due and punctual payment of any fee payable in accordance with Section 2.4 of the Credit Agreement (together with interest thereon and ----------- other amounts payable with respect thereto). XXIV-8 Section 2 COVENANTS AND AGREEMENTS OF MORTGAGOR 2.1 PAYMENT AND PERFORMANCE OF OBLIGATIONS. -------------------------------------- Mortgagor shall pay when due and perform the Obligations, including, without limitation, all amounts payable under and with respect to the Subsidiary Guaranty (including interest thereon as provided in the Subsidiary Guaranty); all charges, fees and other sums (including, without limitation, attorneys' fees and disbursements, late charges, prepayment charges and other amounts and all costs of collection) to be paid by Mortgagor as provided in this Mortgage or in the other Loan Documents; the principal and interest on any future advances secured by this Mortgage; and the principal of and interest on any other indebtedness secured by this Mortgage. 2.2 ASSIGNMENT OF POLICIES UPON FORECLOSURE. --------------------------------------- In the event of foreclosure of this Mortgage or other transfer of title or assignment of the Mortgaged Property, the acceptance by Mortgagee (or a nominee of Mortgagee) of a deed to any part of the Mortgaged Property in lieu of foreclosure of this Mortgage or in connection with a plan of reorganization filed under Chapter 11 of the Bankruptcy Code, or the exercise by Mortgagee of any remedy set forth herein, in extinguishment, in whole or in part, of the debt secured hereby or upon the acceptance by Mortgagee (or a nominee of Mortgagee) of a deed to any part of the Mortgaged Property in lieu of foreclosure of this Mortgage but not in extinguishment, in whole or in part, of the debt secured hereby, all right, title and interest of Mortgagor in and to all policies of insurance required pursuant to Section 6.4 of the Credit Agreement shall inure ----------- to the benefit of and pass to the successor in interest to Mortgagor or the purchaser or grantee of the Mortgaged Property. XXIV-9 2.3 INSPECTIONS. ----------- Mortgagee and its agents, representatives and employees are authorized to enter, at any reasonable time and upon reasonable prior notice to Mortgagor, upon or in any part of the Mortgaged Property as set forth in the Credit Agreement for the purpose of inspecting the same and for the purpose of performing any of the acts they are authorized to perform hereunder or under the terms of the Loan Documents, including performing any architectural, environmental and engineering audits and assessments. Mortgagee agrees that employees of Mortgagor shall be entitled to accompany Mortgagee and its agents, representatives and employees during any such inspection or other entry upon the Mortgaged Property, and Mortgagee and its agents, representatives and employees shall use reasonable efforts not to interfere with Mortgagor's operations at the Premises in connection with such inspection or other entry. Mortgagor shall, at Mortgagor's sole expense, conduct and complete all environmental investigations (including Phase I, Phase II and Phase III environmental investigations), inspections, monitoring, studies, sampling, testing, boring, reporting, clean up, containment, remediation and/or removal of any Hazardous Materials as and when required, and if the same are not timely conducted and completed by Mortgagor due to the fault of Mortgagor or any of its employees, then Mortgagee shall have the right to do so (at Mortgagee's option and without any obligation to do so) on Mortgagor's behalf and at Mortgagor's expense. Mortgagor hereby grants Mortgagee and its employees and agents an irrevocable and non-exclusive royalty-free license, to enter the Mortgaged Property and to investigate (including conducting Phase I, Phase II and Phase III environmental investigations), inspect, monitor, study, sample, test and conduct borings, to make such reports of the findings as may be required by Applicable Law, and to clean up, contain, remediate and/or remove Hazardous Materials (but Mortgagee shall have no obligation to do so). Without limitation of any other rights or remedies of Mortgagee, Mortgagor hereby irrevocably appoints and constitutes Mortgagee as its lawful attorney-in-fact, coupled with an interest and with full power of substitution, for the purpose of taking any of the actions described in the immediately preceding sentence and all acts incidental thereto. The costs of any investigation, inspection, monitoring, studying, sampling, testing, boring, clean-up, containment, remediation and/or removal shall be paid by Mortgagor and shall be secured by this Mortgage. Notwithstanding the foregoing, Mortgagee shall have no duty to make any inspection of the Mortgaged Property (including, without limitation, any environmental inspection) and shall not incur any liability for making or not making any such inspection, and shall not be required to report the results of any such inspection to Mortgagor. XXIV-10 2.4 ACTIONS BY MORTGAGEE TO PRESERVE MORTGAGED PROPERTY. --------------------------------------------------- From and after the occurrence of an Event of Default, Mortgagee may, without obligation so to do and without releasing Mortgagor from any Obligation, make any payment or perform any act required to be paid or performed by Mortgagor under the terms of any of the Loan Documents, if Mortgagee in its sole discretion shall deem such payment or act necessary or proper to protect the security hereof. In connection therewith (without limiting its general and other powers, whether conferred herein, in any other Loan Document or by law), Mortgagee shall have and is hereby given the right (without limiting the rights otherwise available to Mortgagee under any of the other Loan Documents or any other provisions of this Mortgage), but not the obligation, after Mortgagor's failure to cure within the period described above, and upon the occurrence and during the continuance of an Event of Default: (a) to enter upon and take possession of the Mortgaged Property, (b) to make additions, alterations, repairs and improvements to the Mortgaged Property which Mortgagee may consider necessary or proper to keep the Mortgaged Property in good condition and repair, (c) to appear and participate in any action or proceeding affecting or which may affect the security hereof or the rights or powers of Mortgagee, (d) to pay, purchase, contest or compromise any claim, charge, Lien or debt which in the judgment of Mortgagee may materially and adversely affect or appears to materially and adversely affect the security of this Mortgage or to be prior or superior hereto except for any claims, charges, Liens or debts being diligently contested in good faith by Mortgagor in appropriate proceedings in accordance with the terms of Sections 6.3 or 6.6 of the Credit Agreement, (e) to pay any Impositions except those Impositions being diligently contested in good faith by Mortgagor in appropriate proceedings in accordance with the terms of Section 6.3 of the Credit Agreement and to procure, maintain and pay premiums on the insurance policies referred to herein, and (f) in exercising such powers, to pay necessary expenses, including fees and disbursements of counsel or other necessary and desirable consultants. No such advance or performance shall be deemed to have cured any or Event of Default. Mortgagor shall, within ten (10) days after Mortgagee's written demand therefor, pay to Mortgagee an amount equal to all costs and expenses actually incurred by Mortgagee in accordance with the provisions set forth herein and in the other Loan Documents in connection with the exercise by Mortgagee of the foregoing rights including, without limitation, costs of evidence of title and of endorsements to the Closing Date Mortgage Policies, court costs, architectural or engineering studies, appraisals, surveys and architect's, engineer's, accountant's, receiver's, trustee's and attorneys' fees, together with interest thereon from the date of such expenditures at the Agreed Rate. All sums advanced and all expenses incurred by Mortgagee in accordance with the provisions set forth herein and in the other Loan Documents in connection with such advances or actions and all other sums advanced or expenses incurred by Mortgagee hereunder in accordance with the provisions set forth herein and in the other Loan Documents (whether required or optional and whether indemnified hereunder or not) shall be deemed Obligations owing by Mortgagor and shall bear interest from the date incurred or paid by Mortgagee until paid by Mortgagor at the Agreed Rate. All such amounts advanced or incurred, and all such interest thereon, shall be a part of the Obligations and shall be secured by this Mortgage. Mortgagee, upon making such advance, shall be subrogated to all of the rights of the person receiving such advance. XXIV-11 2.5 ACTION BY MORTGAGEE TO PROTECT INTERESTS; SUBROGATION; WAIVER OF ---------------------------------------------------------------- OFFSET. ------ A. ACTION BY MORTGAGEE TO PROTECT INTERESTS. If the title, interest or Lien, as the case may be, of Mortgagor or Mortgagee in and to the Mortgaged Property or any part thereof, or the security of this Mortgage, or the rights or powers of Mortgagee or Mortgagor hereunder, shall be attacked, either directly or indirectly, or if any legal proceedings are commenced involving Mortgagor (which proceedings require notice to Agent or the Lenders pursuant to Section 6.1(x) of the Credit Agreement), Mortgagee or the Mortgaged Property, Mortgagor shall promptly upon obtaining knowledge of the same give written notice thereof to Mortgagee and at Mortgagor's own expense shall take all reasonable steps diligently to defend against any such attack or proceedings, employing attorneys reasonably acceptable to Mortgagee; and if an Event of Default shall have occurred and be continuing, Mortgagee may take such independent action in connection therewith as it may in its discretion deem advisable, and all reasonable costs and expenses, including, without limitation, reasonable attorneys' fees and disbursements, actually incurred by Mortgagee in connection therewith shall be an Obligation owing by Mortgagor and payable to Mortgagee, within ten (10) days of Mortgagee's written demand for payment, and shall bear interest at the Agreed Rate. Mortgagor agrees that, if Mortgagor fails to perform any act which Mortgagor is required to perform under this Section 2.5A, Mortgagee may (after ten (10) days' written notice to Mortgagor), - ------------ but shall not be obligated to, perform or cause to be performed such act, and any expense actually incurred by Mortgagee in connection therewith shall be an Obligation owing by Mortgagor and payable to Mortgagee within ten (10) days of Mortgagee's written demand for payment, and shall bear interest at the Agreed Rate, and shall be secured by this Mortgage, and Mortgagee shall be subrogated to all of the rights of the party receiving such payment. The liabilities of Mortgagor as set forth in this Section 2.5 shall survive the termination of this ----------- Mortgage or of any other Loan Document. B. SUBROGATION. Mortgagor hereby waives any and all right to claim or recover against Mortgagee and the Lenders, and their respective officers, employees, agents and representatives, for loss of or damage to Mortgagor, the Mortgaged Property, Mortgagor's other property or the property of others under Mortgagor's control from any cause insured against or required to be insured against by the provisions of this Mortgage. C. WAIVER OF OFFSET. All sums payable by Mortgagor pursuant to this Mortgage shall be paid (except as otherwise expressly provided herein or in any other Loan Document) without notice, demand, counterclaim, setoff, deduction or defense and without abatement, suspension, deferment, diminution or reduction, and the Obligations and liabilities of Mortgagor hereunder shall in no way be released, discharged or otherwise affected (except as otherwise expressly provided herein) by reason of: (i) any damage to or destruction of or any condemnation or similar taking of the Mortgaged Property or any part thereof; (ii) any restriction or prevention of or interference by any third party with any use of the Mortgaged Property or any part thereof; (iii) any title defect or encumbrance or any eviction from the Premises or any part thereof by title paramount or otherwise; (iv) any bankruptcy, insolvency, reorganization, XXIV-12 composition, adjustment, dissolution, liquidation or other like proceeding relating to Mortgagee or the Lenders, or any action taken with respect to this Mortgage by any trustee or receiver of Mortgagee, or by any court, in any such proceeding; (v) any claim which Mortgagor has or might have against Mortgagee; (vi) any default or failure on the part of Mortgagee to perform or comply with any of the terms hereof or of any other agreement with Mortgagor; or (vii) any other occurrence whatsoever, whether or not Mortgagor shall have notice or knowledge of any of the foregoing. Except as expressly provided herein, Mortgagor waives all rights now or hereafter conferred by statute or otherwise to any abatement, suspension, deferment, diminution or reduction of any sum secured hereby and payable by Mortgagor. 2.6 RESTRICTIONS ON TRANSFER OF MORTGAGED PROPERTY BY MORTGAGOR. ----------------------------------------------------------- The financial stability and managerial and operational ability of Mortgagor are substantial and material considerations to Mortgagee and the Lenders in their agreement to accept the Notes from Borrower and other Loan Documents from Mortgagor and Borrower and to enter into the transactions contemplated thereby. Mortgagor understands and acknowledges that a Transfer of the Mortgaged Property may significantly and materially alter and reduce Mortgagee's security for the Obligations. Therefore, in order to induce Mortgagee and the Lenders to make the loans secured hereby, Mortgagor agrees that, except as expressly permitted under the terms of the Credit Agreement, Mortgagor will not Transfer the Mortgaged Property, or any portion thereof, without the prior written consent of Mortgagee. In the event of any Transfer of the Mortgaged Property, or any portion thereof, that is not expressly permitted under the terms of the Credit Agreement, or consented to by Mortgagee in writing, Mortgagee shall have the absolute right at its option, without prior demand or notice, to declare all of the Obligations immediately due and payable. Consent to one such Transfer shall not be deemed to be a waiver of the right to require consent to future or successive Transfers. If consent should be given to a Transfer and if this Mortgage is not released to the extent of the transferred portion of the Mortgaged Property by a writing signed by Mortgagee, as required by Applicable Law, and recorded in the proper city, town, county or parish records, then (unless otherwise provided in the Credit Agreement) any such Transfer shall be subject to this Mortgage and any such transferee shall assume all obligations hereunder and agree to be bound by all provisions contained herein. Any such assumption shall not, however, release Mortgagor or any maker or guarantor of the Obligations from any liability thereunder without the prior written consent of Mortgagee. This covenant shall run with the land and remain in full force and effect until all of the Obligations are fully paid (or this Mortgage is released of record), and Mortgagee may, without notice to Mortgagor, deal with any transferees with reference to the Obligations in the same manner as Mortgagor, without in any way altering or discharging Mortgagor's liability or the liability of any guarantor of Mortgagor with respect thereto. The provisions of this Section 2.6 shall apply to each and every Transfer of the ----------- Mortgaged Property or any portion thereof, regardless of whether or not Mortgagee has consented to or waived, by its action or inaction, its rights with respect to any previous Transfer. XXIV-13 2.7 INCORPORATION BY REFERENCE; FULL PERFORMANCE REQUIRED; SURVIVAL OF ------------------------------------------------------------------ WARRANTIES. ---------- Mortgagor hereby makes to Mortgagee all of the affirmative and negative covenants relating to the Mortgaged Property that are set forth in Sections 6 and 7 of the Credit Agreement, which affirmative and negative - ---------- - covenants are incorporated herein by reference as of the date hereof. All representations, warranties and covenants of Mortgagor made to Mortgagee in the Loan Documents or incorporated by reference therein shall run to the benefit of Mortgagee, shall survive the execution and delivery of this Mortgage and shall remain continuing obligations, warranties and representations of Mortgagor so long as any portion of the Obligations has accrued and remains outstanding and Mortgagor shall fully and faithfully satisfy and perform all such Obligations, representations, warranties and covenants as required by the terms of the Loan Documents. In the event of a conflict between the provisions of this Mortgage and the Credit Agreement, it is the intention of Mortgagor and Mortgagee that both such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of a conflict that cannot be resolved as aforesaid, the provisions of the Credit Agreement shall control and govern and Mortgagor shall comply therewith. 2.8 ADDITIONAL SECURITY. ------------------- No other security now existing, or hereafter taken, to secure the Obligations shall be impaired or affected by the execution of this Mortgage; and all additional security shall be taken, considered and held as cumulative. The taking of additional security, execution of partial releases of the security, or any extension of the time of payment or performance of the Obligations shall not diminish the force, effect or Lien of this Mortgage and shall not affect or impair the liability of any maker, surety, guarantor or endorser for the payment or performance of said Obligations. Neither the acceptance of this Mortgage nor its enforcement, whether by court action or pursuant to the power of sale or other powers herein contained, shall prejudice or in any manner affect Mortgagee's right, to realize upon or enforce any other security now or hereafter held by Mortgagee, it being agreed that Mortgagee shall be entitled to enforce this Mortgage and any other security now or hereafter held by Mortgagee in such order and manner as it may in its absolute discretion determine. XXIV-14 2.9 FURTHER ACTS. ------------ XXIV-15 Mortgagor shall do and perform all acts as required under Section 7.2 ----------- of the Credit Agreement or as necessary to keep valid and effective the Lien hereof and to carry into effect its objective and purposes, in order to protect the lawful owner and holder of this Mortgage and the other Obligations. Promptly upon request, from time to time, of Mortgagee and at Mortgagor's expense, Mortgagor shall execute, acknowledge and deliver to Mortgagee such other and further instruments and do such other acts as in the reasonable opinion of Mortgagee may be necessary or reasonably requested by Mortgagee to (a) grant to Mortgagee a first priority perfected Lien on all of the Mortgaged Property to secure all of the Obligations, (b) grant to Mortgagee, to the fullest extent permitted by Applicable Law, the right to foreclose on the Mortgaged Property nonjudicially, upon the occurrence and during the continuance of an Event of Default, (c) correct any defect or error which may be discovered in the contents of this Mortgage (including, without limitation, all exhibits and/or schedules hereto) or any other Loan Document or in the recording or filing of this Mortgage or any other Loan Document, (d) identify more fully and subject to the Liens created hereby and by the other Loan Documents any property intended by the terms hereof and of the other Loan Documents to be covered hereby and thereby (including any renewals, additions, substitutions, replacements or appurtenances to the Mortgaged Property), (e) assure the first priority of this Mortgage and of such Liens, and (f) otherwise effectuate the intent of this Mortgage. In the event of the acquisition by Mortgagor or any affiliate of Mortgagor of any greater estate in the Premises or in any other part of the Mortgaged Property or the acquisition by Mortgagor of any after acquired property as described in Granting Clause Twelfth, Mortgagor shall ----------------------- notify Mortgagee and, concurrently with the consummation of such acquisition, shall execute and record (and shall cause Grantor's affiliate, as the case may be, to execute and record) an instrument sufficient in Mortgagee's sole discretion to extend and spread the Lien of this Mortgage to encumber such acquired interest or after acquired interest as a first priority mortgage Lien. To the full extent permitted under Applicable Law and in accordance with the grants made by Mortgagor in Granting Clause Eleventh and Granting Clause Twelfth ------------------------ ----------------------- whether or not Mortgagor has executed and recorded the instrument described in the preceding sentence, this Mortgage shall automatically be a Lien on such acquired interest or after acquired interest. Upon request by Mortgagee, Mortgagor shall supply evidence of fulfillment of each of the covenants herein contained concerning which a request for such evidence has been made. Mortgagor hereby irrevocably appoints Mortgagee as its attorney-in-fact, coupled with an interest and with full power of substitution, to take the above actions and to perform such obligations on behalf of Mortgagor, at Mortgagor's sole expense, if Mortgagor fails to fully comply with Mortgagor's obligations under this Section ------- 2.9. Without limiting the generality of the foregoing, Mortgagor shall promptly - --- and, insofar as not contrary to Applicable Law, at Mortgagor's own expense, record, rerecord, file and refile in such offices, at such times and as often as may be necessary, this Mortgage, additional mortgages, deeds of trust and deeds to secure debt, and every other instrument in addition or supplemental hereto, including applicable financing statements, as may be necessary to create, perfect, maintain and preserve the Liens (and priority thereof) intended to be created hereby and by the other Loan Documents and the rights and remedies of Mortgagee hereunder and thereunder. Upon request by Mortgagee, Mortgagor shall supply evidence reasonably satisfactory to Mortgagee of fulfillment of each of the covenants herein contained concerning which a request for such evidence has been made. XXIV-16 2.10 OFFSITE IMPROVEMENTS. -------------------- Mortgagor shall not construct or install improvements or Equipment (as defined in Exhibit B hereto) necessary or desirable for the operation of the --------- Premises on real property or any interest in real property (for example, an easement, license or lease) that is not subject to the Lien of this Mortgage without the prior written consent of Mortgagee (which consent may be granted or withheld in Mortgagee's sole discretion), but only to the extent that: (a) the construction or installation of such improvements or Equipment on such other real property is commercially reasonable when compared to, and commercially preferable to, construction or installation on the real property that is subject to the Lien of this Mortgage; and (b) Mortgagor grants Mortgagee rights (including, but not limited to, easements or reciprocal easement agreements) with respect to such improvements, Equipment and land that are appurtenant to the Land encumbered by this Mortgage and are sufficient in Mortgagee's judgment (i) to enable Mortgagee and any future owner or holder of Mortgagor's interest in the Premises to enjoy the full and unrestricted use of such improvements and Equipment and (ii) to continue Mortgagee's first priority Lien on any such Equipment. Mortgagor's obligations under this Section 2.10 shall be full ------------ recourse obligations of Mortgagor and shall survive any assignment or foreclosure of this Mortgage, the acceptance by Mortgagee (or a nominee of Mortgagee) of a deed to any part of the Mortgaged Property in lieu of foreclosure or in connection with a plan of reorganization filed under Chapter 11 of the Bankruptcy Code, or the exercise by Mortgagee of any remedy set forth herein. 2.11 UTILITIES. --------- Mortgagor shall pay or cause to be paid prior to becoming delinquent all utility charges which are incurred for the benefit of the Mortgaged Property or which may become a Lien against the Mortgaged Property for gas, steam, electricity, telephone, water, sewer services and all other utilities furnished to the Mortgaged Property and all other assessments or charges of a similar nature, whether public or private, affecting or related to the Mortgaged Property or any portion thereof, whether or not such taxes, assessments or charges are or may become Liens thereon. 2.12 HAZARDOUS MATERIALS AND ENVIRONMENTAL LAWS. ------------------------------------------ Mortgagor shall exercise all due diligence in order to comply with any and all applicable Environmental Laws. Without limiting the foregoing, Mortgagor shall comply with the provisions of Section 6.7 of the Credit ----------- Agreement. 2.13 LEASEHOLD ESTATE. ---------------- This Section 2.13 shall apply only if Mortgagor's interest in either ------------ the Land or the Improvements is as the tenant under a leasehold estate at the Premises (the "SUBJECT LEASE"). If Mortgagor is a tenant under a Subject Lease, Mortgagor hereby covenants, represents and warrants to Mortgagee with respect to the Subject Lease as follows: XXIV-17 A. No default by Mortgagor as lessee has occurred and is continuing under the Subject Lease and no event has occurred which, with the passage of time or service of notice, or both would constitute an event of default under the Subject Lease. The Subject Lease is in full force and effect. Mortgagor has obtained from the lessor with respect to the Subject Lease all consents to this Mortgage required to be obtained from such lessor and Mortgagor has provided (or within 5 days from the date hereof shall provide) such lessor with all notices required to be given to such lessor with respect to this Mortgage together with copies of all documents required to be delivered to such lessor with respect to this Mortgage under the terms of the Subject Lease. B. All rents, additional rents, percentage rents and all other charges due and payable under the Subject Lease have been fully paid through a date no earlier than 30 days before the date hereof. C. The Subject Lease covers 100% of that part of the Land and Improvements that are not owned in fee by Mortgagor, and Mortgagor is the owner of the entire lessee's interest in and under the Subject Lease and has the right and authority under the Subject Lease to execute this Mortgage and to encumber Mortgagor's interest therein. D. Mortgagor shall, at its sole cost and expense, promptly and timely perform and observe all the terms, covenants and conditions required to be performed and observed by Mortgagor as lessee under the Subject Lease (including, but not limited to, the payment of all rent, additional rent, percentage rent and other charges required to be paid under the Subject Lease). E. If Mortgagor shall violate any of the covenants specified in Section 2.13D above, Mortgagor grants Mortgagee the right (but not the ------------- obligation), to take any action as may be necessary to prevent or cure any default of Mortgagor under the Subject Lease, if necessary to protect Mortgagee's interest hereunder, and Mortgagee shall have the right to enter all or any portion of the Premises at such times and in such manner as Mortgagee deems necessary, in order to prevent or to cure any such default. Mortgagee may exercise its rights under this Section 2.12E at any time ------------- after, but only after, Mortgagor shall have (i) received from the lessor under the Subject Lease or any other Person notice of such default, and (ii) failed to promptly commence curing such default. F. No action taken or payment or made by Mortgagee to prevent any default by Mortgagor under the Subject Lease shall remove or waive, as between Mortgagor and Mortgagee, the default which occurred hereunder by virtue of the default by Mortgagor under the Subject Lease. All sums actually expended by Mortgagee in accordance with the terms of this Section ------- 2.13 in order to cure any such default shall be paid by Mortgagor to ---- Mortgagee, within ten (10) days of Mortgagee's written demand, with interest thereon at the Agreed Rate. All such indebtedness shall be deemed to be secured by this Mortgage. XXIV-18 G. Mortgagor shall, promptly upon obtaining knowledge of the following events, notify Mortgagee in writing of (i) the occurrence of any material default by the lessor under the Subject Lease or the occurrence of any event which, with the passage of time or service of notice, or both, would constitute a material default by the lessor under the Subject Lease, and (ii) the receipt by Mortgagor of any notice (written or otherwise) from the lessor under the Subject Lease noting or claiming the occurrence of any default by Mortgagor under the Subject Lease or the occurrence of any event which, with the passage of time or service of notice, or both, would constitute a default by Mortgagor under the Subject Lease. Mortgagor shall deliver to Mortgagee a copy of any such written notice of default. H. Promptly upon demand by Mortgagee from time to time, Mortgagor shall use reasonable efforts (other than payment to the lessor) to obtain from the lessor under the Subject Lease and furnish to Mortgagee the estoppel certificate of such lessor stating the date through which rent has been paid and whether or not there are any defaults under its lease and specifying the nature of such claimed defaults, if any, and stating any other information that the lessor is obligated to provide. I. Mortgagor shall promptly notify Mortgagee, in writing, of any request made by either party to the Subject Lease for arbitration or appraisal proceedings pursuant to the Subject Lease and of the institution of any arbitration or appraisal proceedings, as well as of all proceedings thereunder, and shall promptly deliver to Mortgagee a copy of the determination of the arbitrators or appraisers in each such arbitration or appraisal proceeding. Mortgagee shall have the right (but not the obligation), following the delivery of written notice by Mortgagor, to participate in the appointment of any arbitrator or appraiser to be appointed by Mortgagor and (to the extent permitted under the Subject Lease) to participate (at Mortgagee's expense unless an Event of Default shall have occurred and be continuing, in which case at Mortgagor's expense) in such arbitration or appraisal proceedings in association with Mortgagor or on its own behalf as an interested party. Mortgagor shall promptly notify Mortgagee, in writing, upon learning of the institution of any legal proceedings involving obligations under the Subject Lease. Mortgagee may intervene (at Mortgagee's expense unless an Event of Default shall have occurred and be continuing, in which case at Mortgagor's expense) in any such legal proceedings and be made a party to them. Mortgagor shall promptly provide Mortgagee with a copy of any decision rendered in connection with such proceedings. J. Mortgagor shall promptly execute, acknowledge and deliver to Mortgagee such instruments as may reasonably be required to permit Mortgagee (subject to the provisions of Section 2.13E above) (i) to cure ------------- any default under the Subject Lease or (ii) to take such other action required to enable Mortgagee to cure or remedy the matter in default and preserve the security interest of Mortgagee under this Mortgage with respect to the Subject Lease. Mortgagor hereby irrevocably appoints Mortgagee as its true and lawful XXIV-19 attorney-in-fact, coupled with an interest and with full power of substitution, to do, in its name or otherwise, any and all acts and to execute any and all documents (in each case only upon Mortgagor's failure or refusal to do so) which are necessary to preserve any rights of Mortgagor under or with respect to the Subject Lease, including, without limitation, the right to effectuate any extension or renewal of the Subject Lease, or to preserve any rights of Mortgagor whatsoever in respect of any part of the Subject Lease. K. Mortgagor shall not, without Mortgagee's prior written consent, surrender, terminate, forfeit, or suffer or permit the surrender, termination or forfeiture of, or change, modify or amend in a material or adverse manner, the Subject Lease. Consent to one amendment, change, agreement or modification shall not be deemed to be a waiver of the right to require consent to other, future or successive amendments, changes, agreements or modifications. The acquisition by Mortgagor or any affiliate of Mortgagor of any lessor's interest in the Subject Lease or of any fee holder's interest in the property subject to the Subject Lease shall not require Mortgagee's consent and shall not be a breach of the covenants set forth in this Section 2.13K provided that: (i) such acquisition is ------------- accomplished by Mortgagor in such a manner so as to avoid a merger of the interests of lessor and lessee in the Subject Lease; and (ii) Mortgagor, concurrently with the consummation of such acquisition, executes and records an instrument sufficient in Mortgagee's sole discretion to extend and spread the Lien of this Mortgage to encumber such acquired interest as a first priority mortgage Lien. To the full extent permitted under Applicable Law and in accordance with the grant made by Mortgagor in Granting Clause Twelfth, whether or not Mortgagor has executed and recorded ----------------------- the instrument described in the preceding sentence, this Mortgage shall automatically be a Lien on such acquired interest. L. Notwithstanding anything to the contrary herein contained with respect to the Subject Lease: (i) The Lien of this Mortgage attaches to all of Mortgagor's rights and remedies at any time arising under or pursuant to Subsection 365(h) of the Bankruptcy Code, including, without limitation, all of Mortgagor's rights to remain in possession of the Land. (ii) Mortgagor shall not, without Mortgagee's written consent, elect to treat the Subject Lease as terminated under Subsection 365(h)(1) of the Bankruptcy Code. Any such election made without Mortgagee's prior written consent shall be void. If any lessor of the Subject Lease rejects the Subject Lease under Section 365 of the Bankruptcy Code, Mortgagor shall remain in possession of the Premises. Neither the Lien of this Mortgage nor Mortgagee's rights with respect to the Subject Lease shall be affected or impaired by any lessor's rejection of the Subject Lease under Section 365 of the Bankruptcy Code. XXIV-20 (iii) As security for the Obligations, Mortgagor hereby unconditionally assigns, transfers and sets over to Mortgagee all of Mortgagor's claims and rights to the payment of damages arising from any rejection by any lessor of the Subject Lease under the Bankruptcy Code. Mortgagee and Mortgagor shall proceed jointly or in the name of Mortgagor (and Mortgagor hereby irrevocably appoints Mortgagee as its attorney-in-fact, coupled with an interest and with full power of substitution, from and after the occurrence of an Event of Default, to proceed in the name of Mortgagor and to otherwise take such actions as Mortgagee may deem necessary or desirable) in respect of any claim, suit, action or proceeding relating to the rejection of the Subject Lease, including, without limitation, the right to file and prosecute any proofs of claim, complaints, motions, applications, notices and other documents in any case in respect of such lessor under the Bankruptcy Code. This assignment constitutes a present, irrevocable and unconditional assignment of the foregoing claims, rights and remedies, and shall continue in effect until this Mortgage has been released of record or all of the Obligations secured by this Mortgage shall have been satisfied and discharged in full. Any amounts received by Mortgagee or Mortgagor as damages arising out of the rejection of the Subject Lease as aforesaid shall be applied first to all reasonable costs and expenses of Mortgagee (including, without limitation, attorneys' fees and costs) incurred in connection with the exercise of any of its rights or remedies under this Section 2.13L and ------------- then in accordance with the other applicable provisions of this Mortgage. (iv) If, pursuant to Subsection 365(h)(2) of the Bankruptcy Code, Mortgagor seeks to offset, against the rent reserved in the Subject Lease, the amount of any damages caused by the nonperformance by the lessor thereunder of any of such lessor's obligations under the Subject Lease after the rejection by lessor of the Subject Lease under the Bankruptcy Code, Mortgagor shall, prior to effecting such offset, notify Mortgagee in writing of its intent so to do, setting forth the amounts proposed to be so offset, and, in the event Mortgagee objects, Mortgagor shall not effect any offset of the amounts so objected to by Mortgagee. If Mortgagee has failed to object as aforesaid within ten (10) days after notice from Mortgagor in accordance with the first sentence of this Section 2.13L(iv), Mortgagor may proceed to offset ----------------- the amounts set forth in Mortgagor's notice. (v) If any action, proceeding, motion or notice shall be commenced or filed in respect of any lessor or the Land or any portion thereof in connection with any case under the Bankruptcy Code, Mortgagee and Mortgagor shall cooperatively conduct and control any such litigation (provided that after the occurrence and during the continuance of an Event of Default, Mortgagee shall have the exclusive right (but not the obligation) to control such litigation, and Mortgagor hereby irrevocably appoints Mortgagee as its attorney-in- fact, coupled with an interest and with full power of substitution for such purpose) with counsel agreed upon between XXIV-21 Mortgagor and Mortgagee (or, if an Event of Default shall then have occurred and be continuing, counsel selected by Mortgagee) in connection therewith. Within ten (10) days after Mortgagee's written demand upon Mortgagor, Mortgagor shall pay to Mortgagee, as applicable, all reasonable costs and expenses (including reasonable attorneys' fees and costs) actually paid or incurred by Mortgagee in connection with the cooperative prosecution or conduct of any such proceedings. All such costs and expenses shall be secured by the Lien of this Mortgage. (vii) Mortgagor shall promptly, after obtaining knowledge thereof, notify Mortgagee orally of any filing by or against any lessor of a petition under the Bankruptcy Code. Mortgagor shall thereafter promptly give written notice of such filing to Mortgagee, setting forth any information available to Mortgagor as to the date of such filing, the court in which such petition was filed, and the relief sought therein. Mortgagor shall promptly deliver to Mortgagee, following its receipt thereof, copies of any and all notices, summonses, pleadings, applications and other documents received by Mortgagor in connection with any such petition and any proceedings relating thereto. M. The occurrence of any of the following events shall, at Mortgagee's option, constitute an "Event of Default" hereunder in which event Mortgagee shall have all of the rights and remedies available to it under Section 5 hereof: --------- (i) A breach or default under any material condition or obligation contained in the Subject Lease which is not cured within any applicable cure period provided therein to Mortgagor (provided, -------- however, that upon the occurrence and during the continuance of any ------- breach or default under any condition or obligation contained in the Subject Lease, and prior to the expiration of all applicable cure periods, Mortgagee shall have the cure rights set forth in Section ------- 2.13E of this Mortgage); ----- (ii) The occurrence of any event or condition which gives the lessor under the Subject Lease a right to terminate or cancel, as against Mortgagor, the Subject Lease and the expiration of any notice, grace or cure period with respect thereto; or (iii) Mortgagor's failure to permit Mortgagee and/or its representatives at all reasonable times upon reasonable prior written notice to make investigation or examination concerning Mortgagor's performance and observance of the terms, covenants and conditions of the Subject Lease. N. To the extent permitted by Applicable Law, the price payable by Mortgagor or any other party in the exercise of the right of redemption, if any (which right Mortgagor has waived), from any sale under or decree of foreclosure of this Mortgage shall include all rents and other amounts paid and other sums advanced by Mortgagee on behalf of XXIV-22 Mortgagor as the lessee under the Subject Lease in accordance with the provisions of this Mortgage and the other Loan Documents. O. Mortgagor hereby grants and assigns to Mortgagee a security interest in all prepaid rent and security deposits and all other security which the lessor under the Subject Lease may hold now or later for the performance of Mortgagor's obligations as the lessee under the Subject Lease. P. Mortgagor shall not, without Mortgagee's written consent, fail to exercise any option or right to renew or extend the term of the Subject Lease if such renewal or extension is necessary to extend the term of the Subject Lease to a date which is at least twelve (12) months after the Maturity Date (any such renewal or extension, a "REQUIRED EXTENSION"). Mortgagor shall effect each Required Extension at least six (6) months (or the earliest date permitted under the Subject Lease, if later) prior to the date of termination of any such option or right, shall give immediate written notice thereof to Mortgagee, and shall execute, acknowledge, deliver and record any document reasonably requested by Mortgagee to evidence the Lien of this Mortgage on such extended or renewed lease term; provided, however, Mortgagor shall not be required to effect any -------- ------- particular Required Extension to the extent Mortgagor shall have received the prior written consent of Mortgagee (which consent may be withheld by Mortgagee in its sole and absolute discretion) allowing Mortgagor to forego effecting such Required Extension. If Mortgagor shall fail to exercise any such option or right to effect any Required Extension as aforesaid, Mortgagee may exercise the option or right to effect any Required Extension (provided that unless an Event of Default shall have occurred and be continuing, Mortgagee shall have no right to determine the amount of rent payable under the Subject Lease during any such extension period without Mortgagor's prior written consent thereto, which consent shall not be unreasonably withheld or delayed) as Mortgagor's agent and attorney-in-fact pursuant to Section 2.13J of this Mortgage, or in Mortgagee's own name or ------------- in the name of and on behalf of a nominee of Mortgagee, as Mortgagee may determine in the exercise of its sole and absolute discretion. Q. Subject to the provisions of the Credit Agreement, Mortgagor shall not assign its interest in the Subject Lease or sublease all or any of the Mortgaged Property without the prior written consent of Mortgagee, which consent may be withheld by Mortgagee in its sole discretion. All subleases entered into by Mortgagor after the date of this Mortgage shall provide, and Mortgagor shall use reasonable efforts to ensure that all existing subleases modified, amended or renewed by Mortgagor after the date of this Mortgage shall provide, that such subleases are, at the option and election of Mortgagee, subordinate to the Lien of this Mortgage and any extensions, replacements and modifications of this Mortgage and the Obligations and that if Mortgagee forecloses under this Mortgage or enters into a new lease with the lessor under the Subject Lease whether or not pursuant to the provisions for a new lease, if any, contained in the Subject Lease, then the sublessee shall attorn to Mortgagee or its assignee(s) and the sublease will remain in full XXIV-23 force and effect in accordance with its terms notwithstanding the termination of the Subject Lease. R. Mortgagor hereby represents that the Subject Lease has not been amended, modified, extended, renewed, substituted or assigned except as described in Exhibit A-2 hereto and that Mortgagor has delivered to ----------- Mortgagee true, accurate and complete copies of all items noted on Exhibit ------- A-2. Upon the request of Mortgagee, Mortgagor shall deposit with Mortgagee --- the tenant's original fully executed copy of the Subject Lease, as further security to Mortgagee, until this Mortgage is released of record or all of the Obligations are fully paid and performed. Mortgagor hereby represents that the Subject Lease or a legally valid memorandum thereof has been properly filed or recorded in the city, town, county or parish records (as appropriate) in which the Land covered thereby is located and that the filing and recording data for the same is accurately set forth in Exhibit ------- A-2 hereto. --- S. Mortgagor shall not waive, excuse, condone or in any way release or discharge the lessor under the Subject Lease of or from such lessor's material obligations, covenants and/or conditions under the Subject Lease without the prior written consent of Mortgagee. The generality of the provisions of this Section 2.13 relating to the Subject ------------ Lease shall not be limited by other provisions of this Mortgage setting forth particular obligations of Mortgagor which are also required of Mortgagor with respect to the Subject Lease or the Premises. XXIV-24 Section 3 ASSIGNMENT OF RENTS AND LEASES 3.1 ASSIGNMENT OF RENTS AND LEASES. ------------------------------ In furtherance of and in addition to the assignment made by Mortgagor in Granting Clause Third of this Mortgage, Mortgagor hereby absolutely and --------------------- unconditionally assigns, sells, transfers and conveys to Mortgagee all of its right, title and interest in and to all Leases, whether now existing or hereafter entered into, and all of its right, title and interest in and to all Rents. It is the intention of Mortgagor and Mortgagee that this assignment be treated and construed as an absolute assignment and not an assignment for additional security only. So long as no Event of Default shall have occurred and be continuing, Mortgagor shall have a revocable license from Mortgagee to exercise all rights extended to the landlord under the Leases, including the right to observe, perform, comply with and discharge all of the obligations of the landlord thereunder, the right to demand and receive performance under the Leases, the right to enforce all rights and exercise all remedies under the Leases, the right to terminate or amend any Lease and the right to receive and collect all Rents and to hold the Rents in trust for use in the payment and performance of the Obligations and to otherwise use the same; provided, however, -------- ------- that such rights may be exercised by Mortgagor only to the extent they are not restricted under Section 7.9 of the Credit Agreement. The foregoing license is granted subject to the conditional limitation that no Event of Default shall have occurred and be continuing. Upon the occurrence and during the continuance of an Event of Default, whether or not legal proceedings have commenced, and without regard to waste, adequacy of security for the Obligations or solvency of Mortgagor, the license herein granted shall automatically expire and terminate, without notice by Mortgagee (any such notice being hereby expressly waived by Mortgagor). 3.2 NO LIMITATION OF RIGHTS. ----------------------- The assignment of Rents and Leases herein made shall not be construed to limit in any way Mortgagee's other rights hereunder, including the right to accelerate the Obligations upon an Event of Default. Monies received under the assignments herein made shall not be deemed to have been applied in payment of any portion of the Obligations unless and until such monies actually are applied thereto by Mortgagee. 3.3 SALE OF MORTGAGED PROPERTY. -------------------------- A. FREE AND CLEAR OF ASSIGNMENTS. Upon any sale of any of the Mortgaged Property by or for the benefit of Mortgagee pursuant to Section 5 --------- hereof, the Rents attributable to the part of the Mortgaged Property so sold shall be included in such sale and shall pass to the purchaser free and clear of (i) the assignment by Mortgagor in Granting Clause Third of this Mortgage and --------------------- (ii) the provisions of this Section 3. --------- XXIV-25 B. NO OBLIGATIONS ON MORTGAGEE. It is neither the intent nor the effect of this Mortgage nor the other Loan Documents (other than any Subordination, Non-Disturbance and Attornment Agreement between Mortgagee and any Tenant) to impose any obligation on Mortgagee, including (i) any liability under the covenant of quiet enjoyment contained in any Lease or contained in any Applicable Law, in the event of a sale of the Mortgaged Property or any part thereof pursuant to this Mortgage or (ii) any liability to any Tenant arising (whether in connection with the elimination of such Tenant's equity of redemption in the Mortgaged Property or otherwise) out of (A) the naming of such Tenant as a party defendant in any action to foreclose this Mortgage, or (B) the sale of the Mortgaged Property pursuant to the power of sale reserved to Mortgagee herein. Notwithstanding anything herein to the contrary, under no circumstances shall Mortgagee be subject to any offsets, claims or defenses which a Tenant might have against Mortgagor or any prior landlord with respect to any Lease, whether or not Mortgagee shall have succeeded to the interests of landlord under any such Lease. 3.4 TERM OF ASSIGNMENT. ------------------ The assignment and grant made in Granting Clause Third of this --------------------- Mortgage and in this Section 3 shall continue in effect until release of this --------- Mortgage of record or indefeasible payment in full of the Obligations. The execution of this Mortgage constitutes and evidences the irrevocable consent of Mortgagor to the entry upon and the taking possession of the Premises, or any part thereof, by Mortgagee pursuant to such grant in accordance with the terms set forth in this Mortgage and the terms hereof whether by foreclosure or other remedy and at Mortgagee's option and election, with or without application for a receiver. Mortgagor represents and warrants to Mortgagee that Mortgagee has taken all actions necessary to obtain, and Mortgagee shall (upon recordation of this Mortgage) have, as and to the extent permitted under Applicable Law, a valid and fully perfected, first priority, present assignment of the Rents arising out of the Leases and all security for such Leases, including cash or securities deposited as security under such Leases subject to the prior right of the Tenants making such deposits. Mortgagee has no obligation whatsoever in respect of security for any Leases except and only to the extent such security is actually delivered to Mortgagee, whether or not Mortgagor now has or previously had possession of such security. 3.5 PERFECTION UPON RECORDATION. --------------------------- Mortgagor acknowledges and agrees that, upon recordation of this Mortgage, Mortgagee's interest in the Rents shall be deemed to be fully perfected, ``choate" and enforced as to Mortgagor and all third parties, including, without limitation, any subsequently appointed trustee in any case under the Bankruptcy Code, without the necessity of (a) commencing a foreclosure action with respect to this Mortgage, (b) furnishing notice to Mortgagor or Tenants under the Leases, (c) making formal demand for the Rents, (d) taking possession of the Premises as a lender-in-possession, (e) obtaining the appointment of a receiver of the rents and profits of the Premises, (f) sequestering or impounding the Rents or (g) taking any other affirmative action. XXIV-26 3.6 BANKRUPTCY PROVISIONS. --------------------- Without limitation of the provisions of Section 4 hereof or the --------- absolute nature of the assignment of the Rents hereunder, Mortgagor and Mortgagee agree that (a) this Mortgage shall constitute a "security agreement" for purposes of Section 552(b) of the Bankruptcy Code, (b) the security interest created by this Mortgage extends to property of Mortgagor acquired before the commencement of a case in bankruptcy and to all amounts paid as Rents and (c) such security interest shall extend to all Rents acquired by the estate after the commencement of any case in bankruptcy. Without limitation of the absolute nature of the assignment of the Rents hereunder, to the extent Mortgagor (or Mortgagor's bankruptcy estate) shall be deemed to hold any interest in the Rents after the commencement of a voluntary or involuntary bankruptcy case, Mortgagor hereby acknowledges and agrees that such Rents are and shall be deemed to be "cash collateral" under Section 363 of the Bankruptcy Code. Mortgagor may not use the cash collateral without the consent of Mortgagee and/or an order of any bankruptcy court pursuant to 11 U.S.C. 363(c)(2), and Mortgagor hereby waives any right it may have to assert that such Rents do not constitute cash collateral. No consent by Mortgagee to the use of cash collateral by Mortgagor shall be deemed to constitute Mortgagee's approval, as the case may be, of the purpose for which such cash collateral was expended. XXIV-27 Section 4 SECURITY AGREEMENT 4.1 GRANT OF SECURITY; INCORPORATION BY REFERENCE. --------------------------------------------- This Mortgage shall, in addition to constituting a mortgage Lien as to those parts of the Mortgaged Property classified as real property (including fixtures to the extent they are real property), constitute a security agreement within the meaning of the Uniform Commercial Code or within the meaning of the common law with respect to those parts of the Mortgaged Property classified as personal property (including fixtures to the extent they are personal property). Mortgagor hereby grants Mortgagee a security interest in and to those parts of the Mortgaged Property classified as personal property (including (a) fixtures to the extent they are personal property and (b) personal property and fixtures that are leased, but only to the extent Mortgagor can grant to Mortgagee a security interest therein without breaching the terms of such lease) (collectively, the "PERSONAL PROPERTY COLLATERAL") for the benefit of Mortgagee to further secure the payment and performance of the Obligations and the performance of all of Mortgagor's Obligations, covenants and agreements under the other Loan Documents. Mortgagee shall have all rights granted to the Secured Party pursuant to the Security Agreement. The provisions set forth in the Security Agreement are hereby incorporated by reference into this Mortgage with the same effect as if set forth in full herein. In the event of a conflict between the provisions of Section 4 of this Mortgage and the Security Agreement, --------- it is the intention of Mortgagor and Mortgagee that both such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of a conflict that cannot be resolved as aforesaid, the provisions of the Security Agreement shall control and govern and Mortgagor shall comply therewith. 4.2 FIXTURE FILING FINANCING STATEMENTS. ----------------------------------- Portions of the Mortgaged Property are goods which are or are to become fixtures, and the real estate concerned is described in Exhibit A hereto, --------- Mortgagor expressly covenants and agrees that the filing of this Mortgage in the real property records of the county where the Premises is located shall operate, at the time of filing therein, as a financing statement filed as a fixture filing in accordance with Section 9-401(1)(b) of the Uniform Commercial Code of the state in which the Premises is located. The address of Mortgagor (the debtor) and the address of Mortgagee (the secured party) appear in Exhibit C --------- attached to this Mortgage. The name of the record owner of the Land appears in Exhibit A attached hereto. - --------- 4.3 MORTGAGEE AS SECURED PARTY. -------------------------- If and to the extent that Mortgagee shall act as the secured party for any security interest created in the Mortgaged Property, Mortgagor acknowledges and agrees that Mortgagee may do so. As such, Mortgagee shall have all the rights of the secured party, and shall observe all of the requirements of the secured party, contained in this Section 4 and the Security Agreement. --------- XXIV-28 Section 5 DEFAULTS AND REMEDIES 5.1 EVENTS OF DEFAULT. ----------------- The occurrence of any of the following events ("EVENTS OF DEFAULT") shall, as provided in the Credit Agreement, make all amounts then remaining unpaid on the Obligations due and payable, all without further demand, presentment, notice or other requirements of any kind, all of which are hereby expressly waived by Mortgagor, and this Mortgage and the Lien evidenced or created hereby shall be subject to foreclosure and may be foreclosed or the Mortgaged Property may be sold pursuant to the power of sale reserved to Mortgagee herein, in any manner provided for herein or provided for by law: A. Any "Event of Default" as defined in the Credit Agreement shall occur (after giving effect to any applicable notice or grace periods provided therein), including, without limitation, any such event caused by a failure to pay when due any fee due under the Credit Agreement or any installment of principal of or interest on the Obligations; or B. Any "Event of Default" described in Section 2.12M hereof ------------- shall occur, if Mortgagor is the tenant under a Subject Lease. 5.2 FIXTURES. -------- Upon the occurrence and during the continuance of any of the Events of Default, Mortgagee may, to the extent permitted under Applicable Law, elect to treat the fixtures included in the Mortgaged Property either as real property or as personal property, or both, and proceed to exercise such rights as apply thereto. With respect to any sale of real property included in the Mortgaged Property made under the powers of sale herein granted and conferred, Mortgagee may, to the extent permitted by Applicable Law, include in such sale any personal property and fixtures included in the Mortgaged Property and relating to such real property. XXIV-29 5.3 REMEDIES. -------- A. RIGHTS OF MORTGAGEE; RIGHTS OF ENTRY; RIGHTS OF SALE. Upon the occurrence and during the continuance of any of the Events of Default, in addition to all other powers, rights and remedies herein granted or by law or at equity conferred, Mortgagee, in its sole discretion and at its sole election and without further demand, may do any one or more of the following in any order or manner that Mortgagee elects, it being expressly understood that no remedy provided herein is intended to be exclusive of any other remedy provided herein or in any of the other Loan Documents, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given herein or now or hereafter existing under Applicable Law (including all rights and remedies provided under the applicable provisions of the laws of the state in which the Premises is located): (i) Mortgagee may either foreclose upon all or any portion of the Mortgaged Property or sell all or any portion of the Mortgaged Property pursuant to the power of sale granted to Mortgagee herein (the power of sale permitted and provided by applicable statute being hereby expressly granted by Mortgagor to Mortgagee) with respect to all or any portion of the Mortgaged Property, provided that Mortgagee may proceed -------- as to both real and personal property in accordance with its and their rights and remedies as to real property as required by Applicable Law, and no such sale shall affect any other rights which Mortgagee may have or enjoy at law or pursuant to this Mortgage, including, without limitation, the right to seek a personal or deficiency judgment against Mortgagor. And in addition Mortgagee shall have all of the rights and remedies of a mortgagee under a mortgage granted, conferred or permitted by Applicable Law, and shall, to the extent permitted by Applicable Law, have the right and power, but not the obligation, to enter upon and take immediate possession of the Premises or any part thereof, without interference from Mortgagor to exclude Mortgagor therefrom, to hold, use, operate, manage and control such real property, to make all such repairs, replacements, additions and improvements to the same as Mortgagee in its sole discretion deems necessary, and to demand, collect and retain the Rents as provided in Section 3 hereof. --------- (ii) Mortgagee, with respect to any or all of the Mortgaged Property, in lieu of or in addition to exercising any other power, right or remedy herein granted or by law or equity conferred, may, without notice, demand or declaration of default, which are hereby waived by Mortgagor, and without regard to the solvency of Mortgagor and without regard to the then value of the Mortgaged Property or waste, proceed by an action or actions in equity or at law for the seizure and sale of the Mortgaged Property or any part thereof, for the specific performance of any covenant or agreement herein contained or in aid of the execution of any power, right or remedy herein granted or by law or equity conferred, for the foreclosure or sale of the Mortgaged Property or any part thereof under the judgment or decree of any court of competent jurisdiction, for the appointment of a receiver (without any requirement to post a receiver's bond and without regard to the value of the Mortgaged XXIV-30 Property or solvency of Mortgagor) pending any foreclosure hereunder or the sale of any Mortgaged Property or any part thereof or for the enforcement of any other appropriate equitable or legal remedy. Such receiver shall have the power to collect the rents, issues, profits, earnings, and income from the Mortgaged Property and shall have all other powers which may be necessary or usual in such cases for the protection, possession, control, management and operation of the Mortgaged Property. Such receiver may apply the net income from the Mortgaged Property as payment of the Obligations secured hereby in the manner and order set forth in the applicable Loan Documents. Mortgagor agrees that a receiver may be appointed without any notice to Mortgagor whatsoever and hereby waives notice. (iii) Mortgagee shall have all of the rights and remedies of an assignee and secured party granted by Applicable Law, including the Uniform Commercial Code, and shall, to the extent permitted by Applicable Law, have the right and power, but not the obligation, to take possession of the Personal Property Collateral, and for that purpose Mortgagee may enter upon any premises on which any or all of the Personal Property Collateral is located and take possession of and operate such Personal Property Collateral or remove the same therefrom. Mortgagee, pursuant to Section 9- 501(4) of the Uniform Commercial Code, as such Section is currently constituted or may be hereafter amended, shall have the option of proceeding under the Uniform Commercial Code as to that portion of the Mortgaged Property constituting personal property or of proceeding as to the Mortgaged Property and without regard to the adequacy of Mortgagee's security for the Obligations, or any part or component thereof, including both the real and personal property, in accordance with Mortgagee's rights and remedies in respect of the real property. Mortgagee may require Mortgagor to assemble the Personal Property Collateral and make it available to Mortgagee at a place to be designated by Mortgagee which is reasonably convenient to both parties. The following presumptions shall exist and shall be deemed conclusive with regard to the exercise by Mortgagee of any of its remedies with respect to the Personal Property Collateral: XXIV-31 (a) If notice is required by Applicable Law, ten (10) days' prior written notice of the time and place of any public sale or of the time after which any private sale or any other intended disposition thereof is to be made shall be reasonable notice to Mortgagor. No such notice is necessary if such property is perishable, threatens to decline speedily in value or is of a type customarily sold on a recognized market. (b) Without in any way limiting the right and authority of Mortgagee to sell or otherwise dispose of Personal Property Collateral in a commercially reasonable manner, the following, or any of them, shall be considered commercially reasonable: (1) Mortgagee may hold a public sale of the Personal Property Collateral in New York, New York or in the city, town or county where the Personal Property Collateral is located or in the city, town or county where the Premises to which such Personal Property Collateral relates, if any, is located, after having provided Mortgagor with ten (10) days' notice of such sale and after having published notice of such sale by an advertisement not less than three inches in height and one column in width in a newspaper of general circulation where the Personal Property Collateral is located or where the Premises to which such Personal Property Collateral relates, if any, is located, as Mortgagee determines to be appropriate (which advertisement may be placed in the "classified" section), for a period of not less than five issues commencing not more than ten days prior to the sale; (2) the Personal Property Collateral may be sold for cash; and (3) Mortgagee or any other person owning, directly or indirectly, any interest in any of the Obligations may be a purchaser at such sale. (c) If Mortgagee in good faith believes that the Securities Act of 1933 or any other state or Federal law prohibits or restricts the customary manner of sale or distribution of any of such property, Mortgagee may sell such property privately in a commercially reasonable manner or in any other commercially reasonable manner deemed advisable by Mortgagee at such price or prices as Mortgagee determines in the sole discretion of Mortgagee. Mortgagor recognizes that such prohibition or restriction may cause such property to have less value than it otherwise would have and that, consequently, such sale or disposition by Mortgagee may result in a lower sales price than if the sale were otherwise held. (iv) Mortgagee shall, subject to any mandatory requirements of Applicable Law, sell or have sold the Mortgaged Property or interests therein or any part thereof at one or more sales, as an entirety or in separate parcels, at such place or places and otherwise in such manner and upon such notice as may be required by law or by this Mortgage, or, in the absence of any such requirement, as Mortgagee may deem appropriate. Mortgagee shall make a conveyance to the purchaser or purchasers thereof without, to the extent permitted by Applicable Law, any warranties express or implied. Subject to Applicable XXIV-32 Law, Mortgagee may postpone the sale of such Mortgaged Property or interests therein or any part thereof by public announcement at the time and place of such sale, and from time to time thereafter may further postpone such sale by public announcement made at the time of sale fixed by the preceding postponement. Sale of a part of the Mortgaged Property or interests therein or any defective or irregular sale hereunder will not exhaust the power of sale, and sales may be made from time to time until all such property is sold without defect or irregularity or the Obligations are paid and performed in full. Mortgagee shall have the right to appoint one or more auctioneers or attorneys-in-fact to act in conducting the foreclosure sale and executing a deed to the purchaser. It shall not be necessary for any of the Mortgaged Property at any such sale to be physically present or constructively in the possession of Mortgagee and, subject to Applicable Law, Mortgagor shall deliver all of the Mortgaged Property to the purchaser at such sale. If it should be impossible or impracticable to take actual delivery of the Mortgaged Property, then the title and right of possession to the Mortgaged Property shall pass to the purchaser at such sale as completely as if the same had been actually present and delivered. (v) Mortgagee may, personally or by its agents or attorneys, take such steps to protect and enforce its rights whether by action, suit or proceeding in equity or at law for the specific performance of any covenant, condition or agreement in the Subsidiary Guaranty, in this Mortgage or in any of the other Loan Documents or in aid of the execution of any power herein or therein granted, or sale of the Mortgaged Property as herein permitted or for any foreclosure hereunder, or for the enforcement of any other appropriate legal or equitable remedy or otherwise as Mortgagee shall elect. (vi) In the event Mortgagor shall fail to pay any amounts due and owing in accordance with the terms of this Mortgage, the Subsidiary Guaranty or the other Loan Documents, Mortgagee, at its right and option, may institute an action or proceeding at law or in equity for the collection of any sums due and unpaid and may prosecute any such action or proceeding to judgment or final decree. Mortgagee may enforce any such judgment or final decree against Mortgagor as provided in this Mortgage, and against any guarantor of the Obligations, as provided in any guarantee. Mortgagee may collect moneys adjudged or decreed to be payable to Mortgagee and shall be entitled to recover such judgment either before, after or during the pendency of any proceeding for the enforcement of the provisions of this Mortgage or any such guarantee. The right of Mortgagee to recover such judgment shall not be affected by any entry or sale, by the exercise of any other right, power or remedy provided by and for the enforcement of the provisions of this Mortgage or of the Loan Documents or the foreclosure of the Lien hereof or sale of the Mortgaged Property hereunder. In case of insolvency or bankruptcy proceedings against Mortgagor or any reorganization or liquidation proceedings, Mortgagee shall be entitled to prove the whole amount of Obligations due and owing under this Mortgage and any of the other Loan Documents without deducting therefrom any proceeds obtained from the sale of the whole or any part of the Mortgaged Property; provided, however, that in no instance shall Mortgagee receive a greater -------- ------- amount than the Obligations and any other payments, XXIV-33 charges or costs due and owing to Mortgagee under any of the Loan Documents from the aggregate amount of the proceeds of the sale of the Mortgaged Property and the distribution from the estates of Mortgagor. B. RIGHT TO PURCHASE. Mortgagee (or any other person owning, directly or indirectly, any interest in any of the Obligations) and its agents and attorneys shall have the right to become the purchaser at any sale made pursuant to the provisions of this Section 5.3 and shall have the right to ----------- credit upon the amount of the bid made therefor the amount payable to it out of the net proceeds of such sale. All other sales shall be, to the extent permitted by Applicable Law, on a cash basis. Recitals contained in any conveyance to any purchaser at any sale made hereunder will conclusively establish the truth and accuracy of the matters therein stated, including without limitation nonpayment of the Obligations and advertisement and conduct of such sale in the manner provided herein or provided by law. Mortgagor does hereby ratify and confirm all legal acts that Mortgagee may do in carrying out the provisions of this Mortgage. C. CONVEYANCE OF TITLE UPON SALE. Any sale of the Mortgaged Property or any part thereof in accordance with the provisions of this Section ------- 5.3 will operate to divest all right, title, interest, claim and demand of - --- Mortgagor in and to the property sold and will be a perpetual bar against Mortgagor. Nevertheless, if requested by Mortgagee so to do, Mortgagor shall join in the execution, acknowledgement and delivery of all proper conveyances, assignments and transfers of the property so sold. Subject to Applicable Law, any purchaser at a foreclosure sale will receive immediate possession of the property purchased, and Mortgagor agrees that if Mortgagor retains possession of the property or any part thereof subsequent to such sale, Mortgagor will be considered a tenant at sufferance of the purchaser, and will, if Mortgagor remains in possession after demand to remove, be guilty of forcible detainer and will be subject to eviction and removal, forcible or otherwise, with or without process of law, and all damages to Mortgagor by reason thereof are hereby expressly waived by Mortgagor. D. WAIVER OF RIGHTS AND DEFENSES. Mortgagor acknowledges that it is aware of and has had the advice of counsel of its choice with respect to its rights under Applicable Law with respect to this Mortgage, the Obligations and the Mortgaged Property. Nevertheless, Mortgagor hereby (i) waives and relinquishes (to the maximum extent permitted by Applicable Law) and (ii) agrees that Mortgagor shall not (subject to any mandatory requirements of Applicable Law) at any time hereafter have or assert, any right under any Applicable Law pertaining to: marshalling, whether of assets or Liens, the sale of property in the inverse order of alienation, the exemption of homesteads, the administration of estates of decedents, appraisement, valuation, stay, extension, redemption, statutory right of redemption, the maturing or declaring due of the whole or any part of the Obligations, notice of intention of such maturing or declaring due, other notice (whether of defaults, advances, the creation, existence, extension or renewal of any of the Obligations or otherwise, except for rights to notices expressly granted in the Credit Agreement, herein or in the other Loan Documents), subrogation, or abatement, suspension, deferment, diminution or reduction of any of the Obligations (including, without limitation, set-off), now or hereafter in force. XXIV-34 E. RIGHT TO SUBORDINATE. Mortgagee, at its option, is authorized to foreclose this Mortgage or sell the Mortgaged Property or any portion thereof, subject to the rights of any tenants of the Premises, and the failure to make any such tenants parties to any such foreclosure or sale proceedings and to foreclose their rights will not be, nor be asserted by Mortgagor to be, a defense to any proceedings instituted by Mortgagee to collect the Obligations. F. RIGHT TO PRESERVE OBLIGATIONS. Mortgagee shall, to the extent permitted by Applicable Law, have the option to proceed with foreclosure or to exercise the power of sale in satisfaction of any installment or part of the Obligations that has not been paid or performed without declaring the whole of the Obligations as immediately mature, and such foreclosure or sale may be made subject to the unmatured part of the Obligations, and it is agreed that such foreclosure, if so made, shall not in any manner affect the unmatured part of the Obligations, but as to such unmatured part of the Obligations, this Mortgage, the Subsidiary Guaranty and the Credit Agreement shall remain in full force and effect just as though no foreclosure or sale had been made. Several foreclosures or sales may be made without exhausting the right of foreclosure or the power of sale for any unmatured part of the Obligations, it being the purpose to provide for a foreclosure and sale of the security for any matured portion of the Obligations without exhausting the power of foreclosure and the power to sell the Mortgaged Property for any other part of the Obligations. G. NO WAIVER. No delay or omission of Mortgagee to exercise any right or power accruing upon any Event of Default shall impair any such right or power, or shall be construed to be a waiver of any such right or power or any such Event of Default or an acquiescence thereto. Every power and remedy provided by this Mortgage may be exercised, from time to time, as often as may be deemed expedient by Mortgagee. Nothing in this Mortgage, the Subsidiary Guaranty or any of the other Loan Documents shall affect the obligation of Mortgagor to pay and perform the Obligations in the manner and at the time and place, respectively, expressed therein. H. RIGHT TO DISCONTINUE PROCEEDINGS. If Mortgagee shall have proceeded to enforce any right or remedy under this Mortgage by foreclosure, entry or otherwise and such proceedings shall have been discontinued or abandoned for any reason or such proceedings shall have resulted in a final determination adverse to Mortgagee, then and in every such case Mortgagor and Mortgagee shall be restored to their former positions and rights hereunder, and all rights, power and remedies of Mortgagee shall continue as if no such proceedings had occurred or had been taken. XXIV-35 I. NOTICES TO THIRD PARTIES. Mortgagee shall have the right, but not the obligation, to notify franchisors or ground lessors of any Event of Default or any exercise of remedies by Mortgagee hereunder, and Mortgagee shall have the right, but not the obligation, to notify other third parties of any Event of Default or exercise of remedies by Mortgagee hereunder, whether or not Mortgagee has agreed with any franchisor, ground lessor or other third party to provide such notice. 5.4 COSTS AND EXPENSES. ------------------ All costs and expenses (including, without limitation, reasonable attorneys' fees, legal expenses, title premiums, title report and work charges, filing fees, general intangible taxes and mortgage, mortgage registration, transfer, stamp and other excise taxes) actually incurred by Mortgagee in perfecting, protecting, or enforcing its rights hereunder, whether or not an Event of Default shall have occurred, shall be payable by Mortgagor within ten (10) days after written demand by Mortgagee accompanied by (upon Mortgagor's request) such reasonable documentation of such costs and expenses as is reasonably available to Mortgagee, as the case may be, and shall bear interest at the Agreed Rate from the date such cost or expense is incurred until the date of payment. All such costs, expenses and interest, shall be part of the Obligations and shall be secured by this Mortgage. 5.5 ADDITIONAL RIGHTS OF MORTGAGEE. ------------------------------ Mortgagee shall have the right, at its election, to exercise any and all other remedies in the Subsidiary Guaranty, in the Credit Agreement or in any of the Loan Documents or available at law or in equity, including, but not limited to, the additional rights if any set forth on Schedule I attached hereto ---------- and by this reference incorporated herein. 5.6 APPLICATION OF PROCEEDS. ----------------------- A. The proceeds of any sale of the Mortgaged Property or any part thereof made pursuant to this Section 5 shall be applied as follows: --------- FIRST: to the payment of all costs and expenses incident to the enforcement of this Mortgage, including, a reasonable compensation to the agents, attorneys and in-house counsel of Mortgagee; SECOND: to the payment or prepayment of the Obligations, in such order as Mortgagee shall elect; and THIRD: the remainder, if any, after full and final payment of the Obligations shall be paid to Mortgagor or such other person or persons as may be entitled thereto by law; XXIV-36 provided, however, that if Applicable Law require such proceeds to be paid or - -------- ------- applied in a manner other than as set forth above in this Section 5.6A, then ------------ such proceeds shall be paid or applied in accordance with such Applicable Law. B. Upon any sale made under the powers of sale herein granted and conferred, the receipt of Mortgagee will be sufficient discharge to the purchaser or purchasers at any sale for the purchase money, and such purchaser or purchasers and the heirs, devisees, personal representatives, successors and assigns thereof will not, after paying such purchase money and receiving such receipt of Mortgagee, be obligated to see to the application thereof or be in any way answerable for any loss, misapplication or non-application thereof. Section 6 INDEMNIFICATION Pursuant to and in accordance with the provisions set forth more fully in Section 10.3 of the Credit Agreement, Mortgagor shall defend, indemnify, pay and hold harmless Mortgagee and the other Indemnitees (as defined in the Credit Agreement) from and against any and all claims, liabilities, losses, damages, penalties, fines, forfeitures, judgments, and expenses or other Obligations of any kind or nature whatsoever (including reasonable fees and disbursements of counsel to such Indemnitees) incurred on account of any matter or thing or alleged action or failure to act by Mortgagee, whether in suit or not, arising out of the operation, leasing, management, maintenance, repair, use or occupancy of the Premises (should Mortgagee elect to enter upon and assume the same upon an Event of Default), the construction of Improvements on or about the Premises, any accident, injury, death or damage to any Person or property occurring in, on or about the Premises or any street, drive, sidewalk, curb or passageway adjacent thereto, any misappropriation by Mortgagor of any prepayments of Rent or Security Deposits paid or payable by Mortgagor pursuant to this Mortgage, prior to payment in full of the Obligations of Mortgagor to Mortgagee or in connection therewith, except to the extent that such suit, claim or damage is caused by the gross negligence or willful misconduct of Mortgagee. XXIV-37 Section 7 TERMINATION If all of the Obligations shall be paid in full pursuant to the terms and conditions of this Mortgage and the other Loan Documents, or if this Mortgage shall be released of record in accordance with the provisions of the Credit Agreement or the other Loan Documents, then Mortgagee shall, promptly after the request of Mortgagor, execute, acknowledge and deliver to Mortgagor proper instruments evidencing the termination and release of this Mortgage. Mortgagor shall pay all reasonable legal fees and other expenses incurred by Mortgagee for preparing and reviewing such instruments and the execution and delivery thereof, and Mortgagee may require payment of the same prior to delivery of such instruments. Upon the receipt by Mortgagor of terminations or releases signed by Mortgagee, and in recordable form and evidencing the termination of this Mortgage, Mortgagor shall promptly and at its own expense record or file such terminations or releases in each of the cities, towns, counties and parishes, as appropriate, in which portions of the Mortgaged Property may be located, in such a manner so as to effect a release of all of the Mortgaged Property of record. Upon the request of Mortgagee, Mortgagor shall promptly deliver to Mortgagee evidence reasonably satisfactory to Mortgagee of such recordation or filing. The obligations of Mortgagor under this Section 7 shall survive the termination of this Mortgage. - --------- Section 8 MISCELLANEOUS COVENANTS AND AGREEMENTS 8.1 CUMULATIVE RIGHTS; WAIVERS; MODIFICATIONS. ----------------------------------------- Each and every right, power and remedy hereby granted to Mortgagee shall be cumulative and not exclusive, and each and every right, power and remedy whether specifically hereby granted or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by Mortgagee, and the exercise of any such right, power or remedy will not be deemed a waiver of the right to exercise, at the same time or thereafter, any other right, power or remedy. No delay or omission by Mortgagee in the exercise of any right, power or remedy will impair any such right, power or remedy or operate as a waiver thereof or of any other right, power or remedy then or thereafter existing. All changes to and modifications of this Mortgage must be in writing and signed by Mortgagor and Mortgagee. 8.2 PARTIAL RELEASES. ---------------- No release from the Lien of this Mortgage of any part of the Mortgaged Property by Mortgagee shall in any way alter, vary or diminish the force or effect of this Mortgage on the balance of the Mortgaged Property or the priority of the Lien of this Mortgage on the balance of the Mortgaged Property. XXIV-38 8.3 SEVERABILITY. ------------ In case any provision in or obligation under this Mortgage shall be invalid, illegal or unenforceable in any jurisdiction or under any set of circumstances, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction or under any other set of circumstances, shall not in any way be affected or impaired thereby. If any Lien evidenced or created by this Mortgage is invalid or unenforceable, in whole or in part, as to any part of the Obligations, or is invalid or unenforceable, in whole or in part, as to any part of the Mortgaged Property, such portion, if any, of the Obligations as is not secured by all of the Mortgaged Property hereunder shall be paid prior to the payment of the portion of the Obligations secured by all of the Mortgaged Property, and all payments made on the Obligations (including, without limitation, cash and/or property received in connection with sales of Mortgaged Property pursuant to Section 5 hereof) shall, unless prohibited by Applicable --------- Law or unless Mortgagee, in its sole and absolute discretion, otherwise elects, be deemed to have been first paid on and applied to payment in full of the unsecured or partially secured portion of the Obligations, and the remainder to the secured portion of the Obligations. 8.4 SUBROGATION. ----------- This Mortgage is made with full substitution and subrogation of Mortgagee in and to all covenants and warranties by others heretofore given or made in respect of the Mortgaged Property or any part thereof. If any or all of the proceeds of the indebtedness secured hereby have been used to extinguish, extend or renew any indebtedness heretofore existing against all or any portion of the Mortgaged Property or to satisfy any indebtedness or obligation secured by a Lien of any kind (including Liens securing the payment of any taxes), such proceeds have been advanced by Mortgagee at Mortgagor's request and, to the extent of such funds so used, the indebtedness and obligations in this Mortgage shall be subrogated to and extend to all of the rights, claim, Liens, titles and interests heretofore existing against the Mortgaged Property (or such portion thereof) to secure the indebtedness or obligation so extinguished, paid, extended or renewed, and the former rights, claims, Liens, titles and interests, if any, shall not be waived but rather shall be continued in full force and effect and in favor of Mortgagee and shall be merged with the Lien created herein as cumulative security for the repayment of the indebtedness and satisfaction of the Obligations, but the terms of the Loan Documents shall govern and control the relationship between Mortgagor and Mortgagee. XXIV-39 8.5 MORTGAGEE'S POWERS. ------------------ Without affecting the liability of any other Person liable for the payment of any obligations herein mentioned and without affecting the Lien of this Mortgage upon any portion of the Mortgaged Property not then or theretofore released as security for the full amount of all unpaid Obligations, from time to time, regardless of consideration and without notice to or consent by the holder of any subordinate Lien, right, title or interest in or to the Mortgaged Property, Mortgagee may, (a) release any persons liable, (b) extend the maturity or alter any of the terms of any such Obligation, (c) modify the interest rate payable on the principal balance of the Obligations, (d) grant other indulgences, (e) release or reconvey, or cause to be released or reconveyed at any time at Mortgagee's option any parcel, portion or all of the Mortgaged Property, (f) take or release any other or additional security for any obligations herein mentioned, or (g) make compositions or other arrangements with debtors in relation thereto. 8.6 ENFORCEABILITY OF MORTGAGE. -------------------------- This Mortgage is deemed to be and may be enforced from time to time as an assignment, chattel mortgage, contract, deed of trust, deed to secure debt, financing statement, real estate mortgage, or security agreement, and from time to time as any one or more thereof, as is appropriate under Applicable Law. A carbon, photographic or other reproduction of this Mortgage or any financing statement in connection herewith shall be sufficient as a financing statement for any and all purposes. 8.7 INTEREST. -------- NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, THE AMOUNT OF INTEREST REQUIRED HEREUNDER OR UNDER THE CREDIT AGREEMENT, THE NOTES OR ANY OF THE OTHER LOAN DOCUMENTS SHALL BE LIMITED TO THE MAXIMUM AMOUNT IN ACCORDANCE WITH SECTION [** _____ **] OF THE CREDIT AGREEMENT. ONE OF THE PURPOSES OF THIS PARAGRAPH IS TO PROVIDE RECORD NOTICE OF THE RIGHT OF MORTGAGEE TO INCREASE OR DECREASE THE INTEREST RATE ON ANY OF THE OBLIGATIONS IN ACCORDANCE WITH THE TERMS OF THE LOAN DOCUMENTS WHERE THE TERMS AND PROVISIONS OF SUCH LOAN DOCUMENTS PROVIDE FOR A VARIABLE INTEREST RATE. XXIV-40 8.8 CHOICE OF LAW. ------------- Insofar as permitted by otherwise Applicable Law, this Mortgage and the Obligations shall be and the other Loan Documents provide that they are to be construed under and governed by the laws of the State of New York without regard to conflict of law rules and principles; provided, however, that the laws -------- ------- of the place in which the Mortgaged Property is located shall apply to the extent, and only to the extent, necessary to permit Mortgagor to create the Lien of this Mortgage and to permit Mortgagee to perfect the Lien of this Mortgage and to enforce or realize upon their rights and remedies hereunder with respect to such Mortgaged Property. 8.9 COUNTERPARTS. ------------ This Mortgage and any amendments, waivers, consents or supplements hereto or in connection herewith may be executed and acknowledged in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature and acknowledgement pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature and acknowledgement pages are physically attached to the same document. Mortgagee shall also have the option to exercise all rights and remedies available to Mortgagee hereunder and under Applicable Law as though each counterpart hereof were a separate mortgage, deed of trust, deed to secure debt, chattel mortgage or other security instrument covering only the portions of the Mortgaged Property located in the city, town, county or parish wherein such counterpart is recorded. 8.10 RECORDING REFERENCES. -------------------- Unless otherwise specified in Exhibit A hereto, all recording --------- references in Exhibit A are to the official real property records of the city, --------- town, county or parish, as appropriate, in which the Land is located. XXIV-41 8.11 NOTICES. ------- All notices, requests and demands to be made hereunder shall be made in accordance with Section 10.8 of the Credit Agreement. 8.11 SUCCESSORS AND ASSIGNS. ---------------------- This Mortgage shall be the joint and several obligation of Mortgagor and all of its heirs, devisees, representatives, trustees, successors and assigns, including successors in interest of Mortgagor in and to any part of the Mortgaged Property, and all references in this Mortgage to Mortgagor shall be deemed to include all of the foregoing Persons. This Mortgage shall be assignable by Mortgagee in accordance with the provisions for assignment of the Loans set forth in the Credit Agreement and shall inure to the benefit of Mortgagee, and all of its heirs, successors, substitutes and assigns including, without limitation, (a) any other Eligible Assignee under the terms of the Credit Agreement, and (b) any and all other banks, lending institutions and parties which may participate in the indebtedness evidenced by the Notes or any of them (all such banks, lending institutions and parties who participate in the indebtedness evidenced by the Notes or any of them being referred to herein as the "PARTICIPANTS"). The Participants may, by agreement among them, provide for and regulate the exercise of their rights and remedies hereunder, but Mortgagor and all others shall be entitled to rely on the releases, waivers, consents, approvals, notifications and other acts of Mortgagee, without inquiry into any such agreements or the existence of required consents or approvals of the Participants therefor. As used herein, the term "MORTGAGEE" shall mean, at any particular time, any Person holding any interest of Mortgagee hereunder (as provided in and subject to the provisions of Sections 9.5 and 10.1 of the Credit Agreement) at that time including, without limitation, any Eligible Assignee designated as Agent under the Credit Agreement. Any waiver, consent, approval, notification or other action required or permitted to be obtained from or taken by Mortgagee may be obtained from or taken by the agent or agents of Mortgagee appointed from time to time for that purpose. Mortgagor and all others shall be entitled to rely on the waivers, consents, approvals, notifications and other acts of Mortgagee. As of the date of this Mortgage, Mortgagee is the Person identified as Mortgagee in the introductory paragraph of this Mortgage. Notwithstanding any other provision contained herein, if any property interest granted by this Mortgage does not vest on the execution and delivery of this Mortgage, it shall vest, if at all, no later than 20 years and 364 days after the death of the last surviving descendant of Joseph P. Kennedy (the late father of the former President of the United States) who is alive on the execution and delivery of this Mortgage. 8.13 EXPENSES. -------- The provisions set forth in Section 10.2 of the Credit Agreement are incorporated herein by this reference and shall apply with the same force and effect as if the terms of such section was set forth herein in full. XXIV-42 8.14 NONFOREIGN ENTITY. ----------------- Section 1445 of the Internal Revenue Code of 1986, as amended (the "INTERNAL REVENUE CODE") provides that a transferee of a U.S. real property interest must withhold tax if the transferor is a foreign person. To inform Mortgagee that the withholding of tax will not be required in the event of the disposition of the Premises, or any portion thereof, pursuant to the terms of this Mortgage, Mortgagor hereby certifies, under penalty of perjury, that: (i) Mortgagor is not a foreign corporation, foreign partnership, foreign trust or foreign estate, as those terms are defined in the Internal Revenue Code and the regulations promulgated thereunder; and (ii) Mortgagor's U.S. employer identification number is _______________; and (iii) Mortgagor's principal place of business is [** _______ **]. It is understood that Mortgagee may disclose the contents of this certification to the Internal Revenue Service and that any false statement contained herein could be punished by fine, imprisonment or both. Mortgagor covenants and agrees to execute such further certificates, which shall be signed under penalty of perjury, as Mortgagee shall reasonably require. The covenant set forth herein shall survive the foreclosure of the Lien of this Mortgage or acceptance of a deed in lieu thereof. 8.15 PURPOSE OF THE LOANS. -------------------- Mortgagor hereby represents and agrees that the Loans evidenced or guaranteed by the Loan Documents and secured by this Mortgage are being obtained for business or commercial purposes, and the proceeds thereof will not be used for personal, family, residential, household or agricultural purposes. 8.16 NO JOINT VENTURE OR PARTNERSHIP. ------------------------------- The relationship created hereunder or under the other Loan Documents is that of creditor/debtor. The Lenders individually and collectively, do not owe any fiduciary or special obligation to Mortgagor and/or any of Borrower's partners, agents, or representatives. Nothing herein or in any other Loan Document is intended to create a joint venture, partnership, tenancy-in-common, or joint tenancy relationship between Mortgagor, any other Loan Party or Subsidiary thereof and Agent and the Lenders nor to grant the Agent or the Lenders any interest in the Mortgaged Property other than that of mortgagee or lender. XXIV-43 8.17 AMENDMENTS AND WAIVERS. ---------------------- No amendment, modification, termination or waiver of any provision of this Mortgage or consent to any departure by any Loan Party therefrom, shall in any event be effective without the written concurrence of Mortgagee. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on Mortgagor in any case shall entitle Mortgagor to any other or further notice or demand in similar or other circumstances. 8.18 COVENANTS AND AGREEMENTS RUN WITH LAND. -------------------------------------- All of Mortgagor's covenants and agreements hereunder shall run with the land. 8.19 STATEMENTS BY MORTGAGOR. ----------------------- Mortgagor shall, within ten (10) days after written notice thereof from Mortgagee, deliver to Mortgagee a written statement stating the outstanding principal amount of the Guarantied Obligations under the Subsidiary Guaranty, any accrued and unpaid interest thereon and any other amounts secured by this Mortgage and stating whether any offset or defense then known to Mortgagor after inquiry exists against such principal and interest. 8.20 NON-WAIVER. ---------- A. CERTAIN ACTIONS NOT A RELEASE OF MORTGAGOR. Mortgagor shall not be relieved of Mortgagor's obligation to pay and perform the Obligations at the time and in the manner provided in the Subsidiary Guaranty and the other Loan Documents by reason of, and the rights of Mortgagee hereunder shall not be affected by, (i) any failure of Mortgagee to comply with any request of Mortgagor or any guarantor to take any action to foreclose this Mortgage or otherwise enforce any of the provisions of the Subsidiary Guaranty, the Credit Agreement or any other Loan Document, (ii) any release, regardless of consideration, of the whole or any part of the Mortgaged Property or any other security for the Obligations, (iii) any alteration, extension, renewal, change, modification, release, amendment, compromise or cancellation, in whole or in part, of any term, covenant or provision of any of the Loan Documents, including any increase or decrease in the principal amount of the Obligations or any increase or decrease in the rate of interest applicable thereto or any extension of time for payment thereof, or (iv) any agreement or stipulation between Mortgagee and any subsequent owner or owners of the Mortgaged Property or other Person extending the time of payment or otherwise modifying or supplementing the terms of this Mortgage, the Subsidiary Guaranty, the Credit Agreement or any other Loan Document, without first having obtained the consent of Mortgagor, and in the latter event, Mortgagor shall continue to be obligated to pay and perform the Obligations at the time and in the manner provided in the Subsidiary Guaranty and the other Loan Documents, as so extended, modified and supplemented, unless expressly released and discharged from such obligation by Mortgagee in writing. XXIV-44 B. PRIORITY OVER SUBORDINATE LIENS. Without affecting the liability of any other Person liable for the payment and performance of the Obligations and without affecting the Lien of this Mortgage or of any other Loan Document upon any portion of the Mortgaged Property not then or theretofore released as security for the payment and performance in full of all of the Obligations, from time to time, regardless of consideration and without notice to or consent by the holder of any subordinate Lien, encumbrance, right, title or interest in or to the Mortgaged Property, Mortgagee may, (i) release any persons liable for the payment or performance of the Obligations, (ii) extend the maturity or alter any of the terms of any of the Obligations as provided in the Loan Documents, (iii) modify the interest rate payable on the principal balance of the Obligations as provided in the Loan Documents, (iv) grant other indulgences, (v) release or reconvey, or cause to be released or reconveyed at any time at Mortgagee's option any parcel, portion or all of the Mortgaged Property, (vi) take or release any other or additional security for the Obligations herein mentioned, or (vii) make compositions or other arrangements with debtors in relation thereto. 8.21 SURVIVAL OF OBLIGATIONS. ----------------------- This Mortgage shall continue to secure the entire Obligations until the entire Obligations are paid in full or until this Mortgage has been released of record by Mortgagee pursuant to the terms of the Credit Agreement or any of the other Loan Documents. 8.22 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ---------------------------------------------- ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST MORTGAGOR ARISING OUT OF OR RELATING TO THE SUBSIDIARY GUARANTY, THIS MORTGAGE OR ANY OTHER LOAN DOCUMENT, OR ANY OBLIGATIONS THEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS MORTGAGE, MORTGAGOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY: (i) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (ii) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (iii) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO MORTGAGOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 10.8 OF THE CREDIT AGREEMENT; XXIV-45 (iv) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER MORTGAGOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (v) AGREES THAT MORTGAGEE RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST MORTGAGOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (vi) AGREES THAT THE PROVISIONS OF THIS SECTION 8.22 RELATING TO ------------ JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. 8.23 WAIVER OF JURY TRIAL. -------------------- EACH OF THE PARTIES TO THIS MORTGAGE HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THE SUBSIDIARY GUARANTY, THIS MORTGAGE OR ANY OTHER LOAN DOCUMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR THE LENDER/GUARANTOR RELATIONSHIP THAT IS BEING ESTABLISHED HEREBY AND THEREBY. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each party hereto acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already relied on this waiver in entering into this Mortgage and the other Loan Documents, and that each will continue to rely on this waiver in their related future dealings. Each party hereto further warrants and represents that it has reviewed this waiver with its legal counsel and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 8.23 AND EXECUTED BY EACH OF THE ------------ PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS MORTGAGE OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS MADE UNDER THE CREDIT AGREEMENT OR GUARANTIED UNDER THE SUBSIDIARY GUARANTY. In the event of litigation, this Mortgage may be filed as a written consent to a trial by the court. XXIV-46 8.24 MORTGAGEE'S ADDITIONAL RIGHTS. ----------------------------- The provisions of Schedule I attached hereto are made a part hereof. ---------- LXIX. MISCELLANEOUS COVENANTS AND AGREEMENTS [TO COME.] [ THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY ] XXIV-47 IN WITNESS WHEREOF, Mortgagor has on the date set forth in the acknowledgement hereto, effective as of the date first above written, caused this instrument to be duly EXECUTED AND DELIVERED. Mortgagor: --------- [** SEALY OWNERSHIP ENTITY **], a _____________ By: By: By:______________________________________ Name: Title: S-1 STATE OF NEW YORK ) ) SS.: COUNTY OF NEW YORK ) ON THE ____ DAY OF ___________ IN THE YEAR 1997 BEFORE ME, THE UNDERSIGNED, A NOTARY PUBLIC IN AND FOR SAID STATE, PERSONALLY APPEARED __________________, PERSONALLY KNOWN TO ME OR PROVED TO ME ON THE BASIS OF SATISFACTORY EVIDENCE TO BE THE INDIVIDUALS WHOSE NAMES ARE SUBSCRIBED TO THE WITHIN INSTRUMENT AND ACKNOWLEDGED TO ME THAT THEY EXECUTED THE SAME IN THEIR CAPACITIES, AND THAT BY THEIR SIGNATURES ON THE INSTRUMENT, THE INDIVIDUALS EXECUTED THE INSTRUMENT. __________________________________________________ (SIGNATURE AND OFFICE OF INDIVIDUAL TAKING ACKNOWLEDGEMENT) STATE OF NEW YORK ) ) SS.: COUNTY OF NEW YORK ) ON THE ____ DAY OF __________ IN THE YEAR 1997 BEFORE ME, THE UNDERSIGNED, A NOTARY PUBLIC IN AND FOR SAID STATE, PERSONALLY APPEARED ______________, PERSONALLY KNOWN TO ME OR PROVED TO ME ON THE BASIS OF SATISFACTORY EVIDENCE TO BE THE INDIVIDUAL WHOSE NAME IS SUBSCRIBED TO THE WITHIN INSTRUMENT AND ACKNOWLEDGED TO ME THAT HE EXECUTED THE SAME IN HIS CAPACITY, AND THAT BY HIS SIGNATURE ON THE INSTRUMENT, THE INDIVIDUAL EXECUTED THE INSTRUMENT. __________________________________________________ (SIGNATURE AND OFFICE OF INDIVIDUAL TAKING N-1 EXHIBIT A --------- LEGAL DESCRIPTION OF LAND The Name of the Record Owner of the Land is [** SEALY OWNERSHIP ENTITY. **] [See Attached Page(s) for Legal Description] Exh. A-1 EXHIBIT B --------- DESCRIPTION OF ADDITIONAL MORTGAGED PROPERTY All of Mortgagor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Mortgagor now has or hereafter acquires an interest, now or hereafter located upon or attached to or to be incorporated in (regardless of where located) the Premises or appurtenant thereto, or used or to be used in connection with the present or future use, construction upon, leasing, sale, operation or occupancy of the Premises: (1) all right, title and interest of Mortgagor in and to all buildings, structures, fixtures, tenant improvements and other improvements of every kind and description now or hereafter located in or on the Premises, including all Materials, water, sanitary and storm sewers, drainage, electricity, steam, gas, telephone and other utility facilities, parking areas, roads, driveways, walks and other site improvements; and all additions and betterments thereto and all renewals, substitutions and replacements thereof, owned or to be owned by Mortgagor or in which Mortgagor has or shall acquire an interest, to the extent of Mortgagor's interest therein (all of the foregoing being referred to herein, collectively, as the "IMPROVEMENTS"); (2) all supplies and materials in which Mortgagor has an interest arising in conjunction with Mortgagor's ownership or operation of the Premises, including any supplies or materials intended for incorporation or installation in the Improvements, prior to the time the same are so incorporated or installed, including building materials and components (all of the foregoing being referred to herein, collectively, as the "MATERIALS"); (3) all equipment, machinery, apparatus, fittings, fixtures, furniture, furnishings and articles of personal property of every kind and nature whatsoever owned or leased (but only to the extent Mortgagor can grant to Mortgagee a security interest therein without breaching the terms of such lease) now or in the future by Mortgagor, and either located upon the Premises, or any part thereof, or used in connection with the present use, maintenance, operation or occupancy of the Improvements as a manufacturing plant and/or warehouse or any other future occupancy or use of the Improvements, including all heating, lighting, laundry, incinerating, compacting, loading, unloading, landscaping, garage and power equipment and supplies, tools, engines, pipes, pumps, tanks, motors, generators, conduits, switchboards, plumbing, fittings, lifting, cleaning, fire prevention, fire extinguishing, refrigerating, ventilating, and communications apparatus, rack and shelving systems, air cooling and air conditioning apparatus, elevators, escalators, shades, awnings, screens, storm doors and windows, carpeting, computers, software, telephone switchboards, partitions, ducts, compressors, cables, boilers, stokers, furnaces, tables, desks, chairs, telephones, bathroom fixtures, cleaning equipment and supplies, and all additions, substitutions and Exh. B-1 replacements thereof, wherever located, together with all attachments, components, parts, equipment and accessories installed thereon or affixed thereto and all of Mortgagor's present and future "goods", "equipment" and "fixtures" (as such terms are defined in the Uniform Commercial Code) and other personal property, including without limitation any such personal property and fixtures which are leased (but only to the extent Mortgagor can grant to Mortgagee a security interest therein without breaching the terms of such lease), and all repairs, attachments, betterments, renewals, replacements, substitutions and accessions thereof and thereto (all of the foregoing being referred to herein, collectively, as the "EQUIPMENT"); Exh. B-2 (4) all right, title and interest now owned or hereafter acquired by Mortgagor in and to all options and rights of first refusal to purchase or lease any Mortgaged Property or any portion thereof or interest therein, and in and to any greater estate in the Premises or any other part of any Mortgaged Property including, but not limited to all rights of first refusal to purchase the fee estate in the Land (all of the foregoing being referred to herein as the "OPTIONS"); (5) all the right, in the name and on behalf of Mortgagor, to appear in and defend any action or proceeding brought with respect to any Mortgaged Property, and to commence any action or proceeding to protect the interest of Mortgagor in any Mortgaged Property (collectively, the "PROCEEDING RIGHTS"); (6) subject to the terms of the Credit Agreement, all of Mortgagor's right and power to encumber further any Mortgaged Property or any part thereof (the "ENCUMBRANCE RIGHTS"); (7) all rights, titles, interests, estates or other claims, both in law and in equity, which Mortgagor now has or may hereafter acquire in the Premises or in and to any greater estate in the Premises or in and to any greater estate in any Mortgaged Property (the "GREATER ESTATE RIGHTS"); (8) all prepaid rent and security deposits and all other security which the lessor under any ground lease may hold now or later for the performance of Mortgagor's obligations as the lessee under any such ground lease ("SECURITY DEPOSITS"); (9) subject to the terms of Section 6.4 of the Credit Agreement, all insurance policies and the proceeds thereof, now or hereafter in effect with respect to the Premises or any other Mortgaged Property, including, without limitation, any and all title insurance proceeds, and all unearned premiums and premium refunds, accrued, accruing or to accrue under insurance policies, and all awards made for any taking of or damage to all or any part of the Premises or any other Mortgaged Property by eminent domain, or by any purchase in lieu thereof, and all awards resulting from a change of grade of streets or for severance damages, and all other proceeds of the conversion, voluntary or involuntary, of any Mortgaged Property into cash or other liquidated claims, and all judgments, damages, awards, settlements and compensation (including interest thereon) heretofore or hereafter made to the present and all subsequent owners of any Mortgaged Property or any part thereof for any injury to or decrease in the value thereof for any reason (collectively, the "INSURANCE/CONDEMNATION PROCEEDS"); (10) all right, title and interest of Mortgagor as landlord in and to all leaseholds and all leases, subleases, licenses, franchises, concessions or grants of other possessory interests, tenancies, and any other agreements affecting the use, possession or occupancy of the Premises (or any other part of any Mortgaged Property) or any part thereof, whether now or Exh. B-3 hereafter existing or entered into (including, without limitation, any use or occupancy arrangements created pursuant to Section 365(d) of the Bankruptcy Code or otherwise in connection with the commencement or continuance of any bankruptcy, reorganization, arrangement, insolvency, dissolution, receivership or similar proceedings, or any assignment for the benefit of creditors, in respect of any tenant or occupant of any portion of the Premises (or any other part of any Mortgaged Property)) and all amendments, modifications, supplements, extensions or renewals thereof, and all guaranties thereof or of leasing commissions, whether now or hereafter existing and all amendments, modifications, supplements, extensions or renewals thereof, (all of the foregoing being collectively referred to as the "LEASES"), and all rents, issues, profits, royalties (including all oil and gas or other hydrocarbon substances), earnings, receipts, revenues, accounts, accounts receivable, security deposits and other deposits (subject to the prior right of the tenants making such deposits) and income, including, without limitation, fixed, additional and percentage rents, vending receipts, service charges, telephone charges, and all other fees, charges, accounts and other payments for the use or occupancy of facilities and/or the services rendered and goods provided in connection therewith, and all operating expense reimbursements, reimbursements for increases in taxes, sums paid by tenants to Mortgagor to reimburse Mortgagor for amounts originally paid or to be paid by Mortgagor or Mortgagor's agents or affiliates for which such tenants were liable, as, for example, tenant improvements costs in excess of any work letter, lease takeover costs, moving expenses and tax and operating expense pass-throughs for which a tenant is solely liable, parking, maintenance, common area, tax, insurance, utility and service charges and contributions, proceeds of sale of electricity, gas, heating, air- conditioning and other utilities and services, deficiency rents and liquidated damages, and other benefits now or hereafter derived from any portion of the Premises or otherwise due and payable or to become due and payable as a result of any ownership, use, possession, occupancy or operation thereof and/or services rendered, goods provided and business conducted in connection therewith (including any payments received pursuant to Section 502(b) of the Bankruptcy Code or otherwise in connection with the commencement or continuance of any bankruptcy, reorganization, arrangement, insolvency, dissolution, receivership or similar proceedings, or any assignment for the benefit of creditors, in respect of any tenant or other occupants of any portion of the Premises and all claims as a creditor in connection with any of the foregoing) and all cash or security deposits, advance rentals, and all deposits or payments of a similar nature relating thereto, now or hereafter, including during any period of redemption, derived from the Premises or any other portion of any Mortgaged Property and all proceeds from the cancellation, surrender, sale or other disposition of the Leases (all of the foregoing being referred to collectively, as the "RENTS") and the right to receive and apply the Rents to the payment of the Obligations, subject to the right hereinafter given to Mortgagor to collect the Rents; (11) the right to enforce, whether at law or in equity or by any other means, all terms, covenants and provisions of the Leases (collectively, the "LEASE PROVISIONS"); Exh. B-4 (12) all impounds paid by Mortgagor pursuant to the provisions of the Mortgage and all refunds or rebates of real and personal property taxes or charges in lieu of taxes, heretofore or now or hereafter assessed or levied against the Premises or any other part of any Mortgaged Property, including interest thereon, and the right to receive the same, whether such refunds or rebates relate to fiscal periods before or during the term hereof (collectively, the "REFUNDS"); (13) any loan commitment for financing of the Improvements, including refinancing of any existing loans, and all amounts to be advanced to or on behalf of Mortgagor thereunder (collectively, the "FINANCING COMMITMENTS"); (14) all motor vehicle equipment in all of its forms, wherever located, now or hereafter existing (including, but not limited to, all trucks, tractors, trailers, forklifts and automobiles), and all parts thereof (whether or not at any time of determination incorporated or installed therein or attached thereto, and including, without limitation, spare parts and tires), and all additions and accessions to, and replacements for, any of the foregoing Mortgaged Property (any and all such motor vehicle equipment, parts, additions, accessions and replacements being the "ROLLING STOCK"); (15) any and all accounts receivable and rights to payment for use or occupancy of space or for goods sold or leased or for services rendered, whether or not yet earned by performance, arising from the operation of the Improvements (including the use or occupancy thereof) or any other facility on the Premises, including, without limitation, (a) all accounts arising from the operation of any Improvements (specifically including any accounts receivable) and (b) all rights to receive payment under Leases, all substitutions therefor, proceeds thereof (whether cash or non-cash, movable or immovable, tangible or intangible) received upon the sale, exchange, transfer, collection or other disposition or substitution thereof and any and all of the foregoing and proceeds therefrom (all of the foregoing being referred to herein, collectively, as the "PAYMENT RIGHTS"); (16) subject to the terms of the Credit Agreement, all accounts, goods, contract rights, chattel paper, documents, instruments, general intangibles, accounts receivable, other rights to payment of any nature and other rights and obligations of any kind and all rights in, to and under all security agreements, pledges, chattel mortgages, leases and other contracts securing or otherwise relating to any such accounts, goods, contract rights, chattel paper, documents, instruments, general intangibles, accounts receivable, other rights to payment of any nature or other obligations (any and all such accounts, goods, contract rights, chattel paper, documents, instruments, general intangibles, accounts receivable, other rights to payment of any nature and other obligations, together with the Payment Rights being the "ACCOUNTS", and any and all such security agreements, pledges, chattel mortgages, leases and other contracts being the "RELATED CONTRACTS"); Exh. B-5 (17) all franchise agreements, management agreements, agreements for the acquisition of the Mortgaged Property or any portion thereof, license agreements and all similar future agreements, as each such agreement may be amended, supplemented, replaced or otherwise modified from time to time (said agreements, as so amended, supplemented, replaced or otherwise modified, being referred to herein individually as an "ASSIGNED RELATED AGREEMENT" and collectively as the "ASSIGNED RELATED AGREEMENTS"), including without limitation (i) all rights of Mortgagor to receive moneys due or to become due under or pursuant to the Assigned Related Agreements, (ii) all rights of Mortgagor to receive proceeds of any insurance, indemnity, warranty or guaranty with respect to the Assigned Related Agreements, (iii) all claims of Mortgagor for damages arising out of any breach of or default under the Assigned Related Agreements, and (iv) all rights of Mortgagor to terminate, amend, supplement, modify or exercise rights or options under the Assigned Related Agreements, to perform thereunder and to compel performance and otherwise exercise all remedies thereunder; (18) all abstracts of title, plans, specifications, operating manuals, computer programs, computer data, maps, surveys, studies, reports, appraisals, architectural, engineering and construction drawings and contracts, or whatever kind or character, whether now or hereafter existing, relating to the Premises (all of the foregoing being referred to herein as the "SPECIFICATIONS"); (19) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Mortgaged Property or are otherwise necessary or helpful in the collection thereof or realization thereupon (collectively, the "RECORDS"); (20) at such times and to the extent the granting of a security interest therein is permitted by Applicable Law, all approvals, authorizations, building permits, certifications, entitlements, exemptions, franchises, licenses, orders, variances, plat plan approvals, environmental approvals (including, without limitation, an environmental impact statement or report if required under Applicable Law), air pollution authorities to construct and permits to operate, sewer and waste discharge permits, national pollutant discharge elimination system permits, water permits, zoning and land use entitlements and all other permits, whether now existing or hereafter issued to or obtained by or on behalf of Mortgagor, that relate to or concern in any way the Premises and are given or issued by any governmental or quasi- governmental authority, whether now existing or hereafter created (as the same may be amended, modified, renewed or extended from time to time, and including all substitutions and replacements therefor) (collectively, the "PERMITS"); (21) subject to the terms of the Credit Agreement, all proceeds, products, rents and profits of or from any and all of the foregoing Mortgaged Property and, to the extent not Exh. B-6 otherwise included, all payments under insurance (whether or not Mortgagee is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Mortgaged Property. For purposes hereof, the term "PROCEEDS" includes whatever is receivable or received when Mortgaged Property or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary; provided, however, that in no event shall the Mortgaged Property include, and no - -------- ------- Mortgagor shall be deemed to have granted a security interest in, any of Mortgagor's rights or interests in any agreement to which Mortgagor is a party or any of its rights or interests thereunder to the extent but only to the extent that such a grant would result in a breach of the terms of, or constitute a default under, any such agreement, and the other party to such agreement has not consented to the granting of such security interest in such agreement (other than to the extent that any such term would be rendered ineffective pursuant to Section 9-318(4) of the Uniform Commercial Code of any relevant jurisdiction or any other Applicable Law (including the Bankruptcy Code) or principles of equity); and provided further, that immediately upon the ineffectiveness, lapse -------- ------- or termination of any such provision, the Mortgaged Property shall include and Mortgagor shall be deemed to have granted a security interest in, all such rights or interests in the applicable Mortgaged Property as if such provision had never been in effect. The term "Premises" means the Premises described in the Mortgage to which this Exhibit B is attached. - --------- Exh. B-7 EXHIBIT C --------- UCC INFORMATION DEBTOR: - ------ Name: [** Sealy Ownership Entity **] Corporate Structure: Notice Address: Principal Place of Business: SECURED PARTY: - ------------- Secured Party acts as Agent for the Lenders (the "LENDERS") party from time to time to the Credit Agreement dated as of even date herewith among [** _____ **] the Lenders and Secured Party, as it may hereafter be amended, restated, replaced, supplemented or otherwise modified from time to time. Information regarding the security interest held by the Lenders, for which Secured Party acts as Agent, may be obtained by contacting Secured Party at the address set forth above. Exh. C-8 SCHEDULE I MORTGAGEE'S ADDITIONAL RIGHTS [To Come] Sch.I-1 EXHIBIT XXV [FORM OF COLLATERAL ACCESS AGREEMENT] RECORDING REQUESTED BY: O'Melveny & Myers LLP AND WHEN RECORDED MAIL TO: O'Melveny & Myers LLP 153 East 53rd Street New York, New York 10022 Attn: _____________________ Re: [Name of Company] - -------------------------------------------------------------------------------- Space above this line for recorder's use only REAL PROPERTY HOLDER'S WAIVER AND CONSENT AGREEMENT This REAL PROPERTY HOLDER'S WAIVER AND CONSENT AGREEMENT (this "AGREEMENT") is dated as of ___________, [199_][200_] and entered into by _________________________, a ____________________ ("REAL PROPERTY HOLDER"), to and for the benefit of MORGAN GUARANTY TRUST COMPANY OF NEW YORK, a ___________________ having offices at ______________________________ ("ADMINISTRATIVE AGENT"), as administrative agent for the financial institutions ("LENDERS") which are or may hereafter become parties to the Credit Agreement (as hereinafter defined). R E C I T A L S - - - - - - - - 9.1 ____________________, a _______________ corporation ("COMPANY"), has possession of and occupies all or a portion of the property described on Exhibit A annexed hereto (the "PREMISES"). --------- 9.2 Company's interest in the Premises [arises under the lease agreement (the "LEASE")][is subject to the [mortgage][deed of trust] (the "MORTGAGE")] more particularly described on Exhibit B annexed hereto, --------- pursuant to which Real Property Holder has rights, upon the terms and conditions set forth therein, to take possession of, and otherwise assert control over, the Premises. Sch.I-1 9.3 Administrative Agent and Lenders have entered into that certain Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT") with [Company], [Sealy Mattress Company, an Ohio corporation of which Company is a subsidiary ("BORROWER")], Sealy Corporation, a Delaware corporation ("HOLDINGS"), and Company has executed [a guaranty,] a security agreement and other collateral documents in relation to the Credit Agreement. 9.4 [Company's guaranty of] the extensions of credit made by Lenders to [Company] [Borrower] under the Credit Agreement will be secured, in part, by all raw materials, work-in-process and finished goods inventory of Company (including, without limitation, all inventory of Company now or hereafter located on the Premises (the "INVENTORY")) and all equipment, machinery and other goods used in Company's business (including, without limitation, all equipment of Company now or hereafter located on the Premises (the "EQUIPMENT" and, together with the Inventory, the "COLLATERAL")). 9.5 Administrative Agent has requested that Real Property Holder execute this Agreement as a condition to the extension of credit to [Company] [Borrower] under the Credit Agreement. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Real Property Holder hereby represents and warrants to, and covenants and agrees with, Administrative Agent as follows: 1. Real Property Holder hereby (a) waives and releases unto Administrative Agent and its successors and assigns any and all rights granted by or under any present or future laws to levy or distraint for rent or any other charges which may be due to Real Property Holder against the Collateral, and any and all other claims, liens and demands of every kind which it now has or may hereafter have against the Collateral, and (b) agrees that any rights it may have in or to the Collateral, no matter how arising (to the extent not effectively waived pursuant to clause (a) of this paragraph 1), shall be second and subordinate to the rights of Administrative Agent in respect thereof. Real Property Holder acknowledges that the Collateral is and will remain personal property and not fixtures even though it may be affixed to or placed on the Premises. 2. Real Property Holder certifies that (a) Real Property Holder is the [landlord under the Lease][beneficiary under the Mortgage], (b) the [Lease][Mortgage] is in full force and effect and has not been amended, modified, or supplemented except as set forth on Exhibit B annexed hereto, (c) --------- there is no defense, offset, claim or counterclaim by or in favor of Real Property Holder against Company under the [Lease][Mortgage] or against the obligations of Real Property Holder under the [Lease][Mortgage], (d) no notice of default has been given under or in connection with the [Lease][Mortgage] which has not been cured, and Real Property Holder has no knowledge of Sch.I-2 the occurrence of any other default under or in connection with the [Lease][Mortgage], and (e) except as disclosed to Administrative Agent, no portion of the Premises is encumbered in any way by any deed of trust or mortgage lien or ground or superior lease. 3. Real Property Holder consents to the installation or placement of the Collateral on the Premises, and Real Property Holder grants to Administrative Agent a license to enter upon and into the Premises to do any or all of the following with respect to the Collateral: assemble, have appraised, display, remove, maintain, prepare for sale or lease, repair, transfer, or sell (at public or private sale). In entering upon or into the Premises, Administrative Agent hereby agrees to indemnify, defend and hold Real Property Holder harmless from and against any and all claims, judgments, liabilities, costs and expenses incurred by Real Property Holder caused solely by Administrative Agent's entering upon or into the Premises and taking any of the foregoing actions with respect to the Collateral. Such costs shall include, without limitation, any damage to the Premises made by Administrative Agent in severing and/or removing the Collateral therefrom. 4. Real Property Holder agrees that it will not prevent Administrative Agent or its designee from entering upon the Premises at all reasonable times to inspect or remove the Collateral. In the event that Real Property Holder has the right to, and desires to, obtain possession of the Premises [(either through expiration of the Lease or termination thereof due to the default of Company thereunder)] [(through the exercise of its rights under the Mortgage upon a default by Company thereunder)], Real Property Holder will deliver notice (the "REAL PROPERTY HOLDER'S NOTICE") to Administrative Agent to that effect. Within the 45 day period after Administrative Agent receives the Real Property Holder's Notice, Administrative Agent shall have the right, but not the obligation, to cause the Collateral to be removed from the Premises. During such 45 day period, Real Property Holder will not remove the Collateral from the Premises nor interfere with Administrative Agent's actions in removing the Collateral from the Premises or Administrative Agent's actions in otherwise enforcing its security interest in the Collateral. Notwithstanding anything to the contrary in this paragraph, Administrative Agent shall at no time have any obligation to remove the Collateral from the Premises. 5. Real Property Holder shall send to Administrative Agent a copy of any notice of default under the [Lease][Mortgage] sent by Real Property Holder to Company. In addition, Real Property Holder shall send to Administrative Agent a copy of any notice received by Real Property Holder of a breach or default under any other lease, mortgage, deed of trust, security agreement or other instrument to which Real Property Holder is a party which may affect Company's rights in, or possession of, the Premises. 6. All notices to Administrative Agent under this Agreement shall be in writing and sent to Administrative Agent at its address set forth on the signature page hereof by telefacsimile, by United States mail, or by overnight delivery service. Sch.I-3 7. The provisions of this Agreement shall continue in effect until Real Property Holder shall have received Administrative Agent's written certification that all amounts advanced under the Credit Agreement have been paid in full. 8. This Agreement and the rights and obligations of the parties hereunder shall be governed by, and shall be construed and enforced in accordance with, the internal laws of the State of ___________, without regard to conflicts of laws principles. IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered as of the day and year first set forth above. [NAME OF REAL PROPERTY HOLDER] By: _________________________________ Name: Title: By its acceptance hereof, as of the day and year first set forth above, Administrative Agent agrees to be bound by the provisions hereof. MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By: _________________________________ Name: Title: Sch.I-4 EXHIBIT A --------- LEGAL DESCRIPTION OF PREMISES Sch.I-5 EXHIBIT B --------- DESCRIPTION OF [LEASE] [MORTGAGE] Sch.I-6 EXHIBIT XXV [FORM OF COLLATERAL ACCESS AGREEMENT] RECORDING REQUESTED BY: O'Melveny & Myers LLP AND WHEN RECORDED MAIL TO: O'Melveny & Myers LLP 153 East 53rd Street New York, New York 10022 Attn: _____________________ Re: [Name of Company] - ------------------------------------------------------------------------------- Space above this line for recorder's use only REAL PROPERTY HOLDER'S WAIVER AND CONSENT AGREEMENT This REAL PROPERTY HOLDER'S WAIVER AND CONSENT AGREEMENT (this "AGREEMENT") is dated as of ___________, [199_][200_] and entered into by _________________________, a ____________________ ("REAL PROPERTY HOLDER"), to and for the benefit of MORGAN GUARANTY TRUST COMPANY OF NEW YORK, a ___________________ having offices at ______________________________ ("ADMINISTRATIVE AGENT"), as administrative agent for the financial institutions ("LENDERS") which are or may hereafter become parties to the Credit Agreement (as hereinafter defined). R E C I T A L S - - - - - - - - 9.1 ____________________, a _______________ corporation ("COMPANY"), has possession of and occupies all or a portion of the property described on Exhibit A annexed hereto (the "PREMISES"). --------- 9.2 Company's interest in the Premises [arises under the lease agreement (the "LEASE")][is subject to the [mortgage][deed of trust] (the "MORTGAGE")] more particularly described on Exhibit B annexed hereto, --------- pursuant to which Real Property Holder has rights, upon the terms and conditions set forth therein, to take possession of, and otherwise assert control over, the Premises. 9.3 Administrative Agent and Lenders have entered into that certain Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as amended, supplemented XXV-1 or otherwise modified from time to time, being the "CREDIT AGREEMENT") with [Company], [Sealy Mattress Company, an Ohio corporation of which Company is a subsidiary ("BORROWER")], Sealy Corporation, a Delaware corporation ("HOLDINGS"), and Company has executed [a guaranty,] a security agreement and other collateral documents in relation to the Credit Agreement. 9.4 [Company's guaranty of] the extensions of credit made by Lenders to [Company] [Borrower] under the Credit Agreement will be secured, in part, by all raw materials, work-in-process and finished goods inventory of Company (including, without limitation, all inventory of Company now or hereafter located on the Premises (the "INVENTORY")) and all equipment, machinery and other goods used in Company's business (including, without limitation, all equipment of Company now or hereafter located on the Premises (the "EQUIPMENT" and, together with the Inventory, the "COLLATERAL")). 9.5 Administrative Agent has requested that Real Property Holder execute this Agreement as a condition to the extension of credit to [Company] [Borrower] under the Credit Agreement. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Real Property Holder hereby represents and warrants to, and covenants and agrees with, Administrative Agent as follows: 1. Real Property Holder hereby (a) waives and releases unto Administrative Agent and its successors and assigns any and all rights granted by or under any present or future laws to levy or distraint for rent or any other charges which may be due to Real Property Holder against the Collateral, and any and all other claims, liens and demands of every kind which it now has or may hereafter have against the Collateral, and (b) agrees that any rights it may have in or to the Collateral, no matter how arising (to the extent not effectively waived pursuant to clause (a) of this paragraph 1), shall be second and subordinate to the rights of Administrative Agent in respect thereof. Real Property Holder acknowledges that the Collateral is and will remain personal property and not fixtures even though it may be affixed to or placed on the Premises. 2. Real Property Holder certifies that (a) Real Property Holder is the [landlord under the Lease][beneficiary under the Mortgage], (b) the [Lease][Mortgage] is in full force and effect and has not been amended, modified, or supplemented except as set forth on Exhibit B annexed hereto, (c) --------- there is no defense, offset, claim or counterclaim by or in favor of Real Property Holder against Company under the [Lease][Mortgage] or against the obligations of Real Property Holder under the [Lease][Mortgage], (d) no notice of default has been given under or in connection with the [Lease][Mortgage] which has not been cured, and Real Property Holder has no knowledge of the occurrence of any other default under or in connection with the [Lease][Mortgage], and (e) except as disclosed to Administrative Agent, no portion of the Premises is encumbered in any way by any deed of trust or mortgage lien or ground or superior lease. XXV-2 3. Real Property Holder consents to the installation or placement of the Collateral on the Premises, and Real Property Holder grants to Administrative Agent a license to enter upon and into the Premises to do any or all of the following with respect to the Collateral: assemble, have appraised, display, remove, maintain, prepare for sale or lease, repair, transfer, or sell (at public or private sale). In entering upon or into the Premises, Administrative Agent hereby agrees to indemnify, defend and hold Real Property Holder harmless from and against any and all claims, judgments, liabilities, costs and expenses incurred by Real Property Holder caused solely by Administrative Agent's entering upon or into the Premises and taking any of the foregoing actions with respect to the Collateral. Such costs shall include, without limitation, any damage to the Premises made by Administrative Agent in severing and/or removing the Collateral therefrom. 4. Real Property Holder agrees that it will not prevent Administrative Agent or its designee from entering upon the Premises at all reasonable times to inspect or remove the Collateral. In the event that Real Property Holder has the right to, and desires to, obtain possession of the Premises [(either through expiration of the Lease or termination thereof due to the default of Company thereunder)] [(through the exercise of its rights under the Mortgage upon a default by Company thereunder)], Real Property Holder will deliver notice (the "REAL PROPERTY HOLDER'S NOTICE") to Administrative Agent to that effect. Within the 45 day period after Administrative Agent receives the Real Property Holder's Notice, Administrative Agent shall have the right, but not the obligation, to cause the Collateral to be removed from the Premises. During such 45 day period, Real Property Holder will not remove the Collateral from the Premises nor interfere with Administrative Agent's actions in removing the Collateral from the Premises or Administrative Agent's actions in otherwise enforcing its security interest in the Collateral. Notwithstanding anything to the contrary in this paragraph, Administrative Agent shall at no time have any obligation to remove the Collateral from the Premises. 5. Real Property Holder shall send to Administrative Agent a copy of any notice of default under the [Lease][Mortgage] sent by Real Property Holder to Company. In addition, Real Property Holder shall send to Administrative Agent a copy of any notice received by Real Property Holder of a breach or default under any other lease, mortgage, deed of trust, security agreement or other instrument to which Real Property Holder is a party which may affect Company's rights in, or possession of, the Premises. 6. All notices to Administrative Agent under this Agreement shall be in writing and sent to Administrative Agent at its address set forth on the signature page hereof by telefacsimile, by United States mail, or by overnight delivery service. 7. The provisions of this Agreement shall continue in effect until Real Property Holder shall have received Administrative Agent's written certification that all amounts advanced under the Credit Agreement have been paid in full. 8. This Agreement and the rights and obligations of the parties hereunder shall be governed by, and shall be construed and enforced in accordance with, the internal laws of the State of ___________, without regard to conflicts of laws principles. XXV-3 IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered as of the day and year first set forth above. [NAME OF REAL PROPERTY HOLDER] By: ----------------------------- Name: Title: By its acceptance hereof, as of the day and year first set forth above, Administrative Agent agrees to be bound by the provisions hereof. MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By: ----------------------------- Name: Title: XXV-4 EXHIBIT A --------- LEGAL DESCRIPTION OF PREMISES XXV-5 EXHIBIT B --------- DESCRIPTION OF [LEASE] [MORTGAGE] XXV-6 EXHIBIT XXVI [FORM OF SUBORDINATION PROVISIONS] "INDEBTEDNESS" means (i) all obligations for borrowed money or for the deferred purchase price of property or services (including, without limitation, all obligations contingent or otherwise in connection with acceptance, letter of credit or similar facilities, but excluding any such obligations incurred under ERISA and any accrued expenses or trade payables, (ii) all obligations evidenced by bonds, notes, debentures or other similar instruments, (iii) all indebtedness created or arising under any sale and leaseback arrangement, conditional sale or other title retention agreement with respect to property owned or acquired (whether or not the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (iv) all rental obligations under capital leases to the extent not included in clause (iii) above to the extent properly classified as a liability on a balance sheet in conformity with GAAP, (v) all guarantees (direct or indirect) to the extent properly classified as a liability on a balance sheet in conformity with GAAP, all contingent reimbursement obligations under undrawn letters of credit and all other contingent obligations in respect of, or obligations to purchase or otherwise acquire or to assure payment of, Indebtedness of others and (vi) indebtedness of others secured by any lien upon property, whether or not assumed, but only to the extent of the lesser of such property's fair market value and the stated amount of such obligation. "PERSON" means an individual, a partnership, a corporation, an association, a limited liability company, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "SENIOR AGENT" shall mean Morgan Guaranty Trust Company of New York, as Administrative Agent for the Lenders under the Senior Credit Agreements, and its successors in such capacity, or if there is then no acting Administrative Agent under the Senior Credit Agreements, financial institutions holding a majority in principal amount of the Senior Debt outstanding thereunder. "SENIOR CREDIT AGREEMENTS" shall mean, collectively, (i) the Credit Agreement dated as of December 18, 1997 and (ii) the AXEL Credit Agreement dated as of December 18, 1997, in each case by and among the Borrower, Sealy Corporation, the financial institutions listed therein as Lenders, Senior Agent, Goldman Sachs Credit Partners L.P., as Syndication Agent, and Bankers Trust Company, as Documentation Agent, as each such agreement has heretofore been and may hereafter be amended, restated, modified or supplemented from time to time, together with any credit agreement or similar document from time to time executed by the Borrower to evidence any Refinancing (as defined in the definition of Senior Indebtedness) or successive Refinancings. 1 "SENIOR DEBT DOCUMENTS" shall mean the Senior Credit Agreements and all other documents and instruments delivered or filed in connection with the creation or incurrence of any Senior Indebtedness (including, without limitation, the promissory notes, guaranties, security agreements, pledge agreements and mortgages executed and delivered by the Borrower, Sealy Corporation and the subsidiaries of the Borrower in respect of the Obligations under the Senior Credit Agreements). "SENIOR INDEBTEDNESS" shall mean (i) all Obligations (as defined in the Senior Credit Agreements) now or hereafter incurred pursuant to and in accordance with the terms of the Senior Debt Documents, (ii) any additional Indebtedness incurred under or pursuant to the Senior Credit Agreements and the other Senior Debt Documents whether such Obligations or additional Indebtedness involve principal prepayment charges, interest (including, without limitation, interest accruing after the filing of a petition initiating any proceeding under the Bankruptcy Code, whether or not allowed as a claim in such proceeding), indemnities (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen after all other Obligations have been repaid in full and all commitments to lend thereunder have terminated) or reimbursement of fees, expenses or other amounts, and (iii) any indebtedness incurred (other than those not due and payable when all other Obligations have been repaid and Commitments are terminated) for the purpose of refinancing, restructuring, extending or renewing (collectively, "REFINANCING") the obligations of the Borrower under the Senior Credit Agreements as set forth in clauses (i) and (ii) above. "SENIOR LENDERS" shall mean the financial institutions party to either of the Senior Credit Agreements as "Lenders" from time to time. 1. SUBORDINATION. (a) Agreement to Subordinate. The Borrower and, by its acceptance hereof, ------------------------ each Holder agree that the indebtedness of the Borrower evidenced by this Note, whether for principal, interest on any other amount payable under or in respect hereof and all rights or claims arising out of or associated with such Indebtedness (the "SUBORDINATED OBLIGATIONS"), shall be junior and subordinate in right of payment to the prior payment in full in cash of all Senior Indebtedness, in accordance with the provisions of this Section X. Each holder of Senior Indebtedness shall be deemed to have acquired Senior Indebtedness in reliance upon the agreements of the Borrower and the holder of this Note contained in this Section X. The provisions of this Section X shall be reinstated if at any time any payment of any of the Senior Indebtedness is rescinded or must otherwise be returned by any holder of Senior Indebtedness or any representative of such holder upon the insolvency, bankruptcy or reorganization of the Borrower. Any provision of this Note to the contrary notwithstanding, the Borrower shall not make, and no Holder shall accept, any payment or prepayment of principal, or prepayment of other amounts due thereunder, of any kind whatsoever (including without limitation by distribution of assets, set off, exchange or any other manner) with respect to the Subordinated Obligations at any time when any of the Senior Indebtedness remains outstanding. Holder may receive interest payments in respect of the Subordinated Obligations in accordance with the terms of this Note except to the extent and at the times prohibited or restricted 2 by the provisions of this Section X. In no event shall the Holder commence any action or proceeding to contest the provisions of this Section X or the priority of the Liens (as defined in the Senior Credit Agreements) granted to the holders of the Senior Indebtedness by the Borrower. No Holder shall take, accept or receive any collateral security from the Borrower for the payment of the Subordinated Obligations. (b) Liquidation Dissolution. Bankruptcy. In the event of any insolvency, ----------------------------------- bankruptcy, dissolution, winding up, liquidation, arrangement, reorganization, marshalling of assets or liabilities, composition, assignment for the benefit of creditors or other similar proceedings relating to the Borrower, its debts, its property or its operations, whether voluntary or involuntary, including, without limitation the filing of any petition or the taking of any action to commence any of the foregoing (which, in the case of action by a third party, is not dismissed within 60 days) (a "BANKRUPTCY EVENT"), all Senior Indebtedness shall first be paid in full in cash or other immediately available funds before Holder shall be entitled to receive or retain any payment or distribution of assets of the Borrower with respect to any Subordinated Obligations. In the event of any such Bankruptcy Event, any payment or distribution of assets to which Holder would be entitled if the Subordinated Obligations were not subordinated to the Senior Indebtedness in accordance with this Section X, whether in cash, property, securities or otherwise, shall be paid or delivered by the debtor, custodian, trustee or agent or other Person making such payment or distribution, or by the Holder if received by it, directly to the Senior Agent on behalf of the holders of the Senior Indebtedness for application to the payment of the Senior Indebtedness remaining unpaid, to the extent necessary to make payment in full in cash or other immediately available funds of all Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution to or for the holders of the Senior Indebtedness. (c) No Payments with Respect to Subordinated Obligations in Certain --------------------------------------------------------------- Cicumstances. ------------ (i) In circumstances in which Section X(b) is not applicable, no payment of any nature (including, without limitation, any distribution of assets) in respect of the Subordinated Obligations (including, without limitation, pursuant to any judgment with respect thereto or on account of the purchase or redemption or other acquisition of Subordinated Obligations, by set off, prepayment exchange or other manner) shall be made by or on behalf of the Borrower if, at the time of such payment: (A) a default in the payment when due (whether at the maturity thereof, or upon acceleration of maturity or otherwise and without giving effect to any applicable grace periods) of all or any portion of the Senior Indebtedness (whether of principal, interest or any other amount with respect thereto) shall have occurred, and such default shall not have been cured or waived in accordance with the terms of the Senior Debt Documents; or 3 (B) subject to the last sentence of this Section X(c), (x) the Borrower shall have received notice from the Senior Agent or the Lenders of the occurrence of one or more Events of Default (as defined in either of the Senior Credit Agreement) in respect of any Senior Indebtedness (other than payment defaults described in Section X(c)(i)(A) above), (y) each such Event of Default shall not have been cured or waived in accordance with the terms of the Senior Debt Documents, and (z) 180 days shall not have elapsed since the date such notice was received. The Borrower may resume payments (and may make any payments missed due to the application of Section X(c)(i) in respect of the Subordinated Obligations or any judgment with respect thereto: (A) in the case of a default referred to in clause (A) of this Section X(c)(i), upon a cure or waiver thereof in accordance with the terms of the Senior Debt Documents; or (B) in the case of an Event of Default or Events of Default referred to in clause (B) of this Section X(c)(i), upon the earlier to occur of (1) the cure or waiver of all such Events of Default in accordance with the terms of the Senior Debt Documents, or (2) the expiration of such period of 180 days. (ii) Following any acceleration of the maturity of any Senior Indebtedness and as long as such acceleration shall continue unrescinded and unannulled, such Senior Indebtedness shall first be paid in full in cash, or provision for such payment shall be made in a manner reasonably satisfactory to the holders of the Senior Indebtedness, before any payment is made on account of or applied on the Subordinated Obligations. (iii) The Borrower shall give prompt written notice to the Holder of (i) any default in respect of Senior Obligations referred to in Section X(c)(i)(A) and (ii) any notice of the type described in Section X(c)(i)(B) from the Senior Agent. (d) When Distribution Must Be Paid Over. In the event that Holder shall ----------------------------------- receive any payment or distribution of assets that Holder is not entitled to receive or retain under the provisions of this Note, Holder shall hold any amount so received in trust for the holders of Senior Indebtedness, shall segregate such assets from other assets held by Holder and shall forthwith turn over such payment or distribution (without liability for interest thereon) to the Senior Agent on behalf of the holders of Senior Indebtedness in the form received (with any necessary endorsement) to be applied to Senior Indebtedness. (e) Exercise of Remedies. So long as any Senior Indebtedness is outstanding -------------------- (including any loans, any letters of credit, any commitments to lend or any lender guarantees), Holder (solely in its capacity as a holder of this Note) shall not exercise any rights or remedies with respect to an Event of Default under this Note, including, without limitation, any action (l) to demand or sue for 4 collection of amounts payable hereunder, (2) to accelerate the principal of this Note, or (3) to commence or join with any other creditor (other than the holder of a majority in principal amount of the Senior Indebtedness) in commencing any proceeding in connection with or premised on the occurrence of a Bankruptcy Event prior to the earlier of: (A) the payment in full in cash or other immediately available funds of all Senior Indebtedness; (B) the initiation of a proceeding (other than a proceeding prohibited by clause (3) of this Section X(e)) in connection with or premised upon the occurrence of a Bankruptcy Event; (C) the expiration of 180 days immediately following the receipt by the Senior Agent of notice of the occurrence of such Event of Default from the Holder; and (D) the acceleration of the maturity of the Senior Indebtedness; provided, however, that if, with respect to (B) and (D) above, such proceeding or acceleration, respectively, is rescinded, or with respect to (C) above, during such 180-day period such Event of Default has been cured or waived, the prohibition against taking the actions described in this Section X(e) shall automatically be reinstated as of the date of the rescission, cure or waiver, as applicable. In all events, unless an event described in clause (A), (B) or (D) above has occurred and not been rescinded, the Holder shall give thirty (30) days prior written notice to the Senior Agent before taking any action described in this Section X(e), which notice shall describe with specificity the action that the Holder in good faith intends to take. (f) Acceleration of Payment of Note. If this Note is declared due and ------------------------------- payable prior to the Maturity Date, no direct or indirect payment that is due solely by reason of such declaration shall be made, nor shall application be made of any distribution of assets of the Borrower (whether by set off or in any other manner, including, without limitation, from or by way of collateral) to the payment, purchase or other acquisition or retirement of this Note, unless, in either case, (i) all amounts due or to become due on or in respect of the Senior Indebtedness (including with respect to any outstanding letters of credit) shall have been previously paid in full in cash or other immediately available funds or in any other manner satisfactory to all holders of such Senior Indebtedness, (ii) all commitments to lend under Senior Indebtedness shall have been terminated and (iii) all guarantees constituting Senior Indebtedness shall have been terminated. (g) Proceedings Against Borrower. So long as any Senior Indebtedness ---------------------------- is outstanding (including any loans, any commitments to lend or open lender guarantees or any lender guarantees, Holder (solely in its capacity as a holder of this Note) shall not commence any bankruptcy, insolvency, reorganization or other similar proceeding against Borrower. 5 (h) Amending Senior Indebtedness. Any holder of Senior Indebtedness ---------------------------- may, at any time and from time to time, without the consent of or notice to Holder (i) modify or amend the terms of the Senior Indebtedness, (ii) sell, exchange, release, fail to perfect a lien on or a security interest in or otherwise in any manner deal with or apply any property pledged or mortgaged to secure, or otherwise securing, Senior Indebtedness, (iii) release any guarantor or any other person liable in any manner for the Senior Indebtedness, (iv) exercise or refrain from exercising any rights against Borrower or any other person, (v) apply any sums by whomever paid or however realized to Senior Indebtedness or (vi) take any other action that might be deemed to impair in any way the rights of the holder of this Note. Any and all of such actions may be taken by the holders of Senior Indebtedness without incurring responsibility to Holder and without impairing or releasing the obligations of Holder to the holders of Senior Indebtedness. (i) Certain Rights in Bankruptcy. Holder hereby irrevocably authorizes ---------------------------- and empowers each holder of Senior Indebtedness (and its representative or representatives) to demand, sue for, collect and receive all payments and distributions under the terms of this Note, to file and prove all claims (including claims in bankruptcy) relating to this Note, to exercise any right to vote arising with respect to this Note and any claims hereunder in any bankruptcy, insolvency or similar proceeding and take any and all other actions in the name of Holder (solely in its capacity as a holder of this Note), as such holder of Senior Indebtedness determines to be necessary or appropriate. (j) Subrogation. No payment or distribution to any holder of Senior ----------- Indebtedness pursuant to the provisions of this Note shall entitle Holder to exercise any right of subrogation in respect thereof until (i)(x) all Senior Indebtedness shall have been paid in full in cash or other immediately available funds or in any other manner satisfactory to all holders of Senior Indebtedness, (y) all commitments to lend under Senior Indebtedness shall have been terminated and (z) all guarantees constituting Senior Indebtedness shall have been terminated or (ii) all holders of Senior Indebtedness have consented in writing to the taking of such action. (k) Relative Rights. The provisions of this Section X are for the benefit --------------- of the holders of Senior Indebtedness (and their successors and assigns) and shall be enforceable by them directly against Holder. Holder acknowledges and agrees that any breach of the provisions of this Section X will cause irreparable harm for which the payment of monetary damages may be inadequate. For this reason, Holder agrees that, in addition to any remedies at law or equity to which a holder of the Senior Indebtedness may be entitled, a holder of the Senior Indebtedness will be entitled to an injunction or other equitable relief to prevent breaches of the provisions of this Section X and/or to compel specific performance of such provisions. The provisions of this Section X shall continue to be effective or be reinstated, as the case may be, if at any time any payment of Senior Indebtedness is rescinded or must otherwise be returned by any holder of Senior Indebtedness upon the occurrence of a Bankruptcy Event or otherwise, all as though such payment had not been made. The provisions of this Section X are not intended to impair and shall not impair as between Borrower and Holder, the obligation of Borrower, which is absolute and unconditional, to pay Holder all amounts owing under this Note. 6 (l) Reliance on Orders and Decrees. Subject to the provisions of Section ------------------------------ X(d) hereof, upon any payment or distribution of assets of Borrower, whether in cash, property, securities or otherwise, Holder shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which any insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to Holder for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section X. 7 EXHIBIT 10.5.SCHA SCHEDULE 1.1(i) ADDBACKS TO EBITI)A ------------------- Without duplication: (i) MIS Upgrade Expenditures, Year 2000 Expenditures, EITF 97-13 Expenditures and Other MIS Expenditures, in each case to the extent deducted in determining Consolidated Net Income; (ii) any bad debt and factoring losses incurred specifically with respect to the bankruptcy of Montgomery Ward; (iii) items classified as unusual or nonrecurring gains and losses (including restructuring costs, severance and relocation costs, any one-time expenses related to (or resulting from) any merger, recapitalization or Permitted Acquisition); (iv) one-time compensation charges, including any arising from any recapitalization of Holdings' special bonus program or existing stock options, performance share or restricted stock plans resulting from any merger or recapitalization transaction or expensed in any period prior to the consummation of the Merger; (v) non-recurring cash restructuring charges incurred in connection with the Recapitalization Transactions and related transactions to the extent deducted in determining Consolidated Net Income; provided that such charges are incurred on or before December 18, 1998 and do not exceed in the aggregate the sum of (a) premiums paid in connection with the Debt Tender Offer plus (b) $1,000,000; (vi) non-recurring cash restructuring charges incurred in connection with Permitted Acquisitions to the extent deducted in determining Consolidated Net Income; and (vii) Bain Management Fees (excluding any portion thereof representing reimbursement of expenses or fees for acquisitions, financings or divestitures) paid during such period under the Bain Advisory Services Agreement, and any Harvard Management Fees (excluding any portion thereof representing reimbursement of expenses paid during such period); (viii) non-recurring cash charges incurred prior to June 18, 1999 in connection with the relocation of any of Company's facilities and transition expenses related thereto, but only to the extent that such non-recurring charges do not exceed $6,000,000; and (ix) to the extent deducted in determining Consolidated Net Income, premiums and transaction costs on Existing Subordinated Notes not tendered in the Debt Tender Offer. 1.1(i)-1 SCHEDULE 1.1(ii) Recapitalization Transactions Immediately prior to the Closing Date, Holdings will contribute (the "Capital Contribution") all of the issued and outstanding capital stock of Sealy, Inc., an Ohio corporation, The Stearns & Foster Bedding Company, a Delaware corporation, Advanced Sleep Products, a California corporation, Sealy Components-Pads, Inc., a Delaware corporation, and Sealy Mattress Company of San Diego, a California corporation, to the capital of the Company. Immediately after the Capital Contribution, Company will be the only direct subsidiary of Holdings and will own 100% of the operations of Holdings. On the Closing Date Merger Corp. will be merged with and into Holdings with Holdings being the surviving corporation. Schedule 2.1 Lender's Commitments, Loans and Pro Rata Shares Schedule 2.1 Lender's Commitments, Loans and Pro Rata Shares
PRO RATA PRO RATA PRO RATA PRO RATA SHARE RE SHARE RE SHARE RE SHARE RE AXELs AXELs AXELs ALL LENDER AXELs SERIES B SERIES B AXELs SERIES C SERIES C AXELs SERIES D SERIES D LOANS - ----------------------------------------------------------------------------------------------------------------------------------- Goldman Sachs Credit Partners L.P. $63,636,361 50.9% $45,818,181 50.9% $58,545,456 50.9% 32.6% Morgan Guaranty Trust Company of New York $ 9,848,485 7.9% $ 7,090,909 7.9% $ 9,060,606 7.9% 6.8% Bankers Trust Company $ 1,893,940 1.5% $ 1,363,636 1.5% $ 1,742,424 1.5% 4.0% General Electric Capital Corporation $ 1,893,940 1.5% $ 1,363,636 1.5% $ 1,742,424 1.5% 4.0% Merita Bank Ltd. $ 1,136,363 0.9% $ 818,182 0.9% $ 1,045,455 0.9% 3.3% Royal Bank of CAnada $ 1,136,363 0.9% $ 818,182 0.9% $ 1,045,455 0.9% 3.3% Wells Fargo Bank $ 1,136,363 0.9% $ 818,182 0.9% $ 1,045,455 0.9% 3.3% BankBoston, N.A. $ 1,893,940 1.5% $ 1,363,636 1.5% $ 1,742,424 1.5% 4.0% Commerzbank AG $ 1,515,152 1.2% $ 1,090,909 1.2% $ 1,393,939 1.2% 2.2% Credit Agricole Indosuez $ 1,515,152 1.2% $ 1,090,909 1.2% $ 1,393,939 1.2% 2.2% Skandinaviska Enskilda Banken, New York Branch $ 1,136,363 0.9% $ 818,182 0.9% $ 1,045,455 0.9% 3.3% Merrill Lynch Senior Floating Rate Fund $ 3,030,303 2.4% $ 2,181,818 2.4% $ 2,787,879 2.4% 1.5% Toronto Dominion Bank $ 4,545,455 3.6% $ 3,272,727 3.6% $ 4,171,818 3.6% 2.2% Ares Leveraged Investment Fund, L.P. $ 3,787,879 3.0% $ 2,727,273 3.0% $ 3,484,848 3.0% 1.8% Oak Hill Securities Fund, L.P. $ 3,787,879 3.0% $ 2,727,273 3.0% $ 3,484,848 3.0% 1.8% Transamerica Life Insurance and Annuity Company $ 3,787,879 3.0% $ 2,727,273 3.0% $ 3,484,848 3.0% 1.8% Prime Income Trust $ 3,030,303 2.4% $ 2,181,818 2.4% $ 2,787,879 2.4% 1.5% KZH-Crescent Corporation $ 1,893,940 1.5% $ 1,363,636 1.5% $ 1,742,424 1.5% 4.0% Lehman Commercial Paper, Inc. $ 2,272,727 1.8% $ 1,636,364 1.8% $ 2,090,909 1.8% 1.1% ORIX USA Corporation $ 2,272,727 1.8% $ 1,636,364 1.8% $ 2,090,909 1.8% 1.1% PPM America, Inc. $ 2,272,727 1.8% $ 1,636,364 1.8% $ 2,090,909 1.8% 1.1% The Northwestern Mutual Life Insurance Company $ 1,893,940 1.5% $ 1,363,636 1.5% $ 1,742,424 1.5% 4.0% Octagon Credit Investors Loan Portfolio $ 1,893,940 1.5% $ 1,363,636 1.5% $ 1,742,424 1.5% 4.0% KZH Holding Corporation III $ 1,515,151 1.2% $ 1,090,909 1.2% $ 1,393,940 1.2% 0.7% Bank of America NT & SA $ 1,515,151 1.2% $ 1,090,909 1.2% $ 1,393,940 1.2% 0.7% Franklin Floating Rate Trust $ 757,576 0.6% $ 545,455 0.6% $ 696,970 0.6% 0.4%
SCHEDULE 3.1C Corporate and Capital Structure; Ownership
Company Ownership/1/ ------- ------------ Sealy Corporation Bain Funds (49%)/2/ Sealy Investors LLC (17%) Harvard Private Capital Holdings, Inc. (19%) Zell/Chilmark Fund, L.P. (14%) Sealy Mattress Company Sealy Corporation The Sealy Mattress Company of Puerto Rico Sealy Mattress Company Ohio-Sealy Mattress Manufacturing Co., Inc. - Randolph Sealy Mattress Company Ohio-Sealy Mattress Manufacturing Co. -- Forth Worth Sealy Mattress Company Ohio-Sealy Mattress Manufacturing Co. Sealy Mattress Company Ohio-Sealy Mattress Manufacturing Co. -- Houston Sealy Mattress Company Sealy Mattress Company of Michigan, Inc. Sealy Mattress Company Sealy Mattress Company S.W. Virginia Sealy Mattress Company Sealy Connecticut, Inc. Sealy Mattress Company Sealy Mattress Company of Kansas City, Inc. Sealy Mattress Company Sealy of Maryland and Virginia, Inc. Sealy Mattress Company Sealy Mattress Company of Illinois Sealy Mattress Company A. Brandwein & Company Sealy Mattress Company of Illinois Sealy Mattress Company of Albany, Inc. Sealy Mattress Company Sealy of Minnesota, Inc. Sealy Mattress Company Sealy Mattress Company of Memphis Sealy Mattress Company The Ohio Mattress Company Licensing and Components Group Sealy Mattress Company Sealy Mattress Manufacturing Company, Inc. Ohio Mattress Company Licensing and Components Group Sealy Canada, Ltd. Ohio Mattress Company Licensing and Components Group
- ---------- /1/ The stock records of the Subsidiaries are incomplete. During the decade or more that Holdings has owned the Subsidiaries, however, to the knowledge of Holdings, no third party has made any claim with respect to its ownership of stock of any of the Subsidiaries. /2/ The percentage ownership of Sealy Corporation are rough estimates.
Gestion Centurion, Inc. Sealy Canada, Ltd. Sealy Descanso S.A. Ohio Mattress Company Licensing and Components Group Sealy, Inc. Sealy Mattress Company Sealy Mattress Company Mexico S. de R.L. de C.V. Sealy, Inc./3/ The Stearns & Foster Bedding Company Sealy Mattress Company The Stearns & Foster Upholstery Furniture Company The Stearns & Foster Bedding Company Advanced Sleep Products Sealy Mattress Company Sealy Components - Pads, Inc. Sealy Mattress Company Sealy Mattress Company of San Diego Sealy Mattress Company
- ---------- /3/ 999 shares held by Sealy Inc.; 1 share by The Ohio Mattress Licensing and Components Group. SCHEDULE 3.1I Closing Date Mortgaged Properties THE STEARNS & FOSTER BEDDING COMPANY - ------------------------------------ 4802 West Van Buren Street Phoenix, AZ 85043 1705 Rockdale Ind. Blvd. Conyers, GA 30207 SEALY MATTRESS COMPANY - ---------------------- 1070 Lake Road Medina, OH 44258 THE SEALY MATTRESS COMPANY OF PUERTO RICO - ----------------------------------------- El Comandanta Industrial Center #1 San Marcos Carolina, Puerto Rico 00982 OHIO-SEALY MATTRESS MANUFACTURING CO., INC.-RANDOLPH - ---------------------------------------------------- 671 North Street One Posturepedic Drive Randolph, MA 02368 OHIO-SEALY MATTRESS MANUFACTURING CO., INC.--FORT WORTH - ------------------------------------------------------- 6550 Wuliger Way North Richland Hills, TX 76180 OHIO-SEALY MATTRESS MANUFACTURING CO., INC.-HOUSTON - --------------------------------------------------- Highway Loop 290 Brenham, TX 77833 SEALY MATTRESS COMPANY OF CONNECTICUT, INC. - ------------------------------------------- 100 Canal/Street Putnam, CT 06260 SEALY MATTRESS COMPANY OF ALBANY, INC. - -------------------------------------- 99 Railroad Avenue Albany, NY 12205 SEALY OF MINNESOTA, INC. - ------------------------ 825 Transfer Road St. Paul, MN 55114 SEALY MATTRESS COMPANY OF MEMPHIS, INC. - --------------------------------------- 4120 Air Trans Road Memphis, TN 38118 THE OHIO MATTRESS COMPANY LICENSING AND COMPONENTS GROUP - -------------------------------------------------------- 6275 Lake Shore Court Colorado Springs, CO 80915 1132 North Culled Street Rensselaer, IN 47978 1133 North Cullen Street Rensselaer, IN 47978 Magic Industrial Park Delano, PA 18220 SEALY MATTRESS MANUFACTURING COMPANY, INC. - ------------------------------------------ 1130 Seventh Street Richmond, CA 94801 4361 East Firestone Boulevard South Gate, CA 90280 12555 East 39th Avenue Denver, CO 80239 11220 Space Boulevard Regency Industrial Park Orlando, FL 32821 700 South State Street at 7th Avenue Lexington, NC 27293 13635 N. Lombard Rivergate Industrial Dis. Portland, OR 97203 RD #1, Rt. 322 Clarion, PA 16214 SEALY MATTRESS COMPANY OF KANSAS CITY, INC. - ------------------------------------------- 3100 Fairfax Traffic Way Kansas City, KS 66115 SCHEDULE 3.1K Closing Date Environmental Report 1. 4802 West Van Buren Street Phoenix, AZ 85043 2. 1130 Seventh Street Richmond, CA 94801 3. 4361 East Firestone Boulevard South Gate, CA 90280 4. 6275 Lake Shore Court Colorado Springs, CO 80915 5. 12555 East 39th Avenue Denver, CO 80239 6. 100 Canal Street Putnam, CT 06260 7. 11220 Space Boulevard Regency Industrial Park Orlando, FL 32821 8. 1705 Rockdale Ind. Boulevard Conyers, GA 30207 9. 1030 East Fabian Parkway Batavia, IL 10. 1132 & 1133 North Cullen Street Rensselaer, IN 47978 11. 3100 Fairfax Traffic Way Kansas City, KS 12. 16114 Elliott Parkway 70-81 Industrial Park Williamsport, MD 13. 671 North Street One Posturepedic Drive Randolph, MA 02368 14. 21450 Trolley Industrial Drive Taylor, MI 15. 825 Transfer Road St. Paul, MN 55114 16. 99 Railroad Avenue Albany, NY 12205 17. 700 South State Street at 7th Avenue Lexington, NC 27293 18. 1070 Lake Road Medina, OH 44258 19. 13635 N. Lombard Rivergate Industrial Dis. Portland, OR 97203 20. RD#1, Rt. 322 Clarion, PA 16214 21. Magic Industrial Park Delano, PA 18220 22. 4120 Air Trans Road Memphis, TN 38118 23. Highway Loop 290 Brenham, TX 77833 24. 6550 Wuliger Way North Richland Hills, TX 76180 25. 14550 112th Avenue, NW Edmonton, Alberta, Canada 26. 555 Rue Panneton St. Narcisse, Quebec, Canada 27. 685 Warden Avenue Toronto, Ontario, Canada 28. Lots 17 & 18 Exportec II Industrial Park Toluca, Mexico 29. El Comandante Industrial Center #1 San Marcos Carolina, Puerto Rico 00982 SCHEDULE 4.1 Subsidiaries
Subsidiary Direct Owner of Subsidiary/4/ Jurisdiction of Incorporation ---------- ----------------------------- ----------------------------- Sealy Mattress Company Sealy Corporation Ohio The Sealy Mattress Company of Puerto Rico Sealy Mattress Company Ohio Ohio-Sealy Mattress Manufacturing Co., Inc. Sealy Mattress Company Massachusetts - Randolph Ohio-Sealy Mattress Manufacturing Co.--Forth Worth Sealy Mattress Company Texas Ohio-Sealy Mattress Manufacturing Co. Sealy Mattress Company Georgia Ohio-Sealy Mattress Manufacturing Co.--Houston Sealy Mattress Company Texas Sealy Mattress Company of Michigan, Inc. Sealy Mattress Company Michigan Sealy Mattress Company of S.W. Virginia Sealy Mattress Company Virginia Sealy Connecticut, Inc. Sealy Mattress Company Connecticut Sealy Mattress Company of Kansas City, Inc. Sealy Mattress Company Missouri Sealy of Maryland and Virginia, Inc. Sealy Mattress Company Maryland Sealy Mattress Company of Illinois Sealy Mattress Company Illinois A. Brandwein & Company Sealy Mattress Company of Illinois Illinois Sealy Mattress Company of Albany, Inc. Sealy Mattress Company New York Sealy of Minnesota, Inc. Sealy Mattress Company Minnesota Sealy Mattress Company of Memphis Sealy Mattress Company Tennessee The Ohio Mattress Company Licensing and Sealy Mattress Company Delaware Components Group Sealy Mattress Manufacturing Company, Inc. Ohio Mattress Company Licensing and Delaware Components Group Slay Canada, Ltd. Ohio Mattress Company Licensing and Alberta Components Group Gestion Centurion, Inc. Sealy Canada, Ltd. Quebec
- ---------- /4/ The stock records of the Subsidiaries are incomplete. During the decade or more that Holdings has owned the Subsidiaries, however, to the knowledge of Holdings, no third party has made any claim with respect to its ownership of stock of any of the Subsidiaries. All ownership interests are 100%, except as indicated.
Sealy Descanso S.A. Ohio Mattress Company Licensing and Spain Components Group Sealy, Inc. Sealy Mattress Company Ohio Sealy Mattress Company Sealy, Inc./5/ Mexico Mexico S. de R.L. de C.V. The Stearns & Foster Bedding Company Sealy Mattress Company Delaware The Stearns & Foster Upholstery Furniture The Stearns & Foster Bedding Company Ohio Company Advanced Sleep Products Sealy Mattress Company Ohio Sealy Components - Pads, Inc. Sealy Mattress Company Delaware Sealy Mattress Company of San Diego Sealy Mattress Company California
- ---------- /5/ 999 Shares held by Sealy Inc.; 1 share by The Ohio Mattress Licensing and Components Group. SCHEDULE 4.5 Real Property
COMPANY LOCATION LEASED/OWNED TENANT/LANDLORD SEALY, INC. - ----------- International Home Leased Tenant Furnishings Center High Point,NC 27261 10th Floor/4th Floor, Halle Bldg. Leased Tenant 1228 Euclid Avenue Cleveland, OH 44115 12th Floor Storage, Halle Bldg. Leased Tenant 1228 Euclid Avenue Cleveland, OH 44115 17500 Engle Lake Dr. Leased Tenant Middleburg Hts., OH 44130 17520 Engle Lake Dr. Leased Tenant Middleburg Hts., OH 44190 THE STEARNS & FOSTER BEDDING COMPANY - ------------------------------------ 4802 West Van Buren Street Owned Phoenix, AZ 85043 1705 Rockdale Ind. Blvd. Owned Conyers, GA 30207 1030 Fabyan Parkway Leased Tenant (with 100,000 Batavia. IL 60510 square feet subleased to Legget & Platt) ADVANCED SLEEP PRODUCTS - ----------------------- 1261 Industrial Parkway North Leased Tenant Brunswick, OH 44212 SEALY MATTRESS COMPANY - ---------------------- 1070 Lake Road Owned Medina, OH 44258 18-22 Main Street Extension Leased Tenant Plymouth, MA 4100 Spring Valley Rd. Leased Tenant Suite 800 Dallas, TX 75244
SEALY MATTRESS COMPANY - ---------------------- 48 South Service Road Leased Tenant Melville, NY 11747 200 CenterPort Drive Leased Tenant Greensboro, NC 27409 THE SEALY MATTRESS COMPANY OF PUERTO RICO - ----------------------------------------- El Comandante Industrial Center Owned # I San Marcos Carolina, Puerto Rico 00982 OHIO-SEALY MATTRESS MANUFACTURING CO., INC.-RANDOLPH - ---------------------------------------------------- One Posturepedic Drive Owned Randolph, MA 02368 OHIO-SEALY MATTRESS MANUFACTURING CO., INC.--FORT WORTH - ------------------------------------------------------- 6550 Wuliger Way Owned North Richland Hills, TX 76180 6400-J Wuliger Way Leased Tenant North Richland Hills, TX 76180 OHIO-SEALY MATTRESS MANUFACTURING CO., INC.--HOUSTON - ---------------------------------------------------- Highway Loop 290 Owned Brenham, TX 77833 13111 Westheimer Suite 118 Leased Tenant Leased Tenant Houston, TX 77077 SEALY MATTRESS COMPANY OF MICHIGAN, INC. - ---------------------------------------- 21450 Trolley Industrial Drive Leased Tenant Taylor, MI 48180 SEALY MATTRESS COMPANY OF CONNECTICUT, INC. - ------------------------------------------- 25 Hillside Avenue Owned Leased to private family Oakville, CT 06779 31 Hillside Avenue Owned Leased to private family Oakville, CT 06779 100 Canal Street Owned Leased to Nutmeg Realty Co. Putnam, CT 06260 SEALY MATTRESS COMPANY OF KANSAS CITY, INC. - ------------------------------------------- 3100 Fairfax Traffic Way Leased Tenant Kansas City, KS 66115
SEALY OF MARYLAND AND VIRGINIA, INC. - ------------------------------------ 70-81 Industrial Park Leased Tenant Williamsport, MD 21795 11606 Greencastle Pike Leased Tenant Hagerstown, MD 21740 16121 Business Parkway Leased Tenant Hagerstown, MD 21740 Topflight Air Park Leased Tenant 18450 Showalter Rd. Hagerstown, MD 21740 SEALY MATTRESS COMPANY OF ILLINOIS - ---------------------------------- 1130 Lake Cook Rd. #170 Leased Tenant Buffalo Grove, IL 60089 SEALY MATTRESS COMPANY OF ALBANY INC. - ------------------------------------- 99 Railroad Avenue Owned (Railroad Avenue & Brown Road) Albany, NY 12205 45 Railroad Avenue Leased Tenant Colonie, NY SEALY OF MINNESOTA, INC. - ------------------------ 825 Transfer Road Owned St. Paul, MN 55114 SEALY MATTRESS COMPANY OF MEMPHIS - --------------------------------- 4120 Air Trans Road Owned Memphis, TN 38118 4401 N. Roman Street Leased Tenant New Orleans, LA THE OHIO MATTRESS COMPANY LICENSING AND COMPONENTS GROUP - -------------------------------------------------------- 6275 Lake Shore Court Owned Colorado Springs, CO 80915 Vapor Trail Bldg. Leased Tenant Colorado Springs, CO 80915 525 West Monroe Leased Assigned to Katten, Muchin Chicago, IL 60606 & Zavis 111 N. Canal Street Leased Tenant Chicago, IL 60606 1132 North Cullen Street Owned Rensselaer, IN 47978
1133 North Cullen Street Owned Rensselaer, IN 47978 Magic Industrial Park Owned Owned Delano, PA 18220 Rt. 54 & 309 Leased Tenant Hometown, PA SEALY MATTRESS MANUFACTURING COMPANY, INC. - ------------------------------------------ 1130 7th Street Owned Richmond, CA 94801 4361 East Firestone Blvd. Owned South Gate, CA 90280 12555 East 39th Avenue Owned Denver, CO 80239 11220 Space Blvd. Owned Regency Industrial Park Orlando, FL 32821 1440 Central Florida Parkway Leased Tenant Orlando, FL 32821 700 S. State St. Owned at 7th Avenue Lexington, NC 27293 3 East First Street Leased Tenant Lexington, NC 27293 Industrial Drive Leased Tenant Welcome, NC 8th Ave./State Street Leased Tenant Lexington 13635 N. Lombard Owned Rivergate Industrial Dis. Portland, OR 97203 (U.S. Route 322 & Owned Owned Washington Avenue) R.D. #I Rte. 322 Clarion, PA 16214 R.D. #1, Rt. 322 Leased Tenant Clarion, PA 16214 San Francisco Mart Leased Tenant San Francisco, CA
17291 Irvine Road Leased Tenant Tustin, CA 92680 1930 E. Mariton Pike Leased Tenant Cherry Hill, NJ SEALY CANADA, LTD. - ------------------ 685 Warden Avenue Leased Tenant Scarborough, Ontario M I L 3Z5 14550 112th Avenue Owned Edmonton, Alberta TSM 2VI 431 Thames Avenue Leased Tenant Winnipeg, Manitoba 14550-112 Ave. Leased Tenant Edmonton, Alberta TSM 2V 1 SEALY MATTRESS COMPANY (MEXICO) - ------------------------------- Lot 18 Owned Owned Industrial Park Exportec 11 Toulcam Mexico
SCHEDULE 4.12 Certain Fees 1. Approximately $5,600,000 fee to Merrill Lynch for representation in the sale of Holdings. 2. Approximately $250,000 fee to NationsBanc Montgomery Securities, Inc. for warrant valuation. 3. Approximately $251,550 fee to ABN Ambro for warrant valuation. 4. Approximately $3,663,830 in payments made to certain employees as a result of the change in control caused by the Recapitalization Transactions. SCHEDULE 4.13 Environmental Matters South Brunswick. NJ. A Holdings subsidiary is the former owner of a - ------------------- commercial/industrial facility in Monmouth Junction (South Brunswick Township), New Jersey ("Property"). Prior to 1953, the Property was used as a horse farm. In 1953, the original portion of the current main building was constructed and thereafter operated until 1979 by Stop-Fire, Inc., a fire extinguisher manufacturer. The Property was purchased in 1979 by The Stearns & Foster Bedding Company (which was acquired by Holdings in 1983) and the Property was used as a mattress assembly facility until 1991. After being vacant for four (4) years, Holdings reopened the Property as a mattress pad manufacturing facility in 1995. In 1997, Holdings sold the business and Property to Leggett & Platt which has continued to use the Property for pad manufacturing. Holdings believes that operation/disposal practices by Stop-Fire at the Property resulted in the release of volatile organic compounds to the soil and groundwater. Solvents used to clean factory machinery and degrease fire extinguisher casings prior to painting were reportedly disposed on-site in a large area south of the secondary building and in the area outside the exit door at the former paint room. Paint sludge was also reportedly disposed through a wooded area at the Property near the large spent solvent disposal area. Holdings's environmental consultant has indicated that spent solvents were disposed at a rate of three to four 55 gallon drums per month over a 25 year period. In 1989, as the result of a leveraged buyout, a "triggering event" under New Jersey environmental law (Environmental Cleanup Responsibility Act; "ECRA", now known as the Industrial Site Recovery Act; "ISRA") the New Jersey Department of Environmental Protection ("NJDEP") required Holdings to conduct certain soil and groundwater testing activities that resulted in the discovery of volatile organic compounds in the impacted soil disposal areas and the groundwater. Pursuant to Administrative Consent Order ("ACO") signed by Holdings and its subsidiary, environmental investigation and focused remediation activities have continued at the facility through 1996. In 1995, NJDEP approved Holdings's soil remediation plan. As of July, 1997, Holdings completed required soil remediation at the Property. In August, 1997, NJDEP approved Holdings's interim groundwater remediation plan involving a pilot test program for groundwater containment and recycling of a portion of the contaminant plume with natural attenuation of the remaining plume. Installation of the pilot system is scheduled to begin in September, 1997 with full implementation planned for November or December, 1997. In January, 1997, Holdings settled a New Jersey U.S. District Court cost recovery litigation filed in March, 1994 against former owners of the Property and their lenders. Holdings is currently prosecuting a cost recovery action in New Jersey state court against certain insurance companies of The Steams & Foster Bedding Company. Holdings is also defending a declaratory judgment action filed in Ohio state court by the same insurance companies which seeks a determination of non-liability under the policies. It is conceivable that NJ DEP may seek to intervene in the insurance cost recovery action and/or pursue a portion of the cost recovery award Holdings obtained in early 1997. Oakville, CT. Holdings is the owner of commercial/industrial property in - ------------ Oakville, Connecticut at which two vacant buildings are located ("Property"). Until 1993, Holdings used one of the buildings to assemble mattresses. The other building was used by various manufacturing companies as tenants ("Tenants") until 1991. None ofthe Tenants were affiliated with Holdings. There is soil and groundwater contamination at the Property under the Tenants' building which Holdings believes is attributable to the Tenants' metal plating operations which involved the use of various metals and organic chemical solvents. There is also possible PCB and PAH soil contamination at the transformer areas and parking lot areas of the Property resulting from historical use practices. As owner, Holdings has developed a remediation plan for both soil and groundwater that has been reviewed and approved by the Connecticut Department of Environmental Protection. The plan anticipates the demolition of the Tenants' building with the exception of the floor slab; the further delineation of impacted areas under the floor slab; and the removal of contaminated soils and the dewatering of areas with impacted groundwater. Demolition is scheduled for October, 1997. Additional delineation activities are planned for early Spring, 1998. Holdings has filed a cost recovery action in the Connecticut U.S. District Court seeking to require the Tenants to complete the remediation and/or reimburse Holdings for all site investigation and remedial costs. Oakville, CT. In 1993, a Holdings subsidiary was identified as a Potential - ------------ Responsible Party ("PRP") at a municipal landfill in Naugatuck, Connecticut at which solid, non-hazardous waste from the Oakville plant was previously deposited. The landfill had been identified as a Superfund Site by U.S. EPA at the time of the notice. Holdings has received no further correspondence and is aware of no further activity on this matter since 1993. Lockland, OH. In 1991, Holdings received notice from U.S. EPA that a landfill in - ------------ West Chester, Ohio ("Skinner Landfill") - previously used by a textile and upholstered furniture manufacturing company purchased by Holdings in 1983 - had been identified as a Superfund Site. Holdings responded to U.S. EPA's CERCLA inquiry in 1991 and advised the former seller of U.S. EPA's interest and involvement in the Landfill. Since then, Holdings has heard nothing about this matter from either the U.S. EPA or the seller. On September 12, 1997, Holdings, Inc. was named as a defendant to a cost recovery action by certain Potential Responsible Parties ("PRP's") that had, by order of the U.S. EPA, commenced clean-up of the Skinner Landfill. Holdings intends to vigorously defend the action. St. Paul, MN. In 1994, a Holdings subsidiary was identified as a Potentially - ------------ Responsible Party ("PRP") at a municipal landfill in Minneapolis, MN at which solid, non-hazardous waste from the St. Paul plant was previously deposited. In 1994, the landfill was identified as subject to the Minnesota Landfill Clean-up Act under which the State takes responsibility for the cleanup. As part of this State program, Holdings recently responded to an information request by the Minnesota Department of Environmental Protection as to prior use of the landfill by Holdings's subsidiary. St. Paul, MN. A 1997 environmental report indicated that the Pine Bend Sanitary - ------------ Landfill in Inver Grove Heights used by the plant in 1993 is on the Natural Priorities List ("NPL"). The plant has confirmed that it has not used this landfill since 1994 and has to present used scrap metal dealers as an alternative disposal method. Rensselaer, IN. A 1997 environmental report revealed that the Rensselaer - -------------- facility leased by Holdings (from October, 1995 to October, 1997 when the site was purchased by Holdings) was previously used as an amusement train manufacturing plant from 1947 through 1957. Such activities routinely involve hazardous materials such as paints, solvents and metal waste which may serve as the basis for possible subsurface contamination. Rensselaer, lN. A 1995 environmental report revealed that the Rensselaer - -------------- facility leased by Holdings was previously used as a porcelain fixture and wood cabinet manufacturing plant from 1954 to 1994. Such activities routinely involve hazardous materials such as paints. solvents, acetone, toluene (and perhaps other flammable solids) and dichloromethane, i.e., methylene chloride which may serve as a basis for possible subsurface contamination. Rensselaer, IN. A 1997 environmental report suggested that certain chemical - -------------- constituents of the isocyanate and resin compounds used at the newly-purchased plant location for the manufacture of foam encased mattress units may be present in quantities at or above the specified reporting threshold levels in SARA Title III (Sections 312 and 313). Purchase and production information was reviewed and the 312/313 reporting forms for the years 1995 and 1996 as required by SARA Title III were submitted to the appropriate agencies. Colorado Springs. CO. A 1997 environmental report reflected the fact that the - -------------------- Holdings property abuts railroad property used as a railcar dismantling area and that approximately one (1) acre of the Holdings site was previously owned by the railroad. The report noted that railcar facilities generally deal with a wide assortment of hazardous materials and suggested the potential of railcar-related contamination issues. The 1997 report also noted that prior to 1987, Holdings stored incoming raw materials and waste outdoors on paved areas now used for parking, shipping and receiving. Although no spills or releases were identified, the report suggested the potential of subsurface contamination. Finally, the 1997 report noted the existence of oil stains on soil resulting from the past unprotected discharge of oil from the Holdings plant air compressor. Soil aeration on-site is being employed to address this air compressor discharge matter. Delano, PA. A 1993 environmental report noted that three (3) waste disposal - ---------- facilities used by the Holdings plant for waste oil disposal listed on the Comprehensive Environmental Response, Compensation and Liability Information System (CERCLIS) database. Of these, one facility (and the then transporter utilized by the Holdings plant) have been designated as requiring no further action. At the second facility, an environmental investigation begun in 1986, continued in 1990, and remained ongoing in 1993. The third disposal facility underwent initial site investigation in February, 1992. The Holdings plant no longer utilizes any of these CERCLIS landfills and no notice of a possible recovery action based upon past use has been received. The 1993 report also noted minor areas of oil- stained soil which have since been addressed. Richmond, CA. A 1997 environmental report indicated that prior to Holdings's - ------------ purchase of the property in 1973, a variety of operations were conducted at the plant including the manufacture of plumbing fixtures and. Iater, steel bath tubs. No spills or releases were identified. A prior 1993 report also noted the abutting property as being owned and operated by a registered hazardous waste transfer/hazardous material handling company. Although neither the 1993 or 1997 database search revealed any documented spills or releases, the Holdings plant manager recalls an acid release in the area in 1993 which resulted in a cloud cast over the Holdings plant and the neighboring area. The plant manager also recalls: (a) a mercaptan drum spill in either 1989 or 1990 which caused a strong odor to be present for some time; and (b) a diesel fuel spill of approximately 5 gallons a few years ago from a storage tanker in the driveway of the plant. The diesel fuel spill was immediately contained and the area cleaned by the adjacent hazardous material handling company. The 1997 environmental report also suggested that certain chemical constituents of the isocyanate and resin components used at the facility for the manufacture of foam encased mattress units may be present in quantities at or above the specified reporting threshold levels in SARA Title III, Section 313. Purchase and production information was reviewed and the 313 reporting forms for the years 1994, 1995 and 1996 as required by SARA Title III were submitted to the appropriate agency. Southgate, CA . A 1997 environmental report indicated that prior to Holdings's - ------------- purchase of the property in 1973, the plant was owned by the Holley division of Lear Sigler Co., which manufactured air conditioner units. A prior 1993 report also noted that a former tenant of Holdings at the plant, Hall Metals Company, used the leased area as an engine and scrap metal storage site. When the business failed, Holdings evicted the tenant and cleared the leased area of the stored engines, scrap metal and various other materials, including some unidentified chemicals. The 1993 and 1997 reports suggested that these historical activities could have resulted in possible subsurface contamination. Convers, GA. The rear portion of the Holdings plant was leased to a urethane - ----------- foam manufacturer from 1980 to 1997. A 1997 environmental report noted that the tenants' facility was listed on the CERCLIS database and the Toxic Release Inventory System ("TRIS") database, and that the U.S. EPA had designated the site as requiring no further action after three (3) site assessments in 1980, 1985 and 1989. The TRIS report noted the release of dichloromethane, toluene-2, 6-diisocyanate and toluene-2, 4-diisucyanate. Recent testing by the tenant as part of its cessation of business at the property and the termination of the lease revealed no adverse environmental conditions. Orlando, FL. A urethane foam manufacturer owns and operates the property to the - ----------- rear of the Holdings plant. A spill in 1992 at the foam manufacturer's property resulted in the commencement of environmental investigation under a consent order with the Florida Department of Environmental Protection which investigation, over the past four (4) years, has confirmed the migration of groundwater contamination in the form of 1,1 dichloroethylene, vinyl chloride, acetone, 2-butanone, formaldehyde, toluene and 1,2, dichlorethane under the Holdings property. In 1997, Holdings requested the foam manufacturer to advise Holdings of its future investigation and remediation plan before Holdings allows continued access to Holdings's property. Clarion, PA. A 1997 environmental report revealed that the property was owned - ----------- and operated by a trailer and mobile home manufacturer from 1968 to 1983. Although such an operation was noted to have likely made use of hazardous materials, the 1997 report indicated no spills or other contamination problems. Carolina, Puerto Rico. A 1997 environmental report revealed that of the three - --------------------- (3) buildings presently occupied by Holdings at this location, one building was used previously as a printing shop and another was used as a machine shop and as an office and warehouse for an air conditioner service company. The third building had no significant prior use history. The 1997 report noted that while these operations commonly handle hazardous materials, no report of environmental problems were revealed by an environmental database search. Ft. Worth, TX. A diesel fuel spill occurred on June 8, 1996 as the result of a - ------------- vehicle accident involving a Holdings delivery truck in Longview, Texas. The authorities were notified and the spill area cleaned. The resultant report was submitted to Texas authorities. Holdings is awaiting a no further action letter. Batavia, IL. A diesel fuel spill occurred on May 21, 1996 as the result of a - ----------- vehicle accident involving a Holdings delivery truck in Sturtevant, Wisconsin. The authorities were notified and the spill area cleaned. The resultant report was submitted to Wisconsin authorities. A no further action letter was issued on August 19, 1996. Randolph, MA. A diesel fuel spill occurred on June 30, 1994 as the result of a - ------------ fuel tank rupture at Holdings's Randolph plant. The authorities were notified and the spill area was cleaned. A 1997 database review confirmed the matter was closed by Massachusetts authorities. Randolph, MA. In 1996, the asbestos containing material in the Holdings plant - ------------ boiler room was removed as part of the boiler decommission and overflow tank removal. Beginning June 1996 and continuing to completion in 1997, the outside above ground 20,000 storage tank for #2 heating oil to power the boiler was decommissioned; the 10,000 outside above ground diesel fuel tank and fuel pump were removed: and the associated lines closed in place. Random and isolated oil stained areas were addressed by soil removal as part of these environmental activities. Kansas City. KS. A 1997 environmental report indicated the possible migration of - --------------- subsurface contamination from an automobile manufacturing facility one-quarter mile north of the plant. The manufacturing site is listed on multiple environmental databases and both soil and groundwater contamination has been confirmed to exist at the manufacturing site at concentrations above regulatory action levels. Putnam, CT. Environmental reports from 1993 and 1994 revealed that the Holdings - ---------- property in Putnam, Connecticut was used in the 1920's by a manufacturer of fabric inserts for rubber tires and from the late 1940's to the 1970's (until purchased by Holdings) by a safety material manufacturer, i.e., safety goggle, glove and helmet assembly. The 1994 report noted that the use of chemicals and the generation of wastes by the first manufacturer was unknown. The same report also stated that while no industrial wastes were generated by the second manufacturer, trichloroethylene was used as a degreasing solvent on site. A 1992 environmental report revealed that land adjacent to the Putnam property was used as a steel manufacturing facility and that waste from metal working processes and/or process wastewater of steel pickling may have discharged to the groundwater and may potentially impact the Holdings property. A 1997 environmental report revealed no additional information regarding the site. Phoenix, AZ. The Arizona Department of Environmental Quality (ADEQ) is - ----------- conducting a groundwater contamination study in a roughly 45 square mile area that includes the Holdings plant. The effort is known as the West Van Buren Study. Several contaminated wells have been identified including one well located approximately one-quarter mile south of the Holdings plant. Using 1994 data, the groundwater contamination plume has been identified by ADEQ on an isoconcentration map which shows a PCE plume at the boundary line of the plant and moving in a westerly direction under the plant site. Numerous sources of groundwater contamination have been identified although neither Holdings nor the plant has been listed as a contributor to the contamination. Other principal contaminants are 1,1, DCE; TCA; TCE and their breakdown products. These compounds are not consistent with materials used at the plant. Woodstuff Manufacturing Oak/Pine Plants: Phoenix AZ. In 1997, Holdings sold the - --------------------------------------------------- assets of its furniture manufacturing subsidiary, Woodstuff Manufacturing, Inc., to Sammy, Inc. Holdings agreed to indemnify Sammy from: All Losses (including reasonable legal and accounting fees, resulting from or arising out of (1 ) limitations, reductions or other adverse changes in the permissible level of emissions or other terms and conditions of the Original Pine Plant Permit (as such term is defined in Section 7.3(k) above) as in effect as of the Closing if such changes (a) result from violations of Air Quality Regulations by the Company of the Seller prior to the Closing and (b) are imposed in connection with the Company's original application for a Title 5 Permit for the Pine Plant or the processing thereof or any related review by the Maricopa County Environmental Services Department of Air Pollution Control (the "Company's Original Title 5 Application"), or (2) violations of Air Quality Regulations by the Company or the Seller prior to the Closing, or government or private actions or suits alleging such violations, which violations are alleged or asserted in connection with the Company's Original Title 5 Application or any related review by the Maricopa County Environmental Services Department of Air Pollution Control; provided, however, that this Section 8.1 (iv) shall not cover any Losses resulting from or arising out of any changes in the terms, application or interpretation of any Air Quality Regulations that become effective after the Closing. Environmental investigations and resultant reports conducted in 1997 revealed the existence of the West Van Buren Study and the location of one contaminated well approximately one-half mile north of the Oak plant and one mile north of the Pine plant. Subsurface investigations at both the Pine and Oak plants did not reveal petroleum hydrocarbons or volatile organic compounds at concentrations above regulatory action levels. As of the 1997 divestment, the following Hazardous Substances have been used by or located at the Company's Oak plant: ethyl benzene; toluene; xylene; 1,1,1 - trichloroethane (1, 1,1 TCA); freon 11 (TCFM). freon 113 (TCFE); benzene, dibromochloromethane; and methyl tert butyl ether. As of the 1997 divestment, the following Hazardous Substances have not, to Holdings's knowledge, been used by or located at the Company's Oak plant: tetrachloroethene (PCE); trichloroethene (TCE); 1,1-dichloroethane (1,1 DCA); 1,2-dichloroethane (1,2 DCA); ,1dichloroethene (l,lI DCE); 1,2-dichloroethene (1,2 DCE); bromodichloromethane (BDCM); carbon tetrachloride; chloroform; 1,1,2 trichloroethane (1,1,2 TCA); and vinyl chloride. The current management of Woodstuff Manufacturing intends to file the Title V Permit Application in early October, 1997. The State of Arizona is under no time obligation to act upon the Application, however, the current management has indicated that it intends to seek an expedited conclusion. Lexington, NC. In 1997, Holdings conducted soil and groundwater investigation - ------------- for petroleum hydrocarbon contamination at three (3) former UST removal areas at the Lexington plant. Groundwater analytical data indicated contamination. Soil analytical data revealed only one of six samples to contain total petroleum hydrocarbons at 1500 ppm, 300 ppm in excess of the 1200 ppm State standard. Holdings's environmental consultant concluded that this isolated reading is not representative of a contamination problem and Holdings has requested a no further action determination from North Carolina. Lexington, NC. A 1997 environmental report indicated the possible migration of - ------------- subsurface contamination from three (3) upgradient sites listed as active LUST (Leaking Underground Storage Tank) sites with the North Carolina authorities. Southgate, CA. In 1994, the three (3) underground storage tanks located under - ------------- the area leased to a tenant of Holdings were removed. Soil contamination caused by gasoline, diesel fuel and waste oil releases at the tank pit area was addressed by the removal of the soil. Groundwater contamination involving the same contaminants is being addressed first by the passive removal of free products pending approval of a natural attenuation program by Los Angeles County. Renssealer. IN: A 1997 environmental report notes the possible existence of a UST of approximately 1,000 gallons abandoned by prior owner. Possible underground storage tank abandoned by the prior owner. Toronto, Canada: A 1997 environmental report notes the possible existence of an - --------------- abandoned UST, size not specified, previously used to power the facility boiler. Quebec, Canada: A 1997 environmental report confirms that the facility boiler is - -------------- currently powered with heating fuel contained in existing 1,000 gallon UST. Edmonton, Canada: A 1997 environmental report notes the possible migration of - ---------------- subsurface contamination from two USTs (one for diesel fuel; the other for either gasoline or lubricating oil) removed by the City of Edmonton from its Public Works Department Facility in 1988. The report recommended that the matter be further investigated to determine what the City of Edmonton has done since a 1990 environmental report to the City recommended further investigation at the former UST location. Toronto Canada: A 1997 environmental report indicated the existence of thermal - -------------- system insolation at the facility which, because of its age, may be asbestos- containing. The report recommends that an asbestos inspection be conducted. Ouebec, Canada: A 1997 environmental report indicated the existence of spray- - -------------- applied fire proofing at the Facility which, because of its age, may be asbestors-containing. The report recommended that an asbestos inspection be conducted. Matters set forth in the report titled "Environmental Review of Sealy Corporation," prepared by ENVIRON Corporation, dated December 1997, and the Memorandum to File from Mark Grummer, Kirkland & Ellis, Regarding "Scaly Environmental Liabilities: Offsite and Former Facility," copies of which have been provided to Agent, are incorporated herein by reference and are deemed set forth on this Schedule 5.13. Schedule 5.12 POST-CLOSING DELIVERIES ----------------------- A. Company shall deliver, and shall cause its Subsidiaries to deliver, each of the following items to Administrative Agent no later than 30 days after the Closing Date, in each case in form and substance reasonably satisfactory to Administrative Agent: 1. A Mortgage, in proper form for recording, encumbering the following Real Property Assets: . El Comandante Industrial Center, #1 San Marcos, Carolina, Puerto Rico . Additional Properties at 11220 Space Blvd., Regency Industrial Park, Orlando, Florida . Highway Loop 290, Brenham, Texas (satisfactory survey not yet received) . 100 Canal Street, Putnam, Connecticut (title being transferred to another Subsidiary Guarantor) 2. A Closing Date Mortgage Policy for each of the Closing Date Mortgaged Properties described in paragraph A.1 above. 3. The results of a recent search (and copies of all such filings disclosed by such search), by a Person reasonably satisfactory to Syndication Agent and Administrative Agent, of all effective UCC financing statements and fixture filings and all judgment and tax lien filings which may have been made with respect to any personal or mixed property of the Loan Parties listed below in the jurisdictions set forth on Annex A hereto. 4. Any UCC termination statements, duly executed by all applicable Persons for filing in all applicable jurisdictions as may be necessary to terminate any effective UCC financing statements or fixture filings disclosed in any search described in paragraph A.3 above (other than any such financing statements or fixture filings in respect of Liens permitted to remain outstanding pursuant to the terms of this Agreement). 5. Executed fixture filings with respect to all mixed property Collateral of The Sealy Mattress Company of Puerto Rico, for filing in Puerto Rico. 6. Executed fixture filings with respect to all mixed property Collateral of Sealy Mattress Manufacturing Company, Inc. at the Orlando, Florida additional properties described in paragraph A.1 above, for filing in Orange County, Florida. B. Company shall use, and shall cause its Subsidiaries to use, commercially reasonable efforts to deliver each of the following items to Administrative Agent no later than 30 days after the Closing Date, in each case in form and substance reasonably satisfactory to Administrative Agent: 1. At least one original of a memorandum of lease for the property at 3100 Fairfax Traffic Way, Kansas City, Kansas, in a form acceptable for recording in the applicable jurisdiction. 2. A Mortgage, in proper form for recording, encumbering the leasehold Closing Date Mortgaged Property described in paragraph B.1 above. 3. A Closing Date Mortgage Policy containing a survey exception in the form set forth in the Global Title Letter for the Closing Date Mortgaged Property described in paragraph B.2 above. 4. A Collateral Access Agreement with respect to the properties at Industrial Drive, Welcome, North Carolina. Notwithstanding the foregoing, if Company fails to deliver any of the foregoing items to Administrative Agent within such 30 day period, Administrative Agent may (but shall not be obligated to) (i) consent to an additional period of time for such delivery, in the case of failure to deliver an item described in any of paragraphs A.1 through A.6, or (ii) consent to an additional period of time for such delivery or waive the delivery requirement as set forth in this Schedule, in the case of failure to deliver an item described in any of paragraphs B.1 through B.4. C. In the event that Company and its Subsidiaries shall fail to sell the 31 Hillside Avenue, Oakville, Connecticut property to a third party by November 30, 1998, Company shall no later than December 1, 1998 deliver, or shall cause its applicable Subsidiary to deliver, each of the items set forth in subsection 6.9 of the Credit Agreement with respect to such properties as if they were an Additional Mortgaged Properties as defined in such subsection. D. Company shall, and shall cause its Subsidiaries to, use commercially reasonable efforts to commence and consummate such corporate and other proceedings as Company and its counsel shall determine to be advisable to ratify the issuances of outstanding capital stock of Company and its Subsidiaries as set forth in the applicable Schedules to the Holdings Pledge Agreement, the Company Pledge Agreement and the Subsidiary Pledge Agreement. Annex A ENTITIES & JURISDICTIONS NOT SEARCHED. Sealy of Maryland and Virginia, Inc. - ------------------------------------ State of Delaware State of Virginia Independent City of Richmond Ohio-Sealy Mattress Manufacturing Co., Inc. - ------------------------------------------- State of Connecticut The Stearns & Foster Bedding Company - ------------------------------------ DeKalb County, Georgia/1/ Hall County, Georgia Richmond County, Georgia Dougherty County, Georgia Chatham County, Georgia Fulton County, Georgia State of Florida State of Alabama State of Tennessee Sealy Mattress Manufacturing Company, Inc. - ------------------------------------------ Mecklenburg County, North Carolina Forsyth County, North Carolina New Hanover County, North Carolina State of South Carolina State of Virginia Independent City of Chesapeake State of Florida State of Hawaii State of Washington State of Utah Sealy Mattress Company of Kansas City, Inc. - ------------------------------------------- State of Missouri Independent City of St. Louis Ohio-Sealy Mattress Manufacturlng Co.--Fort Worth - ------------------------------------------------- State of Louisiana Sealy Mattress Companv of Memphis - --------------------------------- State of Mississippi Madison County, Mississippi State of Alabama State of Arkansas Pulaski County, Arkansas Jefferson County, Arkansas State of Florida State of Kentucky - ---------- /1/ Clerk's Cooperative was searched. No records found. SCHEDULE 7.1(v) Existing Foreign Subsidiary Intercompany Indebtedness None SCHEDULE 7.1(xv) Certain Existing Indebtedness 1. Note by The Sealy Mattress Company Licensing and Components Group payble to Jose Ades Tawil, a former licenseee, with an outstanding pricipal balance of $1,200,000. 2. Note from The Sealy Mattress Company of Puerto Rico to Sealy Corporation with an outstanding principal balance of $2,500,000. 3. Letters of Credit issued issued by Banque Paribas for Sealy Corporation: Beneficiary LC Number Amount Effective Date Maturity Tvue Lumbermen's 21365/93 $426,994.00 517/93 5/6/98 Standby Mutual Hartford Fire 21369/93 54,739,577.00 6/1/93 6/2/98 Standby Insurance Hartford Fire 21375/94 $3,360,423.00 8/18/94 8/19/98 Standby Insurance Transcontinental 21404/96 $382,000 00 9/20/96 9/19/98 Standby Tech. Continental 21405/96 $2,831.000.00 9/20/96 9/19/98 Standby Casualty SCHEDULE 7.3(vii) Certain Existing Investments OWNER INVESTMENT Gestion Centurion, Inc. One-third ownership of outstanding stock of Alpha Springs, Ltd. The Ohio Mattress Company 14 shares of Southwest Ohio Water Class "A" common stock Sealy, Inc. Ownership of personal residences in connection with corporate relocation program SCHEDULE 7.3(xiii) Existing Foreign Subsidiary Capital Contributions CONTRIBUTOR AMOUNT FOREIGN SUBSIDIARY The Ohio Mattress Company $31,000,000 Sealy Canada, Ltd. Licensing and Components Group SCHEDULE 7.3(xviii) Certain Proposed Investments 1. The Ohio Mattress Company Licensing and Components Group and Kurlon Limited executed a letter of intent dated October 20, 1997 for a joint venture in India to produce and market inner-spring mattresses under the Sealy brand name. SCHEDULE 7.4 Certain Existing Contingent Obligations None SCHEDULE 7.9 Sale-Leaseback Transactions Proposed relocation of certain of Sealy Mattress Company's assets may involve the purchase of an existing facility, with the subsequent sale and leaseback of the same facility. EX-10.5 7 AXEL CREDIT AGREEMENT EXHIBIT EXHIBIT 10.5 EXHIBIT I [FORM OF NOTICE OF BORROWING] NOTICE OF BORROWING Pursuant to that certain AXEL Credit Agreement dated as of December 18, 1997, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among Sealy Mattress Company, an Ohio corporation, as borrower ("COMPANY"), Sealy Corporation, a Delaware corporation, as guarantor, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, the financial institutions listed therein as Lenders ("LENDERS"), Morgan Guaranty Trust Company of New York, as administrative agent ("ADMINISTRATIVE AGENT"), and Bankers Trust Company, as documentation agent, this represents Company's request to borrow as follows: 1. Date of borrowing: ----------------- -------------------, --------- 2. Amount of borrowing: $ ------------------- ------------------- Lender(s): [_] a. Lenders, in --------- accordance with their applicable Pro Rata Shares [_] b. Swing Line Lender 3. Type of Loans: [_] a. AXELs Series B ------------- [_] b. AXELs Series C [_] c. AXELs Series D 4. Interest rate option: [_] a. Base Rate Loan(s) -------------------- [_] b. Eurodollar Rate Loans with an initial Interest Period of ____________ month(s) The proceeds of such Loans are to be deposited in Company's account at Administrative Agent. The undersigned officer, to the best of his or her knowledge, on behalf of the Company certifies that: (i) The representations and warranties contained in the Credit Agreement and the other Loan Documents are or shall be true, correct and complete in all material respects on and as of the date hereof to the same extent as though made on and as of the Funding Date, except to the extent such representations and warranties specifically relate I-1 to an earlier date, in which case such representations and warranties were true, correct and complete in all material respects on and as of such earlier date; (ii) No event has occurred and is continuing or would result from the consummation of the borrowing contemplated hereby that would constitute an Event of Default or a Potential Event of Default; [and] DATED: ____________________ SEALY MATTRESS COMPANY By: ------------------------------------ Name: Title: I-2 EXHIBIT II [FORM OF NOTICE OF CONVERSION/CONTINUATION] NOTICE OF CONVERSION/CONTINUATION Pursuant to that certain AXEL Credit Agreement dated as of December 18, 1997, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among Sealy Mattress Company, an Ohio corporation, as borrower ("COMPANY"), Sealy Corporation, a Delaware corporation, as guarantor, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, the financial institutions listed therein as Lenders, Morgan Guaranty Trust Company of New York, as administrative agent, and Bankers Trust Company, as documentation agent, this represents Company's request to convert or continue Loans as follows: 1. Date of conversion/continuation: ------------------------------- ------------------, ------- 2. Amount of Loans being converted/continued: $ ----------------------------------------- ------------------ 3. Type of Loans being [_] a. AXELs Series B converted/continued: [_] b. AXELs Series C ------------------- [_] c. AXELs Series D 4. Nature of conversion/continuation: --------------------------------- [_] a. Conversion of Base Rate Loans to Eurodollar Rate Loans [_] b. Conversion of Eurodollar Rate Loans to Base Rate Loans [_] c. Continuation of Eurodollar Rate Loans as such 5. If Loans are being continued as or converted to Eurodollar Rate Loans, the duration of the new Interest Period that commences on the conversion/continuation date: _______________ month(s) II-1 In the case of a conversion to or continuation of Eurodollar Rate Loans, the undersigned officer, to the best of his or her knowledge, and Company certify that no Event of Default has occurred and is continuing under the Credit Agreement. DATED: ____________________ SEALY MATTRESS COMPANY By: --------------------------------- Name: Title: II-2 EXHIBIT IV [FORM OF AXEL SERIES B NOTE] SEALY MATTRESS COMPANY PROMISSORY NOTE DUE DECEMBER __, 2004 $[1] New York, New York [Closing Date] FOR VALUE RECEIVED, SEALY MATTRESS COMPANY, an Ohio corporation ("COMPANY"), promises to pay to [1] ("PAYEE") or its registered assigns the principal amount of [1] ($[4]) in the installments referred to below. Company also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of that certain AXEL Credit Agreement dated as of December 18, 1997 by and among Company, Sealy Corporation, a Delaware corporation, as guarantor, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, the financial institutions listed therein, Morgan Guaranty Trust Company of New York, as administrative agent ("ADMINISTRATIVE AGENT"), and Bankers Trust Company, as documentation agent (said Credit Agreement, as it may be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined). Company shall make principal payments on this Note in consecutive quarterly installments, commencing on March __, 1998 and ending on December __, 2004. Each such installment shall be due on the date specified in the Credit Agreement and in an amount determined in accordance with the provisions thereof; provided -------- that the last such installment shall be in an amount sufficient to repay the entire unpaid principal balance of this Note, together with all accrued and unpaid interest thereon. This Note is one of Company's "AXEL Series B Notes" in the aggregate principal amount of $125,000,000 and is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and conditions under which the AXEL Series B evidenced hereby was made and is to be repaid. - ----------------------- [4] Insert amount of Lender's AXEL Series B in numbers. [5] Insert Lender's name in capital letters. [6] Insert amount of Lender's AXEL Series B in words. IV-1 All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the Funding and Payment Office or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. Unless and until an Assignment Agreement effecting the assignment or transfer of this Note shall have been accepted by Agent and recorded in the Register as provided in subsection [10.1B(ii)] of the Credit Agreement, Company and Agent shall be entitled to deem and treat Payee as the owner and holder of this Note and the Loan evidenced hereby. Payee hereby agrees, by its acceptance hereof, that before disposing of this Note or any part hereof it will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid; provided, however, that the failure to make a -------- ------- notation of any payment made on this Note shall not limit or otherwise affect the obligations of Company hereunder with respect to payments of principal of or interest on this Note. Whenever any payment on this Note shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest on this Note. This Note is subject to mandatory prepayment as provided in subsection [2.4B(iii)] of the Credit Agreement and to prepayment at the option of Company as provided in subsection [2.4B(i)] of the Credit Agreement. THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF COMPANY AND PAYEE HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. This Note is subject to restrictions on transfer or assignment as provided in subsections [10.1 and 10.16] of the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligations of Company, which are absolute and IV-2 unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. After the occurrence of an Event of Default, Company promises to pay all costs and expenses, including reasonable attorneys' fees, all as provided in subsection [10.2] of the Credit Agreement, incurred in the collection and enforcement of this Note. Company hereby consents to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waives diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. IN WITNESS WHEREOF, Company has caused this Note to be duly executed and delivered by its officer thereunto duly authorized as of the date and at the place first written above. SEALY MATTRESS COMPANY By: ____________________________ Name: Title: IV-3 EXHIBIT V [FORM OF AXEL SERIES C NOTE] SEALY MATTRESS COMPANY PROMISSORY NOTE DUE DECEMBER __, 2005 $[7] New York, New York [Closing Date] FOR VALUE RECEIVED, SEALY MATTRESS COMPANY, an Ohio corporation ("COMPANY"), promises to pay to [8] ("PAYEE") or its registered assigns the principal amount of [9] ($[7]) in the installments referred to below. Company also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of that certain AXEL Credit Agreement dated as of December 18, 1997 by and among Company, Sealy Corporation, a Delaware corporation, as guarantor, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, the financial institutions listed therein, Morgan Guaranty Trust Company of New York, as administrative agent ("ADMINISTRATIVE AGENT"), and Bankers Trust Company, as documentation agent (said Credit Agreement, as it may be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined). Company shall make principal payments on this Note in consecutive quarterly installments, commencing on March __, 1998 and ending on December __, 2005. Each such installment shall be due on the date specified in the Credit Agreement and in an amount determined in accordance with the provisions thereof; provided -------- that the last such installment shall be in an amount sufficient to repay the entire unpaid principal balance of this Note, together with all accrued and unpaid interest thereon. This Note is one of Company's "AXEL Series C Notes" in the aggregate principal amount of $90,000,000 and is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and conditions under which the AXEL Series C evidenced hereby was made and is to be repaid. - ------------------------- [7] Insert amount of Lender's AXEL Series C in numbers. [8] Insert Lender's name in capital letters. [9] Insert amount of Lender's AXEL Series C in words. V-1 All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the Funding and Payment Office or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. Unless and until an Assignment Agreement effecting the assignment or transfer of this Note shall have been accepted by Agent and recorded in the Register as provided in subsection [10.1B(ii)] of the Credit Agreement, Company and Agent shall be entitled to deem and treat Payee as the owner and holder of this Note and the Loan evidenced hereby. Payee hereby agrees, by its acceptance hereof, that before disposing of this Note or any part hereof it will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid; provided, however, that the failure to make a -------- ------- notation of any payment made on this Note shall not limit or otherwise affect the obligations of Company hereunder with respect to payments of principal of or interest on this Note. Whenever any payment on this Note shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest on this Note. This Note is subject to mandatory prepayment as provided in subsection [2.4B(iii)] of the Credit Agreement and to prepayment at the option of Company as provided in subsection [2.4B(i)] of the Credit Agreement. THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF COMPANY AND PAYEE HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. This Note is subject to restrictions on transfer or assignment as provided in subsections [10.1 and 10.16] of the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligations of Company, which are absolute and V-2 unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. After the occurrence of an Event of Default, Company promises to pay all costs and expenses, including reasonable attorneys' fees, all as provided in subsection [10.2] of the Credit Agreement, incurred in the collection and enforcement of this Note. Company hereby consents to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waives diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. IN WITNESS WHEREOF, Company has caused this Note to be duly executed and delivered by its officer thereunto duly authorized as of the date and at the place first written above. SEALY MATTRESS COMPANY By: ________________________ Name: Title: V-3 EXHIBIT VI [FORM OF AXEL SERIES D NOTE] SEALY MATTRESS COMPANY PROMISSORY NOTE DUE DECEMBER __, 2006 $[10] New York, New York [Closing Date] FOR VALUE RECEIVED, SEALY MATTRESS COMPANY, an Ohio corporation ("COMPANY"), promises to pay to [11] ("PAYEE") or its registered assigns the principal amount of [12] ($[10]) in the installments referred to below. Company also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of that certain AXEL Credit Agreement dated as of December 18, 1997 by and among Company, Sealy Corporation, a Delaware corporation, as guarantor, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, the financial institutions listed therein, and Morgan Guaranty Trust Company of New York, as administrative agent ("ADMINISTRATIVE AGENT"), and Bankers Trust Company, as documentation agent (said Credit Agreement, as it may be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined). Company shall make principal payments on this Note in consecutive quarterly installments, commencing on March __, 1998 and ending on December __, 2006. Each such installment shall be due on the date specified in the Credit Agreement and in an amount determined in accordance with the provisions thereof; provided -------- that the last such installment shall be in an amount sufficient to repay the entire unpaid principal balance of this Note, together with all accrued and unpaid interest thereon. This Note is one of Company's "AXEL Series D Notes" in the aggregate principal amount of $115,000,000 and is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and conditions under which the AXEL Series D evidenced hereby was made and is to be repaid. - ---------------------- [10] Insert amount of Lender's AXEL Series D in numbers. [11] Insert Lender's name in capital letters. [12] Insert amount of Lender's AXEL Series D in words. VI-1 All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the Funding and Payment Office or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. Unless and until an Assignment Agreement effecting the assignment or transfer of this Note shall have been accepted by Agent and recorded in the Register as provided in subsection [10.1B(ii)] of the Credit Agreement, Company and Agent shall be entitled to deem and treat Payee as the owner and holder of this Note and the Loan evidenced hereby. Payee hereby agrees, by its acceptance hereof, that before disposing of this Note or any part hereof it will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid; provided, however, that the failure to make a -------- ------- notation of any payment made on this Note shall not limit or otherwise affect the obligations of Company hereunder with respect to payments of principal of or interest on this Note. Whenever any payment on this Note shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest on this Note. This Note is subject to mandatory prepayment as provided in subsection [2.4B(iii)] of the Credit Agreement and to prepayment at the option of Company as provided in subsection [2.4B(i)] of the Credit Agreement. THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF COMPANY AND PAYEE HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. This Note is subject to restrictions on transfer or assignment as provided in subsections [10.1 and 10.16] of the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligations of Company, which are absolute and VI-2 unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. After the occurrence of an Event of Default, Company promises to pay all costs and expenses, including reasonable attorneys' fees, all as provided in subsection [10.2] of the Credit Agreement, incurred in the collection and enforcement of this Note. Company hereby consents to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waives diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. IN WITNESS WHEREOF, Company has caused this Note to be duly executed and delivered by its officer thereunto duly authorized as of the date and at the place first written above. SEALY MATTRESS COMPANY By: ___________________________ Name: Title: VI-3 EXHIBIT VII [FORM OF COMPLIANCE CERTIFICATE] COMPLIANCE CERTIFICATE THE UNDERSIGNED HEREBY CERTIFY ON BEHALF OF HOLDINGS (AS DEFINED BELOW) THAT: (1) We are the duly elected [Title] and [Title] of Sealy Corporation, a Delaware corporation ("HOLDINGS"); (2) We have reviewed the terms of that certain AXEL Credit Agreement dated as of December 18, 1997, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the "AXEL CREDIT AGREEMENT", the terms defined therein and not otherwise defined in this Certificate (including Attachment No. 1 annexed hereto and made a part hereof) being used in this Certificate as therein defined), by and among Company, Holdings, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, the financial institutions listed therein, Morgan Guaranty Trust Company of New York, as administrative agent ("ADMINISTRATIVE AGENT"), and Bankers Trust Company, as documentation agent, and the terms of the other Loan Documents, and we have made, or have caused to be made under our supervision, a review in reasonable detail of the transactions and condition of Holdings and its Subsidiaries during the accounting period covered by the attached financial statements; and (3) The examination described in paragraph (2) above did not disclose, and we have no knowledge of, the existence of any condition or event which constitutes an Event of Default or Potential Event of Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate. [Set forth [below] [in a separate attachment to this Certificate] are all exceptions to paragraph (3) above listing, in detail, the nature of the condition or event, the period during which it has existed and the action which Holdings has taken, is taking, or proposes to take with respect to each such condition or event: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ _______________________________________________________________________________] VII-1 The foregoing certifications, together with the computations set forth in Attachment No. 1 annexed hereto and made a part hereof and the financial statements delivered with this Certificate in support hereof, are made and delivered this ____ day of ____________, [199_] [200_] pursuant to subsection 5.1(iv) of the AXEL Credit Agreement. SEALY CORPORATION By: _____________________________ Name: Title: By: _____________________________ Name: Title: VII-2 ATTACHMENT NO. 1 TO COMPLIANCE CERTIFICATE This Attachment No. 1 is attached to and made a part of a Compliance Certificate dated as of ______________, [199_][200_] and pertains to the period from ____________, [199_][200_] to ____________, [199_][200_]. Subsection references herein relate to subsections of the AXEL Credit Agreement. A. CONSOLIDATED FIXED CHARGE COVERAGE RATIO (for the Four-Quarter Period ending _____________, [199_][200_]) 1. Consolidated Net Income: $_____________ 2. Income taxes and foreign withholding taxes paid or accrued in accordance with GAAP: $_____________ 3. Consolidated Interest Expense: $_____________ 4. Consolidated Noncash Charges: $_____________ 5. one-time cash compensation payments made in connection with the Recapitalization Transactions: $_____________ 6. Payments related to addressing Company's or any Restricted Subsidiary's "Year 2000" information systems issue: $_____________ 7. Bad debt and factoring losses incurred specifically with respect to the bankruptcy of Montgomery Ward: 8. EITF 97-13 Expenditures: $_____________ 9. Consolidated EBITDA (1+2+3+4+5+6+7+8) (items 2 through 8 above to be included in such calculation to the extent Consolidated Net Income was reduced by such amounts): $_____________ 10. Consolidated Interest Expense (before amortization or write-off of debt issuance costs): $_____________ 11. Amount of cash dividend payments on any series of VII-3 preferred stock: $_____________ 12. Amount of dividend payments on any series of Permitted Foreign Subsidiary Preferred Stock or Permitted Domestic Subsidiary Preferred Stock: $_____________ 13. Consolidated Fixed Charges (10+11+12): $_____________ 14. Consolidated Fixed Charge Coverage Ratio ((9):(13)): ____:1.00 14. Minimum Consolidated Fixed Charge Coverage Ratio required under subsection 6.3: 2.0:1.0 VII-4 EXHIBIT VIII KIRKLAND & ELLIS A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS Citicorp Center 153 East 53rd Street New York, NY 10022-4675 To Call Writer Direct: 212 446-4800 Facsimile: 212 446-4800 212 446-4900 December 18, 1997 To the Administrative Agent, the Collateral Agent, the Documentation Agent, the Syndication Agent and each of the Lenders party to the Credit Agreement referred to below: Ladies and Gentlemen: We are issuing this opinion letter in our capacity as special legal counsel to Sealy Corporation, a Delaware corporation ("Holdings"), Sealy -------- Mattress Company, an Ohio corporation (the "Borrower"), and each other Domestic -------- Subsidiary of Borrower that is a party to a Subsidiary Guaranty (collectively, the "Subsidiary Guarantors" and, together with Holdings and the Borrower, the --------------------- "Credit Parties," and each a "Credit Party"), in response to the requirement in - --------------- ------------ (a) subsections 4.1J(vii) and 4.1(P) of the Credit Agreement (the "Term ---- A/Revolver Credit Agreement") dated as of the date hereof by and among Holdings, - --------------------------- the Borrower, the various lending institutions party thereto (the "Term ---- A/Revolver Lenders"), Goldman Sachs Credit Partners L.P., as Arranger and - ------------------ Syndication Agent, Morgan Guaranty Trust Company of New York, as Administrative Agent, and Bankers Trust Company, as Documentation Agent, and (b) subsection 3.1J(vi) and 3.1(P) of the AXEL Credit Agreement (the "AXEL Credit Agreement," --------------------- and together with the Term A/Revolver Credit Agreement, the "Credit ------ Agreements"), dated as of the date hereof by and among Holdings, the Borrower, the various lending institutions party thereto (the "AXEL Lenders," collectively ------------ with the AXEL Lenders and Term A/Revolver Lenders, (the "Lenders")), Goldman ------- Sachs Credit Partners L.P., as Arranger and Syndication Agent, Morgan Guaranty Trust Company of New York, as Administrative Agent and Bankers Trust Company, as Documentation Agent (the Lenders and the various aforementioned agents under the Credit Agreements being herein called "you"). The term "Transaction Documents" --- --------------------- whenever it is used in this letter means the Credit Agreements and the following additional documents: (a) the Notes, (b) the Guaranties and Collateral Documents executed on or before the date hereof listed on Schedule E (the ---------- "Collateral Documents"), (c) the Financing Statements (as defined in opinion - --------------------- paragraph 9 of this letter) executed by the Credit Parties, (d) the Recapitalization Agreement and (e) the Related Documents listed on Schedule F. ---------- Unless otherwise indicated, capitalized terms used herein but not otherwise defined herein have the respective meanings set forth in the Credit Agreements. KIRKLAND & ELLIS December 18, 1997 Page 2 Subject to the assumptions, qualifications, exclusions and other limitations which are identified in this letter and in the schedules attached to this letter, we advise you, and with respect to each legal issue addressed in this letter, it is our opinion, that: 1. Holdings is a corporation existing and in good standing under the General Corporation Law of the State of Delaware. Each Subsidiary Guarantor is a corporation existing under the general corporate law of its state of incorporation. Each Credit Party is in good standing in the jurisdictions set forth below such Credit Party's name on Schedule -------- G. For purposes of the foregoing opinions in this paragraph, we have - relied exclusively upon the certificates issued by the governmental authorities in each respective state of incorporation and other relevant jurisdictions for the other Credit Parties incorporated in states other than Delaware, Illinois and New York and such opinions are not intended to provide any conclusion or assurance beyond that conveyed by such certificates. Based upon our review of the Certificate (or Articles, as the case may be) of Incorporation and Bylaws of each Credit Party (other than the Borrower), each Credit Party (other than the Borrower) has the corporate power to own its property and assets of which we are aware and to transact the business in which, to our actual knowledge, it is engaged or presently proposes to engage (as such business is described in the Offering Circular dated December 11, 1997, relating to the Senior Subordinated Notes and the Discount Notes). 2. Each Credit Party (other than the Borrower) has the corporate power to enter into each of the Transaction Documents (other than the Recapitalization Agreement) to which it is a party and perform its obligations under each of the Credit Agreements, the Notes, the Collateral Documents and the Related Documents to which it is a party. 3. The Board of Directors of each Credit Party (other than the Borrower) has adopted by requisite vote the resolutions necessary to authorize such Credit Party's execution and delivery of the Transaction Documents (other than the Recapitalization Agreement) to which it is a party and the performance of the Transaction Documents (other than the Recapitalization Agreement and the Financing Statements) to which it is a party and no approval by the shareholders of such Credit Parties is required in connection with the authorization of such execution, delivery and performance of the KIRKLAND & ELLIS December 18, 1997 Page 3 Transaction Documents (other than the Recapitalization Agreement) to which it is a party. 4. Each Credit Party (other than the Borrower) has duly executed and delivered the Transaction Documents (other than the Recapitalization Agreement) to which it is a party. 5. Each of the Transaction Documents (other than the Recapitalization Agreement and the Financing Statements) is a valid and binding obligation of each Credit Party that is a party thereto and is enforceable against each such Credit Party in accordance with its terms. 6. The execution and delivery of the Transaction Documents (other than the Recapitalization Agreement) to which it is a party by each Credit Party and performance of the obligations under the Transaction Documents (other than the Recapitalization Agreement and the Financing Statements) to which it is a party will not (a) conflict with any of the Transaction Documents, (b) violate any existing provisions of such Credit Party's Certificate (or Articles, as the case may be) of Incorporation or Bylaws, (c) constitute a violation by such Credit Party of any applicable provision of existing statutory law or governmental regulation covered by this letter, (d) result in the creation or imposition of any lien, charge or encumbrance upon any of the property of any Credit Party other than liens, charges and encumbrances in your favor or (e) violate any existing order, writ, injunction or decree applicable to any Credit Party of which we are aware of any court or governmental instrumentality. Without limiting the foregoing, the making of the Loans and the application of the proceeds thereof as provided in the Credit Agreements do not violate Regulations G, T, U or X of the Board of Governors of the Federal Reserve System. 7. No Credit Party is presently required to obtain any consent, approval, authorization or order of any court or governmental agency in order to obtain the right to enter into any of the Transaction Documents (other than the Recapitalization Agreement) or to take any of the actions taken by such Credit Party in connection with the consummation of the transactions contemplated by the Transaction Documents (other than the Recapitalization Agreement), except for: (a) those obtained or made on or prior to the Closing Date, (b) any actions or filings to perfect the liens and security KIRKLAND & ELLIS December 18, 1997 Page 4 interests granted under the Collateral Documents, (c) actions or filings required in connection with ordinary course conduct by the Credit Parties of their respective businesses and ownership or operation by the Credit Parties of their respective assets and (d) actions and filings required under the Securities Act of 1933, as amended, or any state "blue sky" law or related regulation and the Trust Indenture Act of 1939, as amended (as to which matters, except as specifically set forth in paragraph 18, we express no opinion). 8. Each of the Holdings Security Agreement, the Company Security Agreement, the Company Patent and Trademark Security Agreement, the Subsidiary Security Agreement, the Subsidiary Patent and Trademark Security Agreement and Section 4 of the Mortgage (the "New York -------- Mortgage") dated the date hereof executed by Sealy Mattress of Albany, -------- Inc. ("Sealy Albany") (collectively, the "Security Agreements") ------------ ------------------- creates a valid and enforceable security interest in favor of the Collateral Agent in the collateral therein respectively described (the "Collateral") which constitutes property in which a security interest ---------- can be granted under Article 9 of the Uniform Commercial Code as enacted in New York (the "New York UCC"). Such Collateral is referred ------------ to herein as the "Code Collateral." --------------- 9. The Uniform Commercial Code financing statements (Form UCC-1) which have been signed by representatives of each of the applicable Credit Parties and delivered on or before the date of this letter in connection with the transactions specified in the Collateral Documents (the "Financing Statements"), have been duly executed and delivered by -------------------- each such Credit Party. When certain of the Financing Statements have been duly filed or recorded, as appropriate, in the Offices of the Secretary of State of the States of New York and Illinois (and, with respect to certain of the Financing Statements signed by Sealy Albany, the Office of the Clerk, Albany County), the security interests under the Security Agreements in the Code Collateral presently located or deemed located in the States of New York and Illinois under Section 9- 103 of the New York UCC will be perfected to the extent such security interests in such Code Collateral can be perfected by the filing of financing statements in the States of New York and Illinois. 10. Under Section 9-103 of the New York UCC, the perfection and effect of perfection of the security interests in favor of the Collateral Agent in the remaining Code Collateral will be governed by laws other than those of the States of New York and KIRKLAND & ELLIS December 18, 1997 Page 5 Illinois. Although we express no opinion as to such laws, we have reviewed the Commerce Clearing House, Inc. Secured Transactions Guide as supplemented through November 25, 1997 (the "Guide") and, based ----- solely on such review, we advise you that when the remaining Financing Statements executed by each Credit Party are duly filed or recorded, as appropriate, in the filing offices set forth on Schedule H, the ---------- security interests under the Security Agreements in such Code Collateral described therein will be perfected to the extent such security interests can be perfected by the filing of financing statements in such other states. 11. Upon the filing and recordation of the Company Patent and Trademark Security Agreement and the Subsidiary Patent and Trademark Security Agreement with the United States Patent and Trademark Office (and the payment of required filing fees) and the filing of appropriate financing statements as described in paragraphs 9 and 10 of this letter, the security interest for the benefit of the Collateral Agent in the United States patents and registered trademarks described therein will be perfected under applicable Federal law to the extent that security interests in such Collateral may be perfected under such Federal laws. 12. Assuming (in addition to all other assumptions upon which this letter is based) that the Collateral Agent has taken and is retaining possession in the State of New York of the certificates representing the securities which are certificated and pledged pursuant to the Holdings Pledge Agreement, the Company Pledge Agreement and the Subsidiary Pledge Agreement (collectively, the "Pledge Agreements"), ----------------- duly endorsed to the Collateral Agent or in blank by an effective endorsement (within the meaning of Section 8-102(a)(11) of the New York UCC), the security interest in favor of the Collateral Agent in such pledged securities is perfected by "control" under the New York UCC; and assuming further (in addition to all other assumptions upon which this letter is based) that the Collateral Agent has taken possession of such pledged certificated securities and such accompanying endorsements without notice (actual or constructive), at or prior to the time of the delivery of such pledged certificated securities and endorsements to the Collateral Agent, of any adverse claim within the meaning of Section 8-102(a)(1) of the New York UCC, the Collateral Agent has acquired a security interest in such pledged securities free of any such adverse claims. KIRKLAND & ELLIS December 18, 1997 Page 6 13. The New York Mortgage is in proper form for recording and, upon recordation in the Office of the Clerk, Albany County and the payment of all applicable recording fees and taxes, will create in favor of the Collateral Agent a valid and enforceable mortgage lien on Sealy Albany's interest in that portion of the "Mortgaged Property", as defined therein, that constitutes real property (including fixtures, to the extent the same constitute real property). 14. The Credit Parties are not "investment companies" within the meaning of the Investment Company Act of 1940, as amended. 15. The Credit Parties are not "holding companies" or "subsidiary companies" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 16. To the best of our actual knowledge (based solely upon lien searches, inquiries of officers of the Credit Parties and the certificates executed and delivered to us by officers of such parties), (i) there are no actions, suits or proceedings pending or threatened (a) against any Credit Parties (other than those identified in Schedules 4.10(A)- (G) to the Recapitalization Agreement), which have not been disclosed to you or your counsel or (b) against any Credit Parties with respect to any of the Transaction Documents and (ii) there does not exist any judgment, order or injunction prohibiting or imposing any material adverse condition upon the consummation of the transactions contemplated by the Transaction Documents. 17. All monetary obligations of the Borrower under the Credit Agreements are within the definition of "Senior Debt" under, and as defined in, the Senior Subordinated Note Indenture, the Discount Note Indenture and the Junior Subordinated Seller Notes. 18. It is not necessary in connection with the execution and delivery of the Notes and the Credit Agreements to the Lenders to register the Notes or the Credit Agreements or the Loans under the Securities Act of 1933, as amended, or to qualify any indenture in respect thereof under the Trust Indenture Act of 1939, as amended. KIRKLAND & ELLIS December 18, 1997 Page 7 In preparing this letter, we have relied without any independent verification upon the assumptions recited in Schedule B to this letter and upon: ---------- (i) information contained in certificates obtained from governmental authorities; (ii) factual information represented to be true in the Credit Agreements and the other Transaction Documents; (iii) factual information provided to us in a support certificate signed by the Credit Parties; and (iv) factual information we have obtained from such other sources as we have deemed reasonable. We have assumed without investigation that there has been no relevant change or development between the dates as of which the information cited in the preceding sentence was given and the date of this letter and that the information upon which we have relied is accurate and does not omit disclosures necessary to prevent such information from being misleading. While we have not conducted any independent investigation to determine facts upon which our opinions are based or to obtain information about which this letter advises you, we confirm that we do not have any actual knowledge which has caused us to conclude that our reliance and assumptions cited in the preceding paragraph are unwarranted or that any information supplied in this letter is wrong. The terms "knowledge," "actual knowledge" and "aware" whenever used in this letter with respect to our firm means conscious awareness at the time this letter is delivered on the date it bears by the following Kirkland & Ellis lawyers who have had significant involvement with negotiation or preparation of the Transaction Documents (herein called "our Designated Transaction Lawyers"): Lance C. Balk, Linda K. Riley Myers, Debra B. Arenare, Mark J. Eagan, Frederick Tanne, Brian Land, Jeffrey W. Stevenson, Robert J. Frances, Brian W. Raftery, Andrew E. Nagel, Jordon L. Kruse and Jeff A. Hess. Our advice on every legal issue addressed in this letter is based exclusively on the internal laws of New York and Illinois or the Federal law of the United States except that (i) the opinions in paragraphs 1 through 4 are also based on the General Corporation Law of the State of Delaware and our review of summary compilations of the corporate statutes of the jurisdictions of incorporation of the Subsidiary Guarantors that are incorporated in states other than Delaware, Illinois and New York and (ii) our advice in paragraph 10 is based on the laws as summarized in the Guide to the extent indicated in that paragraph. We advise you that issues addressed by this letter may be governed in whole or in part by other laws, but we express no opinion as to whether any relevant difference exists between the laws upon which our opinions are based and any other laws which may actually govern. Our opinions are subject to all qualifications in Schedule A and do not cover or otherwise address any law or ---------- legal issue which is identified in the attached Schedule C or any provision in ---------- the Credit Agreement or any of the other Transaction Documents of any type identified in Schedule D. Provisions in the Transaction Documents which are not ---------- excluded by KIRKLAND & ELLIS December 18, 1997 Page 8 Schedule D or any other part of this letter or its attachments are - ---------- called the "Relevant Agreement Terms." ------------------------ Our advice on each legal issue addressed in this letter represents our opinion as to how that issue would be resolved were it to be considered by the highest court of the jurisdiction upon whose law our opinion on that issue is based. The manner in which any particular issue would be treated in any actual court case would depend in part on facts and circumstances particular to the case, and this letter is not intended to guarantee the outcome of any legal dispute which may arise in the future. It is possible that some Relevant Agreement Terms of a remedial nature contained in the Collateral Documents may not prove enforceable for reasons other than those cited in this letter should an actual enforcement action be brought, but (subject to all the exceptions, qualifications, exclusions and other limitations contained in this letter) such unenforceability would not in our opinion prevent you from realizing the principal benefits purported to be provided by the Relevant Agreement Terms of a remedial nature contained in the Collateral Documents. This letter speaks as of the time of its delivery on the date it bears. We do not assume any obligation to provide you with any subsequent opinion or advice by reason of any fact about which our Designated Transaction Lawyers did not have actual knowledge at that time, by reason of any change subsequent to that time in any law covered by any of our opinions, or for any other reason. The attached schedules are an integral part of this letter, and any term defined in this letter or any schedule has that defined meaning wherever it is used in this letter or in any schedule to this letter. You may rely upon this letter only for the purpose served by the provisions in the Credit Agreements cited in the initial paragraph of this letter in response to which it has been delivered. Without our written consent: (i) no person other than you may rely on this letter for any purpose and (ii) this letter may not be cited or quoted in any financial statement, prospectus, private placement memorandum or other similar document. Notwithstanding the foregoing, persons who subsequently become Lenders (or participants in accordance with the terms of the Credit Agreements) may rely on this letter as of the time of its delivery on the date hereof as if this letter were addressed to them. Sincerely, /s/ Kirkland & Ellis Kirkland & Ellis SCHEDULE A GENERAL QUALIFICATIONS All of our opinions ("our opinions") in the letter to which this Schedule is attached ("our letter") are subject to each of the qualifications set forth in this Schedule. 1. Bankruptcy and Insolvency Exception. Each of our opinions in our ----------------------------------- letter is subject to the effect of bankruptcy, insolvency, reorganization, receivership, moratorium and other similar laws relating to or affecting creditors' rights. This exception includes: a. the federal Bankruptcy Code and thus comprehends, among others, matters of turn-over, automatic stay, avoiding powers, fraudulent transfer, preference, discharge, conversion of a non-recourse obligation into a recourse claim, limitations on ipso facto and anti-assignment clauses and the coverage of pre-petition security agreements applicable to property acquired after a petition is filed; b. all other federal and state bankruptcy, insolvency, reorganization, receivership, moratorium, arrangement and assignment for the benefit of creditors laws that affect the rights of creditors generally or that have reference to or affect only creditors of specific types of debtors; c. state fraudulent transfer and conveyance laws; and d. judicially developed doctrines in this area, such as substantive consolidation of entities and equitable subordination. 2. Equitable Principles Limitation. Each of our opinions as to the ------------------------------- validity, binding effect or enforceability of any of the Transaction Documents or to the availability of injunctive relief and other equitable remedies is subject to the effect of general principles of equity, whether applied by a court of law or equity. This limitation includes principles: a. governing the availability of specific performance, injunctive relief or other equitable remedies, which generally place the award of such remedies, subject to certain guidelines, in the discretion of the court to which application for such relief is made; b. affording equitable defenses (e.g., waiver, laches and estoppel) against a party seeking enforcement; A-1 c. requiring good faith and fair dealing in the performance and enforcement of a contract by the party seeking its enforcement; d. requiring reasonableness in the performance and enforcement of an agreement by the party seeking enforcement of the contract; e. requiring consideration of the materiality of (i) a breach and (ii) the consequences of the breach to the party seeking enforcement; f. requiring consideration of the commercial impracticability or impossibility of performance at the time of attempted enforcement; and g. affording defenses based upon the unconscionability of the enforcing party's conduct after the parties have entered into the contract. 3. Other Common Qualifications. Each of our opinions as to the validity, --------------------------- binding effect or enforceability of any of the Transaction Documents or to the availability of injunctive relief and other equitable remedies is subject to the effect of rules of law that: a. limit or affect the enforcement of provisions of a contract that purport to waive, or to require waiver of, the obligations of good faith, fair dealing, diligence and reasonableness; b. provide that forum selection clauses in contracts are not necessarily binding on the court(s) in the forum selected; c. limit the availability of a remedy under certain circumstances where another remedy has been elected; d. provide a time limitation after which a remedy may not be enforced; e. limit the right of a creditor to use force or cause a breach of the peace in enforcing rights; f. relate to the sale or disposition of collateral or the requirements of a commercially reasonable sale; g. limit the enforceability of provisions releasing, exculpating or exempting a party from, or requiring indemnification of a party for, liability for its own action or inaction, to the extent the action or inaction involves negligence, recklessness, willful misconduct, unlawful conduct, violation of public policy or litigation against another party determined adversely to such party; A-2 h. may, where less than all of a contract may be unenforceable, limit the enforceability of the balance of the contract to circumstances in which the unenforceable portion is not an essential part of the agreed exchange; i. govern and afford judicial discretion regarding the determination of damages and entitlement to attorneys' fees and other costs; j. may permit a party that has materially failed to render or offer performance required by the contract to cure that failure unless (i) permitting a cure would unreasonably hinder the aggrieved party from making substitute arrangements for performance, or (ii) it was important in the circumstances to the aggrieved party that performance occur by the date stated in the contract; and/or k. may render guarantees unenforceable under circumstances where your actions, failures to act or waivers, amendments or replacement of the Transaction Documents so radically change the essential nature of the terms and conditions of the guaranteed obligations and the related transactions that, in effect, a new relationship has arisen between you and the Borrower and/or other Credit Parties which is substantially and materially different from that presently contemplated by the Transaction Documents. 4. Referenced Provision Qualification. Each opinion regarding the ---------------------------------- validity, binding effect or enforceability of a provision (the "First ----- Provision")in any of the Transaction Documents requiring any Credit --------- Party to perform its obligations under, or to cause any other person to perform its obligations under, any other provision (a "Second ------ Provision") of any Transaction Document, or stating that any action --------- will be taken as provided in or in accordance with such Second Provision are subject to the same qualifications as the corresponding opinion in this letter relating to the validity, binding effect and enforceability of such Second Provision. Requirements in the Transaction Documents that provisions therein may only be waived or amended in writing may not be enforceable to the extent that an oral agreement or an implied agreement by trade practice or course of conduct has been created modifying any such provision. 5. Collateral Qualifications. The opinions and advice contained in our ------------------------- letter are subject to the following advice: a. certain rights of debtors and duties of secured parties referred to in Sections 1-102(3) and 9-501(3) of the New York UCC may not be waived, released, varied or disclaimed by agreement prior to a default; b. our opinions regarding the creation and perfection of security interests are subject to the effect of (i) the limitations on the existence and perfection of security interests in proceeds resulting from the operation of Section 9-306, A-3 Section 9-115 or Section 8-321(1) [1977 version] of any applicable Uniform Commercial Code; (ii) the limitations in favor of buyers imposed by Sections 9-307 and 9-308 of any applicable Uniform Commercial Code; (iii) the limitations with respect to documents, instruments and securities imposed by Section 9-309 and 8-303 of any applicable Uniform Commercial Code; (iv) other rights of persons in possession of money, instruments and proceeds constituting certificated or uncertificated securities; and (v) section 547 of the Bankruptcy Code with respect to preferential transfers and section 552 of the Bankruptcy Code with respect to any Collateral acquired by any Credit Party subsequent to the commencement of a case against or by any Credit Party under the Bankruptcy Code; c. Article 9 of each applicable Uniform Commercial Code requires the filing of continuation statements within specified periods in order to maintain the effectiveness of the filings referred to in our letter; d. Additional filings may be necessary if any Credit Party changes its name, identity or corporate structure or the jurisdiction in which any of its places of business, its chief executive office or any Collateral is located; e. your security interest in certain of the Collateral may not be perfected by the filing of financing statements under the Uniform Commercial Code; f. we express no opinion regarding the perfection of any security interest except as specifically set forth in our letter or regarding the continued perfection of any security interest in any Collateral upon or following the removal of such Collateral to another jurisdiction and we express no opinion regarding the priority of any security interest (except for the limited opinion set forth in paragraph 12 regarding the acquisition of certain security interests free of adverse claims); g. the assignment of any contract, lease, license, or permit may require the approval of the issuer thereof or the other parties thereto (other than to the extent provided in Section 9-318(4) of the New York UCC, security interests in the right to receive the payment of money under any such contract); h. we express no opinion with respect to any self-help remedies to the extent they vary from those available under the New York UCC or with respect to any remedies otherwise inconsistent with the New York UCC to the extent that the New York UCC is applicable thereto; i. a substantial body of case law treats guarantors as "debtors" under the New York UCC, thereby according guarantors rights and remedies of debtors established by the New York UCC; A-4 j. we express no opinion as to whether the guarantee would remain enforceable if you release the primary obligor either directly or by electing a remedy which precludes you from proceeding directly against the primary obligor; k. we express no opinion with respect to the creation, perfection or enforceability of security interests in property in which it is illegal or violative of governmental rules or regulations to grant a security interest (such as, for example, governmental permits and licenses), general intangibles which terminate or become terminable if a security interest is granted therein, property subject to negative pledge clauses of which you have knowledge, vehicles, ships, vessels, barges, boats, railroad cars, locomotives or other rolling stock, aircraft, aircraft engines, propellers and related parts, or other property for which a state or federal statute or treaty provides for registration or certification of title or which specifies a place of filing different than that specified in Section 9-401 of any applicable Uniform Commercial Code, cash which is not in your possession, uncertificated securities, crops, timber to be cut, fixtures, accounts subject to subsection (5) of Section 9-103 of any applicable Uniform Commercial Code, consumer goods, farm products, equipment used in farming operations, accounts or general intangibles arising from or relating to the sale of farm products by a farmer, property identified to a contract with, or in the possession of, the United States of America or any state, county, city, municipality or other governmental body or agency, goods for which a negotiable document of title has been issued, and copyrights, patents and trademarks (except as expressly set forth in opinion paragraph 11), other literary property rights, service marks, know-how, processes, trade secrets, undocumented computer software, unrecorded and unwritten data and information, and rights and licenses thereunder; l. we express no opinion with respect to the enforceability of any security interest in any accounts, chattel paper, documents, instruments or general intangibles with respect to which the account debtor or obligor is the United States of America, any state, county, city, municipality or other governmental body, or any department, agency or instrumentality thereof; m. we express no opinion with respect to the enforceability of any provision of any Transaction Document which purports to authorize you to sign or file financing statements or other documents without the signature of the debtor (except to the extent a secured party may execute and file financing statements without the signature of the debtor under Section 9-402(2) of the applicable Uniform Commercial Code); n. we express no opinion with respect to the enforceability of any provision of any Transaction Document which purports to authorize you to purchase at a A-5 private sale collateral which is not subject to widely distributed standard price quotations or sold on a recognized market; o. we note that the remedies under the Pledge Agreements to sell or offer for sale the Pledged Collateral (as defined in the Pledge Agreements) are subject to compliance with applicable state and federal securities laws; p. we express no opinion in this letter regarding creation or perfection of any security interest in, and the term "Code ---- Collateral" shall not include, any property in which a security ---------- interest may be granted under the Uniform Commercial Code in the New York UCC but which is property in which a security interest may not be granted under Article 9 of the Uniform Commercial Code as in effect in any of the following jurisdictions: the jurisdiction in which such property is located, the jurisdiction in which the debtor is located (as defined in Section 9-103(3)(d) of the New York UCC) or (in the case of a deposit account) the jurisdiction in which the office of the depositary institution at which the deposit account is maintained is located; q. we express no opinion regarding the enforceability of any pre- default waiver of redemption rights; and r. we express no opinion regarding the enforceability of any provisions asserting that Collateral is owned by or is property of a secured party prior to such secured party's foreclosure of such Collateral in accordance with the applicable Uniform Commercial Code or, in the case of cash collateral, the application of such cash collateral in payment of the secured obligations. A-6 SCHEDULE B ASSUMPTIONS For purposes of our letter, we have relied, without investigation, upon each of the following assumptions: 1. The Borrower is existing and in good standing in its jurisdiction of incorporation. 2. You are existing and in good standing in your jurisdiction of organization. 3. The Borrower has the full corporate power and authority to execute, deliver and to perform its obligations under each of the Transaction Documents to which it is a party and each of the Transaction Documents to which it is a party has been duly authorized by all necessary action and has been duly executed and delivered by the Borrower. 4. You have full power and authority (including without limitation under the laws of your jurisdiction of organization) to execute, deliver and to perform your obligations under each of the Transaction Documents to which you are a party and each of the Transaction Documents to which you are a party has been duly authorized by all necessary action on your part and has been duly executed and duly delivered by you. 5. The Transaction Documents to which you are a party constitute valid and binding obligations of yours and are enforceable against you in accordance with their terms (subject to qualifications, exclusions and other limitations similar to those applicable to our letter). 6. You have complied with all legal requirements pertaining to your status as such status relates to your rights to enforce the Transaction Documents to which you are a party against any of the Credit Parties. 7. Each document submitted to us for review is accurate and complete, each such document that is an original is authentic, each such document that is a copy conforms to an authentic original, and all signatures (other than those of or on behalf of the Credit Parties) on each such document are genuine. 8. There has not been any mutual mistake of fact or misunderstanding, fraud, duress or undue influence. 9. The conduct of the parties to the Transaction Documents has complied with any requirement of good faith, fair dealing and conscionability. B-1 10. You have acted in good faith and without notice of any defense against the enforcement of any rights created by, or adverse claim to any property or security interest transferred or created as part of, the transactions effected under the Transaction Documents (herein called the "Transactions"). ------------ 11. There are no agreements or understandings among the parties, written or oral, and there is no usage of trade or course or prior dealing among the parties that would, in either case, define, supplement or qualify the terms of the Credit Agreements or any of the other Transaction Documents. 12. With respect to the opinions set forth in opinion paragraphs 6 and 7, we assume that no Credit Party will in the future take any discretionary action (including a decision not to act) permitted under the Transaction Documents that would result in a violation of law or constitute a breach or default under any other agreements or court orders to which such Credit Party may be subject. 13. With respect to the opinions set forth in opinion paragraphs 5, 6 and 7, we assume that each Credit Party will in the future obtain all permits and governmental approvals required, and will in the future take all actions required, relevant to the consummation of the Transactions or performance of the Transaction Documents. 14. Each Credit Party's Certificate (or Articles, as the case may be) of Incorporation (or equivalent governing instrument), all amendments to that Certificate (or those Articles, as the case may be) of Incorporation all resolutions adopted establishing classes or series of stock under that Certificate (or those Articles, as the case may be) of Incorporation and each Credit Party's Bylaws and all amendments to its Bylaws have been adopted in accordance with all applicable legal requirements (except that this assumption is limited to those of the preceding items with respect to the adoption of which we did not have involvement). 15. With respect to the opinions set forth in opinion paragraph 18, we assume that you are acquiring Notes for investment and not with a view to the distribution thereof, and that each of you is an "Accredited Investor" as such term is defined in Regulation D under the Securities Act of 1933, as amended. 16. Collateral Assumptions. The opinions and advice contained in our ---------------------- letter are subject to the following assumptions: a. Each applicable Credit Party (i) has the requisite title and rights to any property involved in the Transactions including, without limiting the generality of the foregoing, each item of Collateral existing on the date hereof and (ii) will have the requisite title and rights to each item of Collateral arising after the date hereof. B-2 b. The descriptions of Collateral in the Collateral Documents and the Financing Statements reasonably describe the property intended to be described as Collateral and the legal descriptions of real estate described in the Financing Statements to be filed as fixture filings are accurate. c. Value (as defined in Section 1-201(44) of the New York UCC) has been given by you to each Credit Party for the security interests and other rights in and assignments of Collateral described in or contemplated by the Collateral Documents. d. The representations made by each Credit Party in the Security Agreements to which it is a party with respect to its chief executive office and location of equipment and inventory are and will remain true and correct. B-3 SCHEDULE C EXCLUDED LAW AND LEGAL ISSUES None of the opinions or advice contained in our letter covers or otherwise addresses any of the following laws, regulations or other governmental requirements or legal issues: 1. except with respect to the Investment Company Act of 1940, as amended, to the extent of our opinion in opinion paragraph 14, except with respect to the Public Utility Holdings Company Act of 1935, as amended, to the extent of our opinion in opinion paragraph 15, and except with respect to the Securities Act of 1933, as amended, and the Trust Indenture Act of 1939, as amended, to the extent of our opinions in opinion paragraph 18, federal securities laws and regulations (including all other laws and regulations administered by the United States Securities and Exchange Commission), state "Blue Sky" laws and regulations, and laws and regulations relating to commodity (and other) futures and indices and other similar instruments; 2. pension and employee benefit laws and regulations (e.g., ERISA); 3. federal and state antitrust and unfair competition laws and regulations; 4. compliance with fiduciary duty requirements; 5. the statutes and ordinances, the administrative decisions and the rules and regulations of counties, towns, municipalities and special political subdivisions and judicial decisions to the extent that they deal with any of the foregoing; 6. federal and state environmental, land use and subdivision, tax, racketeering (e.g., RICO), health and safety (e.g., OSHA), and labor ---- ---- laws and regulations; 7. federal patent, trademark (except to the extent of our opinion in paragraph 11) and copyright, state trademark, and other federal and state intellectual property laws and regulations; 8. federal and state laws, regulations and policies concerning (i) national and local emergency, (ii) possible judicial deference to acts of sovereign states, and (iii) criminal and civil forfeiture laws; 9. other federal and state statutes of general application to the extent they provide for criminal prosecution (e.g., mail fraud and wire fraud statutes); C-1 10. any laws, regulations, directives and executive orders that prohibit or limit the enforceability of obligations based on attributes of the party seeking enforcement (e.g., the Trading with the Enemy Act and the International Emergency Economic Powers Act); and 11. the effect of any law, regulation or order which hereafter is enacted, promulgated or issued. We have not undertaken any research for purposes of determining whether any Credit Party or any of the Transactions which may occur in connection with the Credit Agreements or any of the other Transaction Documents is subject to any law or other governmental requirement other than to those laws and requirements which in our experience would generally be recognized as applicable both to general business corporations which are not engaged in regulated business activities and to transactions of the type contemplated by the Transaction Documents to occur on the date hereof, and none of our opinions covers any such law or other requirement unless (i) one of our Designated Transaction Lawyers had actual knowledge of its applicability at the time our letter was delivered on the date it bears and (ii) it is not excluded from coverage by other provisions in our letter or in any Schedule to our letter. C-2 SCHEDULE D EXCLUDED PROVISIONS None of the opinions in the letter to which this Schedule is attached covers or otherwise addresses any of the following types of provisions which may be contained in the Transaction Documents: 1. Indemnification for negligence, willful misconduct or other wrongdoing or strict product liability or any indemnification for liabilities arising under securities laws. 2. Provisions mandating contribution towards judgments or settlements among various parties. 3. Waivers of (i) legal or equitable defenses, (ii) rights to damages, (iii ) rights to counter claim or set off, (iv) statutes of limitations, (v) rights to notice, (vi) the benefits of statutory, regulatory, or constitutional rights, unless and to the extent the statute, regulation, or constitution explicitly allows waiver, and (vii) other benefits to the extent they cannot be waived under applicable law. 4. Provisions providing for forfeitures or the recovery of amounts deemed to constitute penalties, or for liquidated damages to the extent deemed to be penalties, acceleration of future amounts due (other than principal) without appropriate discount to present value, and, (to the extent deemed to constitute penalties) late charges, prepayment charges, and increased interest rates upon default. 5. Time-is-of-the-essence clauses. 6. Provisions which provide a time limitation after which a remedy may not be enforced. 7. Agreements to submit to the jurisdiction of any particular court or other governmental authority (either as to personal jurisdiction or subject matter jurisdiction); waiver of service of process requirements which would otherwise be applicable; and provisions otherwise purporting to affect the jurisdiction and venue of courts. 8. Provisions appointing one party as an attorney-in-fact for an adverse party or providing that the decision of any particular person will be conclusive or binding on others. 9. Provisions purporting to limit rights of third parties who have not consented thereto or purporting to grant rights to third parties. D-1 10. Provisions which purport to award attorneys' fees solely to one party. 11. Provisions purporting to create a trust or constructive trust without compliance with applicable trust law. 12. Provisions that provide for the appointment of a receiver. 13. Provisions or agreements regarding proxies, shareholders agreements, shareholder voting rights, voting trusts, and the like. 14. Provisions in any of the Transaction Documents requiring any Credit Party to perform its obligations under, or to cause any other person to perform its obligations under, or stating that any action will be taken as provided in or in accordance with, any agreement or other document that is not a Transaction Document. 15. Provisions, if any, which are contrary to the public policy of any jurisdiction. D-2 SCHEDULE E COLLATERAL DOCUMENTS 1. Holdings Guaranty 2. Holdings Security Agreement 3. Holdings Pledge Agreement 4. Company Pledge Agreement 5. Company Security Agreement 6. Company Patent and Trademark Security Agreement 7. Subsidiary Guaranty 8. Subsidiary Pledge Agreement 9. Subsidiary Security Agreement 10. Subsidiary Patent and Trademark Security Agreement 11. Intercreditor Agreement 12. New York Mortgage E-1 SCHEDULE F RELATED DOCUMENTS 1. Junior Subordinated Seller Notes 2. Senior Subordinated Note Indenture 3. Senior Subordinated Notes 4. Discount Note Indenture 5. Senior Subordinated Discount Notes F-1 SCHEDULE G GOOD STANDING JURISDICTIONS 1. Sealy Corporation ----------------- Delaware 2. Sealy Mattress Company ---------------------- Ohio 3. A. Brandwein & Co. ------------------ Illinois Wisconsin 4. Sealy Mattress Company of Albany, Inc. -------------------------------------- New York 5. Ohio-Sealy Mattress Manufacturing Co. ------------------------------------- Georgia 6. Ohio-Sealy Mattress Company of Puerto Rico ------------------------------------------ Ohio 7. Ohio-Sealy Mattress Manufacturing Co., Inc. ------------------------------------------- Massachusetts 8. Sealy Mattress Company of Michigan, Inc. ---------------------------------------- Michigan 9. Sealy Mattress Company of Memphis --------------------------------- Louisiana Tennessee G-1 10. Ohio-Sealy Mattress Manufacturing Co. -- Houston ------------------------------------------------ Texas 11. The Ohio Mattress Company Licensing and Components Group -------------------------------------------------------- Colorado Delaware Illinois Indiana Ohio Pennsylvania 12. Sealy of Maryland and Virginia, Inc. ------------------------------------ Maryland 13. Sealy of Minnesota, Inc. ------------------------ Minnesota 14. Ohio-Sealy Mattress Manufacturing Co. -- Fort Worth --------------------------------------------------- Texas 15. Sealy Mattress Company of Kansas City, Inc. ------------------------------------------- Kansas Missouri 16. Sealy Mattress Manufacturing Company, Inc. ------------------------------------------ Arizona California Colorado Delaware Florida Hawaii Iowa New Jersey North Carolina Oregon Pennsylvania Utah G-2 17. Sealy Mattress Company of Illinois ---------------------------------- Illinois Wisconsin 18. The Stearns & Foster Bedding Company ------------------------------------ Arizona California Delaware Florida Georgia Illinois New Jersey Ohio Texas 19. The Stearns & Foster Upholstery Furniture Company ------------------------------------------------- Mississippi Ohio 20. Sealy, Inc. ----------- Ohio G-3 SCHEDULE H FILING OFFICES Reflected on Attached Chart H-1 CALFEE, HALTER & GRISWOLD LLP Attorneys at Law ------------------------------- 1400 McDonald Investment Center 800 Superior Avenue Cleveland, Ohio 44114-2688 216/622-8200 Fax 216/241/0816 Direct Dial No. 216/622-8446 December 18, 1997 To the Administrative Agent, the Syndication Agent, the Documentation Agent and each of the Lenders party to the Credit Agreement or the AXEL Credit Agreement Ladies and Gentlemen: We have acted as counsel to Sealy Mattress Company, an Ohio corporation (the "Borrower"), in connection with the execution and delivery of (i) that certain Credit Agreement, dated as of December 18, 1997 (the "Credit Agreement") and (ii) that certain AXEL Credit Agreement dated, as of December 18, 1997 (the "AXEL Credit Agreement'), each among the Borrower, Sealy Corporation, a Delaware corporation and shareholder of the Borrower ("Sealy Corp."), Goldman Sachs Credit Partners, L.P., as arranger and Syndication Agent, Morgan Guaranty Trust Company of New York, as Administrative Agent, Bankers Trust Company, as Documentation Agent, and those financial institutions signatory thereto (the "Lenders"). Except as specified herein to the contrary, all capitalized terms used in this opinion shall have the meanings given lo them in the Credit Agreement and the AXEL Credit Agreement. This opinion is being delivered to you pursuant to and in satisfaction of subsection 4.1P of the Credit Agreement and subsection 3.1P of the AXEL Credit Agreement. In connection with this opinion, we have examined originals, or copies certified or otherwise authenticated to our satisfaction, of the following documents and records: (a) the Articles of Incorporation of the Borrower, certified as being true and correct as of December 17, 1997, by the Secretary of State of Ohio, and certified as being true and correct as of the date hereof by the Vice President and General Counsel of the Borrower; (b) a copy of the Code of Regulations of the Borrower, certified as being true and correct as of the date hereof by the Vice President and General Counsel of the Borrower; CALFEE, HALTER & GRISWOLD LLP December 18, 1997 Page 2 (c) a copy of resolutions adopted by the Board of Directors of the Borrower by written consent on December 18, 1997, authorizing, inter alia, ----- ---- the Borrower's execution and delivery of and performance under each of the Loan Documents to which the Borrower is a party, certified as being true and correct as of the date hereof by the Vice President and General Counsel of the Borrower; (d) a Certificate from the Secretary of State of the State of Ohio, dated December 17, 1997, with respect to the status of the Borrower as a corporation in good standing under the laws of the State of Ohio; (e) a Certificate executed by the Vice President and General Counsel of the Borrower, a copy of which Certificate is attached hereto as Exhibit A (the "General Counsel Certificate"); (f) an executed copy of the Credit Agreement and the AXEL Credit Agreement; (g) executed copies of the Notes to be issued on the Closing Date; (h) an executed copy of the Company Pledge Agreement; (i) an executed copy of the Company Security Agreement; (j) an executed copy of the Company Patent and Trademark Security Agreement; (k) the Closing Date Mortgage executed by Company; (l) the Intercreditor Agreement; (m) each of the Uniform Commercial Code financing statements executed by the Borrower (as itemized on Schedule I hereto) (the "Financing Statements"), and filed, respectively, in the offices referred to on such Financing Statements; and (n) such other documents and records, and such other certifications or representations as to factual matters of public officials or officers of the Borrower as we have deemed necessary to appropriate for the purpose of rendering this opinion. CALFEE, HALTER & GRISWOLD LLP December 18, 1997 Page 3 The documents, instruments, and financing Statements set forth in subparagraphs (f) through (m) above are collectively referred to as the "Loan Documents." In rendering this opinion we have relied upon the above-described certified copies of the Articles of Incorporation and Code of Regulations, as amended, of the Borrower and certified copies of the authorizing resolutions of the Borrower, and factual good standing certificates with respect to the Borrower, and, with respect to certain legal matters, the General Counsel Certificate. Any opinion hereinafter set forth with respect to the incorporation, existence, qualification to do business or good standing of the Borrower, is based solely thereon and we have not conducted an independent review or investigation of the matters set forth therein. Insofar as an opinion relates to matters set forth in the General Counsel Certificate, we have relied, with your consent, solely upon such General Counsel Certificate with respect to the accuracy of the factual matters and legal conclusions contained therein and, except as specifically set forth in the following sentence of this opinion, we have not independently verified or established the accuracy of such matters. We do note that the stock records and corporate records of the Borrower are incomplete and we are unable to verify the accuracy of certain information contained in the General Counsel Certificate. However, nothing has come to the attention of the attorneys in this firm who have directly and substantially participated in this transaction (consisting of Lawrence N. Schultz, Dale C. LaPorte, Thomas A. Cicarella, Douglas A. Neary, M. Ann Harlan and Tracy W. Smirnoff) providing clear evidence that the statements in the General Counsel's Certificate are incorrect with respect to such matters. Except to the extent expressly set forth herein, we have not undertaken any independent investigation with respect to such matters, and no inference as to our knowledge should be drawn from the fact of our legal representation of the Borrower in connection with other matters. In rendering our opinions, we have not conducted an investigation into the specific types of business and activities in which the Borrower engages or the manner in which it conducts business as would enable us to render an opinion (and, accordingly, we express no opinion) as to the applicability of any law or regulation of the United States or the State of Ohio not of general applicability to business corporations. On the basis of and in reliance upon the foregoing, and subject lo the assumptions, limitations, qualifications and exceptions set forth below, we are of the opinion that: 1. The Borrower is a corporation validly existing and in good standing under the laws of the State of Ohio. Based upon our review of the Articles of Incorporation and Code of Regulations of the Borrower, the Borrower has the corporate power to own its property and assets of which we are aware and to transact the business in which, to our actual knowledge, it is CALFEE, HALTER & GRISWOLD LLP December 18, 1997 Page 4 engaged or presently proposes to engage (as such business is described in the Offering Circular dated December 11, 1997, relating to the Senior Subordinated Notes and Discount Notes). 2. The Borrower has the corporate power and authority to execute, deliver and perform the Loan Documents to which it is a party. The Borrower has duly executed the Loan Documents. 3. The execution, delivery and performance by the Borrower of those Loan Documents to which it is a party, and its Consummation of the transactions provided for therein, have been authorized by all necessary corporate action on behalf of the Borrower. 4. Neither the execution nor the delivery by the Borrower of the Loan Documents will conflict with, result in a breach or violation of, or constitute a default under, any of the terms, conditions or provisions of any present statute, rule or regulation binding on the Borrower. In rendering the opinions set forth above, we have assumed, without any independent investigation but without any knowledge to the contrary, that: (a) all records and documents that have been submitted to us as originals are authentic, and all records and documents that have been submitted to us as copies conform to authentic, original records and documents; (b) no action has been taken which amends, revokes or otherwise terminates or affects any of the documents or records which ~ve have reviewed; (c) the genuineness of all facsimile signatures; (d) the conformity to original documents of all documents submitted to us as certified, conformed, facsimile or photostatic copies; (e) the authenticity of the originals of such copies; and (f) all persons executing agreements, instruments or documents examined or relied upon by us had the capacity to sign such agreements, instruments or documents, and all such signatures are genuine (other than with respect to the signatures of officers of the Borrower). We render no opinion as to whether any of the Loan Documents is the valid, binding and enforceable obligation of the Borrower. CALFEE, HALTER & GRISWOLD LLP December 18, 1997 Page 5 We are admitted to the practice of law in the State of Ohio and the opinions expressed herein relate solely to the laws of the State of Ohio, and the federal laws of the United States, and no opinion is expressed with respect to any applicable law of any other jurisdiction or with respect to any law not of general applicability to business corporations which would impact the opinions provided herein. The information set forth herein is as of the date hereof. We assume no obligation to advise you of changes that may thereafter be brought to our attention. Our opinions are based on statutory laws and judicial decisions that are in effect on the date hereof, and we express no opinion with respect to any law, regulation, rule or governmental policy that may be enacted or adopted after the date hereof nor do we assume any responsibility to advise you of future changes in our opinions. A copy of this opinion letter may be delivered by any of you to any Eligible Assignee (as defined in the Credit Agreement or the AXEL Credit Agreement, as applicable) in connection with and at the time of any assignment and delegation by any of you as a Lender to such Eligible Assignee of all or a portion of your Loans and Commitments in accordance with the provisions of the Credit Agreement or the AXEL Credit Agreement, and such Eligible Assignee may rely on the opinions expressed above as if this opinion letter were addressed and delivered to such Eligible Assignee on the date hereof. This opinion is limited to the matters expressly stated herein. Except as set forth in the immediately preceding paragraph, the opinions expressed herein are solely for use by the Administrative Agent and the Lenders in connection with the Credit Agreement and may not be used, quoted or relied upon by you for any other purpose, or by any other person or entity for any purpose, without our prior written consent. Very truly yours, /s/ CALFEE, HALTER & GRISWOLD LLP CALFEE, HALTER & GRISWOLD LLP Schedule I [Copies of 75 UCC-1 Filings received December 18, 1997--List to be compiled and supplied post-closing.] Exhibit A CERTIFICATE OF THE VICE PRESIDENT --------------------------------- AND GENERAL COUNSEL OF SEALY MATTRESS COMPANY --------------------------------------------- AND SEALY CORPORATION --------------------- TO: Calfee, Halter & Griswold LLP I, Kenneth L. Walker, do hereby certify that I am the duly elected and qualified Vice President and General Counsel of Sealy Mattress Company, an Ohio corporation (the "Borrower"), and Sealy Corporation, a Delaware corporation ("Sealy Corp."), and that as of the date hereof: 1. Attached hereto as Appendix 1 is a true and correct copy of the Articles of Incorporation of the Borrower as in effect on the date hereof, certified as of December 17th, 1997, by the Secretary of State of the State of ---- Ohio. 2. Attached hereto as Appendix 2 is a true and correct copy of the Code of Regulations, as amended, of the Borrower as in effect on the date hereof. 3. Attached hereto as Appendix 3 is a true and correct copy of resolutions duly adopted by the Board of Directors of the Borrower by written consent on December 18th, 1997 which resolutions have not been modified, revoked or rescinded and remain in full force and effect on the date hereof. 4. The officers listed below are duly elected officers of the Borrower, holding the offices indicated opposite their respective names, duly authorized by the Directors of the Borrower to execute, deliver and perform the Loan Documents on behalf of the Borrower and to take all further action and to execute, deliver and perform all other documents as they deem advisable in connection with the transactions provided for therein, and the signatures set forth below are the genuine signatures of such officers: Offices Officer Signature - ------- ------- --------- President and Chief Executive Ronald L. Jones -------------- Officer /s/Ronald H. Stolle Vice President and Treasurer Ronald H. Stolle ------------------- 5. The individuals listed below are the only directors of the Borrower and have all been duly elected by Sealy Corp., the sole shareholder of the Borrower: December 18, 1997 Page 7 Directors Signature --------- --------- Ronald L. Jones --------------------- Kenneth L. Walker /s/ Kenneth L. Walker --------------------- Ronald H. Stolle /s/ Ronald H. Stolle --------------------- 6. Sealy Corp. owns 1,000 shares of common stock, par value one dollar ($1.00) per share (the "Shares"), of the Borrower consisting all of the issued and outstanding shares of capital stock of the Borrower. All of the Shares have been fully paid for by Sealy Corp. The Borrower has not issued or authorized any outstanding options, warrants or similar rights to subscribe for or purchase any capital stock of the Borrower or outstanding securities convertible into, exchangeable for, or evidencing the right to subscribe for, any shares of capital stock or other equity securities of the Borrower. Please note, however, that the stock records and the corporate records of the Borrower are incomplete and I am unable to verify the accuracy of certain of the information including, without limitation, information regarding the election of directors and the issuance of shares of the Borrower. However, nothing has come to my attention which leads me to believe the statements set forth in this certificate are incorrect as to such matters. All capitalized terms not otherwise defined in this Certificate are used herein as defined in the opinion of Calfee, Halter & Griswold LLP delivered pursuant to subsection 4.1P of that Credit Agreement, dated as of December 18, 1997 (the "Credit Agreement") and subsection 3.1P of that certain AXEL Credit Agreement, dated as of December 18, 1997 (the "AXEL Credit Agreement"). The undersigned acknowledges and agrees that Calfee, Halter & Griswold LLP intend to, and may, rely on this Certificate and the matters contained herein, in rendering opinions in connection with the transactions contemplated by the Credit Agreement and the AXEL Credit Agreement. SEALY MATTRESS COMPANY By: /s/ Kenneth L. Walker ----------------------- Kenneth L. Walker Vice President and General Counsel Effective Date: ,1997 --------- December 18, 1997 Page 8 SEALY CORPORATION By: /s/ Kenneth L. Walker ------------------------ Kenneth L. Walker Vice President and General Counsel EXHIBIT X [FORM OF ASSIGNMENT AGREEMENT] ASSIGNMENT AGREEMENT This ASSIGNMENT AGREEMENT (this "AGREEMENT") is entered into by and between the parties designated as Assignor ("ASSIGNOR") and Assignee ("ASSIGNEE") above the signatures of such parties on the Schedule of Terms attached hereto and hereby made an integral part hereof (the "SCHEDULE OF TERMS") and relates to that certain AXEL Credit Agreement described in the Schedule of Terms (said AXEL Credit Agreement, as amended, supplemented or otherwise modified to the date hereof and as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined). IN CONSIDERATION of the agreements, provisions and covenants herein contained, the parties hereto hereby agree as follows: SECTION 1. ASSIGNMENT AND ASSUMPTION. ------------------------- (a) Effective upon the Settlement Date specified in Item 4 of the Schedule of Terms (the "SETTLEMENT DATE"), Assignor hereby sells and assigns to Assignee, without recourse, representation or warranty (except as expressly set forth herein), and Assignee hereby purchases and assumes from Assignor, that percentage interest in all of Assignor's rights and obligations as a Lender arising under the AXEL Credit Agreement and the other Loan Documents with respect to Assignor's Commitments and outstanding Loans, if any, which represents, as of the Settlement Date, the percentage interest specified in Item 3 of the Schedule of Terms of all rights and obligations of Lenders arising under the AXEL Credit Agreement and the other Loan Documents with respect to the Commitments and any outstanding Loans (the "ASSIGNED SHARE"). (b) In consideration of the assignment described above, Assignee hereby agrees to pay to Assignor, on the Settlement Date, the principal amount of any outstanding Loans included within the Assigned Share, such payment to be made by wire transfer of immediately available funds in accordance with the applicable payment instructions set forth in Item 5 of the Schedule of Terms. (c) Assignor hereby represents and warrants (i) that Item 3 of the Schedule of Terms correctly sets forth the amount of the Commitments, the outstanding AXEL Loans and the Pro Rata Share corresponding to the Assigned Share and (ii) that the assignment complies with clause (a) or (b), as applicable, of subsection 9.1B(i). (d) Assignor and Assignee hereby agree that, upon giving effect to the assignment and assumption described above, (i) Assignee shall be a party to the AXELs Credit Agreement and shall have all of the rights and obligations under the Loan Documents, and shall be deemed -1- to have made all of the covenants and agreements contained in the Loan Documents, arising out of or otherwise related to the Assigned Share, and (ii) Assignor shall be absolutely released from any of such obligations, covenants and agreements assumed or made by Assignee in respect of the Assigned Share. Assignee hereby acknowledges and agrees that the agreement set forth in this Section 1(d) is expressly made for the benefit of Company, Agents, Assignor and the other Lenders and their respective successors and permitted assigns. (e) Assignor and Assignee hereby acknowledge and confirm their understanding and intent that (i) this Agreement shall effect the assignment by Assignor and the assumption by Assignee of Assignor's rights and obligations with respect to the Assigned Share, (ii) any other assignments by Assignor of a portion of its rights and obligations with respect to the Commitments and any outstanding Loans shall have no effect on the Commitments, the outstanding AXEL Loans and the Pro Rata Share corresponding to the Assigned Share as set forth in Item 3 of the Schedule of Terms, and (iii) from and after the Settlement Date, Administrative Agent shall make all payments under the AXEL Credit Agreement in respect of the Assigned Share (including without limitation all payments of principal and accrued but unpaid interest and commitment fees with respect thereto) (A) in the case of any such interest and fees that shall have accrued prior to the Settlement Date, to Assignor, and (B) in all other cases, to Assignee; provided -------- that Assignor and Assignee shall make payments directly to each other to the extent necessary to effect any appropriate adjustments in any amounts distributed to Assignor and/or Assignee by Administrative Agent under the Loan Documents in respect of the Assigned Share in the event that, for any reason whatsoever, the payment of consideration contemplated by Section 1(b) occurs on a date other than the Settlement Date. SECTION 2. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS. -------------------------------------------------- (a) Assignor represents and warrants that it is the legal and beneficial owner of the Assigned Share, free and clear of any adverse claim. (b) Assignor shall not be responsible to Assignee for the execution, effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of any of the Loan Documents or for any representations, warranties, recitals or statements made therein or made in any written or oral statements or in any financial or other statements, instruments, reports or certificates or any other documents furnished or made by Assignor to Assignee or by or on behalf of Company or any of its Subsidiaries to Assignor or Assignee in connection with the Loan Documents and the transactions contemplated thereby or for the financial condition or business affairs of Company or any other Person liable for the payment of any Obligations, nor shall Assignor be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained in any of the Loan Documents or as to the use of the proceeds of the Loans or as to the existence or possible existence of any Event of Default or Potential Event of Default. (c) Assignee represents and warrants that it is an Eligible Assignee; that it has experience and expertise in the making of loans such as the Loans; that it has acquired the Assigned Share for its own account in the ordinary course of its business and without a view to distribution of the Loans within the meaning of the Securities Act or the Exchange Act or other -2- federal securities laws (it being understood that, subject to the provisions of subsection 9.1 of the AXEL Credit Agreement, the disposition of the Assigned Share or any interests therein shall at all times remain within its exclusive control); and that it has received, reviewed and approved a copy of the AXEL Credit Agreement (including all Exhibits and Schedules thereto). (d) Assignee represents and warrants that it has received from Assignor such financial information regarding Company and its Subsidiaries as is available to Assignor and as Assignee has requested, that it has made its own independent investigation of the financial condition and affairs of Company and its Subsidiaries in connection with the assignment evidenced by this Agreement, and that it has made and shall continue to make its own appraisal of the creditworthiness of Company and its Subsidiaries. Assignor shall have no duty or responsibility, either initially or on a continuing basis, to make any such investigation or any such appraisal on behalf of Assignee or to provide Assignee with any other credit or other information with respect thereto, whether coming into its possession before the making of the initial Loans or at any time or times thereafter, and Assignor shall not have any responsibility with respect to the accuracy of or the completeness of any information provided to Assignee. (e) Each party to this Agreement represents and warrants to the other party hereto that it has full power and authority to enter into this Agreement and to perform its obligations hereunder in accordance with the provisions hereof, that this Agreement has been duly authorized, executed and delivered by such party and that this Agreement constitutes a legal, valid and binding obligation of such party, enforceable against such party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity. SECTION 3. MISCELLANEOUS. ------------- (a) Each of Assignor and Assignee hereby agrees from time to time, upon request of the other such party hereto, to take such additional actions and to execute and deliver such additional documents and instruments as such other party may reasonably request to effect the transactions contemplated by, and to carry out the intent of, this Agreement. (b) Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated, except by an instrument in writing signed by the party (including, if applicable, any party required to evidence its consent to or acceptance of this Agreement) against whom enforcement of such change, waiver, discharge or termination is sought. (c) Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed. For the purposes hereof, the notice address of each of Assignor and Assignee shall be as set forth on the Schedule of Terms or, as to either such party, such other address as shall be designated by such party in a written notice delivered to the other such -3- party. In addition, the notice address of Assignee set forth on the Schedule of Terms shall serve as the initial notice address of Assignee for purposes of subsection 9.8 of the AXEL Credit Agreement. (d) In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. (e) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. (f) This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns. (g) This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. (h) This Agreement shall become effective upon the date (the "EFFECTIVE DATE") upon which all of the following conditions are satisfied: (i) the execution of a counterpart hereof by each of Assignor and Assignee, (ii) the execution of a counterpart hereof by Company as evidence of its consent hereto to the extent required under subsection 9.1B(i) of the AXEL Credit Agreement, (iii) the receipt by Administrative Agent of the processing and recordation fee referred to in subsection 9.1B(i) of the AXEL Credit Agreement, (iv) in the event Assignee is a Non-US Lender (as defined in subsection 2.7B(iii)(a) of the AXEL Credit Agreement), the delivery by Assignee to Administrative Agent of such forms, certificates or other evidence with respect to United States federal income tax withholding matters as Assignee may be required to deliver to Administrative Agent pursuant to said subsection 2.7B(iii)(a), (v) the execution of a counterpart hereof by Administrative Agent as evidence of its acceptance hereof in accordance with subsection 9.1B(ii) of the AXEL Credit Agreement, and (vi) the receipt by Administrative Agent of originals or telefacsimiles of the counterparts described above and authorization of delivery thereof, and (vii) the recordation by Administrative Agent in the Register of the pertinent information regarding the assignment effected hereby in accordance with subsection 9.1B(ii) of the AXEL Credit Agreement. [Remainder of page intentionally left blank] -4- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized, such execution being made as of the Effective Date in the applicable spaces provided on the Schedule of Terms. -5- SCHEDULE OF TERMS 38. BORROWER: Sealy Mattress Company, an Ohio corporation -------- 39. NAME AND DATE OF CREDIT AGREEMENT: AXEL Credit Agreement dated as of --------------------------------- December 18, 1997 by and among the Borrower, Sealy Corporation, a Delaware corporation, as guarantor, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, the financial institutions listed therein, Morgan Guaranty Trust Company of New York, as administrative agent, and Bankers Trust Company, as documentation agent. 40. AMOUNTS: RE: ------- AXEL RE: AXEL RE: AXEL SERIES H SERIES B SERIES C -------- --------- --------- (a) Aggregate Commitments of all all Lenders: $_______ $________ $________ (b) Assigned Share/Pro Rata Share: ________% ________% ________% (c) Amount of Assigned Share of Commitments: $_______ $________ $________ (d) Amount of Assigned Share of AXELs: $________ 41. SETTLEMENT DATE: ____________, [199 ][200 ] --------------- 42. PAYMENT INSTRUCTIONS: -------------------- ASSIGNOR: ASSIGNEE: See Annex A See Annex B 43. NOTICE ADDRESSES: ---------------- ASSIGNOR: ASSIGNEE: See Annex A See Annex B -6- 44. SIGNATURES: ---------- [NAME OF ASSIGNOR], [NAME OF ASSIGNEE], as Assignor as Assignee By: _____________________ By: Name: Title: Name: Title: Consented to and accepted in accordance with subsections 9.1B(i) and (ii) of the AXEL Credit Agreement MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By: ____________________ Name: Title: [Consented to and accepted in accordance with subsection 9.1B(i) of the AXEL Credit Agreement SEALY MATTRESS COMPANY By: _____________________________ Name: Title:] -7- ANNEX A ------- ASSIGNOR PAYMENT INSTRUCTIONS: - ----------------------------- ______________________________ ______________________________ ______________________________ Attention: ___________________ Reference: ___________________ ASSIGNOR NOTICE ADDRESSES: - ------------------------- ______________________________ ______________________________ ______________________________ Attention: ___________________ Reference: ___________________ -8- ANNEX B ------- ASSIGNEE PAYMENT INSTRUCTIONS: - ----------------------------- ______________________________ ______________________________ ______________________________ Attention: ___________________ Reference: ___________________ ASSIGNEE NOTICE ADDRESSES: - ------------------------- ______________________________ ______________________________ ______________________________ Attention: ___________________ Reference: ___________________ -9- EXHIBIT IX [FORM OF OPINION OF O'MELVENY & MYERS LLP] [O'M&M Letterhead] [Date] 1 9 9 7 [file number] [doc ID] Goldman Sachs Credit Partners L.P., as Arranger and Syndication Agent Morgan Guaranty Trust Company of New York, as Administrative Agent Bankers Trust Company, as Documentation Agent and The Lenders Party to the Credit Agreement Referenced Below Re: Loans to Sealy Mattress Company ------------------------------- Ladies and Gentlemen: We have acted as counsel to Goldman Sachs Credit Partners L.P., as arranger and syndication agent (in such capacity, "Syndication Agent"), and Morgan Guaranty Trust Company of New York, as administrative agent (in such capacity, "Administrative Agent"; collectively, Syndication Agent and Administrative Agent are referred to herein as "Agents"), in connection with the preparation and delivery of (i) a Credit Agreement dated as of December 18, 1997 (the "Revolver/Tranche A Term Loan Credit Agreement") and (ii) an AXEL Credit Agreement dated as of December 18, 1997 (the "AXEL Credit Agreement"; together with the IX-1 Revolver/Tranche A Term Loan Credit Agreement, the "Credit Agreements"), each among Sealy Mattress Company, an Ohio corporation ("Company"), Sealy Corporation, a Delaware corporation ("Holdings"), the financial institutions listed therein as lenders, Agents and Bankers Trust Company, as documentation agent, and in connection with the preparation and delivery of certain related documents. We have participated in various conferences with representatives of Company and Agents and conferences and telephone calls with Kirkland & Ellis, counsel to Company and Holdings, during which the Credit Agreements and related matters have been discussed, and we have also participated in the meeting held on the date hereof (the "Closing") incident to the funding of the initial loans made under the Credit Agreements. We have reviewed the forms of the Credit Agreements and the respective exhibits thereto, including the forms of the promissory notes annexed thereto (the "Notes"), and the opinions of Kirkland & Ellis and Calfee, Halter & Griswold LLP (collectively, the "Opinions") and the officers' certificates and other documents delivered at the Closing. We have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals or copies and the due authority of all persons executing the same, and we have relied as to factual matters on the documents that we have reviewed. Although we have not independently considered all of the matters covered by the Opinions to the extent necessary to enable us to express the conclusions therein stated, we believe that the Credit Agreements and the respective exhibits thereto are in substantially acceptable legal form and that the Opinions and the officers' certificates and other documents delivered in connection with the execution and delivery of, and as conditions to the making of the initial loans under, the Credit Agreements and the Notes are substantially responsive to the respective requirements of the Credit Agreements. Respectfully submitted, IX-2 EXHIBIT XI [FORM OF CERTIFICATE RE NON-BANK STATUS] CERTIFICATE RE NON-BANK STATUS Reference is hereby made to that certain AXEL Credit Agreement dated as of December 18, 1997, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the ``CREDIT AGREEMENT'', the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among Sealy Mattress Company, an Ohio corporation, as borrower, Sealy Corporation, a Delaware corporation, as guarantor, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, the financial institutions listed therein as Lenders, Morgan Guaranty Trust Company of New York, as administrative agent, and Bankers Trust Company, as documentation agent. Pursuant to subsection 2.7B(iii) of the Credit Agreement, the undersigned hereby certifies that it is not a ``bank'' or other Person described in Section 881(c)(3) of the Internal Revenue Code of 1986, as amended. DATED: __________________________ [NAME OF LENDER] By: ____________________________________ Name: Title: EXHIBIT XII [FORM OF FINANCIAL CONDITION CERTIFICATE] This FINANCIAL CONDITION CERTIFICATE (this ``CERTIFICATE'') is delivered in connection with that certain Credit Agreement dated as of December 18, 1997 (the ``CREDIT AGREEMENT''), by and among Sealy Mattress Company, an Ohio corporation (``COMPANY''), Sealy Corporation, a Delaware corporation (``HOLDINGS''), the financial institutions referred to therein as lenders (the ``CREDIT AGREEMENT LENDERS''), Goldman Sachs Credit Partners L.P. (``GSCP''), as arranger and syndication agent, Morgan Guaranty Trust Company of New York (``MORGAN GUARANTY''), as administrative agent (the ``CA ADMINISTRATIVE AGENT''), and Bankers Trust Company (``BTCo''), as documentation agent, and that certain AXEL Credit Agreement dated as of December 18, 1997 (``AXEL CREDIT AGREEMENT'') by and among Company, Holdings, the financial institutions listed therein as lenders (the``AXEL LENDERS''), GSCP as arranger and syndication agent, Morgan Guaranty, as administrative agent (the ``AXEL ADMINISTRATIVE AGENT''), and BTCo, as documentation agent. Capitalized terms used herein without definition have the same meanings as in the Credit Agreement. A. I am, and at all pertinent times mentioned herein have been, the duly qualified and acting vice president, controller and principal accounting officer of Holdings. I am familiar with the terms and conditions of the Credit Agreement and the AXEL Credit Agreement. B. I have carefully reviewed the contents of this Certificate, and I have conferred with counsel for Holdings for the purpose of discussing the meaning of its contents. C. In connection with preparing for the consummation of the transactions and financings contemplated by the Credit Agreement and the AXEL Credit Agreement (the ``PROPOSED TRANSACTIONS''), I have participated in the preparation of, and I have reviewed, pro forma projections of net income and cash flows for Holdings and its Subsidiaries for the fiscal years of Holdings ending November 30, 1998 through November 30, 2008, inclusive (the ``PROJECTED FINANCIAL STATEMENTS''). The Projected Financial Statements, attached hereto as Exhibit A, give effect to the consummation of the Proposed Transactions and - --------- assume that the debt obligations of Holdings will be paid from the cash flow generated by the operations of Holdings and its Subsidiaries and other cash resources. The Projected Financial Statements were prepared on the basis of information available at August 31, 1997. I know of no facts that have occurred since such date that would lead me to believe that the Projected Financial Statements are inaccurate in any material respect. The Projected Financial Statements do not reflect (i) any potential changes in interest rates from those assumed in the Projected Financial Statements, (ii) any potential material, adverse changes in general business conditions, or (iii) any potential changes in income tax laws. D. In connection with the preparation of the Projected Financial Statements, I have made such investigations and inquiries as I have deemed necessary and prudent therefor and, specifically, have relied on historical information with respect to revenues, expenses and other relevant items supplied by the supervisory personnel of Holdings and its Subsidiaries directly responsible for the various operations involved. The assumptions upon which the Projected Financial Statements are based are stated therein. Although any assumptions and any projections by necessity involve uncertainties and approximations, I believe, based on my discussions with other members of management, that the assumptions on which the Projected Financial Statements are based are reasonable. Based thereon, I believe that the projections for Holdings and its Subsidiaries, taken as a whole, reflected in the Projected Financial Statements provide reasonable estimations of future performance, subject, as stated above, to the uncertainties and approximations inherent in any projections. Based on the foregoing, I have, in my capacity as vice president, controller and principal accounting officer of Holdings, reached the following conclusions: 1. Holdings and its Subsidiaries are not now, nor will the incurrence of the Obligations under the Credit Agreement and the Obligations (as such term is defined in the AXEL Credit Agreement) under the AXEL Credit Agreement, and the incurrence of the other obligations contemplated by the Proposed Transactions render Holdings and its Subsidiaries ``insolvent'' as defined in this paragraph 1. The recipients of this Certificate and I have agreed that, in this context, ``insolvent'' means that the present fair saleable value of assets (on a going concern basis based on the valuation procedures performed by Valuation Research Corporation in their letter of even date herewith (the ``VRC OPINION'')) is less than the amount that will be required to pay the probable liability on existing debts as they become absolute and matured. We have also agreed that the term ``debts'' includes any legal liability, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent. My conclusion expressed above is supported by the VRC Opinion. The assumptions on which the VRC Opinion is based are stated therein. I believe that the assumptions on which the VRC Opinion is based are reasonable. 2. By the incurrence of the Obligations under the Credit Agreement, the Obligations (as such term is defined in the AXEL Credit Agreement) under the AXEL Credit Agreement, and the incurrence of the other obligations contemplated by the Proposed Transactions, Holdings and its Subsdiaries will not incur debts beyond its ability to pay as such debts mature. I have based my conclusion in part on the Projected Financial Statements, which demonstrate that Holdings and its Subsidiaries will have positive cash flow after paying all of its scheduled anticipated indebtedness (including scheduled payments under the Credit Agreement, the AXEL Credit Agreement, the other obligations contemplated by the Proposed Transactions and other permitted indebtedness). I have concluded that the realization of current assets in the ordinary course of business will be sufficient to pay recurring current debt and short-term and long-term debt service as such debts mature, and that the cash flow (including earnings plus non-cash charges to earnings) will be sufficient to provide cash necessary to repay the Loans and other Obligations under the Credit Agreement and the Loans (as such term is defined in the AXEL Credit Agreement) and other Obligations (as such term is defined in the AXEL Credit Agreement) under the AXEL Credit Agreement, the other obligations contemplated by the Proposed Transactions and other long-term indebtedness as such debt matures. The foregoing conclusion also assumes that Holdings and its Subsidiaries will refinance their outstanding debt in the year in which the Senior Subordinated Notes and the Discount Notes mature. XII-2 3. As of the Closing Date, the incurrence of the Obligations under the Credit Agreement, the Obligations (as such term is defined in the AXEL Credit Agreement) under the AXEL Credit Agreement, and the incurrence of the other obligations contemplated by the Proposed Transactions will not leave Holdings and its Subsidiaries with property remaining in their hands constituting ``unreasonably small capital.'' In reaching this conclusion, I understand that ``unreasonably small capital'' depends upon the nature of the particular business or businesses conducted or to be conducted, and I have reached my conclusion based on the needs and anticipated needs for capital of the businesses conducted or anticipated to be conducted by Holdings and its Subsidiaries in light of the Projected Financial Statements and available credit capacity. 4. To the best of my knowledge, Holdings and its Subsidiaries have not executed the Credit Agreement, the AXEL Credit Agreement, or any documents mentioned therein, or made any transfer or incurred any obligations thereunder, with actual intent to hinder, delay or defraud either present or future creditors. I understand that Administrative Agent, AXEL Administrative Agent, Credit Agreement Lenders, and AXEL Lenders are relying on the truth and accuracy of the foregoing in connection with the extension of credit to Company pursuant to the Credit Agreement and the AXEL Credit Agreement. On behalf of Holdings, in my capacity as vice president, controller and principal accounting officer, I represent the foregoing information to be, to the best of my knowledge and belief, true and correct and execute this Certificate this ___ day of December, 1997. SEALY CORPORATION By: ____________________________ Name: Vice President, Controller and Principal Accounting Officer XII-3 EXHIBIT XIII [FORM OF] INTERCREDITOR AGREEMENT This Intercreditor Agreement is dated as of December 18, 1997, and entered into by and among Morgan Guaranty Trust Company of New York, as administrative agent (in such capacity, the "Revolving Facility Agent") for the lenders and the issuer of letters of credit under the Revolving Credit Agreement referred to below, Morgan Guaranty Trust Company of New York, as administrative agent (in such capacity, the "AXEL Facility Agent") for the lenders under the AXEL Credit Agreement referred to below, and Morgan Guaranty Trust Company of New York, as collateral agent (in such capacity, together with its successors in such capacity, the "Collateral Agent") under each of the Security Documents, the Subsidiary Guaranty and the Holdings Guaranty dated of even date herewith referred to below. RECITALS WHEREAS, Sealy Mattress Company (the "Company"), as the borrower, the several lenders from time to time parties thereto (the "Revolving Facility Lenders"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent, and the Revolving Facility Agent have entered into a Credit Agreement dated as of December 18, 1997 (said agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "Revolving Credit Agreement"; the terms defined therein and not otherwise defined herein being used herein as therein defined); WHEREAS, the Company, the various financial institutions parties thereto (the "AXEL Facility Lenders"), GSCP, as arranger and syndication agent, and the AXEL Facility Agent have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "AXEL Credit Agreement"); WHEREAS, the Company may from time to time enter into one or more Interest Rate Agreements (collectively, the "Lender Interest Rate Agreements") with one or more Lenders (in such capacity, collectively, "Interest Rate Exchangers") in accordance with the terms of the Financing Agreements (as hereinafter defined); WHEREAS, the terms of the Revolving Credit Agreement and the AXEL Credit Agreement require that the Company execute and deliver to the Collateral Agent the Company Security Agreement, the Company Pledge Agreement and the Company Patent and Trademark XIII-1 Security Agreement securing the Company's obligations to the Revolving Facility Lenders, the AXEL Facility Lenders, the Revolving Facility Agent and the AXEL Facility Agent as provided therein; WHEREAS, the terms of the Revolving Credit Agreement and the AXEL Credit Agreement also require that all of the Domestic Subsidiaries of the Company execute and deliver to the Collateral Agent a guaranty (the "Subsidiary Guaranty") guaranteeing the Company's obligations to the Revolving Facility Lenders (including the obligations of the Company to the Issuing Lender in respect of any Letters of Credit), the AXEL Facility Lenders, the Revolving Facility Agent and the AXEL Facility Agent as provided therein (such Domestic Subsidiaries and any future Domestic Subsidiaries executing the Subsidiary Guaranty being referred to herein as the "Subsidiary Guarantors"; the Subsidiary Guarantors and Holdings collectively being referred to herein as the "Guarantors"), and that all Domestic Subsidiaries of the Company execute and deliver to the Collateral Agent the Subsidiary Pledge Agreement, the Subsidiary Security Agreement and the Subsidiary Patent and Trademark Security Agreement securing the obligations of such Subsidiaries under the Subsidiary Guaranty; WHEREAS, the terms of the Revolving Credit Agreement and the AXEL Credit Agreement also require that Holdings execute and deliver to the Collateral Agent a guaranty (the "Holdings Guaranty"; together with the Subsidiary Guaranty, the "Guaranties") guaranteeing the Company's obligations to the Revolving Facility Lenders (including the obligations of the Company to the Issuing Lender in respect of any Letters of Credit), the AXEL Facility Lenders, the Revolving Facility Agent and the AXEL Facility Agent as provided therein, and that Holdings execute and deliver to the Collateral Agent the Holdings Pledge Agreement and the Holdings Security Agreement securing the obligations of Holdings under the Holdings Guaranty (the Holdings Pledge Agreement, the Holdings Security Agreement, together with the Subsidiary Pledge Agreement, the Subsidiary Security Agreement, the Subsidiary Patent and Trademark Security Agreement, the Company Security Agreement, the Company Pledge Agreement and the Company Patent and Trademark Security Agreement and any other security agreements, mortgages and deeds of trust entered into by any Loan Party (as hereinafter defined) for the benefit of any Secured Parties and any other security agreements, mortgages and deeds of trust entered into by any Loan Party (as hereinafter defined) for the benefit of any Secured Parties (hereinafter defined), being collectively referred to herein as the "Security Documents"); WHEREAS, the Revolving Facility Agent, the AXEL Facility Agent and the Collateral Agent (such parties collectively referred to as the "Parties") desire to set forth certain provisions regarding the appointment, duties and responsibilities of the Collateral Agent and to set forth certain other provisions concerning the obligations of the Company, Holdings and the Subsidiaries of Holdings executing the Guaranties and the Security Documents (collectively, the "Loan Parties") to the Parties, the Revolving Facility Lenders, the AXEL Facility Lenders and any Interest Rate Exchangers (collectively, together with the Parties, the "Secured Parties") under the agreements referred to in the foregoing recitals; and XIII-2 WHEREAS, the Parties wish to set forth their agreement as to the decisions relating to the exercise of remedies under the Security Documents, the Guaranties and certain limitations on the exercise of such remedies. NOW, THEREFORE, the Parties and, by their acceptance of the benefits hereof and of the Guaranties and the Security Documents, the Interest Rate Exchangers agree as follows: Appointment As Collateral Agent. The Revolving Facility Agent on behalf ------------------------------- of the Revolving Facility Lenders, the AXEL Facility Agent on behalf of the AXEL Facility Lenders, and the Interest Rate Exchangers hereby severally appoint Morgan Guaranty Trust Company of New York to serve as the Collateral Agent and representative of the Secured Parties, and each such Party and Interest Rate Exchanger authorizes the Collateral Agent to act as agent for the Secured Parties (a) for the purposes of executing and delivering on its behalf the Security Documents to be executed and delivered by the Loan Parties and, subject to the provisions of this Agreement, enforcing the Secured Parties' rights in respect of the Collateral and the obligations of the Loan Parties under the Security Documents, and (b) for the purpose of enforcing the Secured Parties' rights under the Guaranties and the obligations of the Guarantors under the Guaranties. The Collateral Agent hereby accepts such appointment and agrees to act as Collateral Agent hereunder and to enter into and act as Collateral Agent under each of the Security Documents and the Guaranties in accordance with the terms thereof and of this Agreement. Decisions Relating to Exercise of Remedies Vested in Requisite Obligees. ----------------------------------------------------------------------- The Collateral Agent agrees to make such demands, to give such notices and to take such other actions under this Agreement, the Guaranties and the Security Documents as are expressly required under the terms hereof and thereof or as Requisite Obligees may request, and to take such action to enforce the Guaranties and the Security Documents and to foreclose upon, collect and dispose of the Collateral or any portion thereof as may be expressly required under the terms of this Agreement, the Guaranties or the Security Documents or as Collateral Agent may be directed by Requisite Obligees. The Collateral Agent shall not be required to take any action that is in its opinion contrary to law or to the terms of this Agreement, any or all of the Security Documents or the Guaranties or that would in its opinion subject it or any of its officers, employees, agents or directors to liability, and the Collateral Agent shall not be required to take any action under this Agreement, any or all of the Security Documents or the Guaranties unless and until the Collateral Agent shall be indemnified to its satisfaction by the Secured Parties against any and all loss, cost, expense or liability in connection therewith. Each Party executing this Agreement agrees that the Collateral Agent may act as Requisite Obligees may request (regardless of whether any individual Party or any other Secured Party agrees, disagrees or abstains with respect to such request), that the Collateral Agent shall have no liability for acting in accordance with such request and that no Party or Secured Party shall have any liability to any other Party or Secured Party for any such request. The Collateral XIII-3 Agent shall give prompt notice to all Parties of actions taken pursuant to the instructions of Requisite Obligees; provided, however, that the failure to give -------- ------- any such notice shall not impair the right of the Collateral Agent to take any such action or the validity or enforceability under this Agreement of the action so taken. The Collateral Agent may at any time request directions from the Requisite Obligees as to any course of action or other matters relating hereto or to the Security Documents or the Guaranties. Directions given by Requisite Obligees to the Collateral Agent shall be binding on the Parties, the Revolving Facility Lenders, the AXEL Facility Lenders and all Secured Parties for all purposes. Each Party, on behalf of the Secured Parties, and each Interest Rate Exchanger, agrees not to take any action whatsoever to enforce any term or provision of the Security Documents or the Guaranties or to enforce any of its rights in respect of the Collateral, except through the Collateral Agent in accordance with this Agreement. Application of Proceeds of Security, Guaranty Payments, Etc. ----------------------------------------------------------- The Collateral Agent shall establish and maintain two accounts into which it shall deposit (i) all amounts received by it in its capacity as the Collateral Agent in respect of any Security Document or the Guaranties (including all monies received on account of any sale of or other realization upon any of the Collateral pursuant to any Security Document or pursuant to Section 5(b) hereof and all monies received by it on account of the enforcement of the Guaranties), and (ii) all amounts received by it as a result of payments described in Section 5(c). One of the two accounts referred to in the preceding sentence shall be established and maintained for the benefit of all Secured Parties (other than with respect to L/C Obligations) (the "General Collateral Account") and the second such account shall be established and maintained solely for the benefit of the Issuing Lender (the "L/C Collateral Account", and together with the General Collateral Account, the "Collateral Accounts"). The Collateral Agent shall have exclusive dominion and control over the Collateral Accounts. All amounts which the Collateral Agent is required at any time to deposit in the respective Collateral Accounts pursuant to Section 3(a) shall be allocated between, and deposited in, such General Collateral Account and such L/C Collateral Account, respectively, pro rata in accordance with (i) the aggregate amount of such Secured Obligations (other than L/C Obligations) then outstanding and (ii) the aggregate amount of the L/C Obligations then outstanding. If any amounts are delivered to the Collateral Agent as cash collateral for the Letters of Credit pursuant to Section 8 of the Revolving Credit Agreement or as collateral for the liability of the Issuing Lender under outstanding Letters of Credit, they shall be deposited in the L/C Collateral Account. If after giving effect to such deposit or at any other time the balance in the L/C Collateral Account exceeds all L/C Obligations then outstanding, the excess shall be transferred to the General Collateral Account. After giving effect to any such deposit to the L/C XIII-4 Collateral Account, subsequent allocations pursuant to the first sentence of this Section 3(b) shall be adjusted to the extent necessary to cause the ratio of the aggregate amount of the Secured Obligations (other than L/C Obligations) then outstanding to the balance in the General Collateral Account to be equal to the ratio of the aggregate amount of the L/C Obligations then outstanding to the balance in the L/C Collateral Account. Prior to the delivery of a Notice of Acceleration any amounts deposited in the Collateral Accounts may be disbursed from the Collateral Accounts only upon the prior written consent of the Requisite Obligees. After the occurrence of a Notice of Acceleration and until such Notice is rescinded, the Collateral Agent shall disburse funds from the Collateral Accounts only as provided in this Section 3. When a Notice of Acceleration is in effect, all amounts deposited in the General Collateral Account shall be applied in the following order of priority: First, to the extent not theretofore paid by or on behalf of ----- any Loan Party, to pay all fees, costs, expenses of the Collateral Agent incurred in connection with the performance of its duties hereunder or under the Security Documents or the Guaranties, as the case may be, including reasonable attorneys' fees and expenses and all Collateral Agent Obligations and any other amounts payable to the Collateral Agent hereunder or under any of the Security Documents or the Guaranties in respect of any indemnities or other obligations of the Loan Parties with such application made pro rata from the General Collateral Account and the L/C Collateral Account based on the amounts on deposit therein; Second, to the other Secured Parties pro rata in accordance ------ --- ---- with the aggregate amount of all Secured Obligations (other than L/C Obligations) held by such Secured Parties; Third, if any L/C Obligations shall remain unpaid, to the L/C ----- Collateral Account to the extent the aggregate amount in such L/C Collateral Account does not exceed the aggregate amount of such L/C Obligations; and Fourth, the balance, if any, to the Company or such other ------ person or persons as are entitled thereto. When a Notice of Acceleration is in effect, all amounts deposited in the L/C Collateral Account shall be applied in the following order of priority (provided that an amount not to exceed all L/C Obligations which are not then L/C Current Obligations shall not be so applied, and shall instead be held by Collateral Agent in the L/C Collateral Account as collateral for such L/C Obligations, until they become L/C Current Obligations): First, to the extent not theretofore paid by or on behalf of ----- any Loan Party, to pay all fees, costs, expenses of the Collateral Agent incurred in connection with the XIII-5 performance of its duties hereunder or under the Security Documents or the Guaranties, as the case may be, including reasonable attorneys' fees and expenses and all Collateral Agent Obligations and any other amounts payable to the Collateral Agent hereunder or under any of the Security Documents or the Guaranties in respect of any indemnities or other obligations of the Loan Parties with such application made pro rata from the General Collateral Account and the L/C Collateral Account based on the amounts on deposit therein; Second, to the holders of any L/C Current Obligations pro rata ------ in accordance with the aggregate amount of all L/C Current Obligations) held by them, Third, if any Secured Obligations (other than L/C Obligations) ----- shall remain unpaid, to the General Collateral Account to the extent the aggregate amount in the General Collateral Account does not exceed the aggregate amount of such Secured Obligations; and Fourth, the balance, if any, to the Company or such other ------ person or persons as are entitled thereto. Unless the Collateral Agent shall have received instructions from the Requisite Obligees as to the times at which any amounts are to be distributed pursuant to Sections 3(c) or 3(d), all distributions or transfers pursuant to Sections 3(c) or 3(d) shall be made at such times and as promptly as the Collateral Agent shall in its good faith discretion determine to be reasonable and practicable under the circumstances, given the amount available for distribution or transfer in the relevant Collateral Account, the time at which the next addition to such Collateral Account is expected to be made, and the cost of distributing funds to the Secured Parties entitled to receive the same. The Collateral Agent shall at all times have the right to request distribution instructions as contemplated by the preceding sentence. Pending the disbursement thereof pursuant to the terms of this Agreement, all amounts in the Collateral Accounts shall be invested by the Collateral Agent in such Cash Equivalents as it shall determine from time to time or such other investments as shall be approved by Requisite Obligees; provided that so long as no Event of Default shall have occurred and be - -------- continuing, the Collateral Agent shall make such other investments at the direction of the Company. All reasonable commissions and other reasonable costs and expenses incurred by the Collateral Agent in connection with the acquisition or disposition by it of Cash Equivalents or such other investments may be deducted by the Collateral Agent from the income received by the Collateral Agent with respect thereto. Payments by the Collateral Agent in respect of the Revolving Credit Agreement Obligations (other than L/C Obligations) shall be made to the Revolving Facility Agent for XIII-6 distribution to the Revolving Facility Lenders in accordance with the terms of the Revolving Credit Agreement; payments with respect to the L/C Obligations shall be made to the Revolving Facility Agent for distribution to the Issuing Lender in accordance with the terms of the Revolving Credit Agreement; payments by the Collateral Agent in respect of the AXEL Credit Agreement Obligations shall be made to the AXEL Facility Agent for distribution to the AXEL FacilityLenders in accordance with the terms of the AXEL Credit Agreement; and payments by the Collateral Agent in respect of the Lender Interest Rate Agreement Obligations shall be distributed to the Interest Rate Exchangers pro --- rata in accordance with the aggregate amount of Lender Interest Rate Agreement - ---- Obligations held by such Interest Rate Exchanger. Information. ----------- Upon the request of the Collateral Agent, each Party and Interest Rate Exchanger agrees to promptly inform the Collateral Agent of the existence and amount of the Secured Obligations owing to such Party or such Interest Rate Exchanger and such other Secured Parties for whom such Party is acting as agent, trustee or other representative and of any commitments to extend additional credit which will constitute Secured Obligations by such Party or other Secured Parties. Upon request of the Collateral Agent, each Party (other than the Collateral Agent) and each Interest Rate Exchanger will inform the Collateral Agent of such payments on the Secured Obligations as may be received from time to time by such Party and such other Secured Parties for whom such Party is acting as agent, trustee or other representative. If, notwithstanding the request of the Collateral Agent, any Party or Interest Rate Exchanger shall fail or refuse reasonably promptly to certify as to the existence or amount of any Secured Obligation or such other information concerning the Secured Obligations as the Collateral Agent may reasonably request, the Collateral Agent shall be entitled to determine such existence or amount of such Secured Obligations by such method as the Collateral Agent may, in its sole discretion, determine in good faith, including by reliance upon a certificate of an officer of the Company. The Collateral Agent may rely conclusively, and shall be fully protected in so relying, on any determination made by it in good faith in accordance with the provisions of this Section (or as otherwise directed by a court of competent jurisdiction after notice and hearing on the merits) and, in the absence of gross negligence, shall have no liability to Company, any Subsidiary, any holder of any Secured Obligation or any other person as a result of such determination. If the Collateral Agent receives any Notice of Acceleration or certificate rescinding a Notice of Acceleration or any request by the Company for any consent, waiver or amendment with respect hereto or any Security Document or the Guaranties, it shall give prompt notice thereof to each Party at the address for such Party provided for in Section 8 hereof. A Notice of Acceleration shall be deemed to have been given only when the Notice of Acceleration has actually been received by the Collateral Agent and to have been rescinded XIII-7 when the Collateral Agent has actually received from the creditor or creditor group which gave such Notice of Acceleration a notice withdrawing such Notice of Acceleration. A Notice of Acceleration shall be deemed to be outstanding at all times after such Notice of Acceleration has been given until such time, if any, as such Notice of Acceleration has been rescinded. The Collateral Agent shall keep executed counterparts of this Agreement, the Security Documents and the Guaranties at the Collateral Agent's address as set forth under Collateral Agent's signature on the signature page to this Agreement and shall permit any Secured Party to inspect this Agreement, the Security Documents and the Guaranties upon request and to take copies thereof. Intercreditor Arrangements. -------------------------- Each of the Collateral Agent, each of the other Parties (on behalf of the respective Secured Parties) and each Interest Rate Exchanger hereby agrees, and each of the Loan Parties hereby acknowledges, that the liens and security interests granted to the Collateral Agent under the Security Documents shall be treated as having equal priority and shall at all times be shared by the Secured Parties as provided herein. If any Secured Party acquires custody, control or possession of any Collateral or proceeds therefrom, or payments with respect to the Guaranties, other than by distribution from the Collateral Agent pursuant to the terms of this Agreement, such Secured Party shall promptly cause such Collateral, proceeds or payments to be delivered to or put in the custody, possession or control of the Collateral Agent for disposition or distribution in accordance with the provisions of Section 3. Until such time as the provisions of the immediately preceding sentence have been complied with, such Secured Party shall be deemed to hold all such Collateral, proceeds and payments in trust for the parties entitled thereto hereunder. Nothing in this Section shall prevent a Secured Party from receiving and retaining payments (a) for the provision of services to any Loan Party, or (b) in connection with any extension of credit or other financial accommodation to any Loan Party if the obligations of such Loan Party incurred in connection with such extension of credit or other financial accommodation do not constitute Secured Obligations, or (c) as security for any such extension of credit or other financial accommodation if the obligations of such Loan Party incurred in connection with such services, extension of credit or other financial accommodation do not constitute Secured Obligations, and if such obligations are not incurred and such security is not given in breach of the Financing Agreements (as defined in Section 6). If (a) at any time after the occurrence of an Acceleration and for so long as such Acceleration is continuing, any Secured Party shall receive payment (voluntary or involuntary) on account of any Secured Obligation (i) from or on behalf of the Company or any Subsidiary or any guarantor of payment or performance of any of the Secured Obligations, or (ii) pursuant to any turnover or similar provision contained in any agreement evidencing or relating to XIII-8 subordinated indebtedness of the Company or any Loan Party or other obligor, or (b) at any time any Secured Party shall receive payment (voluntary or involuntary) on account of any Secured Obligation by way of the exercise of any right of setoff (or similar right) with respect to any assets (whether or not such assets shall constitute Collateral) of any Loan Party or as a result of any counterclaim, purchase of any participation by any Loan Party or otherwise, then such payment, prepayment or repayment (herein, a "Secured Obligation Payment") shall be deemed to be the proceeds of Collateral and shall be delivered to or put in the custody, possession or control of the Collateral Agent by the Secured Party receiving such Secured Obligation Payment for disposition or distribution by the Collateral Agent in accordance with Section 3. Any Secured Party receiving a Secured Obligation Payment that is required pursuant to this Section to be turned over to the Collateral Agent for application under Section 3 is deemed to have received such Secured Obligation Payment solely as agent for the Secured Parties and the Collateral Agent, and will immediately turn such Secured Obligation Payment, in the form received except for the endorsement of such receiving party where appropriate, over to the Collateral Agent, and until so turned over, will hold such Secured Obligation Payment in trust for the Secured Parties and the Collateral Agent. Each Party shall execute and deliver such other documents and instruments, in form and substance reasonably satisfactory to the other Parties, and shall take such other action, in each case as any other Party may reasonably have requested (at the cost and expense of the Company which, by countersigning this Agreement, agrees to pay such reasonable costs and expenses), to effectuate and carry out the provisions of this Agreement, including by recording or filing in such places as the requesting party may deem desirable, this Agreement or such other documents or instruments. In no event will the Revolving Facility Lenders or the AXEL Facility Lenders consent to any amendment of the provisions of the Revolving Credit Agreement or the AXEL Credit Agreement, respectively, or to any payment consistent with an amendment thereof or a change thereto, or enter into any other agreement with the Company or any of its Subsidiaries that would have the effect of (i) changing (to earlier dates) any dates upon which payments of principal or interest are due on loans or letter of credit reimbursement obligations, (ii) reducing the percentage specified in the definition of "Requisite Lenders" in the Revolving Credit Agreement or the AXEL Credit Agreement, or (iii) changing any mandatory prepayments or commitment reductions of the Revolving Credit Agreement or the AXEL Credit Agreement in a manner that disproportionately disadvantages one Class relative to the other Class, or confers additional rights on one Class which would be adverse to the other Class, in each case without the prior written consent of Requisite Obligees. Each Secured Party agrees that to the extent either Credit Agreement is amended in accordance with the terms of this Agreement and the Credit Agreements to increase the commitments and/or Secured Obligations outstanding thereunder, such Secured Obligations shall be entitled to share in the benefits of the Guaranties and the Security Documents on a pro rata basis. XIII-9 The Revolving Facility Agent agrees to deliver to the AXEL Facility Agent upon execution thereof any amendment, waiver or modification of the Revolving Credit Agreement, and the AXEL Facility Agent agrees to deliver to the Revolving Facility Agent any amendment, waiver or modification of the AXEL Credit Agreement. Subject to clause (h) below, without further written consent or authorization from Secured Parties, Collateral Agent may execute any documents or instruments necessary to (a) release any Lien encumbering any item of Collateral that is the subject of a sale or other disposition of assets permitted by the Revolving Credit Agreement and the AXEL Credit Agreement, or to which Requisite Obligees have otherwise consented, or (b) release any Subsidiary Guarantor from the Subsidiary Guaranty if all the capital stock of such Subsidiary Guarantor is sold to any Person pursuant to a sale or other disposition permitted hereunder or to which Requisite Obligees have otherwise consented; provided, however, that nothing herein shall require or permit -------- ------- Collateral Agent to release any such entity which prior to such sale is a Subsidiary Guarantor from the Subsidiary Guaranty if any of the Financing Agreements require that such entity be party to the Subsidiary Guaranty after such sale. Such termination and release shall be without prejudice to the rights of the Collateral Agent to charge and be reimbursed for any expenditure which it may incur in connection therewith. The proceeds of any disposition of Collateral released in accordance with this Section are not required to be delivered to the Collateral Agent or deposited in the Collateral Accounts pursuant to Section 3. Any release of the Collateral by the Collateral Agent from the Liens created by the Security Documents (other than in connection with the exercise of remedies with respect to such Collateral under a Security Document pursuant to instructions from Requisite Obligees) that is not permitted pursuant to the Revolving Credit Agreement and the AXEL Credit Agreement, or any release of a New Subsidiary by the Collateral Agent from the Subsidiary Guaranty that is not permitted pursuant to the Revolving Credit Agreement and the AXEL Credit Agreement, shall require the prior written consent of the Requisite Obligees (except for the release of all or substantially all of the Collateral, in which case the prior written consent of all of the Revolving Facility Lenders and all of the AXEL Facility Lenders are required; it being understood that an increase in the amount of any Indebtedness of the Company secured ratably by the Collateral shall not be deemed to be a release of the Collateral). Each of the Parties on its own behalf and on behalf of other Secured Parties, and each of the Interest Rate Exchangers, hereby covenants and agrees that it (a) will not accept any guarantee of any of the Secured Obligations by any Subsidiary or Affiliate of the Company unless such Subsidiary or Affiliate guarantees the payment of all the Secured Obligations and (b) will not take any security interest in or lien on any assets of the Company or any of its Subsidiaries to secure the payment or performance of any of the Secured Obligations unless all the Secured Parties are granted a pari passu security interest in or lien on such assets and the instrument creating such lien becomes a Security Document for all purposes of this Agreement. XIII-10 No Secured Party may require the Collateral Agent to take or refrain from taking any action hereunder or under any of the Security Documents or with respect to any of the Collateral except as and to the extent expressly set forth in this Agreement. Disclaimers, Indemnity, Etc. --------------------------- The Collateral Agent shall have no duties or responsibilities to the Secured Parties except those expressly set forth in this Agreement, the Security Documents and the Guaranties and the Collateral Agent shall not by reason of this Agreement, the Security Documents or the Guaranties be a trustee for any Secured Party or have any other fiduciary obligation to any Secured Party (including any obligation under the Trust Indenture Act of 1939, as amended). The Collateral Agent shall not be responsible to any Secured Party for any recitals, statements, representations or warranties contained in this Agreement, the Revolving Credit Agreement, the AXEL Credit Agreement and the Loan Documents (as defined in each of the Revolving Credit Agreement and the AXEL Credit Agreement; collectively, the "Financing Agreements") or in any certificate or other document referred to or provided for in, or received by any of them under, any of the Financing Agreements, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of any of the Financing Agreements or any other document referred to or provided for therein or any Lien under the Security Documents or the perfection or priority of any such Lien or the value or condition of the Collateral or the title of the Loan Parties to the Collateral or for any failure by any Loan Party to perform any of its obligations under any of the Financing Agreements. The Collateral Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Neither the Collateral Agent nor any of its directors, officers, employees or agents shall be liable or responsible for any action taken or omitted to be taken by it or them hereunder or in connection herewith, except for its or their own gross negligence or willful misconduct. The Collateral Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telex, telecopy, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company or any Subsidiary of the Company), independent accountants and other experts selected by the Collateral Agent. The Collateral Agent shall not be deemed to have actual, constructive, direct or indirect notice or knowledge of the occurrence of any Acceleration unless and until the Collateral Agent shall have received a Notice of Acceleration. The Collateral Agent shall have no obligation whatsoever either prior to or after receiving a Notice of Acceleration to inquire whether an Acceleration has, in fact, occurred and shall be entitled to rely conclusively, and shall be fully protected in so relying, on any Notice of Acceleration certificate so furnished to it. As to any matters not expressly provided for by this Agreement, the Collateral Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with XIII-11 instructions signed by Requisite Obligees, and such instructions of Requisite Obligees, and any action taken or failure to act pursuant thereto, shall be binding on all of the Secured Parties. The Revolving Facility Lenders and the AXEL Facility Lenders (collectively, the "Paying Indemnifying Parties") agree that such Secured Parties shall indemnify the Collateral Agent, its Affiliates and their respective directors, officers, employees and agents in its capacity as Collateral Agent, ratably in accordance with the amount of the Secured Obligations held by such Secured Parties to the extent neither reimbursed by any Loan Party nor reimbursed out of any proceeds, recoveries or payments under any Security Documents or the Guaranties, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Collateral Agent in any way relating to or arising out of any of the Financing Agreements or any other document contemplated by or referred to therein or the transactions contemplated thereby or the enforcement of any of the terms of any thereof; provided, however, that no such Secured Party shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Collateral Agent. The Collateral Agent shall, notwithstanding anything to the contrary in Section 6(c) hereof, in all cases be fully justified in failing or refusing to act hereunder unless it shall be further indemnified to its satisfaction by the Parties against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. The Collateral Agent may deem and treat the payee of any promissory note or other evidence of indebtedness relating to the Secured Obligations as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof, signed by such payee and in form satisfactory to the Collateral Agent, shall have been filed with the Collateral Agent. Any request, authority or consent of any Person who at the time of making such request or giving such authority or consent is the holder of any such note or other evidence of indebtedness shall be conclusive and binding on any subsequent holder, transferee or assignee of such note or other evidence of indebtedness and of any note or notes or other evidences of indebtedness issued in exchange therefor. Except as expressly provided herein, in the Security Documents or in the Guaranties, the Collateral Agent shall have no duty to take any affirmative steps with respect to the collection of amounts payable in respect of the Collateral or under the Guaranties. The Collateral Agent shall incur no liability (absent gross negligence or willful misconduct) as a result of any sale of any Collateral at any private sale. (i) The Collateral Agent may resign at any time by giving at least 30 days notice thereof to the Parties (such resignation to take effect as hereinafter provided) and the Collateral Agent may be removed as Collateral Agent at any time by Requisite Obligees. In the event of any such resignation or removal of the Collateral Agent, Requisite Obligees shall XIII-12 thereupon have the right to appoint a successor Collateral Agent which appointment shall, unless an Event of Default has occurred and is continuing, be subject to the approval of the Company. If no successor Collateral Agent shall have been so appointed by Requisite Obligees and shall have accepted such appointment within 30 days after the notice of the intent of the Collateral Agent to resign, then the retiring Collateral Agent may, on behalf of the other Parties, appoint a successor Collateral Agent. Any successor Collateral Agent appointed pursuant to this clause (i) shall be a bank party to the Revolving Credit Agreement or the AXEL Credit Agreement or a commercial bank organized under the laws of the United States of America or any state thereof and having a combined capital and surplus of at least $250,000,000. (ii) Upon the acceptance of any appointment as Collateral Agent hereunder by a successor Collateral Agent, such successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent, and the retiring or removed Collateral Agent shall thereupon be discharged from its duties and obligations hereunder. After any retiring or removed Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Section 6 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Collateral Agent. Definitions. ----------- "Acceleration" shall mean any of the Revolving Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Revolving Facility Lenders or the AXEL Facility Lenders shall have been terminated under Section 8 or Section 7 of the Revolving Credit Agreement or the AXEL Credit Agreement, respectively. "Actionable Default" shall mean (i) any failure of the Company to pay upon its final stated maturity, the Revolving Credit Agreement Obligations or the AXEL Credit Agreement Obligations or (ii) any breach or default by the Company under the Revolving Credit Agreement or the AXEL Credit Agreement if the effect of such breach or default is to cause, or to permit the Revolving Facility Lenders or the AXEL Facility Lenders then to cause the Revolving Credit Agreement Obligations or the AXEL Credit Agreement Obligations to become or be declared due prior to their stated maturity. "AXEL Credit Agreement Obligations" shall mean all obligations of every nature of Company and its Subsidiaries from time to time owed to the AXEL Facility Lenders, the AXEL Facility Agent or any of them under the Loan Documents (as defined in the AXEL Credit Agreement). "Class" shall mean each class of lenders under the Revolving Credit Agreement and the AXEL Credit Agreement, with there being two separate classes of lenders, i.e., (i) lenders under ---- XIII-13 the Revolving Credit Agreement and (ii) the lenders under the AXEL Credit Agreement. "Collateral" shall mean all the properties and assets of whatever nature, tangible or intangible, now owned or existing or hereafter acquired or arising, of any of the Loan Parties on or in which the Collateral Agent has been granted a Lien pursuant to any of the Security Documents. "Collateral Agent Obligations" shall mean all indemnity, reimbursement and payment obligations of the Company and any Subsidiary to the Collateral Agent under this Agreement, any Security Document or the Guaranties. "Event of Default" shall mean any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. "L/C Current Obligations" shall mean, at any time of determination, the sum of the amounts referred to in clauses (b) and (c) of the definition of L/C Obligations. "L/C Obligations" shall mean, at any time of determination, the sum of (a) the aggregate then undrawn and unexpired amount of then outstanding Letters of Credit, (b) the aggregate amount of drawings under Letters of Credit which have not then been reimbursed pursuant to the Revolving Credit Agreement, and (c) all interest which has accrued in respect of drawings that have been made under Letters of Credit and which is then unpaid. "Lender Interest Rate Agreement Obligations" shall mean all obligations of every nature of Company from time to time owed to Interest Rate Exchangers or any of them under the Lender Interest Rate Agreements, including without limitation payments for early termination thereof. "Letter of Credit" shall mean a letter of credit issued by the Issuing Lender under the Revolving Credit Agreement. "Notice of Acceleration" shall mean a notice by the Revolving Facility Agent in the case of the Revolving Facility Lenders or the AXEL Facility Agent in case of AXEL Facility Lenders, in each case delivered to the Collateral Agent stating that an Acceleration has occurred. "Requisite AXEL Facility Lenders" shall mean "Requisite Lenders" as defined in the AXEL Credit Agreement. XIII-14 "Requisite Obligees" shall mean (i) (A) unless an Acceleration shall have occurred and be continuing, the Requisite Revolving Facility Lenders and the Requisite AXEL Facility Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% in amount of the Revolving Credit Agreement Obligations and the AXEL Credit Agreement Obligations or (ii) after payment in full of all Revolving Credit Agreement Obligations and all AXEL Credit Agreement Obligations, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements.. "Requisite Revolving Facility Lenders" shall mean "Requisite Lenders" as defined in the Revolving Credit Agreement. "Revolving Credit Agreement Obligations" shall mean all obligations of every nature of Company and its Subsidiaries from time to time owed to Revolving Facility Agent, the Revolving Facility Lenders, the Issuing Lender or any of them under the Loan Documents (as defined in the Revolving Credit Agreement), including, without limitation, the L/C Obligations. "Secured Obligations" shall mean the Revolving Credit Agreement Obligations, the AXEL Credit Agreement Obligations and the Lender Interest Rate Agreement Obligations. Miscellaneous. ------------- All notices and other communications provided for herein shall be in writing and may be personally served, telecopied, telexed or sent by United States mail and shall be deemed to have been given when delivered in person, upon receipt of telecopy or telex, or four Business Days after deposit in the United States mail, registered or certified, with postage prepaid and properly addressed. For the purposes hereof, the addresses of the parties hereto (until notice of a change thereof is delivered as provided in this Section 8(a)) shall be as set forth under each party's name on the signature pages hereof. This Agreement, the Security Documents and the Guaranties may be modified or waived only by an instrument or instruments in writing signed by Collateral Agent and Requisite Obligees and, if applicable, the Loan Party signatory to this Agreement or any such Collateral Document. This Agreement shall be binding upon and inure to the benefit of the Collateral Agent, each other Party and each Secured Party and their respective successors and assigns. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute XIII-15 this Agreement by signing any such counterpart. This Agreement shall become effective as to the Revolving Facility Lenders and the Revolving Facility Agent upon execution thereof by Revolving Facility Agent and as to the AXEL Facility Lenders and the AXEL Facility Agent upon execution by AXEL Facility Agent thereof. Upon receipt by the Collateral Agent of evidence satisfactory to it of the termination of all commitments to extend credit which would constitute Secured Obligations and the indefeasible payment in full of all Secured Obligations (including, without limitation, the reasonable compensation, expenses and disbursements of the Collateral Agent) and expiration or cancellation of all Letters of Credit, this Agreement shall terminate and the Collateral Agent, at the request and expense of the Company, will execute and deliver to the Company a proper instrument or instruments acknowledging the satisfaction and termination of the Collateral Documents and of this Agreement, and will duly assign, transfer and deliver to the Company all of the rights and moneys at the time held by the Collateral Agent under the Collateral Documents and hereunder, provided that Section 6(c) of this Agreement shall survive, and -------- remain operative and in full force and effect, regardless of the termination of this Agreement. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. By countersigning or otherwise accepting the terms of this Agreement, the Company and each other Loan Party acknowledges and consents to and agrees to perform and be bound by each of the provisions hereof stated to be applicable to it. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY LOAN PARTY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY OBLIGATIONS THEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH LOAN PARTY, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO SUCH LOAN PARTY AT ITS ADDRESSES PROVIDED ON THE APPLICABLE SIGNATURE PAGE HERETO; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER SUCH LOAN PARTY IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE XIII-16 CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT COLLATERAL AGENT RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST SUCH LOAN PARTY IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREE THAT THE PROVISIONS OF THIS SECTION 8(i) RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5- 1402 OR OTHERWISE. EACH LOAN PARTY, COLLATERAL AGENT AND EACH PARTY HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each Loan Party, Collateral Agent and each Party acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already relied on this waiver in entering into this Agreement, and that each will continue to rely on this waiver in their related future dealings. Each Loan Party, Collateral Agent and each Party further warrants and represents that it has reviewed this waiver with its legal counsel and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 8(j) AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. XIII-17 Each Loan Party, by its execution of this Agreement in the space provided below, hereby accepts and agrees to be bound by the foregoing provisions of this Agreement. COMPANY: SEALY MATTRESS COMPANY By: Name: Title: Notice Address: HOLDINGS: SEALY CORPORATION By: Name: Title: Notice Address: SUBSIDIARIES: [NAME OF SUBSIDIARY] By: Name: Title: Notice Address: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Collateral Agent, Revolving Facility Agent and AXEL Facility Agent By: Name: Title: Notice Address: EXHIBIT XIV [FORM OF COMPANY PLEDGE AGREEMENT] COMPANY PLEDGE AGREEMENT This COMPANY PLEDGE AGREEMENT (this "AGREEMENT") is dated as of December 18, 1997 and entered into by and between SEALY MATTRESS COMPANY, an Ohio corporation ("PLEDGOR"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as Collateral Agent for and representative of (in such capacity herein called "COLLATERAL AGENT") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined). RECITALS A. Pledgor is the legal and beneficial owner of (i) the shares of stock (the "PLEDGED SHARES") described in Part A of Schedule I annexed hereto and ---------- issued by the corporations named therein and (ii) the indebtedness (the "PLEDGED DEBT") described in Part B of said Schedule I and issued by the ---------- obligors named therein. B. Sealy Corporation, a Delaware Corporation ("HOLDINGS"), the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO"), as documentation agent (in such capacity, "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT") with Pledgor pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Pledgor. C. Pledgor, Holdings, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity, "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "AXEL ADMINISTRATIVE AGENT"), and BTCo., as documentation agent (in such capacity, "AXEL DOCUMENTATION AGENT") and have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, the CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL Lenders have made certain commitments, subject to XIV-1 the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Pledgor. D. Pledgor may from time to time enter into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more Credit Agreement Lenders or their Affiliates or AXEL Lenders or their Affiliates (in such capacity, collectively, "INTEREST RATE EXCHANGERS") in accordance with the terms of the Financing Agreements (as hereinafter defined), and it is desired that the obligations of Pledgor under the Lender Interest Rate Agreements, including without limitation the obligation of Pledgor to make payments, if any, thereunder in the event of early termination thereof, together with all obligations of Pledgor under the Financing Agreements and any other Loan Documents (as hereinafter defined), be secured hereunder. E. It is a condition precedent to the initial extensions of credit by Secured Parties under the Financing Agreements that Pledgor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of, the Pledgor, (iii) the AXEL Administrative Agent, the AXEL Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement, (iv) the AXEL Lenders to make their respective loans to the Pledgor and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor hereby agrees with Collateral Agent as follows: SECTION 1. DEFINED TERMS ------------- (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. "ADDITIONAL PLEDGED SHARES" has the meaning assigned to that term in Section 2(c) of this Agreement. "AGREEMENT" means this Company Pledge Agreement dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. XIV-2 "AXEL COMMITMENTS" means the "Commitments" as defined in the AXEL Credit Agreement. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "AXEL OBLIGATIONS" shall mean "Obligations" as defined in the AXEL Credit Agreement. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. "FINANCING AGREEMENT" means the Credit Agreement or the AXEL Credit Agreement, and "Financing Agreements" means the Credit Agreement and the AXEL Credit Agreement, collectively. "FINANCING AGREEMENT OBLIGATIONS" means Credit Agreement Obligations and AXEL Obligations. "HOLDINGS" has the meaning assigned to that term in the recitals to this Agreement. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. XIV-3 "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "NEW PLEDGED SHARES" has the meaning assigned to that term in Section 2(e) of this Agreement. "PLEDGE AMENDMENT" has the meaning assigned to that term in Section 7 of this Agreement. "PLEDGED COLLATERAL" has the meaning assigned to that term in Section 2 of this Agreement. "PLEDGED DEBT" has the meaning assigned to that term in the recitals of this Agreement. "PLEDGED SHARES" has the meaning assigned to that term in the recitals to this Agreement. "PLEDGOR" has the meaning assigned to that term in the introduction of this Agreement. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. "REQUISITE OBLIGEES" has the meaning assigned to that term in Section 17(a) of this Agreement. "SECURED OBLIGATIONS" has the meaning assigned to that term in Section 3 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. XIV-4 SECTION 2. PLEDGE OF SECURITY ------------------ Pledgor hereby pledges and assigns to Collateral Agent, and hereby grants to Collateral Agent a security interest in, all of Pledgor's right, title and interest in and to the following (the "PLEDGED COLLATERAL"): (a) the Pledged Shares and the certificates representing the Pledged Shares and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to the Pledged Shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; provided, however, that to -------- ------- the extent the issuer of any of the Pledged Shares is a controlled foreign corporation (used hereinafter as such term is defined in Section 957(a) or a successor provision of the Internal Revenue Code), Pledgor shall only be required to pledge Pledged Shares of, certificates representing Pledged Shares of, and such interests pertaining to Pledged Shares of such issuer possessing up to but not exceeding 65% of the voting power of all classes of capital stock entitled to vote of such issuer, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Pledged Shares; (b) the Pledged Debt and the instruments evidencing the Pledged Debt, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Debt; (c) all additional shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any issuer of the Pledged Shares from time to time acquired by Pledgor in any manner (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such additional shares, securities, warrants, options or other rights and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such additional shares (all such shares, securities, warrants, options, rights, certificates, instruments and interests collectively being "ADDITIONAL PLEDGED SHARES"), and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Additional Pledged Shares; provided, however, that to the extent that the -------- ------- issuer of any Additional Pledged Shares is a controlled foreign corporation, Pledgor shall only be required to pledge Additional Pledged Shares of such issuer possessing up to but not exceeding 65% of the voting power of all classes of capital stock entitled to vote of such issuer, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Additional Pledged Shares; (d) all additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt and the instruments evidencing such indebtedness, and all interest, cash, XIV-5 instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; (e) all shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of Pledgor (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such shares, securities, warrants, options or other rights and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such shares (all such shares, securities, warrants, options, rights, certificates, instruments and interests collectively being "NEW PLEDGED SHARES"), and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares, securities, warrants, options or other rights; provided, however, that in the event that any such direct -------- ------- Subsidiary is a controlled foreign corporation, Pledgor shall only be required to pledge New Pledged Shares of such Subsidiary possessing up to but not exceeding 65% of the voting power of all classes of capital stock entitled to vote of such Subsidiary, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such New Pledged Shares; (f) all indebtedness from time to time owed to Pledgor by any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a Subsidiary of Pledgor, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; and (g) to the extent not covered by clauses (a) through (f) above, all proceeds of any or all of the foregoing Pledged Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Pledged Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, proceeds of any indemnity or guaranty payable to Pledgor or Collateral Agent from time to time with respect to any of the Pledged Collateral. SECTION 3. SECURITY FOR OBLIGATIONS. ------------------------ This Agreement secures, and the Pledged Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all obligations and liabilities of every nature of Pledgor now or hereafter existing under or arising out of or in connection with any Financing Agreements and any other Loan Documents and the Lender Interest Rate Agreements and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Pledgor, would accrue on such obligations), reimbursement XIV-6 of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Collateral Agent or any Secured Party or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise, and all obligations of every nature of Pledgor now or hereafter existing under this Agreement (all such obligations of Pledgor being the "SECURED OBLIGATIONS"). SECTION 4. DELIVERY OF PLEDGED COLLATERAL. ------------------------------ All certificates or instruments representing or evidencing the Pledged Collateral shall be delivered to and held by or on behalf of Collateral Agent pursuant hereto and shall be in suitable form for transfer by delivery or, as applicable, shall be accompanied by Pledgor's endorsement, where necessary, or duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to Collateral Agent. Upon the occurrence and during the continuance of an Event of Default, Collateral Agent shall have the right, without notice to Pledgor, to transfer to or to register in the name of Collateral Agent or any of its nominees any or all of the Pledged Collateral, subject only to the revocable rights specified in Section 8(a). In addition, upon the occurrence and during the continuance of an Event of Default, Collateral Agent shall have the right at any time to exchange certificates or instruments representing or evi dencing Pledged Collateral for certificates or instruments of smaller or larger denominations. SECTION 5. REPRESENTATIONS AND WARRANTIES. ------------------------------ Pledgor represents and warrants as follows: (a) Due Authorization, etc. of Pledged Collateral. All of the --------------------------------------------- Pledged Shares have been duly authorized and validly issued and are fully paid and non-assessable. All of the Pledged Debt has been duly authorized, authenticated or issued, and delivered and is the legal, valid and binding obligation of the issuers thereof and is not in default. (b) Description of Pledged Collateral. The Pledged Shares --------------------------------- constitute the percentage of the issued and outstanding shares of stock of each issuer thereof set forth on Schedule I annexed hereto, and there are no ---------- outstanding warrants, options or other rights to purchase, or other agreements outstanding with respect to, or property that is now or hereafter convertible into, or that requires the issuance or sale of, any Pledged Shares. The Pledged Debt constitutes all of the issued and outstanding intercompany indebtedness evidenced by a promissory note of the respective issuers thereof owing to Pledgor. (c) Ownership of Pledged Collateral. Pledgor is the legal, record ------------------------------- and beneficial owner of the Pledged Collateral free and clear of any Lien except for the security interest created by this Agreement. SECTION 6. TRANSFERS AND OTHER LIENS; ADDITIONAL PLEDGED COLLATERAL; ETC. -------------------------------------------------------------- XIV-7 Pledgor shall: (a) not, except as expressly permitted by the Financing Agreements, (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral, (ii) create or suffer to exist any Lien upon or with respect to any of the Pledged Collateral, except for the security interest under this Agreement, or (iii) permit any issuer of Pledged Shares to merge or consolidate unless all the outstanding capital stock of the surviving or resulting corporation is, upon such merger or consolidation, pledged hereunder and no cash, securities or other property is distributed in respect of the outstanding shares of any other constituent corporation provided that if the surviving or resulting -------- corporation upon any such merger or consolidation involving an issuer of Pledged Shares which is a controlled foreign corporation is a controlled foreign corporation, then Pledgor shall only be required to pledge outstanding capital stock of such surviving or resulting corporation possessing up to but not exceeding 65% of the voting power of all classes of capital stock of such issuer entitled to vote; provided that in the event -------- Pledgor makes an Asset Sale permitted by the Financing Agreements and the assets subject to such Asset Sale are Pledged Shares, Collateral Agent shall release the Pledged Shares that are the subject of such Asset Sale to Pledgor free and clear of the lien and security interest under this Agreement concurrently with the consummation of such Asset Sale; provided, -------- further that, as a condition precedent to such release, Collateral Agent ------- shall have received evidence reasonably satisfactory to it that arrangements reasonably satisfactory to it have been made for delivery to Collateral Agent of the Net Asset Sale Proceeds of such Asset Sale in the event and to the extent that all or any portion of such Net Asset Sale Proceeds are required to be applied to prepay the Loans under the Financing Agreements; (b) (i) cause each issuer of Pledged Shares not to issue any stock or other securities in addition to or in substitution for the Pledged Shares issued by such issuer, except to Pledgor, (ii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities of each issuer of Pledged Shares, and (iii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all shares of stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of Pledgor; provided, that notwithstanding -------- anything contained in this clause (b) to the contrary, Pledgor shall only be required to pledge the outstanding capital stock of a foreign controlled corporation possessing up to but not exceeding 65% of the voting power of all classes of capital stock of such controlled foreign corporation entitled to vote; (c) (i) pledge hereunder, immediately upon their issuance, any and all instruments or other evidences of additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt, and (ii) pledge hereunder, immediately upon their issuance, any and all instruments or other evidences of indebtedness from time to time owed to Pledgor by any Person that after the date of this Agreement becomes, as a result of any occurrence, a Subsidiary of Pledgor; and XIV-8 (d) pay promptly when due all taxes, assessments and governmental charges or levies imposed upon, and all claims against, the Pledged Collateral, except to the extent the validity thereof is being contested in good faith. SECTION 7. FURTHER ASSURANCES; PLEDGE AMENDMENTS. ------------------------------------- (a) Pledgor agrees that from time to time, at the expense of Pledgor, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Without limiting the generality of the foregoing, Pledgor will: (i) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices as Collateral Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby and (ii) at Collateral Agent's reasonable request, appear in and defend any action or proceeding that may affect Pledgor's title to or Collateral Agent's security interest in all or any part of the Pledged Collateral. (b) Pledgor further agrees that it will, upon obtaining any additional shares of stock or other securities required to be pledged hereunder as provided in Section 6(b) or (c), promptly (and in any event within five Business Days) deliver to Collateral Agent a Pledge Amendment, duly executed by Pledgor, in substantially the form of Schedule II annexed hereto (a "PLEDGE AMENDMENT"), ----------- in respect of the additional Pledged Shares or Pledged Debt to be pledged pursuant to this Agreement. Pledgor hereby authorizes Collateral Agent to attach each Pledge Amendment to this Agreement and agrees that all Pledged Shares or Pledged Debt listed on any Pledge Amendment delivered to Collateral Agent shall for all purposes hereunder be considered Pledged Collateral; provided that the failure of Pledgor to execute a Pledge Amendment with respect - -------- to any additional Pledged Shares or Pledged Debt pledged pursuant to this Agreement shall not impair the security interest of Collateral Agent therein or otherwise adversely affect the rights and remedies of Collateral Agent hereunder with respect thereto. SECTION 8. VOTING RIGHTS; DIVIDENDS; ETC. ------------------------------ (a) So long as no Event of Default shall have occurred and be continuing: (i) Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Financing Agreements; (ii) Pledgor shall be entitled to receive and retain, and to utilize free and clear of the lien of this Agreement, any and all dividends and interest paid in respect of the Pledged Collateral; provided, however, that -------- ------- any and all dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral, shall be, and shall forthwith be delivered to Collateral Agent to hold as, Pledged Collateral and shall, if received by Pledgor, be received in trust for the benefit of Collateral Agent, be segregated XIV-9 from the other property or funds of Pledgor and be forthwith delivered to Collateral Agent as Pledged Collateral in the same form as so received (with all necessary endorsements); provided, that Pledgor shall not be required to -------- deliver the outstanding capital stock of a foreign controlled corporation paid as a dividend or interest to the Pledgor, if Collateral Agent would hold as Pledged Collateral outstanding capital stock of such controlled foreign corporation possessing greater than 65% of the voting power of all classes of capital stock of such controlled foreign corporation entitled to vote; and (iii) Collateral Agent shall promptly execute and deliver (or cause to be executed and delivered) to Pledgor all such proxies, dividend payment orders and other instruments as Pledgor may from time to time reasonably request for the purpose of enabling Pledgor to exercise the voting and other consensual rights which it is entitled to exercise pursuant to paragraph (i) above and to receive the dividends, principal or interest payments which it is authorized to receive and retain pursuant to paragraph (ii) above. (b) Upon the occurrence and during the continuation of an Event of Default: (i) upon written notice from Collateral Agent to Pledgor, all rights of Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 8(a)(i) shall cease, and all such rights shall thereupon become vested in Collateral Agent who shall thereupon have the sole right to exercise such voting and other consensual rights; (ii) all rights of Pledgor to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 8(a)(ii) shall cease, and all such rights shall thereupon become vested in Collateral Agent who shall thereupon have the sole right to receive and hold as Pledged Collateral such dividends and interest payments; and (iii) all dividends, principal and interest payments which are received by Pledgor contrary to the provisions of paragraph (ii) of this Section 8(b) shall be (A) forthwith (and in any event within two Business Days) deposited by the Pledgor to the exact form received, duly endorsed by the Pledgor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent for the account of the Secured Parties only as provided in Section 15, (B) until so turned over in accordance with the preceding subsection (A), all such amounts and proceeds received by Grantor shall be received in trust for the benefit of Collateral Agent hereunder -- and shall be segregated from other funds of Pledgor. (c) In order to permit Collateral Agent to exercise the voting and other consensual rights which it may be entitled to exercise pursuant to Section 8(b)(i) and to receive all dividends and other distributions which it may be entitled to receive under Section 8(a)(ii) or Section 8(b)(ii), (i) Pledgor shall promptly execute and deliver (or cause to be executed and delivered) to Collateral Agent all such proxies, dividend payment orders and other instruments as Collateral Agent may from time to time reasonably request and (ii) without limiting the effect of the immediately preceding clause (i), Pledgor hereby grants to Collateral Agent an irrevocable proxy to vote the Pledged Shares and to XIV-10 exercise all other rights, powers, privileges and remedies to which a holder of the Pledged Shares would be entitled (including, without limitation, giving or withholding written consents of shareholders, calling special meetings of shareholders and voting at such meetings), which proxy shall be effective, automatically and without the necessity of any action (including any transfer of any Pledged Shares on the record books of the issuer thereof) by any other Person (including the issuer of the Pledged Shares or any officer or agent thereof), upon the occurrence and during the continuance of an Event of Default and which proxy shall only terminate upon the payment in full of the Secured Obligations. SECTION 9. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. ------------------------------------------- Pledgor hereby irrevocably appoints Collateral Agent as Pledgor's attorney- in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor, Collateral Agent or otherwise, from time to time, upon the occurrence and during the continuance of an Event of Default, in Collateral Agent's reasonable discretion to take any action and to execute any instrument that Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) to file one or more financing or continuation statements, or amendments thereto, relative to all or any part of the Pledged Collateral without the signature of Pledgor to the extent allowed under applicable law; (b) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Pledged Collateral; (c) to receive, endorse and collect any instruments made payable to Pledgor representing any dividend, principal or interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same; and (d) to file any claims or take any action or institute any proceedings that Collateral Agent may reasonably deem necessary or desirable for the collection of any of the Pledged Collateral or otherwise to enforce the rights of Collateral Agent with respect to any of the Pledged Collateral. SECTION 10. COLLATERAL AGENT MAY PERFORM. ---------------------------- If Pledgor fails to perform any agreement contained herein, Collateral Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of Collateral Agent incurred in connection therewith shall be payable by Pledgor under Section 16(b). SECTION 11. STANDARD OF CARE. ---------------- The powers conferred on Collateral Agent hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Pledged Collateral in its possession and the XIV-11 accounting for moneys actually received by it hereunder, Collateral Agent shall have no duty as to any Pledged Collateral, it being understood that Collateral Agent shall have no responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Pledged Collateral, whether or not Collateral Agent has or is deemed to have knowledge of such matters, (b) taking any necessary steps (other than steps taken in accordance with the standard of care set forth above to maintain possession of the Pledged Collateral) to preserve rights against any parties with respect to any Pledged Collateral, (c) taking any necessary steps to collect or realize upon the Secured Obligations or any guarantee therefor, or any part thereof, or any of the Pledged Collateral, or (d) initiating any action to protect the Pledged Collateral against the possibility of a decline in market value. Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equal to that which Collateral Agent accords its own property consisting of negotiable securities. XIV-12 SECTION 12. REMEDIES. -------- (a) If any Event of Default shall have occurred and be continuing, Collateral Agent may exercise in respect of the Pledged Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Pledged Collateral), and Collateral Agent may also in its sole discretion, without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange or broker's board or at any of Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Collateral Agent may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Pledged Collateral. Collateral Agent or any Secured Party or Interest Rate Exchanger may be the purchaser of any or all of the Pledged Collateral at any such sale and Collateral Agent, as agent for and representative of Secured Parties and Interest Rate Exchangers (but not any Secured Party or Secured Parties or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Obligees shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Pledged Collateral payable by Collateral Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Pledgor, and Pledgor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Collateral Agent shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Pledgor hereby waives any claims against Collateral Agent arising by reason of the fact that the price at which any Pledged Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Collateral Agent accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Pledged Collateral are insufficient to pay all the Secured Obligations, Pledgor shall be liable for the deficiency and the reasonable fees of any attorneys employed by Collateral Agent to collect such deficiency. (b) Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws, Collateral Agent may be compelled, with respect to any sale of all or any part of the Pledged Collateral conducted without prior registration or qualification of such Pledged Collateral under the Securities Act and/or such state securities laws, to limit purchasers to those who will agree, among other things, to acquire the Pledged Collateral for their own account, for investment and not with a view to the distribution or resale thereof. Pledgor acknowledges that any such private sales may be at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including, without limitation, a public XIV-13 offering made pursuant to a registration statement under the Securities Act) and, notwithstanding such circumstances, Pledgor agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that Collateral Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Pledged Collateral for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would, or should, agree to so register it. (c) If Collateral Agent determines to exercise its right to sell any or all of the Pledged Collateral, upon written request, Pledgor shall and shall cause each issuer of any Pledged Shares to be sold hereunder from time to time to furnish to Collateral Agent all such information as Collateral Agent may reasonably request in order to determine the number of shares and other instruments included in the Pledged Collateral which may be sold by Collateral Agent in exempt transactions under the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder, as the same are from time to time in effect. SECTION 13. PROCEEDS TO BE TURNED OVER TO COLLATERAL AGENT. ---------------------------------------------- In addition to the rights of the Collateral Agent and the Secured Parties specified in Section 8(b) with respect to payment of Accounts, if an Event of Default shall occur and be continuing, upon request of the Collateral Agent, all proceeds received by the Pledgor consisting of cash, checks and other near-cash items shall be held by the Pledgor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of the Pledgor, and shall, forthwith upon receipt by the Pledgor, be turned over to the Collateral Agent in the exact form received by the Pledgor (duly indorsed by the Pledgor to the Collateral Agent, if required) and held by the Collateral Agent in a Collateral Account maintained under the Intercreditor Agreement. All proceeds while held by the Collateral Agent in a Collateral Account (or by the Pledgor in trust for the Collateral Agent and the Secured Parties) shall continue to be held as collateral security for all the Secured Obligations and shall not constitute payment thereof until applied as provided in Section 15. SECTION 14. APPLICATION OF PROCEEDS. ----------------------- All proceeds held in any Collateral Account and all other proceeds received by Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral shall be applied as provided in subsection 3 of the Intercreditor Agreement. SECTION 15. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. ----------------------------------------------- This Agreement shall create a continuing security interest in the Pledged Collateral and shall (a) remain in full force and effect until the payment in full of all Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Pledgor, its successors and assigns, and (c) inure, together with the rights and remedies of Collateral Agent XIV-14 hereunder, to the benefit of Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement and subsection 10.1 of the AXEL Credit Agreement, any Secured Party may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to herein or otherwise. Upon the payment in full of all Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Pledged Collateral shall revert to Pledgor. Upon any such termination Collateral Agent will, at Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination in accordance with the terms of the Intercreditor Agreement and Pledgor shall be entitled to the return, upon its request and at its expense, against receipt and without recourse to Collateral Agent, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 16. COLLATERAL AGENT AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Collateral Agent has been appointed to act as Collateral Agent hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and AXEL Administrative Agent on behalf of the AXEL Lenders pursuant to Intercreditor Agreement and, by their acceptance of the benefits hereof, Interest Rate Exchangers and shall be entitled to the benefits of the Intercreditor Agreement. Collateral Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Pledged Collateral), solely in accordance with this Agreement and the Intercreditor Agreement; provided that Collateral Agent shall -------- exercise, or refrain from exercising, any remedies provided for in Section 12 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 18(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Pledged Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Collateral Agent for the benefit of and Interest Rate Exchangers in accordance with the terms of this Section 18(a). (b) Collateral Agent shall at all times be the same Person that is appointed Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, XIV-15 privileges and duties of the retiring or removed Collateral Agent under this Agreement, and the retiring or removed Collateral Agent under this Agreement shall promptly (i) transfer to such successor Collateral Agent all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Collateral Agent under this Agreement, and (ii) execute and deliver to such successor Collateral Agent such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Collateral Agent of the security interests created hereunder, whereupon such retiring or removed Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Collateral Agent hereunder. SECTION 17. AMENDMENTS; ETC. --------------- No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Pledgor therefrom, shall in any event be effective unless the same shall be in writing and signed by Collateral Agent and, in the case of any such amendment or modification, by Pledgor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 18. NOTICES. ------- Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex (with received answerback), or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices to Collateral Agent or Pledgor shall not be -------- effective until received. For the purposes hereof, the address of each party hereto shall be as provided in subsection 10.8 of the Credit Agreement or subsection 10.8 of the AXEL Credit Agreement, as applicable, or as set forth under such party's name on the signature pages hereof or such other address as shall be designated by such party in a written notice delivered to the other parties hereto. SECTION 19. SEVERABILITY. ------------ In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 20. HEADINGS. -------- XIV-16 Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 21. GOVERNING LAW; TERMS. -------------------- THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5- 1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Financing Agreements, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 22. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] XIV-17 IN WITNESS WHEREOF, Pledgor and Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. SEALY MATTRESS COMPANY By: -------------------------------------- Name: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Collateral Agent By: ------------------------------------- Name: Title: XIV-18 SCHEDULE I Attached to and forming a part of the Company Pledge Agreement dated as of December 18, 1997 between Sealy Mattress Company, as Pledgor, and Morgan Guaranty Trust Company of New York, as Collateral Agent. PART A
========================================================================== PERCENTAGE OF STOCK NUMBER OUTSTANDING CLASS OF CERTIFICATE PAR OF SHARES STOCK ISSUER STOCK NOS. VALUE SHARES PLEDGED ========================================================================== - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- ==========================================================================
PART B
====================================================================== AMOUNT OF DEBT ISSUER INDEBTEDNESS ====================================================================== - ---------------------------------------------------------------------- - ---------------------------------------------------------------------- - ---------------------------------------------------------------------- - ---------------------------------------------------------------------- ======================================================================
XIV-19 SCHEDULE II PLEDGE AMENDMENT This Pledge Amendment, dated ____________, [199_][200_], is delivered pursuant to Section 6(b) of the Pledge Agreement referred to below. The undersigned hereby agrees that this Pledge Amendment may be attached to the Company Pledge Agreement dated as of December 18, 1997, between the undersigned and Morgan Guaranty Trust Company of New York, as Collateral Agent (the "PLEDGE AGREEMENT," capitalized terms defined therein being used herein as therein defined), and that the [Pledged Shares] [Pledged Debt] listed on this Pledge Amendment shall be deemed to be part of the [Pledged Shares] [Pledged Debt] and shall become part of the Pledged Collateral and shall secure all Secured Obligations. SEALY MATTRESS COMPANY By: ---------------------------------------- Name: Title:
========================================================================= PERCENTAGE OF CLASS STOCK NUMBER OUTSTANDING OF CERTIFICATE PAR OF SHARES PLEDGED STOCK ISSUER STOCK NOS. VALUE SHARES ========================================================================= - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- =========================================================================
================================================== AMOUNT OF DEBT ISSUER INDEBTEDNESS ================================================== -------------------------------------------------- -------------------------------------------------- ==================================================
XIV-20 EXHIBIT XV [FORM OF COMPANY SECURITY AGREEMENT] COMPANY SECURITY AGREEMENT This COMPANY SECURITY AGREEMENT (this "AGREEMENT") is dated as of December corporation ("GRANTOR"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as Collateral Agent for and representative of (in such capacity, herein called "COLLATERAL AGENT") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined). RECITALS A. Grantor, Sealy Corporation, a Delaware Corporation ("HOLDINGS") the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO."), as documentation agent (in such capacity, "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the ("CREDIT AGREEMENT") pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Grantor. B. Grantor, Holdings, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity the "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity "AXEL ADMINISTRATIVE AGENT"), and BTCo., as documentation agent (in such capacity "AXEL DOCUMENTATION AGENT") have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, the CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL Lenders have made certain commitments, subject to the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Grantor. C. Grantor may from time to time enter into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more CA Lenders or their Affiliates or AXEL Lenders or their Affiliates (in such capacity, collectively, "INTEREST RATE EXCHANGERS") in accordance with the terms of the Financing Agreements (as hereinafter defined), XV-1 and it is desired that the obligations of Grantor under the Lender Interest Rate Agreements, including without limitation the obligation of Grantor to make payments, if any, thereunder in the event of early termination thereof, together with all obligations of Grantor under the Financing Agreements and any other Loan Documents (as hereinafter defined), be secured hereunder. D. It is a condition precedent to the initial extensions of credit by Secured Parties under the Financing Agreements that Grantor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of, the Grantor, (iii) the AXEL Administrative Agent, the AXEL Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement, (iv) the AXEL Lenders to make their respective loans to the Grantor and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Grantor hereby agrees with the Collateral Agent as follows: 1. DEFINED TERMS. ------------- (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. "ACCOUNTS" has the meaning assigned to that term in Section 2 of this Agreement. "AGREEMENT" means this Company Security Agreement dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. "ASSIGNED AGREEMENT" has the meaning assigned to that term in Section 2 of this Agreement. "AXEL COMMITMENTS" shall mean the "Commitments" as defined in the AXEL Credit Agreement. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. XV-2 "AXEL OBLIGATIONS" shall mean the "Obligations" as defined in the AXEL Credit Agreement. "COLLATERAL" has the meaning assigned to that term in Section 2 of this Agreement. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EQUIPMENT" has the meaning assigned to that term in Section 2 of this Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. "FINANCING AGREEMENT" means either the Credit Agreement or the AXEL Credit Agreement, and "Financing Agreements" means the Credit Agreement and the AXEL Credit Agreement, collectively. "FINANCING AGREEMENT OBLIGATIONS" means Credit Agreement Obligations and AXEL Obligations. "GRANTOR" has the meaning assigned to that term in the introduction of this Agreement. "HOLDINGS" has the meaning assigned to that term in the recitals to this Agreement. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. XV-3 "INVENTORY" has the meaning assigned to that term in Section 2 of this Agreement. "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "NEGOTIABLE DOCUMENT OF TITLE" has the meaning assigned to that term in Section 2 of this Agreement. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "RELATED CONTRACTS" has the meaning assigned to that term in Section 2 of this Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. "REQUISITE OBLIGEES" has the meaning assigned to that term in Section 23 of this Agreement. "SECURED OBLIGATIONS" has the meaning assigned to that term in Section 2 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. 2. GRANT OF SECURITY. ----------------- Grantor hereby assigns to Collateral Agent and hereby grants to Collateral Agent, a security interest in, all of Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Grantor now has or hereafter acquires an interest and wherever the same may be located (the "COLLATERAL"): XV-4 (a) all equipment in all of its forms, all parts thereof and all accessions thereto (any and all such equipment, parts and accessions being the "EQUIPMENT"); (b) all inventory in all of its forms (including, but not limited to, (i) all goods held by Grantor for sale or lease or to be furnished under contracts of service or so leased or furnished, (ii) all raw materials, work in process, finished goods, and materials used or consumed in the manufacture, packing, shipping, advertising, selling, leasing, furnishing or production of such inventory or otherwise used or consumed in Grantor's business, (iii) all goods in which Grantor has an interest in mass or a joint or other interest or right of any kind, and (iv) all goods which are returned to or repossessed by Grantor) and all accessions thereto and products thereof (all such inventory, accessions and products being the "INVENTORY") and all negotiable and non-negotiable documents of title (including without limitation warehouse receipts, dock receipts and bills of lading) issued by any Person covering any Inventory (any such negotiable document of title being a "NEGOTIABLE DOCUMENT OF TITLE"); (c) all accounts, contract rights, chattel paper, documents, instruments, general intangibles and other rights and obligations of any kind and all rights in, to and under all security agreements, leases and other contracts securing or otherwise relating to any such accounts, contract rights, chattel paper, documents, instruments, general intangibles or other obligations (any and all such accounts, contract rights, chattel paper, documents, instruments, general intangibles and other obligations being the "ACCOUNTS", and any and all such security agreements, leases and other contracts being the "RELATED CONTRACTS"); (d) all agreements and contracts to which Grantor is a party as of the date hereof or becomes a party after the date hereof, as each such agreement may be amended, supplemented or otherwise modified from time to time (said agreements, as so amended, supplemented or otherwise modified, being referred to herein individually as an "ASSIGNED AGREEMENT" and collectively as the "ASSIGNED AGREEMENTS"), including (i) all rights of Grantor to receive moneys due or to become due under or pursuant to the Assigned Agreements, (ii) all rights of Grantor to receive proceeds of any insurance, indemnity, warranty or guaranty with respect to the Assigned Agreements, (iii) all claims of Grantor for damages arising out of any breach of or default under the Assigned Agreements, and (iv) all rights of Grantor to terminate, amend, supplement, modify or exercise rights or options under the Assigned Agreements, to perform thereunder and to compel performance and otherwise exercise all remedies thereunder; (e) all deposit accounts, including without limitation all deposit accounts maintained with Collateral Agent; (f) all tradesecrets, licenses, copyrights, registrations and franchise rights, and all goodwill associated with any of the foregoing; (g) to the extent not included in any other paragraph of this Section 2, all other general intangibles (including without limitation tax refunds, rights to payment or XV-5 performance, choses in action and judgments taken on any rights or claims included in the Collateral); (h) all plant fixtures, business fixtures and other fixtures and storage and office facilities, and all accessions thereto and products thereof; (i) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; and (j) all proceeds, products, rents and profits of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Collateral Agent is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. Notwithstanding anything herein to the contrary, in no event shall the Collateral include, and Grantor shall not be deemed to have granted a security interest in, any of Grantor's rights or interests in any license, contract or agreement to which Grantor is a party or any of its rights or interests thereunder to the extent, but only to the extent, that such a grant would, under the terms of such license, contract or agreement or otherwise, result in a breach of the terms of, or constitute a default under any license, contract or agreement to which Grantor is a party (other than to the extent that any such term would be rendered ineffective pursuant to Section 9-318(4) of the Uniform Commercial Code of any relevant jurisdiction or any other applicable law (including the Bankruptcy Code) or principles of equity); provided, that -------- immediately upon the ineffectiveness, lapse or termination of any such provision, the Collateral shall include, and Grantor shall be deemed to have granted a security interest in, all such rights and interests as if such provision had never been in effect. 3. SECURITY FOR OBLIGATIONS. ------------------------ This Agreement secures, and the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all obligations and liabilities of every nature, of Grantor now or hereafter existing under or arising out of or in connection with any Financing Agreement and any other Loan Documents and the Lender Interest Rate Agreements and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Grantor, would accrue on such obligations), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or XV-6 contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Collateral Agent or any Secured Party or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise and all obligations of every nature of Grantor now or hereafter existing under this Agreement (all such obligations of Grantor being the "SECURED OBLIGATIONS"). 4. GRANTOR REMAINS LIABLE. ---------------------- Anything contained herein to the contrary notwithstanding, (a) Grantor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Collateral Agent of any of its rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Collateral Agent shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Collateral Agent be obligated to perform any of the obligations or duties of Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. 5. REPRESENTATIONS AND WARRANTIES. ------------------------------ Grantor represents and warrants as follows: (a) Ownership of Collateral. Except for the security interest created ----------------------- by this Agreement, Grantor owns the Collateral free and clear of any Lien subject to Liens permitted by the Financing Agreements. (b) Location of Equipment and Inventory. All of the Equipment and ----------------------------------- Inventory is, as of the date hereof, located at the places specified in Schedule 5(b) annexed hereto. ------------- (c) Negotiable Documents of Title. No Negotiable Documents of Title ----------------------------- are outstanding with respect to any of the Inventory (other than in respect of (i) Inventory with an aggregate value not in excess of $1,000,000 or (ii) Inventory which, in the ordinary course of business, is in transit either (A) from a supplier to Grantor, (B) between the locations specified in Schedule 5(b) hereto, or (C) to customers of Grantor). ------------- (d) Office Locations; Other Names. The chief place of business, the ----------------------------- chief executive office and the office where Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts is, and has been for the four month period preceding the date hereof, located at the places indicated on Schedule 5d. Grantor has not in ----------- the past done, and does not now do, business under any other name (including any trade-name or fictitious business name) except for those names set forth on Schedule 5d. ----------- XV-7 6. FURTHER ASSURANCES. ------------------ (a) Grantor agrees that from time to time, at the expense of Grantor, Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Grantor will: (i) mark conspicuously each item of chattel paper included in the Accounts, each Related Contract and, at the reasonable request of Collateral Agent, each of its records pertaining to the Collateral, with a legend, in form and substance reasonably satisfactory to Collateral Agent, indicating that such Collateral is subject to the security interest granted hereby, (ii) at the reasonable request of Collateral Agent, deliver and pledge to Collateral Agent hereunder all promissory notes and other instruments (excluding checks) and all original counterparts of chattel paper constituting Collateral, duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance reasonably satisfactory to Collateral Agent, (iii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as Collateral Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iv) after the acquisition by Grantor of any item of Equipment which is covered by a certificate of title under a statute of any jurisdiction under the law of which indication of a security interest on such certificate is required as a condition of perfection thereof, upon the reasonable request of Collateral Agent, execute and file with the registrar of motor vehicles or other appropriate authority in such jurisdiction an application or other document requesting the notation or other indication of the security interest created hereunder on such certificate of title, (v) upon the reasonable request of Collateral Agent, deliver to Collateral Agent copies of all such applications or other documents filed during such calendar quarter and copies of all such certificates of title issued during such calendar quarter indicating the security interest created hereunder in the items of Equipment covered thereby, and (vi) at Collateral Agent's reasonable request, appear in and defend any action or proceeding that may affect Grantor's title to or Collateral Agent's security interest in all or any part of the Collateral. (b) Grantor hereby authorizes Collateral Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Grantor to the extent permitted by applicable law. Grantor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by Grantor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. 7. CERTAIN COVENANTS OF GRANTOR. ---------------------------- Grantor shall: (a) notify Collateral Agent of any change in Grantor's name, identity or corporate structure within 30 days of such change; XV-8 (b) give Collateral Agent 30 days' written notice following any change in Grantor's chief place of business, chief executive office or residence or the office where Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts; (c) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent the validity thereof is being contested in good faith. 8. SPECIAL COVENANTS WITH RESPECT TO EQUIPMENT AND INVENTORY. --------------------------------------------------------- Grantor shall: (a) keep the Equipment and Inventory at the places therefor specified on Schedule 5(b) annexed hereto or, upon 30 days' written notice to ------------- Collateral Agent following any change in location, at such other places in jurisdictions where all action that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder, with respect to such Equipment and Inventory shall have been taken; (b) cause the Equipment to be maintained and preserved in working order, ordinary wear and tear and damage by casualty excepted, and in accordance with Grantor's past practices, and shall forthwith make or cause to be made all repairs, replacements and other improvements in connection therewith that are necessary in the Grantor's reasonable business judgment to such end; (c) keep correct and accurate records of the Inventory, itemizing and describing the kind, type and quantity of Inventory, Grantor's cost therefor and (where applicable) the current list prices for the Inventory; (d) if any Inventory is in possession or control of any of Grantor's agents or processors, upon the occurrence of an Event of Default, instruct such agent or processor to hold all such Inventory for the account of Collateral Agent and subject to the instructions of Collateral Agent; and (e) promptly upon the issuance and delivery to Grantor of any Negotiable Document of Title (other than any one or more Negotiable Documents of Title covering (i) Inventory with an aggregate value not in excess of $1,000,000 or (ii) Inventory which, in the ordinary course of business, is in transit either (A) from a supplier to Grantor, (B) between the locations specified in Schedule 5(b) hereto, or (C) to customers of ------------- Grantor), deliver such Negotiable Document of Title to Collateral Agent. XV-9 9. INSURANCE. --------- Grantor shall, at its own expense, maintain insurance with respect to the Equipment and Inventory in accordance with the terms of the Financing Agreements. 10. SPECIAL COVENANTS WITH RESPECT TO ACCOUNTS AND RELATED CONTRACTS. ---------------------------------------------------------------- (a) Grantor shall keep its chief place of business and chief executive office and the office where it keeps its records concerning the Accounts and Related Contracts, and all originals of all chattel paper that evidence Accounts, at the location therefor specified in Section 5 or, upon 30 days' written notice to Collateral Agent following any change in location, at such other location in a jurisdiction where all action that Collateral Agent may request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder, with respect to such Accounts and Related Contracts shall have been taken. Promptly upon the reasonable request of Collateral Agent, Grantor shall deliver to Collateral Agent complete and correct copies of each Related Contract. (b) Grantor shall, maintain (i) complete records of each Account, including records of all payments received, credits granted and merchandise returned, and (ii) all documentation relating thereto in accordance with prudent business practices. (c) Except as otherwise provided in this subsection (c), Grantor shall continue to collect, at its own expense, all amounts due or to become due to Grantor under the Accounts and Related Contracts. In connection with such collections, Grantor shall take such action as Grantor or Collateral Agent may deem necessary or advisable to enforce collection of amounts due or to become due under the Accounts; provided, however, that Collateral Agent shall have the -------- ------- right at any time, upon the occurrence and during the continuation of an Event of Default and upon written notice to Grantor of its intention to do so, to notify the account debtors or obligors under any Accounts of the assignment of such Accounts to Collateral Agent and to direct such account debtors or obligors to make payment of all amounts due or to become due to Grantor thereunder directly to Collateral Agent, to notify each Person maintaining a lockbox or similar arrangement to which account debtors or obligors under any Accounts have been directed to make payment to remit all amounts representing collections on checks and other payment items from time to time sent to or deposited in such lockbox or other arrangement directly to Collateral Agent and, upon such notification and at the expense of Grantor, to enforce collection of any such Accounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Grantor might have done. After receipt by Grantor of the notice from Collateral Agent referred to in the proviso to the preceding sentence, (i) any payments of Accounts, received by the - ------- Grantor shall be forthwith (and in any event within two Business Days) deposited by the Grantor in the exact form received, duly indorsed by the Grantor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of the Secured Parties only as provided in Section 21, (ii) until so turned over in accordance with the preceding subsection (i), all amounts and proceeds (including checks and other instruments) received by Grantor in respect of the Accounts and the Related XV-10 Contracts shall be received in trust for the benefit of Collateral Agent hereunder and shall be segregated from other funds of Grantor and (iii) Grantor shall not adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon. 11. DEPOSIT ACCOUNTS. ---------------- Upon the occurrence and during the continuation of an Event of Default, Collateral Agent may exercise dominion and control over, and refuse to permit further withdrawals (whether of money, securities, instruments or other property) from any deposit accounts maintained with Collateral Agent constituting part of the Collateral. 12. LICENSE OF COPYRIGHTS, ETC. -------------------------- Grantor hereby assigns, transfers and conveys to Collateral Agent, effective upon the occurrence of any Event of Default, the nonexclusive right and license to use all copyrights or technical processes owned or used by Grantor that relate to the Collateral and any other collateral granted by Grantor as security for the Secured Obligations, together with any goodwill associated therewith, all to the extent necessary to enable Collateral Agent to use, possess and realize on the Collateral and to enable any successor or assign to enjoy the benefits of the Collateral. This right and license shall inure to the benefit of all successors, assigns and transferees of Collateral Agent and its successors, assigns and transferees, whether by voluntary conveyance, operation of law, assignment, transfer, foreclosure, deed in lieu of foreclosure or otherwise. Such right and license is granted free of charge, without requirement that any monetary payment whatsoever be made to Grantor. 13. TRANSFERS AND OTHER LIENS. ------------------------- Grantor shall not: (a) sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Financing Agreements; or (b) except for the security interest created by this Agreement and Liens permitted by the Financing Agreements, create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person. 14. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. ------------------------------------------- Grantor hereby irrevocably appoints Collateral Agent as Grantor's attorney-in-fact, with full authority in the place and stead of Grantor and in the name of Grantor, Collateral Agent or otherwise, from time to time, upon the occurrence and continuance of an Event of Default, in Collateral Agent's reasonable discretion to take any action and to execute any instrument that Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: XV-11 (a) to obtain and adjust insurance required to be maintained by Grantor or paid to Collateral Agent pursuant to Section 9; (b) to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (c) to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clauses (a) and (b) above; (d) to file any claims or take any action or institute any proceedings that Collateral Agent may reasonably deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Collateral Agent with respect to any of the Collateral; (e) to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Financing Agreements) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Collateral Agent in its reasonable discretion, any such payments made by Collateral Agent to become obligations of Grantor to Collateral Agent, due and payable immediately without demand; (f) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with Accounts and other documents relating to the Collateral; and (g) upon the occurrence and during the continuation of an Event of Default, generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Collateral Agent were the absolute owner thereof for all purposes, and to do, at Collateral Agent's option and Grantor's expense, at any time or from time to time, all acts and things that Collateral Agent reasonably deems necessary to protect, preserve or realize upon the Collateral and Collateral Agent's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as Grantor might do. 15. COLLATERAL AGENT MAY PERFORM. ---------------------------- If Grantor fails to perform any agreement contained herein, Collateral Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of Collateral Agent incurred in connection therewith shall be payable by Grantor under Section 17. XV-12 16. INDEMNITY AND EXPENSES. ---------------------- (a) Grantor agrees to indemnify Collateral Agent, each Secured Party and each Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including without limitation enforcement of this Agreement), except to the extent such claims, losses or liabilities result from Collateral Agent's or such Secured Party's or Interest Rate Exchanger's gross negligence or willful misconduct as determined by a court of competent jurisdiction. (b) Grantor agrees to pay to Collateral Agent promptly following written demand the amount of any and all reasonable costs and reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Collateral Agent hereunder, or (iv) the failure by Grantor to perform or observe any of the provisions hereof. (c) The obligations of Grantor in this Section 17 shall survive the termination of this Agreement and the discharge of Grantor's other obligations under this Agreement, the Interest Rate Agreements, the Financing Agreements and any other Loan Documents. 17. STANDARD OF CARE. ---------------- The powers conferred on Collateral Agent hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Collateral Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Collateral Agent accords its own property. XV-13 18. REMEDIES. -------- If any Event of Default shall have occurred and be continuing, Collateral Agent may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Collateral), and also may (a) require Grantor to, and Grantor hereby agrees that it will at its expense and upon request of Collateral Agent forthwith, assemble all or part of the Collateral as directed by Collateral Agent and make it available to Collateral Agent at a place to be designated by Collateral Agent that is reasonably convenient to both parties, (b) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (c) prior to the disposition of the Collateral, store, process, repair or recondition the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Collateral Agent deems appropriate, (d) take possession of Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same and any of Grantor's equipment for the purpose of completing any work in process, taking any actions described in the preceding clause (c) and collecting any Secured Obligation, and (e) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Collateral Agent may deem commercially reasonable. Collateral Agent or any Secured Party or Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Collateral Agent, as agent for and representative of Secured Parties and Interest Rate Exchangers (but not any Secured Party or Secured Parties or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Obligees shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Collateral Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Grantor, and Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Collateral Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Grantor hereby waives any claims against Collateral Agent arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Collateral Agent accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantor shall be liable for the deficiency and the reasonable fees of any attorneys employed by Collateral Agent to collect such deficiency. 19. PROCEEDS TO BE TURNED OVER TO COLLATERAL AGENT. ---------------------------------------------- XV-14 In addition to the rights of the Collateral Agent and the Secured Parties specified in Section 10 with respect to payments of Accounts, if an Event of Default shall occur and be continuing, upon request of the Collateral Agent, all proceeds received by the Grantor consisting of cash, checks and other near-cash items shall be held by the Grantor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of the Grantor, and shall, forthwith upon receipt by the Grantor, be turned over to the Collateral Agent in the exact form received by the Grantor (duly indorsed by the Grantor to the Collateral Agent, if required) and held by the Collateral Agent in a Collateral Account maintained under the Intercreditor Agreement. All proceeds while held by the Collateral Agent in a Collateral Account (or by the Borrower in trust for the Collateral Agent and the Secured Parties) shall continue to be held as collateral security for all the Obligations and shall not constitute payment thereof until applied as provided in subsection 21. 20. APPLICATION OF PROCEEDS. ----------------------- Except as expressly provided elsewhere in this Agreement, all proceeds held in any Collateral Account and all other proceeds received by Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in subsection 3 of the Intercreditor Agreement. 21. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. ----------------------------------------------- This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of the Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantor, its successors and assigns, and (c) inure, together with the rights and remedies of Collateral Agent hereunder, to the benefit of Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement and subsection 10.1 of the AXEL Credit Agreement, any Secured Party may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Secured Parties herein or otherwise. Upon the payment in full of all Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to Grantor. Upon any such termination Collateral Agent will, at Grantor's expense, execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination in accordance with the terms of the Intercreditor Agreement. XV-15 22. COLLATERAL AGENT AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Collateral Agent has been appointed to act as Collateral Agent hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and AXEL Administrative Agent on behalf of the AXEL Lenders pursuant to the Intercreditor Agreement and, by their acceptance of the benefits hereof, Interest Rate Exchangers, and shall be entitled to the benefits of the Intercreditor Agreement. Collateral Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Collateral), solely in accordance with this Agreement and the Intercreditor Agreement; provided that -------- Collateral Agent shall exercise, or refrain from exercising, any remedies provided for in Section 21 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 23(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Collateral Agent for the benefit of Secured Parties and Interest Rate Exchangers in accordance with the terms of this Section 23(a). (b) Collateral Agent shall at all times be the same Person that is appointed Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent under this Agreement, and the retiring or removed Collateral Agent under this Agreement shall promptly (i) transfer to such successor Collateral Agent all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Collateral Agent under this Agreement, and (ii) execute and deliver to such successor Collateral Agent such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Collateral Agent of the security interests created hereunder, whereupon such retiring or removed Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Collateral Agent hereunder. XV-16 23. AMENDMENTS; ETC. --------------- No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Grantor therefrom, shall in any event be effective unless the same shall be in writing and signed by Collateral Agent and, in the case of any such amendment or modification, by Grantor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. 24. NOTICES. ------- Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex (with received answerback), or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices to Collateral Agent and Grantor shall not be -------- effective until received. For the purposes hereof, the address of each party hereto shall be as provided in subsection 10.8 of the Credit Agreement or subsection 10.8 of the AXEL Credit Agreement, as applicable, or as set forth under such party's name on the signature pages hereof or such other address as shall be designated by such party in a written notice delivered to the other parties hereto. 25. SEVERABILITY. ------------ In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. XV-17 26. HEADINGS. -------- Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. 27. GOVERNING LAW; TERMS. -------------------- THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 26. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] XV-18 IN WITNESS WHEREOF, Grantor and Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. SEALY MATTRESS COMPANY By: _____________________________ Name: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Collateral Agent By: _____________________________ Name: Title: XV-19 SCHEDULE 5(b) TO COMPANY SECURITY AGREEMENT Locations of Equipment: Locations of Inventory: XV-20 EXHIBIT XVI [FORM OF COMPANY PATENT AND TRADEMARK SECURITY AGREEMENT] COMPANY PATENT AND TRADEMARK SECURITY AGREEMENT This COMPANY PATENT AND TRADEMARK SECURITY AGREEMENT (this "AGREEMENT") is COMPANY, an Ohio corporation ("COMPANY")(Company being referred to herein as a "GRANTOR"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as Collateral Agent for and representative of (in such capacity herein called "COLLATERAL AGENT") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined). RECITALS (a) Grantor, Sealy Corporation, a Delaware Corporation ("HOLDINGS"), the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO."), as documentation agent (in such capacity, "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT") pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Grantor. B. Grantor, Holdings, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity, "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "AXEL ADMINISTRATIVE AGENT"), and BTCo. as documentation agent (in such capacity, "AXEL DOCUMENTATION AGENT") have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, the CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL Lenders have made certain commitments, subject to the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Grantor. C. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more CA Lenders or their Affiliates or AXEL Lenders or their Affiliates (in such XVI-1 capacity, collectively, "INTEREST RATE EXCHANGERS") in accordance with the terms of the Financing Agreements (as hereinafter defined), and it is desired that the obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments thereunder in the event of early termination thereof (all such obligations being the "INTEREST RATE OBLIGATIONS"), together with all obligations of Company under the Financing Agreements and any other Loan Documents (as hereinafter defined), be secured hereunder. D. Grantor has and may in the future have rights, title and interests in and to various Patents and other related Collateral (as such terms are hereinafter defined). E. Grantor owns and uses in its business, and will in the future adopt and so use, various intangible assets, including trademarks, service marks, designs, logos, indicia, tradenames, corporate names, company names, business names, fictitious business names, trade styles and/or other source and/or business identifiers and applications pertaining thereto (collectively, the "TRADEMARKS"). F. Collateral Agent desires Grantor to grant to it a lien on and security interest in all of Grantor's existing and future Patents, existing and future Trademarks, all registrations that have been or may hereafter be issued or applied for thereon in the United States and any state thereof (the "REGISTRATIONS"), all common law and other rights in and to the Trademarks in the United States and any state thereof (the "TRADEMARK RIGHTS"), all goodwill of Grantor's business symbolized by the Trademarks and associated therewith, including without limitation the documents and things described in Section 2(b) (the "ASSOCIATED GOODWILL"), any other Collateral and all proceeds of the Patents, the Trademarks, the Registrations, the Trademark Rights, the Associated Goodwill and any other Collateral, and Grantor agrees to grant to Collateral Agent a secured and protected interest in the Trademarks, the Registrations, the Trademark Rights, the Associated Goodwill, any other Collateral and all the proceeds thereof as provided herein. G. Pursuant to the Company Security Agreement, Grantor has granted to Collateral Agent a lien on and security interest in, among other assets, all Grantor's equipment, inventory, accounts and general intangibles relating to the products and services sold or delivered under or in connection with the Trademarks such that, upon the occurrence and during the continuation of an Event of Default, Collateral Agent would be able to exercise its remedies consistent with the Security Agreement, this Agreement and applicable law to foreclose upon Grantor's business and use the Trademarks, the Registrations and the Trademark Rights in conjunction with the continued operation of such business, maintaining substantially the same product and service specifications and quality as maintained by Grantor, and benefit from the Associated Goodwill. H. It is a condition precedent to the initial extensions of credit by Secured Parties under the Credit Agreement that Grantor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of, the Grantor, (iii) the AXEL Administrative Agent, the AXEL XVI-2 Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement, (iv) the AXEL Lenders to make their respective loans to the Grantor, and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Grantor hereby agrees with the Collateral Agent as follows: I. DEFINED TERMS. ------------- (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. "AGREEMENT" means this Company Security Agreement dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. "ASSOCIATED GOODWILL" has the meaning assigned to that term in the recitals to this Agreement. "AXEL COMMITMENTS" shall mean the "Commitments" as defined in the AXEL Credit Agreement. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "AXEL LENDERS" has the meaning assigned to that term in the recitals to this Agreement. "AXEL OBLIGATIONS" shall mean the "Obligations" as defined in the AXEL Credit Agreement. "AXEL SYNDICATION AGENT" has the meaning assigned to that term in the recitals to this Agreement. "COLLATERAL" has the meaning assigned to that term in Section 5 of this Agreement. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COLLATERAL AGENT" has the meaning assigned to that term in the introduction. XVI-3 "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. "FINANCING AGREEMENT" means the Credit Agreement or the AXEL Credit Agreement, and "FINANCING AGREEMENTS" means the Credit Agreement and the AXEL Credit Agreement, collectively. "FINANCING AGREEMENT OBLIGATIONS" means Credit Agreement Obligations and AXEL Obligations. "GRANTOR" has the meaning assigned to that term in the introduction of this Agreement. "HOLDINGS" has the meaning assigned to that term in the recitals to this Agreement. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. "INTEREST RATE OBLIGATIONS" has the meaning assigned to that term in the recitals to this Agreement. "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. XVI-4 "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "MATERIAL PATENT" has the meaning assigned to that term in Section 5 of this Agreement. "MATERIAL TRADEMARK PROPERTY" has the meaning assigned to that term in Section 5 of this Agreement. "PATENTS" has the meaning assigned to that term in Section 2 of this Agreement. "PERMITTED PATENT LIENS" has the meaning assigned to that term in Section 5 of this Agreement. "PERMITTED TRADEMARK LIENS" has the meaning assigned to that term in Section 5 of this Agreement. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "REGISTRATIONS" has the meaning assigned to that term in the recitals to this Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. "REQUISITE OBLIGEES" has the meaning assigned to that term in Section 19 of this Agreement. "SECURED OBLIGATIONS" has the meaning assigned to that term in Section 3 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. "TRADEMARKS" has the meaning assigned to that term in the recitals to this Agreement. "TRADEMARK RIGHTS" has the meaning assigned to that term in the recitals to this Agreement. XVI-5 II. GRANT OF SECURITY. ----------------- Grantor hereby grants to Collateral Agent a security interest in all of Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Grantor now has or hereafter acquires an interest and wherever the same may be located (the "COLLATERAL"): A. each of the U.S. Trademarks and rights and interests in Trademarks which are presently, or in the future may be, owned, held (whether pursuant to a license or otherwise) or used by Grantor, in whole or in part (including without limitation the U.S. Trademarks specifically identified in Schedule I), and including all Trademark Rights with ---------- respect thereto and all federal and state Registrations therefor heretofore or hereafter granted or applied for, the right (but not the obligation) to file for registration claims under any state or federal trademark law or regulation and to apply for, renew and extend the Trademarks, Registrations and Trademark Rights, the right (but not the obligation) to sue or bring opposition or cancellation proceedings in the name of Grantor or in the name of Collateral Agent or otherwise for past, present and future infringements of the Trademarks, Registrations or Trademark Rights and all rights (but not obligations) corresponding thereto in the United States, and the Associated Goodwill; it being understood that the rights and interests included herein shall include, without limitation, all rights and interests pursuant to licensing or other contracts in favor of Grantor pertaining to any Trademarks, Registrations or Trademark Rights presently or in the future owned, held or used by third parties but, in the case of third parties which are not Affiliates of Grantor, only to the extent permitted by such licensing or other contracts or otherwise permitted by applicable law and, if not so permitted under any such contracts and applicable law, only with the consent of such third parties; B. the following documents and things in Grantor's possession, or subject to Grantor's right to possession, related to (Y) the production, sale and delivery by Grantor, or by any Affiliate, licensee or subcontractor of Grantor, of products or services sold or delivered by or under the authority of Grantor in connection with the Trademarks, Registrations or Trademark Rights (which products and services shall, for purposes of this Agreement, be deemed to include, without limitation, products and services sold or delivered pursuant to merchandising operations utilizing any Trademarks, Registrations or Trademark Rights); or (Z) any retail or other merchandising operations conducted under the name of or in connection with the Trademarks, Registrations or Trademark Rights by Grantor or any Affiliate, licensee or subcontractor of Grantor: 1. all lists and ancillary documents that identify and describe any of Grantor's customers, or those of its Affiliates, licensees or subcontractors, for products sold and services delivered under or in connection with the Trademarks or Trademark Rights, including without limitation any lists and ancillary documents that contain a customer's name and address, the name and address of any of its warehouses, branches or other places of business, the identity of the Person or Persons having the principal responsibility on a customer's behalf for ordering XVI-6 products or services of the kind supplied by Grantor, or the credit, payment, discount, delivery or other sale terms applicable to such customer, together with information setting forth the total purchases, by brand, product, service, style, size or other criteria, and the patterns of such purchases; 2. all product and service specification documents and production and quality control manuals used in the manufacture or delivery of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights; 3. all documents which reveal the name and address of any source of supply, and any terms of purchase and delivery, for any and all materials, components and services used in the production of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights; and 4. all documents constituting or concerning the then current or proposed advertising and promotion by Grantor or its Affiliates, licensees or subcontractors of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights including, without limitation, all documents which reveal the media used or to be used and the cost for all such advertising conducted within the described period or planned for such products and services; and (c) all patents and patent applications and rights and interests in U.S. patents and patent applications that are presently, or in the future may be, owned, held (whether pursuant to a license or otherwise) or used by Grantor in whole or in part (including, without limitation, the U.S. patents and patent applications listed in Schedule II annexed hereto, all rights ----------- (but not obligations) corresponding thereto (including without limitation the right (but not the obligation) to sue for past, present and future infringements in the name of Grantor or in the name of Collateral Agent), and all re-issues, divisions, continuations, renewals, extensions and continuations-in-part thereof (all of the foregoing being collectively referred to as the "PATENTS"); it being understood that the rights and interests granted hereby shall include, without limitation, all rights and interests pursuant to licensing or other contracts in favor of Grantor pertaining to any Patent presently or in the future owned, held or used by third parties but, in the case of third parties which are not Affiliates of Grantor, only to the extent permitted by such licensing or other contracts or otherwise permitted by applicable law and, if not so permitted under any such contracts and applicable law, only with the consent of such third parties; (d) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; (e) to the extent not included in the foregoing clauses (a) - (d), all general intangibles relating to the Collateral; and XVI-7 (f) all proceeds, products, and profits (including without limitation license royalties and proceeds of infringement suits) of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Collateral Agent is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. III. SECURITY FOR OBLIGATIONS. ------------------------ This Agreement secures, and the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including without limitation the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all Secured Obligations with respect to Grantor. "SECURED OBLIGATIONS" means all obligations and liabilities of every nature of Company now or hereafter existing under or arising out of or in connection with any Financing Agreements and any other Loan Documents and any Lender Interest Rate Agreement, and in each case together with all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Grantor, would accrue on such obligations), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Collateral Agent or any Secured Party or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise, and all obligations of every nature of Grantor now or hereafter existing under this Agreement. IV. GRANTOR REMAINS LIABLE. ---------------------- Anything contained herein to the contrary notwithstanding, (a) Grantor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Collateral Agent of any of its rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Collateral Agent shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Collateral Agent be obligated to perform any of the obligations or duties of Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. XVI-8 V. REPRESENTATIONS AND WARRANTIES. ------------------------------ Grantor represents and warrants as follows: (a) OWNERSHIP OF COLLATERAL. Except as expressly permitted by the Financing Agreements and for the security interest and conditional assignment created by this Agreement (other than ownership and other rights reserved by third party owners with respect to each Material Trademark Property and each Material Patent that Grantor is licensed to use), Grantor is the legal and beneficial owner of the entire right, title and interest in and to (i) each Material Trademark Property, free and clear of any Lien other than Liens of mechanics, materialmen, attorneys and other similar liens imposed by laws in the ordinary course of business in connection with the establishment, creation or application for registration of any Trademarks, Registrations or Trademark Rights for sums not yet delinquent or being contested in good faith (such Liens being referred to herein as "PERMITTED TRADEMARK LIENS"), and (ii) each Material Patent, free and clear of any Lien other than Liens of mechanics, materialmen, attorneys and other similar liens imposed by law in the ordinary course of business in connection with the establishment, creation or application for any Patent for sums not yet delinquent or being contested in good faith (such Liens being referred to herein as "PERMITTED PATENT LIENS"). Except such as may have been filed in favor of Collateral Agent relating to this Agreement or except as permitted by the Financing Agreements, no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office, including the United States Patent and Trademark Office. (b) DESCRIPTION OF COLLATERAL. A true and complete list of all Registrations, tradenames, corporate names, fictitious business names and Trademark license agreements owned, held (whether pursuant to a license or otherwise) or used by Grantor, in whole or in part, as of the date of this Agreement is set forth in Schedule I annexed hereto. Each Registration, ---------- tradename, corporate name, fictitious business name and Trademark license designated on Schedule I annexed hereto as a Material Trademark Property, ---------- and each other Trademark, Registration or Trademark Right hereafter arising or otherwise owned, held or used by Grantor that is material to any of Grantor's business or operations is referred to herein as a "MATERIAL TRADEMARK PROPERTY". A true and complete list of all Patents owned or held (whether pursuant to a license or otherwise) by Grantor, in whole or in part, as of the date of this Agreement is set forth in Schedule II annexed ----------- hereto. Each Patent designated on Schedule II annexed hereto as a Material ----------- Patent and each other Patent hereafter arising or otherwise owned or held by Grantor that is material to any of Grantor's business or operations is referred to herein as a "MATERIAL PATENT". (c) VALIDITY AND ENFORCEABILITY OF COLLATERAL. Each Material Trademark Property and each Material Patent is subsisting and had not been adjudged invalid or unenforceable, in whole or in part and Grantor is not aware of any pending or threatened claim by any third party that any Material Trademark Property or any Material Patent is invalid or unenforceable or that the use of any Material Trademark Property or any Material Patent violates the rights of any third person. XVI-9 (d) PERFECTION. This Agreement together with the filing of UCC financing statements naming Grantor as "debtor", naming secured party as "Collateral Agent" and describing the Collateral in the filing offices set forth on Schedule III annexed hereto and the recording of this Agreement ------------ with the United States Patent and Trademark Office, creates a valid, perfected and First Priority security interest in the U.S. Collateral (subject only to Permitted Patent Liens and Permitted Trademark Liens) securing the payment of the Secured Obligations, and all filings and other actions necessary to perfect and protect such security interest under the laws of the United States or any State thereof have been or will promptly following execution hereof be duly made or taken. (e) OTHER INFORMATION. All information hereto, herein or hereafter supplied to Collateral Agent by or on behalf of Grantor with respect to the Collateral is accurate and complete in all material respects. VI. FURTHER ASSURANCES; NEW TRADEMARKS, REGISTRATIONS AND TRADEMARK RIGHTS; NEW --------------------------------------------------------------------------- PATENTS AND PATENT APPLICATIONS; CERTAIN INSPECTION RIGHTS. - ---------------------------------------------------------- (a) Grantor agrees that from time to time, at the expense of Grantor, Grantor will promptly execute and deliver all further instruments and documents, and take all further action that Collateral Agent may reasonably request, in order to perfect and protect any security interest or conditional assignment granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Grantor will: (i) at the reasonable request of Collateral Agent, mark conspicuously each of its records pertaining to the Collateral with a legend, in form and substance reasonably satisfactory to Collateral Agent indicating that such Collateral is subject to the security interest granted hereby, (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as Collateral Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iii) use its best efforts to obtain any necessary consents of third parties to the grant and perfection of a security interest to Collateral Agent with respect to any Collateral, and (iv) at Collateral Agent's request, appear in and defend any action or proceeding that would reasonably be expected to affect Grantor's title to or Collateral Agent's security interest in all or any part of the Collateral. (b) Grantor hereby authorizes Collateral Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Grantor to the extent permitted by applicable law. Grantor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by Grantor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. (c) Grantor will furnish to Collateral Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Collateral Agent may reasonably request, all in reasonable detail. XVI-10 (d) If Grantor shall obtain rights to any new Trademarks, Registrations or Trademark Rights, or to any patentable inventions, or become entitled to the benefit of any U.S. patent application or patent or any reissue, division, continuation, renewal, extension, or continuation-in-part of any Patent or any improvement in any Patent, the provisions of this Agreement shall automatically apply thereto. Once per calendar year, Grantor shall notify Collateral Agent in writing of any Registrations or Patents acquired by Grantor during such calendar year and of any Registrations or Patents issued or applications for Registration or Patents made during such calendar year, which notice shall state whether such Registration constitutes a Material Trademark Property or whether such Patent constitutes a Material Patent. Concurrently with the filing of an application for Registration for any Trademark, or an application for any Patent the Grantor shall execute, deliver and record in all places where this Agreement is recorded an appropriate Patent and Trademark Security Agreement, substantially in the form hereof, with appropriate insertions, or an amendment to this Agreement, in form and substance reasonably satisfactory to Collateral Agent, pursuant to which Grantor shall grant a security interest to the extent of its interest in such Registration or Patent as provided herein to Collateral Agent unless so doing would, in the reasonable judgment of Grantor, after due inquiry, result in the grant of a Patent or Registration in the name of Collateral Agent, in which event Grantor shall give written notice to Collateral Agent as soon as reasonably practicable and the filing shall instead be undertaken as soon as practicable but in no case later than immediately following the grant of such Patent or Registration. (e) No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the grant by Grantor of the security interest and conditional assignment granted hereby, (ii) the execution, delivery or performance of this Agreement by grantor, or (iii) the perfection of or the exercise by Collateral Agent of its rights and remedies hereunder (except as may have been taken by or at the direction of Grantor). VII. CERTAIN COVENANTS OF GRANTOR. ---------------------------- Grantor shall: (a) notify Collateral Agent of any change in Grantor's name, identity or corporate structure within 30 days of such change; (b) give Collateral Agent 30 days' written notice following any change in Grantor's chief place of business or chief executive office or the office where Grantor keeps its records regarding the Collateral; (c) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent the validity thereof is being contested in good faith; (d) not sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Financing Agreements; XVI-11 (e) except for Permitted Patent Liens and Permitted Trademark Liens and the security interest and conditional assignment created by this Agreement, not create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person other than Liens permitted by the Financing Agreements; (f) diligently keep reasonable records respecting the Collateral and at all times keep at least one complete set of its records concerning substantially all of the Patents and Registrations at its chief executive office or principal place of business; (g) take all steps reasonably necessary in Grantor's business judgment to protect the secrecy of all trade secrets relating to the products and services sold or delivered under or in connection with the Patents, Trademarks and Trademark Rights; (h) use proper statutory notice in connection with its use of each Material Patent and Material Trademark Property to the extent reasonably necessary for the protection of such Material Patent or Material Trademark Property; and (i) use consistent standards of high quality (which may be consistent with Grantor's past practices or with Grantor's business judgment) in the manufacture, sale and delivery of products and services sold or delivered under or in connection with the Patents, Trademarks, Registrations and Trademark Rights, including, to the extent applicable, in the operation and maintenance of its merchandising operations. VIII. AMOUNTS PAYABLE IN RESPECT OF THE COLLATERAL. -------------------------------------------- Except as otherwise provided in this Section 8, Grantor shall continue to collect, at its own expense, all amounts due or to become due to Grantors in respect of the Collateral or any portion thereof. In connection with such collections, each Grantor may take (and, at Collateral Agent's direction, shall take) such action as Grantor may deem necessary or advisable to enforce collection of such amounts; provided, however, that Collateral Agent shall have -------- ------- the right at any time, upon the occurrence and during the continuation of an Event of Default and upon written notice to Grantor of its intention to do so, to notify the obligors with respect to any such amounts of the existence of the security interest and the conditional assignment created hereby, and to direct such obligors to make payment of all such amounts directly to Collateral Agent, and, upon such notification and at the expense of Grantor, to enforce collection of any such amounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Grantor might have done. After receipt by Grantor of the notice from Collateral Agent referred to in the proviso to the preceding sentence, (i) all amounts and proceeds (including checks and other instruments) received by Grantor in respect of amounts due to Grantor in respect of Collateral or any portion thereof received by the Grantor shall be forthwith (and in any event within two Business Days) deposited by the Grantor in the exact form received, duly indorsed by the Grantor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of Secured Parties only as provided in Section 16, (ii) until so turned over in accordance with the preceding subsection (i), all such amounts and proceeds received by Grantor shall be received in trust for the benefit of Collateral Agent hereunder- and shall be segregated from other funds of Grantor and (iii) Grantor shall not XVI-12 adjust, settle or compromise the amount or payment of any such amount or release wholly or partly any obligor with respect thereto or allow any credit or discount thereon. IX. PATENT OR TRADEMARK APPLICATIONS AND LITIGATION. ----------------------------------------------- (a) Grantor shall have the duty diligently, to prosecute any trademark application relating to any Material Trademark Property that is pending as of the date of this Agreement, to make federal application on any existing or future registerable but unregistered Material Trademark Property (whenever it is commercially reasonable in the reasonable judgement of Grantor to do so), and to file and prosecute opposition and cancellation proceedings, renew Registrations and do any and all acts which are necessary or desirable to preserve and maintain all rights in all Material Trademark Properties; provided, however, -------- ------- that Grantor shall not be obligated to prosecute or apply for registration of any Trademark or Registration that Grantor determines in its reasonable business judgment is no longer necessary or desirable in the conduct of its business. Any expenses incurred in connection therewith shall be borne solely by Grantor. Grantor shall not abandon any Material Trademark Property; provided, however, -------- ------- that Grantor shall not be obligated to maintain any Trademark or Registration that Grantor determines in its reasonable business judgment is no longer necessary or desirable in the conduct of its business. (b) Grantor shall have the duty diligently to prosecute any patent application relating to any Material Patent that is pending as of the date of this Agreement and to do any and all acts which are necessary or desirable to preserve and maintain all rights in all Material Patents; provided, however, -------- ------- that Grantor shall not be obligated to prosecute or maintain any Patent that Grantor determines in its reasonable business judgment is no longer necessary or desirable in the conduct of its business. Any expenses incurred in connection therewith shall be borne solely by Grantor. Grantor shall not, as to any patentable invention or Patent that constitutes or could constitute a Material Patent, abandon any pending patent application or any Patent without the prior written consent of Collateral Agent; provided, however, that Grantor shall not -------- ------- be obligated to prosecute or maintain any Patent that Grantor determines in its reasonable business judgment is no longer necessary or desirable in the conduct of its business. (c) Except as provided in Section 9(e), Grantor shall have the right to commence and prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions for infringement, unfair competition, dilution or other damage as are in its reasonable business judgment necessary to protect the Collateral. Collateral Agent shall provide, at Grantor's expense, all reasonable and necessary cooperation in connection with any such suit, proceeding or action including, without limitation, joining as a necessary party. (d) Grantor shall promptly, following its becoming aware thereof, notify Collateral Agent of the institution of, or of any adverse determination in, any proceeding (whether in the United States Patent and Trademark Office or any federal, state, local or foreign court) described in subsection 9(a), 9(b) or 9(c) or regarding Grantor's claim of ownership in or right to use any of the Trademarks, Registrations or Trademark Rights, its right to register the same, or its right to keep and maintain such Registration. Grantor shall provide to Collateral Agent any information with respect thereto requested by Collateral Agent. XVI-13 (e) Anything contained herein to the contrary notwithstanding, upon the occurrence and during the continuation of an Event of Default, Collateral Agent shall have the right (but not the obligation) to bring suit, in the name of Grantor, Collateral Agent or otherwise, to enforce any Patent, Trademark, Registration, Trademark Right, Associated Goodwill and any license thereunder, in which event Grantor shall, at the request of Collateral Agent, do any and all lawful acts and execute any and all documents required by Collateral Agent in aid of such enforcement and Grantor shall promptly, upon demand, reimburse and indemnify Collateral Agent as provided in Section 17 in connection with the exercise of its rights under this Section 9. To the extent that Collateral Agent shall elect not to bring suit to enforce any Patent, Trademark, Registration, Trademark Right Associated Goodwill or any license thereunder as provided in this Section 9(e), Grantor agrees to use all reasonable measures, whether by action, suit, proceeding or otherwise, to prevent the infringement of any of the Patents, Trademarks, Registrations, Trademark Rights or Associated Goodwill by others and for that purpose agrees to diligently maintain in accordance with reasonable business practice any action, suit or proceeding against any Person so infringing necessary to prevent such infringement. X. NON-DISTURBANCE AGREEMENTS, ETC. -------------------------------- If and to the extent that Grantor is permitted to license the Collateral, Collateral Agent shall enter into a non-disturbance agreement or other similar arrangement, at Grantor's request and expense, with Grantor and any licensee of any Collateral permitted hereunder in form and substance reasonably satisfactory to Collateral Agent pursuant to which (a) Collateral Agent shall agree not to disturb or interfere with such licensee's rights under its license agreement with Grantor so long as such licensee is not in default thereunder and (b) such licensee shall acknowledge and agree that the Collateral licensed to it is subject to the security interest and conditional assignment created in favor of Collateral Agent and the other terms of this Agreement. XI. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. ------------------------------------------- Grantor hereby irrevocably appoints Collateral Agent as Grantor's attorney-in-fact, with full authority in the place and stead of Grantor and in the name of Grantor, Collateral Agent or otherwise, from time to time, upon the occurrence and during the continuance of an Event of Default, in Collateral Agent's reasonable discretion to take any action and to execute any instrument that Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) to endorse Grantor's name on all applications, documents, papers and instruments necessary for Collateral Agent in the use or maintenance of the Collateral; (b) to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (c) to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (b) above; XVI-14 (d) to file any claims or take any action or institute any proceedings that Collateral Agent may reasonably deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Collateral Agent with respect to any of the Collateral; (e) to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Financing Agreements) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Collateral Agent in its sole discretion, any such payments made by Collateral Agent to become obligations of Grantor to Collateral Agent, due and payable immediately without demand; and (f) upon the occurrence and during the continuance of an Event of Default, (i) to execute and deliver any of the assignments or documents requested by Collateral Agent pursuant to Section 14(b), (ii) to grant or issue an exclusive or non-exclusive license to the Collateral or any portion thereof to any Person, and (iii) otherwise generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Collateral Agent were the absolute owner thereof for all purposes, and to do, at Collateral Agent's option and Grantor's expense, at any time or from time to time, all acts and things that Collateral Agent deems necessary to protect, preserve or realize upon the Collateral and Collateral Agent's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as Grantor might do. XII. COLLATERAL AGENT MAY PERFORM. ---------------------------- If Grantor fails to perform any agreement contained herein, Collateral Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of Collateral Agent incurred in connection therewith shall be payable by Grantor under Section 17. XIII. STANDARD OF CARE. ---------------- The powers conferred on Collateral Agent hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for monies actually received by it hereunder, Collateral Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Collateral Agent accords its own property. XVI-15 XIV. REMEDIES. -------- If any Event of Default shall have occurred and be continuing: XVI-16 (a) Collateral Agent may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Collateral), and also may (i) require Grantor to, and Grantor hereby agrees that it will at its expense and upon request of Collateral Agent forthwith, assemble all or part of the Collateral as directed by Collateral Agent and make it available to Collateral Agent at a place to be designated by Collateral Agent that is reasonably convenient to both parties, (ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (iii) prior to the disposition of the Collateral, store the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Collateral Agent deems appropriate, (iv) take possession of Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same for the purpose of taking any actions described in the preceding clause (iii) and collecting any Secured Obligation, (v) exercise any and all rights and remedies of Grantor under or in connection with the contracts related to the Collateral or otherwise in respect of the Collateral, including without limitation any and all rights of Grantor to demand or otherwise require payment of any amount under, or performance of any provision of, such contracts, and (vi) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Collateral Agent may deem commercially reasonable. Collateral Agent or any Secured Party or Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Collateral Agent, as agent for and representative of Secured Parties and Interest Rate Exchangers (but not any Secured Party or Secured Parties or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Obligees, (shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Collateral Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Grantor, and Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Collateral Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Grantor hereby waives any claims against Collateral Agent arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Collateral Agent accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantor shall be liable for the XVI-17 deficiency and the reasonable fees of any attorneys employed by Collateral Agent to collect such deficiency. (b) Upon written demand from Collateral Agent, Grantor shall execute and deliver to Collateral Agent an assignment or assignments of the Patents, Trademarks, Registrations, Trademark Rights and the Associated Goodwill and such other documents as are requested by Collateral Agent. Grantor agrees that such an assignment and/or recording shall be applied to reduce the Secured Obligations outstanding only to the extent that Collateral Agent (or any Secured Party) receives cash proceeds in respect of the sale of, or other realization upon, the Collateral. (c) Within five Business Days after written notice from Collateral Agent, Grantor shall make available to Collateral Agent, to the extent within Grantor's power and authority, such personnel in Grantor's employ on the date of such Event of Default as Collateral Agent may reasonably designate, by name, title or job responsibility, to permit Grantor to continue, directly or indirectly, to produce, advertise and sell the products and services sold or delivered by Grantor under or in connection with the Patents, Trademarks, Registrations and Trademark Rights, such persons to be available to perform their prior functions on Collateral Agent's behalf and to be compensated by Collateral Agent at Grantor's expense on a per diem, pro-rata basis consistent with the salary and benefit structure applicable to each as of the date of such Event of Default. XV. PROCEEDS TO BE TURNED OVER TO COLLATERAL AGENT. ---------------------------------------------- In addition to the rights of the Collateral Agent and the Secured Parties specified in Section 8 with respect to payments of Accounts, if an Event of Default shall occur and be continuing, upon request of the Collateral Agent, all proceeds received by the Grantor consisting of cash, checks and other near-cash items shall be held by the Grantor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of the Grantor, and shall, forthwith upon receipt by the Grantor, be turned over to the Collateral Agent in the exact form received by the Grantor (duly indorsed by the Grantor to the Collateral Agent, if required) and held by the Collateral Agent in a Collateral Account maintained under the Intercreditor Agreement. All proceeds while held by the Collateral Agent in a Collateral Account (or by the Grantor in trust for the Collateral Agent and the Secured Parties) shall continue to be held as collateral security for all the Obligations and shall not constitute payment thereof until applied as provided in Section 16. XVI. APPLICATION OF PROCEEDS. ----------------------- Except as expressly provided elsewhere in this Agreement, all proceeds held in any Collateral Account and all other proceeds received by Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in subsection 3 of the Intercreditor Agreement. XVI-18 XVII. INDEMNITY AND EXPENSES. ---------------------- (a) Grantor agrees to indemnify Collateral Agent, each Secured Party and each Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including without limitation enforcement of this Agreement), except to the extent such claims, losses or liabilities result from Collateral Agent's or such Secured Party's or Interest Rate Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Grantor agrees to pay to Collateral Agent promptly following written demand the amount of any and all costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Collateral Agent hereunder, or (iv) the failure by Grantor to perform or observe any of the provisions hereof. (c) The obligations of Grantor in this Section 17 shall survive the termination of this Agreement and the discharge of Grantor's other obligations under this Agreement, the Interest Rate Agreements, the Credit Agreement and the other Loan Documents. XVIII. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. ----------------------------------------------- This Agreement shall create a continuing security interest in, and a conditional assignment of the Collateral effective upon the occurrence and during the continuance of an Event of Default and shall (a) remain in full force and effect until the payment in full of the Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantor and its respective successors and assigns, and (c) inure, together with the rights and remedies of Collateral Agent hereunder, to the benefit of Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement and subsection 10.1 of the AXEL Credit Agreement, any Secured Party may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Secured Parties herein or otherwise. Upon the payment in full of all Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest and conditional assignment granted hereby shall terminate and all rights to the Collateral shall revert to Grantor. Upon any such termination Collateral Agent will, at Grantor's expense, execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination in accordance with the terms of the Intercreditor Agreement. XVI-19 XX. COLLATERAL AGENT AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Collateral Agent has been appointed to act as Collateral Agent hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and AXEL Administrative Agent on behalf of the AXEL Lenders pursuant to the Intercreditor Agreement and, by their acceptance of the benefits hereof, Interest Rate Exchangers, and shall be entitled to the benefits of the Intercreditor Agreement. Collateral Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including without limitation the release or substitution of Collateral), solely in accordance with this Agreement and the Intercreditor Agreement; provided that -------- Collateral Agent shall exercise, or refrain from exercising, any remedies provided for in Section 14 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 19(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Collateral Agent for the benefit of Secured Parties and Interest Rate Exchangers in accordance with the terms of this Section 19(a). (b) Collateral Agent shall at all times be the same Person that is appointed Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent under this Agreement, and the retiring or removed Collateral Agent under this Agreement shall promptly (i) transfer to such successor Collateral Agent all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Collateral Agent under this Agreement, and (ii) execute and deliver to such successor Collateral Agent such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Collateral Agent of the security interests created hereunder, whereupon such retiring or removed Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Collateral Agent hereunder. XVI-20 XX. AMENDMENTS; ETC. --------------- No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Grantor therefrom, shall in any event be effective unless the same shall be in writing and signed by Collateral Agent and, in the case of any such amendment or modification, by Grantor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. XXI. NOTICES. ------- Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex (with received answerback), or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices to Collateral Agent or Grantor shall not be -------- effective until received. For the purposes hereof, the address of each party hereto shall be provided in subsection 10.8 of the Credit Agreement or subsection 10.8 of the AXEL Credit Agreement, as applicable, or as set forth under such party's name on the signature pages hereof or such other address as shall be designated by such party in a written notice delivered to the other parties hereto. XXII. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. ----------------------------------------------------- No failure or delay on the part of Collateral Agent in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. XXIII. SEVERABILITY. ------------ In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. XXIV. HEADINGS. -------- Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. XVI-21 XXV. GOVERNING LAW; TERMS. -------------------- THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. XXVI. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] XVI-22 IN WITNESS WHEREOF, Grantor and Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. SEALY MATTRESS COMPANY By: ___________________________________ Name: __________________________ Title:____________________________ MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Collateral Agent By: ___________________________________ Name: __________________________ Title:____________________________ XVI-23 SCHEDULE I TO COMPANY PATENT AND TRADEMARK SECURITY AGREEMENT REGISTERED UNITED STATES TRADEMARK REGISTRATION REGISTRATION OWNER DESCRIPTION NUMBER DATE ----- ----------- ------ ---- XVI-24 SCHEDULE II TO COMPANY PATENT AND SECURITY AGREEMENT PATENTS ISSUED -------------- Patent No. Issue Date Invention ---------- ---------- --------- PATENTS PENDING --------------- Applicant's Date Application Name Filed No. Invention Inventor ---- ----- ----------- --------- -------- XVI-25 SCHEDULE III TO COMPANY PATENT AND TRADEMARK SECURITY AGREEMENT FILING OFFICES -------------- XVI-26 EXHIBIT XVII [FORM OF SUBSIDIARY GUARANTY] SUBSIDIARY GUARANTY This SUBSIDIARY GUARANTY is entered into as of December 18, 1997 by THE UNDERSIGNED (each a "GUARANTOR" and collectively, "GUARANTORS") in favor of and for the benefit of MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as collateral agent for and representative of (in such capacity herein called "GUARANTIED PARTY") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined), and, subject to subsection 3.12, for the benefit of the other Beneficiaries (as hereinafter defined). RECITALS A. Sealy Mattress Company, an Ohio corporation ("COMPANY"), Sealy Corporation, a Delaware corporation ("HOLDINGS"), the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCo."), as documentation agent (in such capacity, "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the ("CREDIT AGREEMENT") pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. B. Company, Holdings, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity, "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "AXEL ADMINISTRATIVE AGENT"), and BTCo., as documentation agent (in such capacity, "AXEL DOCUMENTATION AGENT") have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL Lenders have made certain commitments, subject to the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Company. C. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with or one or more Credit Agreement Lenders or their Affiliates or AXEL Lenders XVII-1 or their Affiliates (in such capacity, collectively, "INTEREST RATE EXCHANGERS") in accordance with the terms of the Financing Agreements (as hereinafter defined), and it is desired that the obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments thereunder in the event of early termination thereof (all such obligations being the "INTEREST RATE OBLIGATIONS"), together with all obligations of Company under the Financing Agreements and any other Loan Documents (as hereinafter defined), be guarantied hereunder. D. A portion of the proceeds of the Loans (as hereinafter defined) may be advanced to Guarantors and thus the Guarantied Obligations (as hereinafter defined) are being incurred for and will inure to the benefit of Guarantors (which benefits are hereby acknowledged). E. It is a condition precedent to the making of the initial Loans under the Financing Agreements that Company's obligations thereunder be guarantied by Guarantors. F. Guarantors are willing irrevocably and unconditionally to guaranty such obligations of Company. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of, the Company, (iii) the AXEL Administrative Agent, the AXEL Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement and (iv) the AXEL Lenders to make their respective loans to the Company, and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Guarantors hereby agree as follows: SECTION 1. DEFINITIONS 1.1 CERTAIN DEFINED TERMS. --------------------- (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. XVII-2 "ADDITIONAL GUARANTOR" has the meaning assigned to that term in subsection 3.12. "ADJUSTED MAXIMUM AMOUNT" has the meaning assigned to that term in subsection 2.2. "AGGREGATE PAYMENTS" has the meaning assigned to that term in subsection 2.2. "AXEL COMMITMENTS" shall mean the "Commitments" as defined in the AXEL Credit Agreement. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "AXEL OBLIGATIONS" shall mean the "Obligations" as defined in the AXEL Credit Agreement. "BENEFICIARIES" means Guarantied Party, Secured Parties and any Interest Rate Exchangers. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CONTRIBUTING GUARANTORS" has the meaning assigned to that term in subsection 2.2. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. XVII-3 "FAIR SHARE" has the meaning assigned to that term in subsection 2.2. "FINANCING AGREEMENT" means either the Credit Agreement or the AXEL Credit Agreement, and "Financing Agreements" means the Credit Agreement and the AXEL Credit Agreement, collectively. "FINANCING AGREEMENT OBLIGATIONS" means Credit Agreement Obligations and AXEL Obligations. "FRAUDULENT TRANSFER LAWS" has the meaning assigned to that term in subsection 2.2. "FAIR SHARE SHORTFALL" has the meaning assigned to that term in subsection 2.2. "FUNDING GUARANTOR" has the meaning assigned to that term in subsection 2.2. "GUARANTIED OBLIGATIONS" has the meaning assigned to that term in subsection 2.1. "GUARANTY" means this Subsidiary Guaranty dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. "GRANTOR" has the meaning assigned to that term in the introduction of this Agreement. "HOLDINGS" has the meaning assigned to that term in the recitals to this Agreement. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. XVII-4 "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. "REQUISITE OBLIGEES" has the meaning assigned to that term in subsection 3.14 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. "PAYMENT IN FULL", "PAID IN FULL" or any similar term means payment in full of the Guarantied Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), including without limitation all principal, interest, costs, fees and expenses (including, without limitation, reasonable legal fees and expenses) of Beneficiaries as required under the Loan Documents and the Lender Interest Rate Agreements. 1.2 INTERPRETATION. References to "Sections" and "subsections" -------------- shall be to Sections and subsections, respectively, of this Guaranty unless otherwise specifically provided. SECTION 2. THE GUARANTY 2.1 GUARANTY OF THE GUARANTIED OBLIGATIONS. Subject to the -------------------------------------- provisions of subsection 2.2(a), Guarantors jointly and severally hereby irrevocably and unconditionally guaranty, as primary obligors and not merely as sureties, the due and punctual payment in full of all Guarantied Obligations when the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S) 362(a)). The term "GUARANTIED OBLIGATIONS" is used herein in its most comprehensive sense and includes: XVII-5 (a) any and all Financing Agreement Obligations of Company and any and all Interest Rate Obligations, in each case now or hereafter made, incurred or created, whether absolute or contingent, liquidated or unliquidated, whether due or not due, and however arising under or in connection with any Financing Agreement and any other Loan Documents and the Lender Interest Rate Agreements, including those arising under successive borrowing transactions under any Financing Agreement which shall either continue the Financing Agreement Obligations of Company or from time to time renew them after they have been satisfied and including interest which, but for the filing of a petition in bankruptcy with respect to Company, would have accrued on any Guarantied Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding; and (b) those expenses set forth in subsection 2.9 hereof. 2.2 LIMITATION ON AMOUNT GUARANTIED; CONTRIBUTION BY GUARANTORS. (a) ----------------------------------------------------------- Anything contained in this Guaranty to the contrary notwithstanding, if any Fraudulent Transfer Law (as hereinafter defined) is determined by a court of competent jurisdiction to be applicable to the obligations of any Guarantor under this Guaranty, such obligations of such Guarantor hereunder shall be limited to a maximum aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any applicable provisions of comparable state law (collectively, the "FRAUDULENT TRANSFER LAWS"), in each case after giving effect to all other liabilities of such Guarantor, contingent or otherwise, that are relevant under the Fraudulent Transfer Laws (specifically excluding, however, any liabilities of such Guarantor (x) in respect of intercompany indebtedness to Company or other affiliates of Company to the extent that such indebtedness would be discharged in an amount equal to the amount paid by such Guarantor hereunder and (y) under any guaranty of Subordinated Indebtedness which guaranty contains a limitation as to maximum amount similar to that set forth in this subsection 2.2(a), pursuant to which the liability of such Guarantor hereunder is included in the liabilities taken into account in determining such maximum amount) and after giving effect as assets to the value (as determined under the applicable provisions of the Fraudulent Transfer Laws) of any rights to subrogation, reimbursement, indemnification or contribution of such Guarantor pursuant to applicable law or pursuant to the terms of any agreement (including without limitation any such right of contribution under subsection 2.2(b) or under the Holdings Guaranty as contemplated by subsection 2.2(b)). (b) Guarantors under this Guaranty, and Holdings under the Holdings Guaranty, together desire to allocate among themselves (collectively, the "CONTRIBUTING GUARANTORS"), in a fair and equitable manner, their obligations arising under this Guaranty and the Holdings Guaranty. Accordingly, in the event any payment or distribution is made on any date by any Guarantor under this Guaranty or Holdings under the Holdings Guaranty (a "FUNDING GUARANTOR") that exceeds its Fair Share (as defined below) as of such date, that Funding Guarantor shall be entitled to a contribution from each of the other Contributing Guarantors in the amount of such other Contributing Guarantor's Fair Share Shortfall (as defined below) as of such date, with the result that all such contributions will cause each Contributing Guarantor's Aggregate Payments (as defined below) to XVII-6 equal its Fair Share as of such date. "FAIR SHARE" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the ratio of (x) the Adjusted Maximum Amount (as defined below) with respect to such Contributing Guarantor to (y) the aggregate of the Adjusted Maximum Amounts with respect to all Contributing Guarantors multiplied by (ii) the aggregate ------------- amount paid or distributed on or before such date by all Funding Guarantors under this Guaranty and the Holdings Guaranty in respect of the obligations guarantied. "FAIR SHARE SHORTFALL" means, with respect to a Contributing Guarantor as of any date of determination, the excess, if any, of the Fair Share of such Contributing Guarantor over the Aggregate Payments of such Contributing Guarantor. "ADJUSTED MAXIMUM AMOUNT" means, with respect to a Contributing Guarantor as of any date of determination, the maximum aggregate amount of the obligations of such Contributing Guarantor under this Guaranty or the Holdings Guaranty, as applicable, determined as of such date, in the case of any Guarantor, in accordance with subsection 2.2(a); provided that, solely for -------- purposes of calculating the "Adjusted Maximum Amount" with respect to any Contributing Guarantor for purposes of this subsection 2.2(b), any assets or liabilities of such Contributing Guarantor arising by virtue of any rights to subrogation, reimbursement or indemnification or any rights to or obligations of contribution hereunder or under subsection 2.2 of the Holdings Guaranty shall not be considered as assets or liabilities of such Contributing Guarantor. "AGGREGATE PAYMENTS" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the aggregate amount of all payments and distributions made on or before such date by such Contributing Guarantor in respect of this Guaranty or the Holdings Guaranty, as applicable (including, without limitation, in respect of this subsection 2.2(b) or subsection 2.2 of the Holdings Guaranty) minus (ii) the aggregate amount of all ----- payments received on or before such date by such Contributing Guarantor from the other Contributing Guarantors as contributions under this subsection 2.2(b) or subsection 2.2 of the Holdings Guaranty. The amounts payable as contributions hereunder and under subsection 2.2 of the Holdings Guaranty shall be determined as of the date on which the related payment or distribution is made by the applicable Funding Guarantor. The allocation among Contributing Guarantors of their obligations as set forth in this subsection 2.2(b) and subsection 2.2 of the Holdings Guaranty shall not be construed in any way to limit the liability of any Contributing Guarantor hereunder or under the Holdings Guaranty. Holdings is a third party beneficiary to the contribution agreement set forth in this subsection 2.2(b). 2.3 PAYMENT BY GUARANTORS; APPLICATION OF PAYMENTS. Subject to the ---------------------------------------------- provisions of subsection 2.2(a), Guarantors hereby jointly and severally agree, in furtherance of the foregoing and not in limitation of any other right which any Beneficiary may have at law or in equity against any Guarantor by virtue hereof, that upon the failure of Company to pay any of the Guarantied Obligations when and as the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S) 362(a)), Guarantors will promptly following written demand pay, or cause to be paid, in cash, to Guarantied Party for the ratable benefit of Beneficiaries, an amount equal to the sum of the unpaid principal amount of all Guarantied Obligations then due as aforesaid, accrued and unpaid interest on such Guarantied Obligations (including, without limitation, interest which, but for the filing of a petition in bankruptcy with respect to Company, would have accrued on such Guarantied Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding) and all other Guarantied Obligations then owed to Beneficiaries as XVII-7 aforesaid. All such payments shall be applied promptly from time to time by Guarantied Party as provided in subsection 3 of the Intercreditor Agreement. 2.4 LIABILITY OF GUARANTORS ABSOLUTE. Each Guarantor agrees that its -------------------------------- obligations hereunder are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than payment in full of the Guarantied Obligations. In furtherance of the foregoing and without limiting the generality thereof, each Guarantor agrees as follows: A. This Guaranty is a guaranty of payment when due and not of collectibility. B. The obligations of each Guarantor hereunder are independent of the obligations of Company under the Loan Documents or the Lender Interest Rate Agreements and the obligations of any other guarantor (including any other Guarantor) of the obligations of Company under the Loan Documents or the Lender Interest Rate Agreements, and a separate action or actions may be brought and prosecuted against such Guarantor whether or not any action is brought against Company or any of such other guarantors and whether or not Company is joined in any such action or actions. C. Payment by any Guarantor of a portion, but not all, of the Guarantied Obligations shall in no way limit, affect, modify or abridge any Guarantor's liability for any portion of the Guarantied Obligations which has not been paid. Without limiting the generality of the foregoing, if Guarantied Party is awarded a judgment in any suit brought to enforce any Guarantor's covenant to pay a portion of the Guarantied Obligations, such judgment shall not be deemed to release such Guarantor from its covenant to pay the portion of the Guarantied Obligations that is not the subject of such suit, and such judgment shall not, except to the extent satisfied by such Guarantor, limit, affect, modify or abridge any other Guarantor's liability hereunder in respect of the Guarantied Obligations. D. Any Beneficiary, upon such terms as it deems appropriate, without notice or demand and without affecting the validity or enforceability of this Guaranty or giving rise to any reduction, limitation, impairment, discharge or termination of any Guarantor's liability hereunder, from time to time may (i) renew, extend, accelerate, increase the rate of interest on, or otherwise change the time, place, manner or terms of payment of the Guarantied Obligations, (ii) settle, compromise, release or discharge, or accept or refuse any offer of performance with respect to, or substitutions for, the Guarantied Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations; (iii) request and accept other guaranties of the Guarantied Obligations and take and hold security for the payment of this Guaranty or the Guarantied Obligations; (iv) release, surrender, exchange, substitute, compromise, settle, rescind, waive, alter, subordinate or modify, with or without consideration, any security for payment of the Guarantied Obligations, any other guaranties of the Guarantied XVII-8 Obligations, or any other obligation of any Person (including any other Guarantor) with respect to the Guarantied Obligations; (v) enforce and apply any security now or hereafter held by or for the benefit of such Beneficiary in respect of this Guaranty or the Guarantied Obligations and direct the order or manner of sale thereof, or exercise any other right or remedy that such Beneficiary may have against any such security, in each case as such Beneficiary in its discretion may determine consistent with the applicable Financing Agreement or the applicable Lender Interest Rate Agreement and any applicable security agreement, including foreclosure on any such security pursuant to one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, and even though such action operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of any Guarantor against Company or any security for the Guarantied Obligations; and (vi) exercise any other rights available to it under the Loan Documents or the Lender Interest Rate Agreements. E. This Guaranty and the obligations of Guarantors hereunder shall be valid and enforceable and shall not be subject to any reduction, limitation, impairment, discharge or termination for any reason (other than payment in full of the Guarantied Obligations), including without limitation the occurrence of any of the following, whether or not any Guarantor shall have had notice or knowledge of any of them: (i) any failure or omission to assert or enforce or agreement or election not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy (whether arising under the Loan Documents or the Lender Interest Rate Agreements, at law, in equity or otherwise) with respect to the Guarantied Obligations or any agreement relating thereto, or with respect to any other guaranty of or security for the payment of the Guarantied Obligations; (ii) any rescission, waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including without limitation provisions relating to events of default) of any Financing Agreement, any of the other Loan Documents, any of the Lender Interest Rate Agreements or any agreement or instrument executed pursuant thereto, or of any other guaranty or security for the Guarantied Obligations, in each case whether or not in accordance with the terms of such Financing Agreement or such Loan Document, such Lender Interest Rate Agreement or any agreement relating to such other guaranty or security; (iii) the application of payments received from any source (other than payments received pursuant to the other Loan Documents or any of the Lender Interest Rate Agreements or from the proceeds of any security for the Guarantied Obligations, except to the extent such security also serves as collateral for indebtedness other than the Guarantied Obligations) to the payment of indebtedness other than the Guarantied Obligations, even though any Beneficiary might have elected to apply such payment to any part or all of the Guarantied Obligations; (iv) any Beneficiary's consent to the change, reorganization or termination of the corporate structure or existence of Holdings or any of its Subsidiaries and to any corresponding restructuring of the Guarantied Obligations; (v) any failure to perfect or continue perfection of a security interest in any collateral which secures any of the Guarantied Obligations; (vi) any defenses, set-offs or XVII-9 counterclaims which Company may allege or assert against any Beneficiary in respect of the Guarantied Obligations, including but not limited to failure of consideration, breach of warranty, payment, statute of frauds, statute of limitations, accord and satisfaction and usury; and (vii) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of any Guarantor as an obligor in respect of the Guarantied Obligations. 2.5 WAIVERS BY GUARANTORS. Each Guarantor hereby waives, for the --------------------- benefit of Beneficiaries: (a) any right to require any Beneficiary, as a condition of payment or performance by such Guarantor, to (i) proceed against Company, any other guarantor (including any other Guarantor) of the Guarantied Obligations or any other Person, (ii) proceed against or exhaust any security held from Company, any such other guarantor or any other Person, (iii) proceed against or have resort to any balance of any deposit account or credit on the books of any Beneficiary in favor of Company or any other Person, or (iv) pursue any other remedy in the power of any Beneficiary whatsoever; (b) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of Company including, without limitation, any defense based on or arising out of the lack of validity or the unenforceability of the Guarantied Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of Company from any cause other than payment in full of the Guarantied Obligations; (c) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (d) any defense based upon any Beneficiary's errors or omissions in the administration of the Guarantied Obligations, except behavior which amounts to bad faith, gross negligence or willful misconduct; (e) (i) any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of this Guaranty, (ii) the benefit of any statute of limitations affecting such Guarantor's liability hereunder or the enforcement hereof, (iii) any rights to set-offs, recoupments and counterclaims, and (iv) promptness, diligence and any requirement that any Beneficiary protect, secure, perfect or insure any security interest or lien or any property subject thereto; and (f) notices, demands, presentments, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance of this Guaranty, notices of default under the Financing Agreements, the Lender Interest Rate Agreements or any agreement or instrument related thereto, notices of any XVII-10 renewal, extension or modification of the Guarantied Obligations or any agreement related thereto, notices of any extension of credit to Company and notices of any of the matters referred to in subsection 2.4 and any right to consent to any thereof. 2.6 CERTAIN CALIFORNIA LAW WAIVERS. As used in this subsection 2.6, ------------------------------ any reference to "the principal" includes Company, and any reference to "the creditor" includes each Beneficiary. In accordance with Section 2856 of the California Civil Code: (a) each Guarantor agrees (i) to waive any and all rights of subrogation and reimbursement against Company or against any collateral or security granted by Company for any of the Guarantied Obligations and (ii) to withhold the exercise of any and all rights of contribution against any other guarantor of any of the Guarantied Obligations and against any collateral or security granted by any such other guarantor for any of the Guarantied Obligations until the Guarantied Obligations shall have been paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, all as more fully set forth in subsection 2.7; (b) each Guarantor waives any and all other rights and defenses available to such Guarantor by reason of Sections 2787 to 2855, inclusive, 2899 and 3433 of the California Civil Code, including without limitation any and all rights or defenses such Guarantor may have by reason of protection afforded to the principal with respect to any of the Guarantied Obligations, or to any other guarantor (including any other Guarantor) of any of the Guarantied Obligations with respect to any of such guarantor's obligations under its guaranty, in either case pursuant to the antideficiency or other laws of the State of California limiting or discharging the principal's indebtedness or such guarantor's obligations, including without limitation Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure; and (c) each Guarantor waives all rights and defenses arising out of an election of remedies by the creditor, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for any Guarantied Obligation, has destroyed such Guarantor's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the Code of Civil Procedure or otherwise; and even though that election of remedies by the creditor, such as nonjudicial foreclosure with respect to security for an obligation of any other guarantor (including any other Guarantor) of any of the Guarantied Obligations, has destroyed such Guarantor's rights of contribution against such other guarantor. No other provision of this Guaranty shall be construed as limiting the generality of any of the covenants and waivers set forth in this subsection 2.6. In accordance with subsection 3.6 below, this Guaranty shall be governed by, and shall be construed and enforced in accordance with, the internal laws of the State of New York, without regard to conflicts of laws principles. This subsection 2.6 is included solely out of an abundance of caution, and shall not be construed to mean that any of the above-referenced provisions of California law are in any way applicable to this Guaranty or to any of the Guarantied Obligations. XVII-11 2.7 GUARANTORS' RIGHTS OF SUBROGATION, CONTRIBUTION, ETC. Each ---------------------------------------------------- Guarantor hereby waives any claim, right or remedy, direct or indirect, that such Guarantor now has or may hereafter have against Company or any of its assets in connection with this Guaranty or the performance by such Guarantor of its obligations hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by statute (including without limitation under California Civil Code Section 2847, 2848 or 2849), under common law or otherwise and including without limitation (a) any right of subrogation, reimbursement or indemnification that such Guarantor now has or may hereafter have against Company with respect to the Guarantied Obligations, (b) any right to enforce, or to participate in, any claim, right or remedy that any Beneficiary now has or may hereafter have against Company, and (c) any benefit of, and any right to participate in, any collateral or security now or hereafter held by any Beneficiary. In addition, until the Guarantied Obligations shall have been indefeasibly paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, each Guarantor shall withhold exercise of any right of contribution such Guarantor may have against any other guarantor (including any other Guarantor) of the Guarantied Obligations (including without limitation any such right of contribution under California Civil Code Section 2848 or under subsection 2.2(b) or under the Holdings Guaranty as contemplated by subsection 2.2(b). Each Guarantor further agrees that, to the extent the waiver or agreement to withhold the exercise of its rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification such Guarantor may have against Company or against any collateral or security, and any rights of contribution such Guarantor may have against any such other guarantor, shall be junior and subordinate to any rights any Beneficiary may have against Company, to all right, title and interest any Beneficiary may have in any such collateral or security, and to any right any Beneficiary may have against such other guarantor. If any amount shall be paid to any Guarantor on account of any such subrogation, reimbursement, indemnification or contribution rights at any time when all Guarantied Obligations shall not have been paid in full, such amount shall be held in trust for Guarantied Party on behalf of Beneficiaries and shall forthwith be paid over to Guarantied Party for the benefit of Beneficiaries to be credited and applied against the Guarantied Obligations, whether matured or unmatured, in accordance with the terms hereof. 2.8 SUBORDINATION OF OTHER OBLIGATIONS. Any indebtedness of Company ---------------------------------- now or hereafter held by any Guarantor is hereby subordinated in right of payment to the Guarantied Obligations, and any such indebtedness of Company to such Guarantor collected or received by such Guarantor after an Event of Default has occurred and is continuing shall be held in trust for Guarantied Party on behalf of Beneficiaries and shall forthwith be paid over to Guarantied Party for the benefit of Beneficiaries to be credited and applied against the Guarantied Obligations but without affecting, impairing or limiting in any manner the liability of such Guarantor under any other provision of this Guaranty. 2.9 EXPENSES. Guarantors jointly and severally agree to pay, or -------- cause to be paid, promptly upon written demand, and to save Beneficiaries harmless against liability for, any and all reasonable costs and reasonable expenses (including reasonable fees and reasonable disbursements of counsel and allocated costs of internal counsel) incurred or expended by any Beneficiary in connection with the enforcement of or preservation of any rights under this Guaranty. XVII-12 2.10 CONTINUING GUARANTY. This Guaranty is a continuing guaranty and ------------------- shall remain in effect until all of the Guarantied Obligations shall have been paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled. Each Guarantor hereby irrevocably waives any right (including without limitation any such right arising under California Civil Code Section 2815) to revoke this Guaranty as to future transactions giving rise to any Guarantied Obligations. 2.11 AUTHORITY OF GUARANTORS OR COMPANY. It is not necessary for any ---------------------------------- Beneficiary to inquire into the capacity or powers of any Guarantor or Company or the officers, directors or any agents acting or purporting to act on behalf of any of them. 2.12 FINANCIAL CONDITION OF COMPANY. Any Loans may be granted to ------------------------------ Company or continued from time to time, and any Lender Interest Rate Agreements may be entered into from time to time, in each case without notice to or authorization from any Guarantor regardless of the financial or other condition of Company at the time of any such grant or continuation or at the time such Lender Interest Rate Agreement is entered into, as the case may be. No Beneficiary shall have any obligation to disclose or discuss with any Guarantor its assessment, or any Guarantor's assessment, of the financial condition of Company. Each Guarantor has adequate means to obtain information from Company on a continuing basis concerning the financial condition of Company and its ability to perform its obligations under the Loan Documents and the Lender Interest Rate Agreements, and each Guarantor assumes the responsibility for being and keeping informed of the financial condition of Company and of all circumstances bearing upon the risk of nonpayment of the Guarantied Obligations. Each Guarantor hereby waives and relinquishes any duty on the part of any Beneficiary to disclose any matter, fact or thing relating to the business, operations or conditions of Company now known or hereafter known by any Beneficiary. 2.13 RIGHTS CUMULATIVE. The rights, powers and remedies given to ----------------- Beneficiaries by this Guaranty are cumulative and shall be in addition to and independent of all rights, powers and remedies given to Beneficiaries by virtue of any statute or rule of law or in any of the other Loan Documents, any of the Lender Interest Rate Agreements or any agreement between any Guarantor and any Beneficiary or Beneficiaries or between Company and any Beneficiary or Beneficiaries. Any forbearance or failure to exercise, and any delay by any Beneficiary in exercising, any right, power or remedy hereunder shall not impair any such right, power or remedy or be construed to be a waiver thereof, nor shall it preclude the further exercise of any such right, power or remedy. 2.14 BANKRUPTCY; POST-PETITION INTEREST; REINSTATEMENT OF GUARANTY. ------------------------------------------------------------- (a) So long as any Guarantied Obligations remain outstanding, no Guarantor shall, without the prior written consent of Guarantied Party acting pursuant to the instructions of Requisite Obligees (as defined in subsection 3.12), commence or join with any other Person in commencing any bankruptcy, reorganization or insolvency proceedings against Company. The obligations of Guarantors under this Guaranty shall not be reduced, limited, impaired, discharged, deferred, suspended or terminated by any proceeding, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement of Company or by any defense which Company may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding. XVII-13 (b) Each Guarantor acknowledges and agrees that any interest on any portion of the Guarantied Obligations which accrues after the commencement of any proceeding referred to in clause (a) above (or, if interest on any portion of the Guarantied Obligations ceases to accrue by operation of law by reason of the commencement of said proceeding, such interest as would have accrued on such portion of the Guarantied Obligations if said proceedings had not been commenced) shall be included in the Guarantied Obligations because it is the intention of Guarantors and Beneficiaries that the Guarantied Obligations which are guarantied by Guarantors pursuant to this Guaranty should be determined without regard to any rule of law or order which may relieve Company of any portion of such Guarantied Obligations. Guarantors will permit any trustee in bankruptcy, receiver, debtor in possession, assignee for the benefit of creditors or similar person to pay Guarantied Party, or allow the claim of Guarantied Party in respect of, any such interest accruing after the date on which such proceeding is commenced. (c) In the event that all or any portion of the Guarantied Obligations are paid by Company, the obligations of Guarantors hereunder shall continue and remain in full force and effect or be reinstated, as the case may be, in the event that all or any part of such payment(s) are rescinded or recovered directly or indirectly from any Beneficiary as a preference, fraudulent transfer or otherwise, and any such payments which are so rescinded or recovered shall constitute Guarantied Obligations for all purposes under this Guaranty until indefeasibly paid in full. 2.15 SET OFF. In addition to any other rights any Beneficiary may ------- have under law or in equity, if any amount shall at any time be due and owing by any Guarantor to any Beneficiary under this Guaranty, such Beneficiary is authorized at any time or from time to time, without notice (any such notice being hereby expressly waived), to set off and to appropriate and to apply any and all deposits (general or special, including but not limited to indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness of such Beneficiary owing to such Guarantor and any other property of such Guarantor held by any Beneficiary to or for the credit or the account of such Guarantor against and on account of the Guarantied Obligations and liabilities of such Guarantor to any Beneficiary under this Guaranty. 2.16 DISCHARGE OF GUARANTY UPON SALE OF GUARANTOR. If all of the -------------------------------------------- stock of any Guarantor or any of its successors in interest under this Guaranty shall be sold or otherwise disposed of (including by merger or consolidation) in an Asset Sale not prohibited by subsection 7.7 of the Credit Agreement or otherwise consented to by Requisite Lenders, the Guaranty of such Guarantor or such successor in interest, as the case may be, hereunder shall automatically be discharged and released without any further action by any Beneficiary or any other Person effective as of the time of such Asset Sale; provided that, as a -------- condition precedent to such discharge and release, Guarantied Party shall have received evidence satisfactory to it that arrangements satisfactory to it have been made for disposition of the applicable Net Asset Sale Proceeds in accordance with the requirements of the Credit Agreement. SECTION 3. MISCELLANEOUS 3.1 SURVIVAL OF WARRANTIES. All agreements, representations and ---------------------- warranties made herein shall survive the execution and delivery of this Guaranty and the other Loan Documents XVII-14 and the Lender Interest Rate Agreements and any increase in the Commitments under any Financing Agreement. 3.2 NOTICES. Any communications between Guarantied Party and any ------- Guarantor and any notices or requests provided herein to be given may be given by mailing the same, postage prepaid, or by telex, facsimile transmission or cable to each such party at its addresses set forth in the Financing Agreements, on the signature pages hereof or to such other addresses as each such party may in writing hereafter indicate. Any notice, request or demand to or upon Guarantied Party or any Guarantor shall not be effective until received. 3.3 SEVERABILITY. In case any provision in or obligation under this ------------ Guaranty shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 3.4 AMENDMENTS AND WAIVERS. No amendment, modification, termination ---------------------- or waiver of any provision of this Guaranty, and no consent to any departure by any Guarantor therefrom, shall in any event be effective without the written concurrence of Guarantied Party and, in the case of any such amendment or modification, each Guarantor against whom enforcement of such amendment or modification is sought. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. 3.5 HEADINGS. Section and subsection headings in this Guaranty are -------- included herein for convenience of reference only and shall not constitute a part of this Guaranty for any other purpose or be given any substantive effect. 3.6 APPLICABLE LAW. THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF -------------- GUARANTORS AND BENEFICIARIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. 3.7 SUCCESSORS AND ASSIGNS. This Guaranty is a continuing guaranty ---------------------- and shall be binding upon each Guarantor and its respective successors and assigns. This Guaranty shall inure to the benefit of Beneficiaries and their respective successors and assigns. No Guarantor shall assign this Guaranty or any of the rights or obligations of such Guarantor hereunder without the prior written consent of all Secured Parties. Any Beneficiary may, without notice or consent, assign its interest in this Guaranty in whole or in part. The terms and provisions of this Guaranty shall inure to the benefit of any transferee or assignee of any Loan, and in the event of such transfer or assignment the rights and privileges herein conferred upon such Beneficiary shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. 3.8 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL JUDICIAL ---------------------------------------------- PROCEEDINGS BROUGHT AGAINST ANY GUARANTOR ARISING OUT OF OR XVII-15 RELATING TO THIS GUARANTY, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH GUARANTOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO SUCH GUARANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SUBSECTION 3.2; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER SUCH GUARANTOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT BENEFICIARIES RETAIN THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST SUCH GUARANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SUBSECTION 3.8 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. 3.9 WAIVER OF TRIAL BY JURY. EACH GUARANTOR AND, BY ITS ACCEPTANCE OF THE ----------------------- BENEFITS HEREOF, EACH BENEFICIARY EACH HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS GUARANTY. The scope of this waiver is intended to be all encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each Guarantor and, by its acceptance of the benefits hereof, each Beneficiary, each (i) acknowledges that this waiver is a material inducement for such Guarantor and Beneficiaries to enter into a business relationship, that such Guarantor and Beneficiaries have already relied on this waiver in entering into this Guaranty or accepting the benefits thereof, as the case may be, and that each will continue to rely on this waiver in their related future dealings and (ii) further warrants and XVII-16 represents that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SUBSECTION 3.9 AND EXECUTED BY GUARANTIED PARTY AND EACH GUARANTOR), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTY. In the event of litigation, this Guaranty may be filed as a written consent to a trial by the court. 3.10 NO OTHER WRITING. This writing is intended by Guarantors and ---------------- Beneficiaries as the final expression of this Guaranty and is also intended as a complete and exclusive statement of the terms of their agreement with respect to the matters covered hereby. No course of dealing, course of performance or trade usage, and no parol evidence of any nature, shall be used to supplement or modify any terms of this Guaranty. There are no conditions to the full effectiveness of this Guaranty. 3.11 FURTHER ASSURANCES. At any time or from time to time, upon the ------------------ request of Guarantied Party, Guarantors shall execute and deliver such further documents and do such other acts and things as Guarantied Party may reasonably request in order to effect fully the purposes of this Guaranty. 3.12 ADDITIONAL GUARANTORS. The initial Guarantors hereunder --------------------- shall be such of the Subsidiaries of Company as are signatories hereto on the date hereof. From time to time subsequent to the date hereof, additional Subsidiaries of Company may become parties hereto, as additional Guarantors (each an "ADDITIONAL GUARANTOR"), by executing a counterpart of this Guaranty. Upon delivery of any such counterpart to Collateral Agent, notice of which is hereby waived by Guarantors, each such Additional Guarantor shall be a Guarantor and shall be as fully a party hereto as if such Additional Guarantor were an original signatory hereof. Each Guarantor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Guarantor hereunder, nor by any election of Collateral Agent not to cause any Subsidiary of Company to become an Additional Guarantor hereunder. This Guaranty shall be fully effective as to any Guarantor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Guarantor hereunder. 3.13 COUNTERPARTS; EFFECTIVENESS. This Guaranty may be executed in --------------------------- any number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original for all purposes; but all such counterparts together shall constitute but one and the same instrument. This Guaranty shall become effective as to each Guarantor upon the execution of a counterpart hereof by such Guarantor (whether or not a counterpart hereof shall have been executed by any other Guarantor) and receipt by Guarantied Party of written or telephonic notification of such execution and authorization of delivery thereof. 3.14 GUARANTIED PARTY AS COLLATERAL AGENT. ------------------------------------ XVII-17 (a) Guarantied Party has been appointed to act as Guarantied Party hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and by AXEL Administrative Agent on behalf of the AXEL Lenders pursuant to the Intercreditor Agreement, and, by their acceptance of the benefits hereof, Interest Rate Exchangers and shall be entitled to the benefits of the Intercreditor Agreement. Guarantied Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action, solely in accordance with this Guaranty and the Intercreditor Agreements; provided that Guarantied Party shall exercise, or refrain from exercising, any - -------- remedies hereunder in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this subsection 3.14, each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to enforce this Guaranty, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Guarantied Party for the benefit of Beneficiaries in accordance with the terms of this subsection 3.14. (b) Guarantied Party shall at all times be the same Person that is Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Written notice of resignation by Collateral Agent pursuant to the Intercreditor Agreement shall also constitute notice of resignation as Guarantied Party under this Guaranty; removal of Collateral Agent pursuant to the Intercreditor Agreement shall also constitute removal as Guarantied Party under this Guaranty; and appointment of a successor Collateral Agent pursuant to the Intercreditor Agreement shall also constitute appointment of a successor Guarantied Party under this Guaranty. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Guarantied Party under this Guaranty, and the retiring or removed Guarantied Party under this Guaranty shall promptly (i) transfer to such successor Guarantied Party all sums held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Guarantied Party under this Guaranty, and (ii) take such other actions as may be necessary or appropriate in connection with the assignment to such successor Guarantied Party of the rights created hereunder, whereupon such retiring or removed Guarantied Party shall be discharged from its duties and obligations under this Guaranty. After any retiring or removed Guarantied Party's resignation or removal hereunder as Guarantied Party, the provisions of this Guaranty shall inure to its benefit as to any actions taken or omitted to be taken by it under this Guaranty while it was Guarantied Party hereunder. [Remainder of page intentionally left blank] XVII-18 IN WITNESS WHEREOF, each of the undersigned Guarantors has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of the date first written above. [NAMES OF GUARANTORS] By: ------------------ Name: Title: Notice Address: - ---------------------- - ---------------------- - ---------------------- XVII-19 IN WITNESS WHEREOF, the undersigned Additional Guarantor has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of ______________, [199_][200_]. [NAME OF ADDITIONAL GUARANTOR] By: -------------------------- Name: Title: Notice Address: ----------------------- ----------------------- ----------------------- XVII-20 EXHIBIT XVIII [FORM OF SUBSIDIARY PLEDGE AGREEMENT] SUBSIDIARY PLEDGE AGREEMENT This SUBSIDIARY PLEDGE AGREEMENT (this "AGREEMENT") is dated as of INDIRECT SUBSIDIARIES (each of such undersigned Subsidiaries being a "PLEDGOR" and collectively "PLEDGORS"; provided that after the Closing Date, "Pledgors" -------- shall be deemed to include any Additional Pledgors (as hereinafter defined)) of Sealy Mattress Company, an Ohio corporation ("COMPANY"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as Collateral Agent for and representative of (in such capacity herein called "COLLATERAL AGENT") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined). RECITALS A. Pledgors are the legal and beneficial owners of (i) the shares of stock (the "PLEDGED SHARES") described in Part A of Schedule I annexed hereto ---------- and issued by the corporations named therein and (ii) the indebtedness (the "PLEDGED DEBT") described in Part B of said Schedule I and issued by the ---------- obligors named therein. B. Sealy Corporation, a Delaware Corporation ("HOLDINGS"), the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO."), as documentation agent (in such capacity "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT") with Company pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. C. Company, Holdings, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity the "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity "AXEL ADMINISTRATIVE AGENT"), and BTCo., as documentation agent (in such capacity, "AXEL DOCUMENTATION AGENT") have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT XVIII-1 AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, the CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL Lenders have made certain commitments, subject to the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Company. D. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more CA Lenders and their Affiliates or AXEL Lenders and their Affiliates (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). E. Pledgors have executed and delivered that certain Subsidiary Guaranty dated as of December 18, 1997 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "GUARANTY") in favor of Collateral Agent for the benefit of Secured Parties and any Interest Rate Exchangers, pursuant to which Pledgors have guarantied the prompt payment and performance when due of all obligations of Company under the Financing Agreements and all obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments, if any, thereunder in the event of early termination thereof. F. It is a condition precedent to the initial extensions of credit by Secured Parties under the Financing Agreements that each Pledgor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of, Company, (iii) the AXEL Administrative Agent, the AXEL Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement, (iv) the AXEL Lenders to make their respective loans to Company and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, each Pledgor hereby agrees with Collateral Agent as follows: SECTION 1. DEFINED TERMS ------------- (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the XVIII-2 AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. "ADDITIONAL PLEDGED SHARES" has the meaning assigned to that term in Section 2(c) of this Agreement. "AGREEMENT" means this Company Pledge Agreement dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. "AXEL COMMITMENTS" shall mean the "Commitments" as defined in the AXEL Credit Agreement. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "AXEL OBLIGATIONS" shall mean "Obligations" as defined in the AXEL Credit Agreement. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which the Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. "FINANCING AGREEMENT" means the Credit Agreement or the AXEL Credit Agreement, and "Financing Agreements" means the Credit Agreement and the AXEL Credit Agreement, collectively. XVIII-3 "FINANCING AGREEMENT OBLIGATIONS" means Credit Agreement Obligations and AXEL Obligations. "HOLDINGS" has the meaning assigned to that term in the recitals to this Agreement. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "NEW PLEDGED SHARES" has the meaning assigned to that term in Section 2(e) of this Agreement. "PLEDGE AMENDMENT" has the meaning assigned to that term in Section 7 of this Agreement. "PLEDGED COLLATERAL" has the meaning assigned to that term in Section 2 of this Agreement. "PLEDGED DEBT" has the meaning assigned to that term in the recitals to this Agreement. "PLEDGED SHARES" has the meaning assigned to that term in the recitals to this Agreement. "PLEDGOR" has the meaning assigned to that term in the introduction of this Agreement. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. XVIII-4 "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. "REQUISITE OBLIGEES" has the meaning assigned to that term in Section 17(a) of this Agreement. "SECURED OBLIGATIONS" has the meaning assigned to that term in Section 3 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. SECTION 2. PLEDGE OF SECURITY. ------------------ Each Pledgor hereby pledges and assigns to Collateral Agent, and hereby grants to Collateral Agent a security interest in, all of such Pledgor's right, title and interest in and to the following (the "PLEDGED COLLATERAL"): (a) the Pledged Shares and the certificates representing the Pledged Shares and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to the Pledged Shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; (b) the Pledged Debt and the instruments evidencing the Pledged Debt, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Debt; (c) all additional shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any issuer of the Pledged Shares from time to time acquired by such Pledgor in any manner (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such additional shares, securities, warrants, options or other rights and any interest of such Pledgor in the entries on the books of any financial intermediary pertaining to such additional shares (all such shares, securities, warrants, options, rights, certificates, instruments and interests collectively being "ADDITIONAL PLEDGED SHARES"), and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or XVIII-5 in exchange for any or all of such Additional Pledged Shares; provided, however, that to the extent that the issuer of any -------- ------- Additional Pledged Shares is a controlled foreign corporation, such Pledgor shall only be required to pledge Additional Pledged Shares of such issuer possessing up to but not exceeding 65% of the voting power of all classes of capital stock entitled to vote of such issuer, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Additional Pledged Shares; (d) all additional indebtedness from time to time owed to such Pledgor by any obligor on the Pledged Debt and the instruments evidencing such indebtedness, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; (e) all shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of such Pledgor (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such shares (all such shares, securities, warrants, options, rights, certificates, instruments and interests collectively being "NEW PLEDGED SHARES"), securities, warrants, options or other rights and any interest of such Pledgor in the entries on the books of any financial intermediary pertaining to such shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares, securities, warrants, options or other rights; provided, however, that in the -------- ------- event that any such direct Subsidiary is a controlled foreign corporation, such Pledgor shall only be required to pledge New Pledged Shares of such Subsidiary possessing up to but not exceeding 65% of the voting power of all classes of capital stock entitled to vote of such Subsidiary, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such New Pledged Shares; (f) all indebtedness from time to time owed to such Pledgor by any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a Subsidiary of such Pledgor, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; and (g) to the extent not covered by clauses (a) through (f) above, all proceeds of any or all of the foregoing Pledged Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Pledged Collateral or proceeds are sold, exchanged, collected or otherwise XVIII-6 disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, proceeds of any indemnity or guaranty payable to such Pledgor or Collateral Agent from time to time with respect to any of the Pledged Collateral. SECTION 3. SECURITY FOR OBLIGATIONS. ------------------------ This Agreement secures, and the Pledged Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all obligations and liabilities of every nature of Pledgors now or hereafter existing under or arising out of or in connection with the Guaranty and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Company, would accrue on such obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Collateral Agent or any Secured Party or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise, and all obligations of every nature of Pledgors now or hereafter existing under this Agreement (all such obligations of Pledgors being the "SECURED OBLIGATIONS"). SECTION 4. DELIVERY OF PLEDGED COLLATERAL. ------------------------------ All certificates or instruments representing or evidencing the Pledged Collateral shall be delivered to and held by or on behalf of Collateral Agent pursuant hereto and shall be in suitable form for transfer by delivery or, as applicable, shall be accompanied by the applicable Pledgor's endorsement, where necessary, or duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to Collateral Agent. Upon the occurrence and during the continuation of an Event of Default, Collateral Agent shall have the right, without notice to any Pledgor, to transfer to or to register in the name of Collateral Agent or any of its nominees any or all of the Pledged Collateral, subject only to the revocable rights specified in Section 8(a). In addition, upon the occurrence and during the continuance of an Event of Default, Collateral Agent shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Collateral for certificates or instruments of smaller or larger denominations. SECTION 5. REPRESENTATIONS AND WARRANTIES. ------------------------------ Each Pledgor represents and warrants as follows: XVIII-7 (a) Due Authorization, etc. of Pledged Collateral. All of the --------------------------------------------- Pledged Shares have been duly authorized and validly issued and are fully paid and non-assessable. All of the Pledged Debt has been duly authorized, authenticated or issued, and delivered and is the legal, valid and binding obligation of the issuers thereof and is not in default. (b) Description of Pledged Collateral. The Pledged Shares --------------------------------- constitute the percentage of the issued and outstanding shares of stock of each issuer thereof set forth on Schedule I annexed hereto, ---------- and there are no outstanding warrants, options or other rights to purchase, or other agreements outstanding with respect to, or property that is now or hereafter convertible into, or that requires the issuance or sale of, any Pledged Shares. The Pledged Debt constitutes all of the issued and outstanding intercompany indebtedness evidenced by a promissory note of the respective issuers thereof owing to Pledgor. (c) Ownership of Pledged Collateral. Pledgors are the legal, ------------------------------- record and beneficial owners of the Pledged Collateral free and clear of any Lien except for the security interest created by this Agreement. SECTION 6. TRANSFERS AND OTHER LIENS; ADDITIONAL PLEDGED COLLATERAL; ETC. -------------------------------------------------------------- Each Pledgor shall: (a) not, except as expressly permitted by the Financing Agreements, (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral, (ii) create or suffer to exist any Lien upon or with respect to any of the Pledged Collateral, except for the security interest under this Agreement, or (iii) permit any issuer of Pledged Shares to merge or consolidate unless all the outstanding capital stock of the surviving or resulting corporation is, upon such merger or consolidation, pledged hereunder and no cash, securities or other property is distributed in respect of the outstanding shares of any other constituent corporation; provided that if the surviving or resulting corporation upon any such merger or consolidation involving an issuer of Pledged Shares which is a controlled foreign corporation is a controlled foreign corporation, then such Pledgor shall only be required to pledge outstanding capital stock of such surviving or resulting corporation possessing up to but not exceeding 65% of the voting power of all classes of capital stock of such issuer entitled to vote; provided that in the event a Pledgor makes an Asset Sale -------- permitted by the Financing Agreements and the assets subject to such Asset Sale are Pledged Shares, Collateral Agent shall release the Pledged Shares that are the subject of such Asset Sale to Pledgor free and clear of the lien and security interest under this Agreement concurrently with the consummation of such Asset Sale; provided, -------- further that, as a condition precedent to such release, Collateral ------- Agent shall have received evidence reasonably satisfactory to it that arrangements reasonably satisfactory to it have been made for delivery to Collateral Agent of the Net Asset Sale Proceeds of XVIII-8 such Asset Sale in the event and to the extent that all or any portion of such Net Asset Sale Proceeds are required to be applied to prepay the Loans under the Financing Agreements; (b) (i) cause each issuer of Pledged Shares not to issue any stock or other securities in addition to or in substitution for the Pledged Shares issued by such issuer, except to a Pledgor, (ii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities of each issuer of Pledged Shares, and (iii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all shares of stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of such Pledgor; provided, that notwithstanding -------- anything contained in this clause (b) to the contrary, such Pledgor shall only be required to pledge the outstanding capital stock of a foreign controlled corporation possessing up to but not exceeding 65% of the voting power of all classes of capital stock of such controlled foreign corporation entitled to vote; (c) (i) pledge hereunder, immediately upon their issuance, any and all instruments or other evidences of additional indebtedness from time to time owed to such Pledgor by any obligor on the Pledged Debt, and (ii) pledge hereunder, immediately upon their issuance, any and all instruments or other evidences of indebtedness from time to time owed to such Pledgor by any Person that after the date of this Agreement becomes, as a result of any occurrence, a Subsidiary of such Pledgor; and (d) pay promptly when due all taxes, assessments and governmental charges or levies imposed upon, and all claims against, the Pledged Collateral, except to the extent the validity thereof is being contested in good faith. SECTION 7. FURTHER ASSURANCES; PLEDGE AMENDMENTS; ADDITIONAL PLEDGORS. ---------------------------------------------------------- (a) Each Pledgor agrees that from time to time, at the expense of Pledgors, such Pledgor will promptly execute and deliver all further instruments and documents, and take all further action that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Without limiting the generality of the foregoing, each Pledgor will: (i) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices as Collateral Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby and (ii) at Collateral Agent's reasonable request, appear in and defend any action or proceeding that may affect such Pledgor's title to or Collateral Agent's security interest in all or any part of the Pledged Collateral. (b) Each Pledgor further agrees that it will, upon obtaining any additional shares of stock or other securities required to be pledged hereunder as provided in Section 6(b) XVIII-9 or (c), promptly (and in any event within five Business Days) deliver to Collateral Agent a Pledge Amendment, duly executed by such Pledgor, in substantially the form of Schedule II annexed hereto (a "PLEDGE AMENDMENT"), in ----------- respect of the additional Pledged Shares or Pledged Debt to be pledged pursuant to this Agreement. Each Pledgor hereby authorizes Collateral Agent to attach each Pledge Amendment to this Agreement and agrees that all Pledged Shares or Pledged Debt listed on any Pledge Amendment delivered to Collateral Agent shall for all purposes hereunder be considered Pledged Collateral; provided that the -------- failure of any Pledgor to execute a Pledge Amendment with respect to any additional Pledged Shares or Pledged Debt pledged pursuant to this Agreement shall not impair the security interest of Collateral Agent therein or otherwise adversely affect the rights and remedies of Collateral Agent hereunder with respect thereto. (c) The initial Pledgors hereunder shall be those Subsidiaries of Company as are signatories hereto on the date hereof. From time to time subsequent to the date hereof, additional Subsidiaries of Company may become parties hereto, as additional Pledgors (each an "ADDITIONAL PLEDGOR"), by executing a counterpart of this Agreement substantially in the form of Schedule -------- III annexed hereto. Upon delivery of any such counterpart to the Collateral - --- Agent, notice of which is hereby waived by the Pledgors, each Additional Pledgor shall be a Pledgor and shall be as fully a party hereto as if such Additional Pledgor were an original signatory hereof. Each Pledgor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Pledgor hereunder, nor by any election of Collateral Agent not to cause any Subsidiary to become an Additional Pledgor hereunder. This Agreement shall be fully effective as to any Pledgor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Pledgor hereunder. Each Additional Pledgor shall execute and file such financing statements and such other instruments or notices as may be necessary or desirable, or as Collateral Agent may reasonably request, in order to perfect the security interests granted or purported to be granted hereunder. SECTION 8. VOTING RIGHTS; DIVIDENDS; ETC. ------------------------------ (a) So long as no Event of Default shall have occurred and be continuing: (i) Each Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Financing Agreements; (ii) Each Pledgor shall be entitled to receive and retain, and to utilize free and clear of the lien of this Agreement, any and all dividends and interest paid in respect of the Pledged Collateral; provided, however, that any and all dividends and interest paid or -------- ------- payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral, shall be, and shall forthwith be delivered to Collateral Agent to hold as, Pledged Collateral and shall, if received by such Pledgor, be received in trust for the benefit of XVIII-10 Collateral Agent, be segregated from the other property or funds of such Pledgor and be forthwith delivered to Collateral Agent as Pledged Collateral in the same form as so received (with all necessary endorsements); provided, that such Pledgor shall not be -------- required to deliver the outstanding capital stock of a foreign controlled corporation paid as a dividend or interest to such Pledgor, if Collateral Agent would hold as Pledged Collateral outstanding capital stock of such controlled foreign corporation possessing greater than 65% of the voting power of all classes of capital stock of such controlled foreign corporation entitled to vote; and (iii) Collateral Agent shall promptly execute and deliver (or cause to be executed and delivered) to each Pledgor all such proxies, dividend payment orders and other instruments as such Pledgor may from time to time reasonably request for the purpose of enabling such Pledgor to exercise the voting and other consensual rights which it is entitled to exercise pursuant to paragraph (i) above and to receive the dividends, principal or interest payments which it is authorized to receive and retain pursuant to paragraph (ii) above. (b) Upon the occurrence and during the continuation of an Event of Default: (i) upon written notice from Collateral Agent to a Pledgor, all rights of such Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 8(a)(i) shall cease, and all such rights shall thereupon become vested in Collateral Agent who shall thereupon have the sole right to exercise such voting and other consensual rights; (ii) all rights of such Pledgor to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 8(a)(ii) shall cease, and all such rights shall thereupon become vested in Collateral Agent who shall thereupon have the sole right to receive and hold as Pledged Collateral such dividends and interest payments; and (iii) all dividends, principal and interest payments which are received by such Pledgor contrary to the provisions of paragraph (ii) of this Section 8(b) shall be (A) forthwith (and in any event within two Business Days) deposited by the Grantor in the exact form received, duly indorsed by the Pledgor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of the Secured Parties only as provided in Section 15, (B) until turned over in accordance with the preceding subsection (A), all such amounts and proceeds received by Pledgor shall be received in trust for the benefit of Collateral Agent hereunder and shall be segregated from other funds of Pledgor. (c) In order to permit Collateral Agent to exercise the voting and other consensual rights which it may be entitled to exercise pursuant to Section 8(b)(i) and to receive XVIII-11 all dividends and other distributions which it may be entitled to receive under Section 8(a)(ii) or Section 8(b)(ii), (i) each Pledgor shall promptly execute and deliver (or cause to be executed and delivered) to Collateral Agent all such proxies, dividend payment orders and other instruments as Collateral Agent may from time to time reasonably request and (ii) without limiting the effect of the immediately preceding clause (i), each Pledgor hereby grants to Collateral Agent an irrevocable proxy to vote the Pledged Shares and to exercise all other rights, powers, privileges and remedies to which a holder of the Pledged Shares would be entitled (including, without limitation, giving or withholding written consents of shareholders, calling special meetings of shareholders and voting at such meetings), which proxy shall be effective, automatically and without the necessity of any action (including any transfer of any Pledged Shares on the record books of the issuer thereof) by any other Person (including the issuer of the Pledged Shares or any officer or agent thereof), upon the occurrence and during the continuance of an Event of Default and which proxy shall only terminate upon the payment in full of the Secured Obligations. SECTION 9. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. ------------------------------------------- Each Pledgor hereby irrevocably appoints Collateral Agent as such Pledgor's attorney-in-fact, with full authority in the place and stead of such Pledgor and in the name of such Pledgor, Collateral Agent or otherwise, from time to time, upon the occurrence and during the continuance of an Event of Default, in Collateral Agent's reasonable discretion to take any action and to execute any instrument that Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) to file one or more financing or continuation statements, or amendments thereto, relative to all or any part of the Pledged Collateral without the signature of such Pledgor; (b) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Pledged Collateral; (c) to receive, endorse and collect any instruments made payable to such Pledgor representing any dividend, principal or interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same; and (d) to file any claims or take any action or institute any proceedings that Collateral Agent may reasonably deem necessary or desirable for the collection of any of the Pledged Collateral or otherwise to enforce the rights of Collateral Agent with respect to any of the Pledged Collateral. SECTION 10. COLLATERAL AGENT MAY PERFORM. ---------------------------- If any Pledgor fails to perform any agreement contained herein, Collateral Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of XVIII-12 Collateral Agent incurred in connection therewith shall be payable by Pledgors under Section 16(b). SECTION 11. STANDARD OF CARE. ---------------- The powers conferred on Collateral Agent hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Pledged Collateral in its possession and the accounting for moneys actually received by it hereunder, Collateral Agent shall have no duty as to any Pledged Collateral, it being understood that Collateral Agent shall have no responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Pledged Collateral, whether or not Collateral Agent has or is deemed to have knowledge of such matters, (b) taking any necessary steps (other than steps taken in accordance with the standard of care set forth above to maintain possession of the Pledged Collateral) to preserve rights against any parties with respect to any Pledged Collateral, (c) taking any necessary steps to collect or realize upon the Secured Obligations or any guarantee therefor, or any part thereof, or any of the Pledged Collateral, or (d) initiating any action to protect the Pledged Collateral against the possibility of a decline in market value. Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equal to that which Collateral Agent accords its own property consisting of negotiable securities. XVIII-13 SECTION 12. REMEDIES. -------- (a) If any Event of Default shall have occurred and be continuing, Collateral Agent may exercise in respect of the Pledged Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Pledged Collateral), and Collateral Agent may also in its sole discretion, without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange or broker's board or at any of Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Collateral Agent may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Pledged Collateral. Collateral Agent or any Secured Party or Interest Rate Exchanger may be the purchaser of any or all of the Pledged Collateral at any such sale and Collateral Agent, as administrative agent for and representative of Secured Parties and Interest Rate Exchangers (but not any Secured Party or Secured Parties or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Obligees shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Pledged Collateral payable by Collateral Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of any Pledgor, and each Pledgor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Each Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to such Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Collateral Agent shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Each Pledgor hereby waives any claims against Collateral Agent arising by reason of the fact that the price at which any Pledged Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Collateral Agent accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Pledged Collateral are insufficient to pay all the Secured Obligations, Pledgors shall be jointly and severally liable for the deficiency and the reasonable fees of any attorneys employed by Collateral Agent to collect such deficiency. (b) Each Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws, Collateral Agent may be compelled, with respect to any sale of all or any part of the Pledged Collateral conducted without prior registration or qualification of such Pledged Collateral under the Securities Act and/or such state securities laws, to limit purchasers to those who will agree, among other things, to acquire XVIII-14 the Pledged Collateral for their own account, for investment and not with a view to the distribution or resale thereof. Each Pledgor acknowledges that any such private sales may be at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including, without limitation, a public offering made pursuant to a registration statement under the Securities Act) and, notwithstanding such circumstances, Pledgor agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that Collateral Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Pledged Collateral for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would, or should, agree to so register it. (c) If Collateral Agent determines to exercise its right to sell any or all of the Pledged Collateral, upon written request, such Pledgor shall and shall cause each issuer of any Pledged Shares to be sold hereunder from time to time to furnish to Collateral Agent all such information as Collateral Agent may reasonably request in order to determine the number of shares and other instruments included in the Pledged Collateral which may be sold by Collateral Agent in exempt transactions under the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder, as the same are from time to time in effect. SECTION 13. PROCEEDS TO BE TURNED OVER TO COLLATERAL AGENT. ---------------------------------------------- In addition to the rights of the Collateral Agent and the Secured Parties specified in Section 8, if an Event of Default shall occur and be continuing, upon request of the Collateral Agent, all proceeds received by the Grantor consisting of cash, checks and other near-cash items shall be held by the Grantor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of the Grantor, and shall, forthwith upon receipt by the Grantor, be turned over to the Collateral Agent in the exact form received by the Grantor (duly indorsed by the Grantor to the Collateral Agent, if required) and held by the Collateral Agent in a Collateral Account maintained under the Intercreditor Agreement. All proceeds while held by the Collateral Agent in a Collateral Account (or by the Grantor in trust for the Collateral Agent and the Secured Parties) shall continue to be held as collateral security for all the Secured Obligations and shall not constitute payment thereof until applied as provided in Section 15. SECTION 14. APPLICATION OF PROCEEDS. ----------------------- All proceeds held in any Collateral Account and all other proceeds received by Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral shall be applied as provided in subsection 3 of the Intercreditor Agreement. SECTION 15. INDEMNITY AND EXPENSES. ---------------------- (a) Pledgors jointly and severally agree to indemnify Collateral Agent, each Lender and each Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the XVIII-15 transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Collateral Agent's or such Secured Party's or Interest Rate Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Pledgors jointly and severally agree to pay to Collateral Agent promptly following written demand the amount of any and all reasonable costs and reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Pledged Collateral, (iii) the exercise or enforcement of any of the rights of Collateral Agent hereunder, or (iv) the failure by any Pledgor to perform or observe any of the provisions hereof. SECTION 16. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. ----------------------------------------------- This Agreement shall create a continuing security interest in the Pledged Collateral and shall (a) remain in full force and effect until the payment in full of all Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon each Pledgor, its successors and assigns, and (c) inure, together with the rights and remedies of Collateral Agent hereunder, to the benefit of Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement and subsection 10.1 of the AXEL Credit Agreement, any Secured Party may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Pledged Collateral shall revert to the applicable Pledgors. Upon any such termination Collateral Agent will, at the joint and several expense of Pledgors, execute and deliver to Pledgors such documents as Pledgors shall reasonably request to evidence such termination in accordance with the terms of the Intercreditor Agreement and Pledgors shall be entitled to the return, upon its request and at its expense, against receipt and without recourse to Collateral Agent, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 17. COLLATERAL AGENT AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Collateral Agent has been appointed to act as Collateral Agent hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and AXEL Administrative Agent on behalf of the AXEL Lenders pursuant to the Intercreditor Agreement and, by their acceptance of the benefits hereof, Interest Rate Exchangers and shall be entitled to XVIII-16 the benefits of the Intercreditor Agreement. Collateral Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Pledged Collateral), solely in accordance with this Agreement and the Intercreditor Agreement; provided that Collateral Agent shall exercise, or -------- refrain from exercising, any remedies provided for in Section 12 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 18(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Pledged Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Collateral Agent for the benefit of Lenders and Interest Rate Exchangers in accordance with the terms of this Section 18(a). (b) Collateral Agent shall at all times be the same Person that is appointed Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent under this Agreement, and the retiring or removed Collateral Agent under this Agreement shall promptly (i) transfer to such successor Collateral Agent all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Collateral Agent under this Agreement, and (ii) execute and deliver to such successor Collateral Agent such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Collateral Agent of the security interests created hereunder, whereupon such retiring or removed Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Collateral Agent hereunder. SECTION 18. AMENDMENTS; ETC. --------------- No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by any Pledgor therefrom, shall in any event be effective unless the same shall be in writing and signed by Collateral Agent and, in the case of any such amendment or modification, by Pledgors; provided that any Pledge Amendment in the form of Schedule II annexed -------- ----------- hereto or any amendment hereto pursuant to Section 6(c) shall be XVIII-17 effective upon execution by any Pledgor and Pledgors hereby waive any requirement of notice or of consent to any such Pledge Amendment or amendment. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 19. NOTICES. ------- Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex (with received answerback), or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices to Collateral Agent and Pledgors shall not be -------- effective until received. For the purposes hereof, the address of each party hereto shall be as provided in subsection 10.8 of the Credit Agreement and subsection 10.8 AXEL Credit Agreement, as applicable, or as set forth under such party's name on the signature pages hereof or such other address as shall be designated by such party in a written notice delivered to the other parties hereto. SECTION 20. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. ----------------------------------------------------- No failure or delay on the part of Collateral Agent in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 21. SEVERABILITY. ------------ In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 22. HEADINGS. -------- Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 23. GOVERNING LAW; TERMS. THIS AGREEMENT AND THE RIGHTS AND -------------------- OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT XVIII-18 LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Financing Agreements, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 24. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ---------------------------------------------- ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY PLEDGOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH PLEDGOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO SUCH PLEDGOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 20; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER SUCH PLEDGOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT COLLATERAL AGENT RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST SUCH PLEDGOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION 25 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5- 1402 OR OTHERWISE. XVIII-19 SECTION 25. WAIVER OF JURY TRIAL. -------------------- EACH PLEDGOR AND COLLATERAL AGENT HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all- encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Pledgors and Collateral Agent each acknowledge that this waiver is a material inducement for Pledgors and Collateral Agent to enter into a business relationship, that each Pledgor and Collateral Agent have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Each Pledgor and Collateral Agent further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 26 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 26. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] XVIII-20 IN WITNESS WHEREOF, Pledgors and Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. SEALY, INC. THE STEARNS & FOSTER BEDDING COMPANY THE STEARNS & FOSTER UPHOLSTERY FURNITURE COMPANY ADVANCED SLEEP PRODUCTS SEALY MATTRESS COMPANY OF SAN DIEGO SEALY MATTRESS COMPANY OF PUERTO RICO OHIO-SEALY MATTRESS MANUFACTURING CO. INC. OHIO-SEALY MATTRESS MANUFACTURING CO. -- FORT WORTH OHIO-SEALY MATTRESS MANUFACTURING CO. OHIO-SEALY MATTRESS MANUFACTURING CO. -- HOUSTON [OTHER PLEDGORS] By: __________________ Name: Title: Notice Address: _____________________ _____________________ _____________________ XVIII-21 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: __________________ Name: Title: Notice Address: _____________________ _____________________ _____________________ XVIII-22 SCHEDULE I Attached to and forming a part of the Subsidiary Pledge Agreement dated as of December 18, 1997 between the subsidiaries of Sealy Mattress Company party thereto from time to time, as Pledgors, and Morgan Guaranty Trust Company of New York, as Collateral Agent. PART A
==================================================================================== PERCENTAGE OF STOCK NUMBER OF OUTSTANDING CLASS OF CERTIFI- PAR SHARES SHARES PLEDGOR STOCK ISSUER STOCK CATE VALUE PLEDGED NOS. =================================================================================== ___________________________________________________________________________________ ___________________________________________________________________________________ ___________________________________________________________________________________ ===================================================================================
PART B ============================================================== AMOUNT OF PLEDGOR DEBT ISSUER INDEBTEDNESS ============================================================== ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ============================================================== XVIII-23 SCHEDULE II PLEDGE AMENDMENT This Pledge Amendment, dated ____________, [199_][200_], is delivered pursuant to Section 6(b) of the Pledge Agreement referred to below. The undersigned hereby agrees that this Pledge Amendment may be attached to the Subsidiary Pledge Agreement dated as of December 18, 1997, between the undersigned, the other Pledgors party thereto from time to time, and Morgan Guaranty Trust Company of New York, as Collateral Agent (the "PLEDGE AGREEMENT," capitalized terms defined therein being used herein as therein defined), and that the [Pledged Shares] [Pledged Debt] listed on this Pledge Amendment shall be deemed to be part of the [Pledged Shares] [Pledged Debt] and shall become part of the Pledged Collateral and shall secure all Secured Obligations. [NAME OF PLEDGOR] By: ____________________ Name: Title:
=============================================================================== PERCENTAGE OF STOCK NUM- OUTSTANDING CLASS OF CERTIFICATE PAR BER OF SHARES PLEDGED STOCK ISSUER STOCK NOS. VALUE SHARES =============================================================================== _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ ===============================================================================
==================================================================== AMOUNT OF DEBT ISSUER INDEBTEDNESS ==================================================================== ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ==================================================================== XVIII-24 SCHEDULE III [FORM OF COUNTERPART TO SUBSIDIARY PLEDGE AGREEMENT] This counterpart, dated ___________, [199_][200_] is delivered pursuant to Section 6(c) of that certain Subsidiary Pledge Agreement dated as of December 18, 1997, among the Pledgors party thereto from time to time, and Morgan Guaranty Trust Company of New York, as Collateral Agent (the "PLEDGE AGREEMENT," capitalized terms defined therein being used herein as therein defined). The undersigned hereby agrees (i) that this counterpart may be attached to the Pledge Agreement, (ii) that the undersigned will comply with all the terms and conditions of the Pledge Agreement as if it were an original signatory thereto, and (iii) that the [Pledged Shares] [Pledged Debt] listed below shall be deemed to be part of the [Pledged Shares] [Pledged Debt] and shall become part of the Pledged Collateral and shall secure all Secured Obligations. [NAME OF ADDITIONAL PLEDGOR] By: ___________________ Name: Title:
================================================================================ PERCENTAGE OF STOCK NUM- OUTSTANDING CLASS OF CERTIFICATE PAR BER OF SHARES STOCK ISSUER STOCK NOS. VALUE SHARES PLEDGED ================================================================================ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ================================================================================
=================================================================== AMOUNT OF DEBT ISSUER INDEBTEDNESS =================================================================== ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ==================================================================== XVIII-25 EXHIBIT XIX [FORM OF SUBSIDIARY SECURITY AGREEMENT] SUBSIDIARY SECURITY AGREEMENT This SUBSIDIARY SECURITY AGREEMENT (this "AGREEMENT") is dated as of December 18, 1997 and entered into by and among THE UNDERSIGNED DIRECT AND INDIRECT SUBSIDIARIES (each of such undersigned Subsidiaries being a "GRANTOR" and collectively "GRANTORS"; provided that after the Closing Date, "Grantors" -------- shall be deemed to include any Additional Grantors (as hereinafter defined)) of Sealy Mattress Company, an Ohio corporation ("COMPANY"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as Collateral Agent for and representative of (in such capacity herein called "COLLATERAL AGENT") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined). RECITALS A. Company, Sealy Corporation, a Delaware Corporation ("HOLDINGS"), the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO."), as documentation agent (in such capacity, "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the ("CREDIT AGREEMENT") pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. B. Company, Holdings, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity, "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "AXEL ADMINISTRATIVE AGENT"), and BTCo., as documentation agent (in such capacity, "AXEL DOCUMENTATION AGENT") have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, the CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL Lenders have made certain commitments, subject to the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Company. XIX-1 C. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more CA Lenders or their Affiliates or AXEL Lenders or their Affiliates (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). D. Grantors have executed and delivered that certain Subsidiary Guaranty dated as of December 18, 1997 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "GUARANTY") in favor of Collateral Agent for the benefit of Secured Parties and any Interest Rate Exchangers, pursuant to which Grantors have guarantied the prompt payment and performance when due of all obligations of Company under the Financing Agreements and any other Loan Documents and all obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments, if any, thereunder in the event of early termination thereof. E. It is a condition precedent to the initial extensions of credit by Secured Parties under the Financing Agreements that each Grantor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of, Company, (iii) the AXEL Administrative Agent, the AXEL Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement, (iv) the AXEL Lenders to make their respective loans to Company and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, each Grantor hereby agrees with the Collateral Agent as follows: 1. DEFINED TERMS. ------------- (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. "ACCOUNTS" has the meaning assigned to that term in Section 2 of this Agreement. XIX-2 "AGREEMENT" means this Company Security Agreement dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. "ASSIGNED AGREEMENT" has the meaning assigned to that term in Section 2 of this Agreement. "AXEL COMMITMENTS" shall mean the "Commitments" as defined in the AXEL Credit Agreement. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "AXEL OBLIGATIONS" shall mean the "Obligations" as defined in the AXEL Credit Agreement. "COLLATERAL" has the meaning assigned to that term in Section 2 of this Agreement. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EQUIPMENT" has the meaning assigned to that term in Section 2 of this Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. XIX-3 "FINANCING AGREEMENT" means either the Credit Agreement or the AXEL Credit Agreement, and "Financing Agreements" means the Credit Agreement and the AXEL Credit Agreement, collectively. "FINANCING AGREEMENT OBLIGATIONS" means Credit Agreement Obligations and AXEL Obligations. "GRANTOR" has the meaning assigned to that term in the introduction of this Agreement. "HOLDINGS" has the meaning assigned to that term in the recitals to this Agreement. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. "INVENTORY" has the meaning assigned to that term in Section 2 of this Agreement. "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "NEGOTIABLE DOCUMENT OF TITLE" has the meaning assigned to that term in Section 2 of this Agreement. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "RELATED CONTRACTS" has the meaning assigned to that term in Section 2 of this Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. XIX-4 "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. "REQUISITE OBLIGEES" has the meaning assigned to that term in Section 23 of this Agreement. "SECURED OBLIGATIONS" has the meaning assigned to that term in Section 2 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. SECTION 2. GRANT OF SECURITY. ----------------- Each Grantor hereby assigns to Collateral Agent, and hereby grants to Collateral Agent a security interest in, all of such Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which such Grantor now has or hereafter acquires an interest and wherever the same may be located (the "COLLATERAL"): (a) all equipment in all of its forms, all parts thereof and all accessions thereto (any and all such equipment, parts and accessions being the "EQUIPMENT"); (b) all inventory in all of its forms (including, but not limited to, (i) all goods held by such Grantor for sale or lease or to be furnished under contracts of service or so leased or furnished, (ii) all raw materials, work in process, finished goods, and materials used or consumed in the manufacture, packing, shipping, advertising, selling, leasing, furnishing or production of such inventory or otherwise used or consumed in such Grantor's business, (iii) all goods in which such Grantor has an interest in mass or a joint or other interest or right of any kind, and (iv) all goods which are returned to or repossessed by such Grantor) and all accessions thereto and products thereof (all such inventory, accessions and products being the "INVENTORY") and all negotiable and non-negotiable documents of title (including without limitation warehouse receipts, dock receipts and bills of lading) issued by any Person covering any Inventory (any such negotiable document of title being a "NEGOTIABLE DOCUMENT OF TITLE"); (c) all accounts, contract rights, chattel paper, documents, instruments, general intangibles and other rights and obligations of any kind and all rights in, to and under all security agreements, leases and other contracts securing or otherwise relating to any such accounts, contract rights, chattel paper, documents, instruments, general intangibles or other obligations (any and all such accounts, contract rights, chattel paper, XIX-5 documents, instruments, general intangibles and other obligations (any and all such accounts, contract rights, chattel paper, documents, instruments, general intangibles and other obligations being the "ACCOUNTS", and any and all such security agreements, leases and other contracts being the "RELATED CONTRACTS"); (d) all agreements and contracts to which such Grantor is a party as of the date hereof or becomes a party after the date hereof, as each such agreement may be amended, supplemented or otherwise modified from time to time (said agreements, as so amended, supplemented or otherwise modified, being referred to herein individually as an "ASSIGNED AGREEMENT" and collectively as the "ASSIGNED AGREEMENTS"), including (i) all rights of such Grantor to receive moneys due or to become due under or pursuant to the Assigned Agreements, (ii) all rights of such Grantor to receive proceeds of any insurance, indemnity, warranty or guaranty with respect to the Assigned Agreements, (iii) all claims of such Grantor for damages arising out of any breach of or default under the Assigned Agreements, and (iv) all rights of such Grantor to terminate, amend, supplement, modify or exercise rights or options under the Assigned Agreements, to perform thereunder and to compel performance and otherwise exercise all remedies thereunder; (e) all deposit accounts, including without limitation all deposit accounts maintained with Collateral Agent; (f) all tradesecrets, licenses, copyrights, registrations and franchise rights, and all goodwill associated with any of the foregoing; (g) to the extent not included in any other paragraph of this Section 2, all other general intangibles (including without limitation tax refunds, rights to payment or performance, choses in action and judgments taken on any rights or claims included in the Collateral); (h) all plant fixtures, business fixtures and other fixtures and storage and office facilities, and all accessions thereto and products thereof; (i) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; and (j) all proceeds, products, rents and profits of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Collateral Agent is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received XIX-6 when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. Notwithstanding anything herein to the contrary, in no event shall the Collateral include, and each Grantor shall not be deemed to have granted a security interest in, any of such Grantor's rights or interests in any license, contract or agreement to which such Grantor is a party or any of its rights or interests thereunder to the extent, but only to the extent, that such a grant would, under the terms of such license, contract or agreement or otherwise, result in a breach of the terms of, or constitute a default under any license, contract or agreement to which such Grantor is a party (other than to the extent that any such term would be rendered ineffective pursuant to Section 9-318(4) of the Uniform Commercial Code of any relevant jurisdiction or any other applicable law (including the Bankruptcy Code) or principles of equity); provided, that -------- immediately upon the ineffectiveness, lapse or termination of any such provision, the Collateral shall include, and each Grantor shall be deemed to have granted a security interest in, all such rights and interests as if such provision had never been in effect. SECTION 3. SECURITY FOR OBLIGATIONS. ------------------------ This Agreement secures, and the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all obligations and liabilities of every nature of Grantors now or hereafter existing under or arising out of or in connection with the Guaranty and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Company, would accrue on such obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Collateral Agent or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise and all obligations of every nature of Grantors now or hereafter existing under this Agreement (all such obligations of Grantors being the "SECURED OBLIGATIONS"). SECTION 4. GRANTORS REMAIN LIABLE. ---------------------- Anything contained herein to the contrary notwithstanding, (a) each Grantor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Collateral Agent of any of its rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and XIX-7 agreements included in the Collateral, and (c) Collateral Agent shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Collateral Agent be obligated to perform any of the obligations or duties of any Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 5. REPRESENTATIONS AND WARRANTIES. ------------------------------ Each Grantor represents and warrants as follows: (a) Ownership of Collateral. Except for the security interest ----------------------- created by this Agreement, Grantors own the Collateral free and clear of any Lien subject to liens permitted by the Financing Agreements. (b) Location of Equipment and Inventory. All of the Equipment and ----------------------------------- Inventory is, as of the date hereof, located at the places specified in Schedule 5(b) annexed hereto. ------------- (c) Negotiable Documents of Title. No Negotiable Documents of ----------------------------- Title are outstanding with respect to any of the Inventory (other than in respect of (i) Inventory with an aggregate value not in excess of $1,000,000 or (ii) Inventory which, in the ordinary course of business, is in transit either (A) from a supplier to Grantor, (B) between the locations specified in Schedule 5(b) hereto, or (C) to ------------- customers of Grantor). (d) Office Locations; Other Names. The chief place of business, ----------------------------- the chief executive office and the office where such Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts is, and has been for the four month period preceding the date hereof, located at the offices set forth on Schedule 5(d) annexed hereto. Grantors have not in the past done, and ------------- do not now do, business under any other name (including any trade- name or fictitious business name) except as set forth on Schedule -------- 5(d) annexed hereto. ---- XIX-8 SECTION 6. FURTHER ASSURANCES; ADDITIONAL GRANTORS. --------------------------------------- (a) Each Grantor agrees that from time to time, at the expense of Grantors, such Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, each Grantor will: (i) mark conspicuously each item of chattel paper included in the Accounts, each Related Contract and, at the reasonable request of Collateral Agent, each of its records pertaining to the Collateral, with a legend, in form and substance reasonable satisfactory to Collateral Agent, indicating that such Collateral is subject to the security interest granted hereby, (ii) at the reasonable request of Collateral Agent, deliver and pledge to Collateral Agent hereunder all promissory notes and other instruments (excluding checks) and all original counterparts of chattel paper constituting Collateral, duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Collateral Agent, (iii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, or as Collateral Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iv) after the acquisition by such Grantor of any item of Equipment which is covered by a certificate of title under a statute of any jurisdiction under the law of which indication of a security interest on such certificate is required as a condition of perfection thereof, upon the reasonable request of Collateral Agent, execute and file with the registrar of motor vehicles or other appropriate authority in such jurisdiction an application or other document requesting the notation or other indication of the security interest created hereunder on such certificate of title, (v) upon the reasonable request of Collateral Agent, deliver to Collateral Agent copies of all such applications or other documents filed during such calendar quarter and copies of all such certificates of title issued during such calendar quarter indicating the security interest created hereunder in the items of Equipment covered thereby, and (vi) at Collateral Agent's reasonable request, appear in and defend any action or proceeding that may affect such Grantor's title to or Collateral Agent's security interest in all or any part of the Collateral. (b) Each Grantor hereby authorizes Collateral Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of such Grantor to the extent permitted by applicable law. Each Grantor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by such Grantor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. XIX-9 (c) The initial Grantors hereunder shall be those Subsidiaries of Company as are signatories hereto on the date hereof. From time to time subsequent to the date hereof, additional Subsidiaries of Company may become parties hereto, as additional Grantors (each an "ADDITIONAL GRANTOR"), by executing a counterpart of this Agreement substantially in the form of Schedule -------- 6(d) annexed hereto. Upon delivery of any such counterpart to the Collateral - ---- Agent, notice of which is hereby waived by the Grantors, each Additional Grantor shall be a Grantor and shall be as fully a party hereto as if such Additional Grantor were an original signatory hereof. Each Grantor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Grantor hereunder, nor by any election of Collateral Agent not to cause any Subsidiary to become an Additional Grantor hereunder. This Agreement shall be fully effective as to any Grantor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Grantor hereunder. Each Additional Grantor shall execute and file such financing statements and such other instruments or notices or as Collateral Agent may reasonably request, in order to perfect the security interests granted or purported to be granted hereunder. SECTION 7. CERTAIN COVENANTS OF GRANTORS. ----------------------------- Each Grantor shall: (a) notify Collateral Agent of any change in such Grantor's name, identity or corporate structure within 30 days of such change; (b) give Collateral Agent 30 days' written notice following any change in such Grantor's chief place of business, chief executive office or residence or the office where such Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts; (c) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent the validity thereof is being contested in good faith. SECTION 8. SPECIAL COVENANTS WITH RESPECT TO EQUIPMENT AND INVENTORY. --------------------------------------------------------- Each Grantor shall: (a) keep the Equipment and Inventory at the places therefor specified on Schedule 5(b) annexed hereto or, upon 30 days' written ------------- notice to Collateral Agent following any change in location, at such other places in jurisdictions where all action, or that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder, with respect to such Equipment and Inventory shall have been taken; XIX-10 (b) cause the Equipment to be maintained and preserved working order as when new, ordinary wear and tear and damage by casualty excepted, and in accordance with such Grantor's past practices, and shall forthwith make or cause to be made all repairs, replacements and other improvements in connection therewith that are necessary in the Grantor's reasonable business judgment to such end; (c) keep correct and accurate records of the Inventory, itemizing and describing the kind, type and quantity of Inventory, such Grantor's cost therefor and (where applicable) the current list prices for the Inventory; (d) if any Inventory is in possession or control of any of such Grantor's agents or processors, upon the occurrence of an Event of Default, instruct such agent or processor to hold all such Inventory for the account of Collateral Agent and subject to the instructions of Collateral Agent; and (e) promptly upon the issuance and delivery to such Grantor of any Negotiable Document of Title (other than any one or more Negotiable Documents of Title covering (i) Inventory with an aggregate value not in excess of $1,000,000 or (ii) Inventory which, in the ordinary course of business, is in transit either (A) from a supplier to such Grantor, (B) between the locations specified in Schedule 5(b) hereto, or (C) to customers of such Grantor), deliver ------------- such Negotiable Document of Title to Collateral Agent. SECTION 9. SPECIAL COVENANTS WITH RESPECT TO ACCOUNTS AND RELATED CONTRACTS. ---------------------------------------------------------------- (a) Each Grantor shall keep its chief place of business and chief executive office and the office where it keeps its records concerning the Accounts and Related Contracts, and all originals of all chattel paper that evidence Accounts, at the location therefor specified in Section 5 or, upon 30 days' written notice to Collateral Agent following any change in location, at such other location in a jurisdiction where all action that Collateral Agent may request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder, with respect to such Accounts and Related Contracts shall have been taken. Promptly upon the reasonable request of Collateral Agent, Grantors shall deliver to Collateral Agent complete and correct copies of each Related Contract. (b) Grantors shall, maintain (i) complete records of each Account, including records of all payments received, credits granted and merchandise returned, and (ii) all documentation relating thereto in accordance with prudent business practices. (c) Except as otherwise provided in this subsection (c), each Grantor shall continue to collect, at its own expense, all amounts due or to become due to each Grantor under the Accounts and Related Contracts. In connection with such collections, each Grantor shall XIX-11 take such action as such Grantor or Collateral Agent may deem necessary or advisable to enforce collection of amounts due or to become due under the Accounts; provided, however, that Collateral Agent shall have the right at any -------- ------- time, upon the occurrence and during the continuation of an Event of Default and upon written notice to such Grantor of its intention to do so, to notify the account debtors or obligors under any Accounts of the assignment of such Accounts to Collateral Agent and to direct such account debtors or obligors to make payment of all amounts due or to become due to such Grantor thereunder directly to Collateral Agent, to notify each Person maintaining a lockbox or similar arrangement to which account debtors or obligors under any Accounts have been directed to make payment to remit all amounts representing collections on checks and other payment items from time to time sent to or deposited in such lockbox or other arrangement directly to Collateral Agent and, upon such notification and at the expense of Grantors, to enforce collection of any such Accounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as such Grantors might have done. After receipt by a Grantor of the notice from Collateral Agent referred to in the proviso to the preceding sentence, (i) any payments of Accounts, received by the - ------- Grantor shall be forthwith (and in any event within two Business Days) deposited by the Grantor in the exact form received, duly indorsed by the Grantor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of the Secured Parties only as provided in subsection 19, (ii) until so turned over in accordance with the proceeding subsection (i), all amounts and proceeds (including checks and other instruments) received by Grantor in respect of the Accounts and the Related Contracts shall be received in trust for the benefit of Collateral Agent hereunder and shall be segregated from other funds of Grantor and (iii) Grantor shall not adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon. SECTION 10. DEPOSIT ACCOUNTS. ---------------- Upon the occurrence and during the continuation of an Event of Default, Collateral Agent may exercise dominion and control over, and refuse to permit further withdrawals (whether of money, securities, instruments or other property) from any deposit accounts maintained with Collateral Agent constituting part of the Collateral. SECTION 11. LICENSE OF COPYRIGHTS, ETC. -------------------------- Each Grantor hereby assigns, transfers and conveys to Collateral Agent, effective upon the occurrence of any Event of Default, the nonexclusive right and license to use all copyrights or technical processes owned or used by such Grantor that relate to the Collateral and any other collateral granted by such Grantor as security for the Secured Obligations, together with any goodwill associated therewith, all to the extent necessary to enable Collateral Agent to use, possess and realize on the Collateral and to enable any successor or assign to enjoy the benefits of the Collateral. This right and license shall inure to the benefit of all successors, assigns and transferees of Collateral Agent and its successors, assigns and transferees, whether by voluntary conveyance, operation of law, assignment, transfer, foreclosure, deed in lieu of foreclosure or otherwise. Such right and license is granted free of charge, without requirement that any monetary payment whatsoever be made to any Grantor. XIX-12 SECTION 12. TRANSFERS AND OTHER LIENS. ------------------------- Each Grantor shall not: (a) sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Financing Agreements; or (b) except for the security interest created by this Agreement and Liens permitted by the Financing Agreements, create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person. SECTION 13. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. ------------------------------------------- Each Grantor hereby irrevocably appoints Collateral Agent as such Grantor's attorney-in-fact, with full authority in the place and stead of such Grantor and in the name of such Grantor, Collateral Agent or otherwise, from time to time upon the occurrence and during the continuance of an Event of Default in Collateral Agent's reasonable discretion to take any action and to execute any instrument that Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) to obtain and adjust insurance required to be maintained on the Collateral or paid to Collateral Agent under the Financing Agreements; (b) to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (c) to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clauses (a) and (b) above; (d) to file any claims or take any action or institute any proceedings that Collateral Agent may reasonably deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Collateral Agent with respect to any of the Collateral; (e) to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Credit Agreement) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Collateral Agent in its reasonable discretion, any such payments made by Collateral Agent to become obligations of such Grantor to Collateral Agent, due and payable immediately without demand; XIX-13 (f) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with Accounts and other documents relating to the Collateral; and (g) upon the occurrence and during the continuation of an Event of Default, generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Collateral Agent were the absolute owner thereof for all purposes, and to do, at Collateral Agent's option and Grantors' expense, at any time or from time to time, all acts and things that Collateral Agent reasonably deems necessary to protect, preserve or realize upon the Collateral and Collateral Agent's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as any Grantor might do. SECTION 14. COLLATERAL AGENT MAY PERFORM. ---------------------------- If any Grantor fails to perform any agreement contained herein, Collateral Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of Collateral Agent incurred in connection therewith shall be payable by Grantors under Section 20. SECTION 15. STANDARD OF CARE. ---------------- The powers conferred on Collateral Agent hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Collateral Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Collateral Agent accords its own property. SECTION 16. REMEDIES. -------- If any Event of Default shall have occurred and be continuing, Collateral Agent may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Collateral), and also may (a) require Grantors to, and each Grantor hereby agrees that it will at its expense and upon request of Collateral Agent forthwith, assemble all or part of the Collateral as directed by Collateral Agent and make it available to Collateral Agent at a place to be designated by Collateral Agent that is reasonably convenient to both parties, (b) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (c) prior to the disposition of the Collateral, XIX-14 store, process, repair or recondition the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Collateral Agent deems appropriate, (d) take possession of any or each Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same and any of such Grantor's equipment for the purpose of completing any work in process, taking any actions described in the preceding clause (c) and collecting any Secured Obligation, and (e) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Collateral Agent may deem commercially reasonable. Collateral Agent or any Secured Party or Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Collateral Agent, as agent for and representative of Secured Parties and Interest Rate Exchangers (but not any Secured Party or Secured Parties or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Obligees shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Collateral Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of any Grantor, and each Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Each Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to such Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Collateral Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Each Grantor hereby waives any claims against Collateral Agent arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Collateral Agent accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantors shall be jointly and severally liable for the deficiency and the reasonable fees of any attorneys employed by Collateral Agent to collect such deficiency. SECTION 17. PROCEEDS TO BE TURNED OVER TO COLLATERAL AGENT. ---------------------------------------------- In addition to the rights of the Collateral Agent and the Secured Parties specified in Section 9 with respect to payments of Accounts, if an Event of Default shall occur and be continuing, upon request of the Collateral Agent, all proceeds received by the Grantor consisting of cash, checks and other near- cash items shall be held by the Grantor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of the Grantor, and shall, forthwith upon receipt by the Grantor, be turned over to the Collateral Agent in the exact form received by the Grantor (duly indorsed by the Grantor to the Collateral Agent, if required) and held by the Collateral Agent in a Collateral Account maintained under the Intercreditor XIX-15 Agreement. All proceeds while held by the Collateral Agent in a Collateral Account (or by the Borrower in trust for the Collateral Agent and the Secured Parties) shall continue to be held as collateral security for all the Secured Obligations and shall not constitute payment thereof until applied as provided in Section 19. SECTION 18. APPLICATION OF PROCEEDS. ----------------------- Except as expressly provided elsewhere in this Agreement, all proceeds held in any Collateral Account and all other proceeds received by Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in subsection 3 of the Intercreditor Agreement. SECTION 19. INDEMNITY AND EXPENSES. ---------------------- (a) Grantors jointly and severally agree to indemnify Collateral Agent, each Lender and each Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result from Collateral Agent's or such Lender's or Interest Rate Exchanger's gross negligence or willful misconduct as determined by a court of competent jurisdiction. (b) Grantors jointly and severally agree to pay to Collateral Agent, promptly following written upon demand the amount of any and all reasonable costs and reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Collateral Agent hereunder, or (iv) the failure by Grantor to perform or observe any of the provisions hereof. SECTION 20. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. ----------------------------------------------- This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of the Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon each Grantor, its successors and assigns, and (c) inure, together with the rights and remedies of Collateral Agent hereunder, to the benefit of Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement and subsection 10.1 of the AXEL Credit Agreement, any Secured Party may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Secured Parties herein or otherwise. Upon the payment in full of all Secured Obligations (other than inchoate indemnification obligations with XIX-16 respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the applicable Grantors. Upon any such termination Collateral Agent will, at the joint and several expense of Grantors, expense, execute and deliver to Grantors such documents as Grantors shall reasonably request to evidence such termination in accordance with the terms of the Intercreditor Agreement. SECTION 21. COLLATERAL AGENT AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Collateral Agent has been appointed to act as Collateral Agent hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and AXEL administrative agent on behalf of the AXEL Lenders pursuant to the Intercreditor Agreement and, by their acceptance of the benefits hereof, Interest Rate Exchangers, and shall be entitled to the benefits of the Intercreditor Agreement. Collateral Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Collateral), solely in accordance with this Agreement and the Credit Agreement; provided that -------- Collateral Agent shall exercise, or refrain from exercising, any remedies provided for in Section 17 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 22(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Collateral Agent for the benefit of Lenders and Interest Rate Exchangers in accordance with the terms of this Section 22(a). (b) Collateral Agent shall at all times be the same Person that is appointed Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent under this Agreement, and the retiring or removed Collateral Agent under this Agreement shall promptly (i) transfer to such successor Collateral Agent all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Collateral Agent under this Agreement, and (ii) execute and deliver to such successor Collateral Agent such amendments to financing statements, and take such other actions, as may be necessary or XIX-17 appropriate in connection with the assignment to such successor Collateral Agent of the security interests created hereunder, whereupon such retiring or removed Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Collateral Agent hereunder. SECTION 23. AMENDMENTS; ETC. --------------- No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by any Grantor therefrom, shall in any event be effective unless the same shall be in writing and signed by Collateral Agent and, in the case of any such amendment or modification, by Grantors; provided that any amendment hereto pursuant to Section 5(d) shall be -------- effective upon execution by any Grantor and Grantors hereby waive any requirement of notice or of consent to any such amendment. SECTION 23. NOTICES. ------- Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex (with received answerback), or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices to Collateral Agent and Grantor shall not be -------- effective until received. For the purposes hereof, the address of each party hereto shall be as provided in subsection 10.8 of the Credit Agreement or subsection 10.8 of the AXEL Credit Agreement, as applicable, or as set forth under such party's name on the signature pages hereof or such other address as shall be designated by such party in a written notice delivered to the other parties hereto. SECTION 24. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. ----------------------------------------------------- No failure or delay on the part of Collateral Agent in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 25. SEVERABILITY. ------------ In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. XIX-18 SECTION 26. HEADINGS. -------- Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 27. GOVERNING LAW; TERMS. -------------------- THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 28. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ---------------------------------------------- ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY GRANTOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH GRANTOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO SUCH GRANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 24; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER SUCH GRANTOR IN ANY SUCH PROCEEDING IN ANY SUCH XIX-19 COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT COLLATERAL AGENT RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST SUCH GRANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION 29 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5- 1402 OR OTHERWISE. SECTION 29. WAIVER OF JURY TRIAL. -------------------- EACH GRANTOR AND COLLATERAL AGENT HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all- encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Grantors and Collateral Agent each acknowledge that this waiver is a material inducement for Grantors and Collateral Agent to enter into a business relationship, that each Grantor and Collateral Agent have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Each Grantor and Collateral Agent further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 28 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 30. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] XIX-20 IN WITNESS WHEREOF, Grantors and Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. SEALY, INC. THE STEARNS & FOSTER BEDDING COMPANY THE STEARNS & FOSTER UPHOLSTERY FURNITURE COMPANY ADVANCED SLEEP PRODUCTS SEALY MATTRESS COMPANY OF SAN DIEGO SEALY MATTRESS COMPANY OF PUERTO RICO OHIO-SEALY MATTRESS MANUFACTURING CO. INC. OHIO-SEALY MATTRESS MANUFACTURING CO. -- FORT WORTH OHIO-SEALY MATTRESS MANUFACTURING CO. OHIO-SEALY MATTRESS MANUFACTURING CO. -- HOUSTON [OTHER GRANTORS] By: ____________________ Name: Title: Notice Address: _____________________ _____________________ _____________________ XIX-21 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, AS COLLATERAL AGENT By: ___________________ Name: Title: Notice Address: ______________________ ______________________ ______________________ XIX-22 SCHEDULE 5(b) TO SUBSIDIARY SECURITY AGREEMENT Locations of Equipment: Locations of Inventory: XIX-23 SCHEDULE 5(d) TO SUBSIDIARY SECURITY AGREEMENT Office Locations; Other Names XIX-24 SCHEDULE 6(d) TO SUBSIDIARY SECURITY AGREEMENT [FORM OF COUNTERPART TO SUBSIDIARY SECURITY AGREEMENT] This counterpart, dated ___________, [199_][200_] is delivered pursuant to Section 5(d) of that certain Subsidiary Security Agreement dated as of December 18, 1997, among the Grantors party thereto from time to time, and Morgan Guaranty Trust Company of New York, as Collateral Agent (the "SECURITY AGREEMENT," capitalized terms defined therein being used herein as therein defined). The undersigned hereby agrees (i) that this counterpart may be attached to the Security Agreement, and (ii) that the undersigned will comply with all the terms and conditions of the Pledge Agreement as if it were an original signatory thereto. [NAME OF ADDITIONAL GRANTOR] By: _____________________ Name: Title: XIX-25 EXHIBIT XX [FORM OF SUBSIDIARY PATENT AND TRADEMARK SECURITY AGREEMENT] SUBSIDIARY PATENT AND TRADEMARK SECURITY AGREEMENT This SUBSIDIARY PATENT AND TRADEMARK SECURITY AGREEMENT (this "AGREEMENT") is dated as of December 18, 1997 and entered into by and among THE UNDERSIGNED DIRECT AND INDIRECT SUBSIDIARIES (each of such undersigned Subsidiaries being a "GRANTOR" and collectively "GRANTORS"; provided that -------- after the Closing Date, "Grantors" shall be deemed to include any Additional Grantors (as hereinafter defined)) of Sealy Mattress Company, an Ohio corporation ("COMPANY"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as Collateral Agent for and representative of (in such capacity herein called "COLLATERAL AGENT") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined). RECITALS A. Sealy Corporation, a Delaware Corporation ("HOLDINGS"), the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO."), as documentation agent (in such capacity, "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT"), with Company pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. B. Company, Holdings, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity, "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "AXEL ADMINISTRATIVE AGENT"), and BTCo., as documentation agent (in such capacity, "AXEL DOCUMENTATION AGENT") have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, the CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL Lenders have made certain commitments, subject to the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Company. XX-1 C. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more CA Lenders or their Affiliates or AXEL Lenders or their Affiliates (in such capacity, collectively, "INTEREST RATE EXCHANGERS") in accordance with the terms of the Financing Agreements (as hereinafter defined), and it is desired that the obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments thereunder in the event of early termination thereof (all such obligations being the "INTEREST RATE OBLIGATIONS"), together with all obligations of Company under the Financing Agreements and the any other Loan Documents, be secured hereunder. D. Grantors have executed and delivered that certain Subsidiary Guaranty dated as of December 18, 1997 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "SUBSIDIARY GUARANTY") in favor of Collateral Agent for the benefit of Secured Parties and any Interest Rate Exchangers, pursuant to which Grantors have guarantied the prompt payment and performance when due of all obligations of Company under the Financing Agreements and any other Loan Documents and all obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments thereunder in the event of early termination thereof. E. Additional Grantors shall execute and deliver counterparts to the Subsidiary Guaranty in favor of Collateral Agent for the benefit of Secured Parties and any Interest Rate Exchangers, pursuant to which each Additional Grantor shall guaranty the prompt payment and performance when due of all obligations of Company under the Financing Agreements and any other Loan Documents and all obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments thereunder in the event of early termination thereof. F. Grantors have and may in the future have rights, title and interests in and to various Patents and other related Collateral (as such terms are hereinafter defined). G. Grantors own and use in their business, and will in the future adopt and so use, various intangible assets, including trademarks, service marks, designs, logos, indicia, tradenames, corporate names, company names, business names, fictitious business names, trade styles and/or other source and/or business identifiers and applications pertaining thereto (collectively, the "TRADEMARKS"). H. Collateral Agent desires Grantors to grant to it a lien on and security interest in all of Grantors' existing and future Patents, existing and future Trademarks, all registrations that have been or may hereafter be issued or applied for thereon in the United States and any state thereof (the "REGISTRATIONS"), all common law and other rights in and to the Trademarks in the United States and any state thereof (the "TRADEMARK RIGHTS"), all goodwill of Grantors' business symbolized by the Trademarks and associated therewith, including without limitation the documents and things described in Section 2(b) (the "ASSO- XX-2 CIATED GOODWILL") and any other Collateral, and all proceeds of the Patents, Trademarks, the Registrations, the Trademark Rights, the Associated Goodwill and any other Collateral, and Grantors agree to grant to Collateral Agent a secured and protected interest in the Trademarks, the Registrations, the Trademark Rights, the Associated Goodwill and all the proceeds thereof as provided herein. I. Pursuant to the Subsidiary Security Agreement, each Grantor has granted to Collateral Agent a lien on and security interest in, among other assets, all Grantors' equipment, inventory, accounts and general intangibles relating to the products and services sold or delivered under or in connection with the Trademarks such that, upon the occurrence and during the continuation of an Event of Default (as hereinafter defined) Collateral Agent would be able to exercise its remedies consistent with the Security Agreement, this Agreement and applicable law to foreclose upon Grantors' business and use the Trademarks, the Registrations and the Trademark Rights in conjunction with the continued operation of such business, maintaining substantially the same product and service specifications and quality as maintained by Grantors, and benefit from the Associated Goodwill. J. It is a condition precedent to the initial extensions of credit by Lenders under the Financing Agreements that Grantors shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of, Company, (iii) the AXEL Administrative Agent, the AXEL Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement, (iv) the AXEL Lenders to make their respective loans to Company, and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, each Grantor hereby agrees with the Collateral Agent as follows: I. DEFINED TERMS. ------------- (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. "AGREEMENT" means this Company Security Agreement dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. XX-3 "ASSOCIATED GOODWILL" has the meaning assigned to that term in the recitals to this Agreement. "AXEL COMMITMENTS" shall mean the "Commitments" as defined in the AXEL Credit Agreement. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "AXEL LENDERS" has the meaning assigned to that term in the recitals to this Agreement. "AXEL OBLIGATIONS" shall mean "Obligations" as defined in the AXEL Credit Agreement. "AXEL SYNDICATION AGENT" has the meaning assigned to that term in the recitals to this Agreement. "COLLATERAL" has the meaning assigned to that term in Section 5 of this Agreement. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COLLATERAL AGENT" has the meaning assigned to that term in the introduction. "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company in the Defaulting Party and which results in the designation of an Early Termination Date (as defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. XX-4 "HOLDINGS" has the meaning assigned to that term in the recitals to this Agreement. "FINANCING AGREEMENT" means the Credit Agreement or the AXEL Credit Agreement, and "Financing Agreements" means the Credit Agreement and the AXEL Credit Agreement, collectively. "FINANCING AGREEMENT OBLIGATIONS" means "Credit Agreement Obligations and AXEL Obligations. "GRANTOR" has the meaning assigned to that term in the introduction of this Agreement. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. "INTEREST RATE OBLIGATIONS" has the meaning assigned to that term in the recitals to this Agreement. "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "MATERIAL PATENT" has the meaning assigned to that term in Section 5 of this Agreement. "MATERIAL TRADEMARK PROPERTY" has the meaning assigned to that term in Section 5 of this Agreement. "PATENTS" has the meaning assigned to that term in Section 2 of this Agreement. "PERMITTED PATENT LIENS" has the meaning assigned to that term in Section 5 of this Agreement. XX-5 "PERMITTED TRADEMARK LIENS" has the meaning assigned to that term in Section 5 of this Agreement. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "REGISTRATIONS" has the meaning assigned to that term in the recitals to this Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. "REQUISITE OBLIGEES" has the meaning assigned to that term in Section 19 of this Agreement. "SECURED OBLIGATIONS" has the meaning assigned to that term in Section 3 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. "TRADEMARKS" has the meaning assigned to that term in the recitals to this Agreement. "TRADEMARK RIGHTS" has the meaning assigned to that term in the recitals to this Agreement. II. GRANT OF SECURITY. ----------------- Each Grantor hereby grants to Collateral Agent a security interest in all of such Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Grantor now has or hereafter acquires an interest and wherever the same may be located (the "COLLATERAL"): A. each of the U.S. Trademarks and rights and interests in Trademarks which are presently, or in the future may be, owned, held (whether pursuant to a license or otherwise) or used by such Grantor, in whole or in part (including without limitation the U.S. Trademarks specifically identified in Schedule I ---------- XX-6 annexed hereto) and including all Trademark Rights with respect thereto and all federal and state Registrations heretofore or hereafter granted or applied for, the right (but not the obligation) to file for registration claims under any state or federal trademark law or regulation and to apply for, renew and extend the Trademarks, Registrations and Trademark Rights, the right (but not the obligation) to sue or bring opposition or cancellation proceedings in the name of such Grantor or in the name of Collateral Agent or otherwise for past, present and future infringements of the Trademarks, Registrations or Trademark Rights and all rights (but not obligations) corresponding thereto in the United States, and the Associated Goodwill; it being understood that the rights and interests included herein shall include, without limitation, all rights and interests pursuant to licensing or other contracts in favor of such Grantor pertaining to any Trademarks, Registrations or Trademark Rights presently or in the future owned, held or used by third parties but, in the case of third parties which are not Affiliates of such Grantor, only to the extent permitted by such licensing or other contracts or otherwise permitted by applicable law and, if not so permitted under any such contracts and applicable law, only with the consent of such third parties; B. the following documents and things in such Grantor's possession, or subject to such Grantor's right to possession, related to (Y) the production, sale and delivery by such Grantor, or by any Affiliate, licensee or subcontractor of such Grantor, of products or services sold or delivered by or under the authority of such Grantor in connection with the Trademarks, Registrations or Trademark Rights (which products and services shall, for purposes of this Agreement, be deemed to include, without limitation, products and services sold or delivered pursuant to merchandising operations utilizing any Trademarks, Registrations or Trademark Rights); or (Z) any retail or other merchandising operations conducted under the name of or in connection with the Trademarks, Registrations or Trademark Rights by such Grantor or any Affiliate, licensee or subcontractor of such Grantor: 1. all lists and ancillary documents that identify and describe any of such Grantor's customers, or those of their Affiliates, licensees or subcontractors, for products sold and services delivered under or in connection with the Trademarks or Trademark Rights, including without limitation any lists and ancillary documents that contain a customer's name and address, the name and address of any of its warehouses, branches or other places of business, the identity of the Person or Persons having the principal responsibility on a customer's behalf for ordering products or services of the kind supplied by such Grantor, or the credit, payment, discount, delivery or other sale terms applicable to such customer, together with information setting forth the total purchases, by brand, product, service, style, size or other criteria, and the patterns of such purchases; XX-7 2. all product and service specification documents and production and quality control manuals used in the manufacture or delivery of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights; 3. all documents which reveal the name and address of any source of supply, and any terms of purchase and delivery, for any and all materials, components and services used in the production of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights; and 4. all documents constituting or concerning the then current or proposed advertising and promotion by such Grantor or its Affiliates, licensees or subcontractors of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights including, without limitation, all documents which reveal the media used or to be used and the cost for all such advertising conducted within the described period or planned for such products and services; and C. all patents and patent applications and rights and interests in U.S. patents and patent applications that are presently, or in the future may be, owned, held (whether pursuant to a license or otherwise) or used by such Grantor in whole or in part (including, without limitation, the U.S. patents and patent applications listed in Schedule II annexed hereto, all rights (but not obligations) ----------- corresponding thereto (including without limitation the right (but not the obligation) to sue for past, present and future infringements in the name of such Grantor or in the name of Secured Party), and all re- issues, divisions, continuations, renewals, extensions and continuations-in-part thereof (all of the foregoing being collectively referred to as the "PATENTS"); it being understood that the rights and interests granted hereby shall include, without limitation, all rights and interests pursuant to licensing or other contracts in favor of such Grantor pertaining to any Patent presently or in the future owned, held or used by third parties but, in the case of third parties which are not Affiliates of such Grantor, only to the extent permitted by such licensing or other contracts or otherwise permitted by applicable law and, if not so permitted under any such contracts and applicable law, only with the consent of such third parties; D. all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; E. to the extent not included in the foregoing clauses (a) - (d), all general intangibles relating to the Collateral; and XX-8 F. all proceeds, products, and profits (including without limitation license royalties and proceeds of infringement suits) of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Collateral Agent is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. III. SECURITY FOR OBLIGATIONS. ------------------------ This Agreement secures, and the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including without limitation the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all Secured Obligations with respect to such Grantor. "SECURED OBLIGATIONS" means all obligations and liabilities of every nature of Grantors now or hereafter existing under or arising out of or in connection with the Subsidiary Guaranty, in each case together with all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Grantor, would accrue on such obligations), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Collateral Agent or any Secured Party or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise, and all obligations of every nature of Grantors now or hereafter existing under this Agreement. IV. GRANTORS REMAINS LIABLE. ----------------------- Anything contained herein to the contrary notwithstanding, (a) each Grantor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Collateral Agent of any of its rights hereunder shall not release any Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Collateral Agent shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Collateral Agent be obligated to perform any of the obligations or duties of any Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. XX-9 V. REPRESENTATIONS AND WARRANTIES. ------------------------------ Each Grantor represents and warrants as follows: (a) OWNERSHIP OF COLLATERAL. Except as expressly permitted by the Financing Agreements and for the security interest and conditional assignment created by this Agreement (and other than ownership and other rights reserved by third party owners with respect to each Material Trademark Property and each Material Patent that Grantor is licensed to use), such Grantor is the legal and beneficial owner of the entire right, title and interest in and to (i) each Material Trademark Property, free and clear of any Lien other than Liens of mechanics, materialmen, attorneys and other similar liens imposed by laws in the ordinary course of business in connection with the establishment, creation or application for registration of any Trademarks, Registrations or Trademark Rights for sums not yet delinquent or being contested in good faith (such Liens being referred to herein as "PERMITTED TRADEMARK LIENS"), and (ii) each Material Patent, free and clear of any Lien other than Liens of mechanics, materialmen, attorneys and other similar liens imposed by law in the ordinary course of business in connection with the establishment, creation or application for any Patent for sums not yet delinquent or being contested in good faith (such Liens being referred to herein as "PERMITTED PATENT LIENS"). Except such as may have been filed in favor of Collateral Agent relating to this Agreement except as permitted by the Financing Agreements, no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office, including the United States Patent and Trademark Office. (b) DESCRIPTION OF COLLATERAL. A true and complete list of all Registrations, trade names, corporate names, fictitious business names and Trademark license agreements owned, held (whether pursuant to a license or otherwise) or used by such Grantor, in whole or in part, as of the date such Grantor has entered into this Agreement is set forth in Schedule I annexed hereto. Each Registration, trade name, ---------- corporate name, fictitious business name and Trademark license designated on Schedule I annexed hereto as a Material Trademark ---------- Property, and each other Trademark, Registration or Trademark Right hereafter arising or otherwise owned, held or used by any Grantor that is material to any of such Grantor's business or operations is referred to herein as a "MATERIAL TRADEMARK PROPERTY". A true and complete list of all Patents owned or held (whether pursuant to a license or otherwise) by such Grantor, in whole or in part, as of the date such Grantor has entered into this Agreement is set forth in Schedule II annexed hereto. Each Patent designated on Schedule II ----------- ----------- annexed hereto as a Material Patent and each other Patent hereafter arising or otherwise owned or held by such Grantor that is material to any of such Grantor's business or operations is referred to herein as a "MATERIAL PATENT". XX-10 (c) VALIDITY AND ENFORCEABILITY OF COLLATERAL. Each Material Trademark Property and each Material Patent is subsisting and has not been adjudged invalid or unenforceable, in whole or in part, and Grantor has entered into this Agreement, such Grantor is not aware of any pending or threatened claim by any third party that any Material Trademark Property or any Material Patent is invalid or unenforceable or that the use of any Material Trademark Property or any Material Patent violates the rights of any third person. (d) PERFECTION. This Agreement together with the filing of UCC financing statements naming each Grantor as "debtor", naming Collateral Agent as "secured party" and describing the U.S. Collateral in the filing offices set forth on Schedule III annexed hereto and the ------------ recording of this Agreement with the United States Patent and Trademark Office, creates a valid, perfected and First Priority security interest in the Collateral (subject only to Permitted Patent Liens and Permitted Trademark Liens) securing the payment of the Secured Obligations, and all filings and other actions necessary to perfect and protect such security interests under the laws of the United States or any State thereunder have been or will promptly be following execution hereof duly made or taken. (e) OTHER INFORMATION. All information hereto, herein or hereafter supplied to Collateral Agent by or on behalf of each Grantor with respect to the Collateral is accurate and complete in all material respects. VI. FURTHER ASSURANCES; NEW TRADEMARKS, REGISTRATIONS AND ----------------------------------------------------- TRADEMARK RIGHTS; NEW PATENTS AND PATENT APPLICATIONS; CERTAIN INSPECTION - ------------------------------------------------------------------------- RIGHTS. - ------ (a) Each Grantor agrees that from time to time, at the expense of Grantors, such Grantor will promptly execute and deliver all further instruments and documents, and take all further action, or that Collateral Agent may reasonably request, in order to perfect and protect any security interest or conditional assignment granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, each Grantor will: (i) at the reasonable request of Collateral Agent, mark conspicuously each of its records pertaining to the Collateral with a legend, in form and substance reasonably satisfactory to Collateral Agent indicating that such Collateral is subject to the security interest granted hereby, (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, or as Collateral Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iii) use its best efforts to obtain any necessary consents of third parties to the grant and perfection of a security interest to Collateral Agent with respect to any Collateral, and (iv) at Collateral Agent's request, appear in and defend any action or proceeding that would reasonably be expected to affect such Grantor's title to or Collateral Agent's security interest in all or any part of the Collateral. XX-11 (b) Each Grantor hereby authorizes Collateral Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of any Grantor to the extent permitted by applicable law. Each Grantor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by such Grantor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. (c) Each Grantor will furnish to Collateral Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Collateral Agent may reasonably request, all in reasonable detail. (d) If any Grantor shall obtain rights to any new Trademarks, Registrations or Trademark Rights, or to any patentable inventions, or become entitled to the benefit of any U.S. patent application or patent or any reissue, division, continuation, renewal, extension, or continuation-in-part of any Patent or any improvement in any Patent, the provisions of this Agreement shall automatically apply thereto. Once per calendar year, each Grantor shall notify Collateral Agent in writing of any Registrations or Patents acquired by such Grantor during such calendar year and of any Registrations issued or applications for Registration made during such calendar year, which notice shall state whether such Registration constitutes a Material Trademark Property or whether such Patent constitutes a Material Patent. Concurrently with the filing of an application for Registration for any Trademark, or an application for any Patent the applicable Grantor shall execute, deliver and record in all places where this Agreement is recorded an appropriate Patent and Trademark Security Agreement, substantially in the form hereof, with appropriate insertions, or an amendment to this Agreement, in form and substance reasonably satisfactory to Collateral Agent, pursuant to which such Grantor shall grant a security interest to the extent of its interest in such Registration or Patent as provided herein to Collateral Agent unless so doing would, in the reasonable judgment of such Grantor, after due inquiry, result in the grant of a Patent or Registration in the name of Collateral Agent, in which event such Grantor shall give written notice to Collateral Agent as soon as reasonably practicable and the filing shall instead be undertaken as soon as practicable but in no case later than immediately following the grant of such Patent or Registration. VII. CERTAIN COVENANTS OF GRANTORS. ----------------------------- Each Grantor shall: (a) notify Collateral Agent of any change in such Grantor's name, identity or corporate structure within 30 days of such change; (b) give Collateral Agent 30 days' written notice following any change in such Grantor's chief place of business or chief executive office or the office where such Grantor keeps its records regarding the Collateral; (c) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including XX-12 claims for labor, materials and supplies) against, the Collateral, except to the extent the validity thereof is being contested in good faith; (d) not sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Financing Agreements; (e) except for Permitted Patent Liens and Permitted Trademark Liens and the security interest and conditional assignment created by this Agreement, not create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person other than Lien permitted by the Financing Agreements; (f) diligently keep reasonable records respecting the Collateral and at all times keep at least one complete set of its records concerning substantially all of the Patents and Registrations at its chief executive office or principal place of business; (g) take all steps reasonably necessary in such Grantor's business judgment to protect the secrecy of all trade secrets relating to the products and services sold or delivered under or in connection with the Patents, Trademarks and Trademark Rights; (h) use proper statutory notice in connection with its use of each Material Patent and Material Trademark Property to the extent reasonably necessary for the protection of such Material Patent or Material Trademark Property; and (i) use consistent standards of high quality (which may be consis tent with such Grantor's past practices or with such Grantor's business judgment) in the manufacture, sale and delivery of products and services sold or delivered under or in connection with the Trademarks, Registrations and Trademark Rights, including, to the extent applicable, in the operation and maintenance of its merchandising operations. VIII. AMOUNTS PAYABLE IN RESPECT OF THE COLLATERAL. -------------------------------------------- Except as otherwise provided in this Section 8, each Grantor shall continue to collect, at its own expense, all amounts due or to become due to Grantors in respect of the Collateral or any portion thereof. In connection with such collections, each Grantor may take (and, at Collateral Agent's direction, shall take) such action as such Grantor may deem necessary or advisable to enforce collection of such amounts; provided, however, that -------- ------- Collateral Agent shall have the right at any time, upon the occurrence and during the continuation of an Event of Default and upon written notice to such Grantor of its intention to do so, to notify the obligors with respect to any such amounts of the existence of the security interest and the conditional assignment created hereby, and to direct such obligors to make XX-13 payment of all such amounts directly to Collateral Agent, and, upon such notification and at the expense of Grantors, to enforce collection of any such amounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as such Grantor might have done. After receipt by such Grantor of the notice from Collateral Agent referred to in the proviso to the preceding sentence, (i) all amounts and proceeds (including checks and other instruments) received by such Grantor in respect of amounts due to such Grantor in respect of the Collateral or any portion thereof shall be forthwith (and in any event within two Business Days) deposited by the Grantor in the exact form received, duly indorsed by the Grantor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of Secured Parties only as provided in Section 16, (ii) until so turned over in accordance with the preceding subsection (i), all such amounts and proceeds received by such Grantor shall be received in trust for the benefit of Collateral Agent hereunder- and shall be segregated from other funds of Grantor and (iii)such Grantor shall not adjust, settle or compromise the amount or payment of any such amount or release wholly or partly any obligor with respect thereto or allow any credit or discount thereon. IX. PATENT OR TRADEMARK APPLICATIONS AND LITIGATION. ----------------------------------------------- (a) Each Grantor shall have the duty diligently, to prosecute any trademark application relating to any Material Trademark Property that is pending as of the date of this Agreement, to make federal application on any existing or future registerable but unregistered Material Trademark Property (whenever it is commercially reasonable in the reasonable judgement of such Grantor to do so), and to file and prosecute opposition and cancellation proceedings, renew Registrations and do any and all reasonable acts which are necessary or desirable to preserve and maintain all rights in all Material Trademark Properties; provided, however, that Grantor shall not be obligated to -------- ------- prosecute or apply for registration of any Trademark or Registration that Grant determines in its reasonable business judgment is no longer necessary or desirable in the conduct of its business. Any expenses incurred in connection therewith shall be borne solely by Grantors. No Grantor shall abandon any Material Trademark Property; provided, however, that Grantor shall not be -------- ------- obligated to maintain any Trademark or Registration that Grantor determines in its reasonable business judgment is no longer necessary or desirable in the conduct of its business. (b) Each Grantor shall have the duty diligently, through counsel reasonably acceptable to Collateral Agent, to prosecute any patent application relating to any Material Patent that is pending as of the date of this Agreement and to do any and all acts which are necessary or desirable to preserve and maintain all rights in all Material Patents; provided, however, that Grantor -------- ------- shall not be obligated to prosecute or maintain any Patent that Grantor determines in its reasonable business judgment is no longer necessary or desirable in the conduct of its business. Any expenses incurred in connection therewith shall be borne solely by Grantors. Each Grantor shall not, as to any patentable invention or Patent that constitutes or could constitute a Material Patent, abandon any pending patent application or any Patent without the prior written consent of Collateral Agent; provided, however, that Grantor shall not -------- ------- be obligated to prosecute or maintain any Patent that Grantor determines in its reasonable business judgment is no longer necessary or desirable in the conduct of its business. XX-14 (c) Except as provided in Section 9(e), each Grantor shall have the right to commence and prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions for infringement, unfair competition, dilution or other damage as are in its reasonable business judgment necessary to protect the Collateral. Collateral Agent shall provide, at Grantor's expense, all reasonable and necessary cooperation in connection with any such suit, proceeding or action including, without limitation, joining as a necessary party. (d) Each Grantor shall promptly, following its becoming aware thereof, notify Collateral Agent of the institution of, or of any adverse determination in, any proceeding (whether in the United States Patent and Trademark Office or any federal, state, local or foreign court) described in subsection 9(a), 9(b) or 9(c) or regarding such Grantor's claim of ownership in or right to use any of the Trademarks, Registrations or Trademark Rights, its right to register the same, or its right to keep and maintain such Registration. Such Grantor shall provide to Collateral Agent any information with respect thereto requested by Collateral Agent. (e) Anything contained herein to the contrary notwithstanding, upon the occurrence and during the continuation of an Event of Default, Collateral Agent shall have the right (but not the obligation) to bring suit, in the name of any Grantor, Collateral Agent or otherwise, to enforce any Patent, Trademark, Registration, Trademark Right, Associated Goodwill and any license thereunder, in which event each Grantor shall, at the request of Collateral Agent, do any and all lawful acts and execute any and all documents required by Collateral Agent in aid of such enforcement and each Grantor shall promptly, upon demand, reimburse and indemnify Collateral Agent as provided in Section 17 in connection with the exercise of its rights under this Section 9. To the extent that Collateral Agent shall elect not to bring suit to enforce any Patent, Trademark, Registration, Trademark Right, Associated Goodwill or any license thereunder as provided in this Section 9(e), each Grantor agrees to use all reasonable measures, whether by action, suit, proceeding or otherwise, to prevent the infringement of any of the Patents, Trademarks, Registrations, Trademark Rights or Associated Goodwill by others and for that purpose agrees to diligently maintain in accordance with reasonable business practice any action, suit or proceeding against any Person so infringing necessary to prevent such infringement. X. NON-DISTURBANCE AGREEMENTS, ETC. -------------------------------- If and to the extent that any Grantor is permitted to license the Collateral, Collateral Agent shall enter into a non-disturbance agreement or other similar arrangement, at Grantors' request and expense, with such Grantor and any licensee of any Collateral permitted hereunder in form and substance reasonably satisfactory to Collateral Agent pursuant to which (a) Collateral Agent shall agree not to disturb or interfere with such licensee's rights under its license agreement with such Grantor so long as such licensee is not in default thereunder and (b) such licensee shall acknowledge and agree that the Collateral licensed to it is subject to the security interest and conditional assignment created in favor of Collateral Agent and the other terms of this Agreement. XX-15 XI. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. ------------------------------------------- Each Grantor hereby irrevocably appoints Collateral Agent as such Grantor's attorney-in-fact, with full authority in the place and stead of such Grantor and in the name of such Grantor, Collateral Agent or otherwise, from time to time, upon the occurrence during the continuance of an Event of Default, in Collateral Agent's reasonable discretion to take any action and to execute any instrument that Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: A. to endorse such Grantor's name on all applications, documents, papers and instruments necessary for Collateral Agent in the use or maintenance of the Collateral; B. to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; C. to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (b) above; D. upon the occurrence and during the continuance of an Event of Default, to file any claims or take any action or institute any proceedings that Collateral Agent may reasonably deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Collateral Agent with respect to any of the Collateral; E. to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Financing Agreements) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Collateral Agent in its sole discretion, any such payments made by Collateral Agent to become obligations of such Grantor to Collateral Agent, due and payable immediately without demand; and F. upon the occurrence and during the continuance of an Event of Default, (i) to execute and deliver any of the assignments or documents requested by Collateral Agent pursuant to Section 14(b), (ii) to grant or issue an exclusive or non-exclusive license to the Collateral or any portion thereof to any Person, and (iii) otherwise generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Collateral Agent were the absolute owner thereof for all purposes, and to do, at Collateral Agent's option and Grantors' expense, at any time or from time to time, all acts and things that Collateral Agent deems necessary to protect, preserve or realize upon the Collateral and Collateral Agent's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as such Grantor might do. XX-16 XII. COLLATERAL AGENT MAY PERFORM. ---------------------------- If any Grantor fails to perform any agreement contained herein, Collateral Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of Collateral Agent incurred in connection therewith shall be payable by such Grantor under Section 17. XIII. STANDARD OF CARE. ---------------- The powers conferred on Collateral Agent hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for monies actually received by it hereunder, Collateral Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Collateral Agent accords its own property. XX-17 XIV. REMEDIES. -------- If any Event of Default shall have occurred and be continuing: XX-18 A. Collateral Agent may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a collateral agent on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Collateral), and also may (i) require each Grantor to, and each Grantor hereby agrees that it will at its expense and upon request of Collateral Agent forthwith, assemble all or part of the Collateral as directed by Collateral Agent and make it available to Collateral Agent at a place to be designated by Collateral Agent that is reasonably convenient to both parties, (ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (iii) prior to the disposition of the Collateral, store the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Collateral Agent deems appropriate, (iv) take possession of any Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same for the purpose of taking any actions described in the preceding clause (iii) and collecting any Secured Obligation, (v) exercise any and all rights and remedies of Grantors under or in connection with the contracts related to the Collateral or otherwise in respect of the Collateral, including without limitation any and all rights of Grantors to demand or otherwise require payment of any amount under, or performance of any provision of, such contracts, and (vi) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Collateral Agent may deem commercially reasonable. Collateral Agent or any Secured Party or Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Collateral Agent, as agent for and representative of Secured Parties and Interest Rate Exchangers (but not any Secured Party or Secured Parties or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Obligees shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Collateral Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of any Grantor, and each Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Each Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to such Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Collateral Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Each Grantor hereby waives any claims against Collateral Agent arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Collateral Agent accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantors shall be jointly and severally liable for the deficiency and the reasonable fees of any attorneys employed by Collateral Agent to collect such deficiency. B. Upon written demand from Secured Party, each Grantor shall execute and deliver to Collateral Agent an assignment or assignments of the Patents, Trademarks, Registrations, Trademark Rights and the Associated Goodwill and such other documents as are requested by Collateral Agent. Each Grantor agrees that such an assignment and/or recording shall be applied to reduce the Secured Obligations outstanding only to the extent that Collateral Agent (or any Secured) receives cash proceeds in respect of the sale of, or other realization upon, the Collateral. C. Within five Business Days after written notice from Collateral Agent, each Grantor shall make available to Collateral Agent, to the extent within each applicable Grantor's power and authority, such personnel in such Grantor's employ on the date of such Event of Default as Collateral Agent may reasonably designate, by name, title or job responsibility, to permit such Grantor to continue, directly or indirectly, to produce, advertise and sell the products and services sold or delivered by such Grantor under or in connection with the Patents, Trademarks, Registrations and Trademark Rights, such persons to be available to perform their prior functions on Collateral Agent's behalf and to be compensated by Collateral Agent at Grantors' expense on a per diem, pro-rata basis consistent with the salary and benefit structure applicable to each as of the date of such Event of Default. XX-20 XV. PROCEEDS TO BE TURNED OVER TO COLLATERAL AGENT. ---------------------------------------------- In addition to the rights of the Collateral Agent and the Secured Parties specified in Section 8 with respect to payments of Accounts, if an Event of Default shall occur and be continuing, upon request of the Collateral Agent, all proceeds received by the Grantor consisting of cash, checks and other near- cash items shall be held by the Grantor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of the Grantor, and shall, forthwith upon receipt by the Grantor, be turned over to the Collateral Agent in the exact form received by the Grantor (duly indorsed by the Grantor to the Collateral Agent, if required) and held by the Collateral Agent in a Collateral Account maintained under the Intercreditor Agreement. All proceeds while held by the Collateral Agent in a Collateral Account (or by the Grantor in trust for the Collateral Agent and the Secured Parties) shall continue to be held as collateral security for all the Secured Obligations and shall not constitute payment thereof until applied as provided in Section 16. XVI. APPLICATION OF PROCEEDS. ----------------------- Except as expressly provided elsewhere in this Agreement, all proceeds held in any Collateral Account and all other proceeds received by Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in subsection 3 of the Intercreditor Agreement. XVII. INDEMNITY AND EXPENSES. ---------------------- (a) Grantors jointly and severally agree to indemnify Collateral Agent, each Secured Party and each Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including without limitation enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Collateral Agent's or such Secured Party's or Interest Rate Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Grantors jointly and severally agree to pay to Collateral Agent promptly following written demand the amount of any and all costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Collateral Agent hereunder, or (iv) the failure by any Grantor to perform or observe any of the provisions hereof. (c) The obligations of Grantors in this Section 17 shall survive the termination of this Agreement and the discharge of Grantors' other obligations under this Agreement, the Interest Rate Agreements, the Credit Agreement and the other Loan Documents. XX-21 XVIII. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. ----------------------------------------------- This Agreement shall create a continuing security interest in and conditional assignment of the Collateral effective only upon the occurrence and during the continuance of an Event of Default and shall (a) remain in full force and effect until the payment in full of the Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantors and their respective successors and assigns, and (c) inure, together with the rights and remedies of Collateral Agent hereunder, to the benefit of Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement and subsection 10.1 of the AXEL Credit Agreement, any Secured Party may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Secured Parties herein or otherwise. Upon the payment in full of all Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest and conditional assignment granted hereby shall terminate and all rights to the Collateral shall revert to the applicable Grantors. Upon any such termination Collateral Agent will, at Grantors' expense, execute and deliver to Grantors such documents as Grantors shall reasonably request to evidence such termination in accordance with the terms of the Intercreditor Agreement. XX-22 XIX. COLLATERAL AGENT AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Collateral Agent has been appointed to act as Collateral Agent hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and AXEL Administrative Agent on behalf of the AXEL Lenders pursuant to the Intercreditor Agreement and, by their acceptance of the benefits hereof, Interest Rate Exchangers, and shall be entitled to the benefits of the Intercreditor Agreement. Collateral Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including without limitation the release or substitution of Collateral), solely in accordance with this Agreement and the Intercreditor Agreement; provided that -------- Collateral Agent shall exercise, or refrain from exercising, any remedies provided for in Section 14 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 19(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Collateral Agent for the benefit of Secured Parties and Interest Rate Exchangers in accordance with the terms of this Section 19(a). (b) Collateral Agent shall at all times be the same Person that is appointed Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent under this Agreement, and the retiring or removed Collateral Agent under this Agreement shall promptly (i) transfer to such successor Collateral Agent all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Collateral Agent under this Agreement, and (ii) execute and deliver to such successor Collateral Agent such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Collateral Agent of the security interests created hereunder, whereupon such retiring or removed Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Collateral Agent hereunder. XX-23 XX. AMENDMENTS; ETC. --------------- No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by any Grantor therefrom, shall in any event be effective unless the same shall be in writing and signed by Collateral Agent and, in the case of any such amendment or modification, by Grantors; provided that any amendment hereto pursuant to Section 22 or Section -------- 6(c) shall be effective upon execution by any Additional Grantor and Grantors hereby waive any requirement of notice of or consent to any such amendment. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. XXI. NOTICES. ------- Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex (with received answerback), or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices to Collateral Agent or Grantor shall not be -------- effective until received. For the purposes hereof, the address of each party hereto shall be provided in subsection 10.8 of the Credit Agreement or subsection 10.8 of the AXEL Credit Agreement, or as set forth under such party's name on the signature pages hereof or such other address as shall be designated by such party in a written notice delivered to the other parties hereto. XXII. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. ----------------------------------------------------- No failure or delay on the part of Collateral Agent in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. XX-24 XXIII. ADDITIONAL GRANTORS. ------------------- From time to time subsequent to the date hereof, Subsidiaries of Company may become parties hereto as additional Grantors (each an "ADDITIONAL GRANTOR") by executing an acknowledgement to this Agreement substantially in the form of Schedule IV annexed hereto. Upon delivery of any such ----------- acknowledgment to Collateral Agent and Secured Party, notice of which is hereby waived by Grantors, each such Additional Grantor shall be a Grantor and shall be as fully a party hereto as if such Additional Grantor were an original signatory hereto. Each Grantor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Grantor hereunder, nor by any election of Collateral Agent not to cause any Subsidiary of Company to become an Additional Grantor hereunder. This Agreement shall be fully effective as to any Grantor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Grantor hereunder. XXIV. SEVERABILITY. ------------ In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. XXV. HEADINGS. -------- Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. XXVI. GOVERNING LAW; TERMS. -------------------- THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. XX-25 XVII. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ---------------------------------------------- ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY GRANTOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH GRANTOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY a) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; b) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; c) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO SUCH GRANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 21; d) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER SUCH GRANTOR IN ANY SUCH PROCEED ING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; e) AGREES THAT COLLATERAL AGENT RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST SUCH GRANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND f) AGREES THAT THE PROVISIONS OF THIS SECTION 25 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5- 1402 OR OTHERWISE. XX-26 XXVIII. WAIVER OF JURY TRIAL. -------------------- GRANTORS AND COLLATERAL AGENT HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Each Grantor and Collateral Agent acknowledge that this waiver is a material inducement for Grantors and Collateral Agent to enter into a business relationship, that Grantors and Collateral Agent have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Each Grantor and Collateral Agent further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 28 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. XXIX. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] XX-27 IN WITNESS WHEREOF, Grantors and Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. SEALY, INC. THE STEARNS & FOSTER BEDDING COMPANY THE STEARNS & FOSTER UPHOLSTERY FURNITURE COMPANY ADVANCED SLEEP PRODUCTS SEALY MATTRESS COMPANY OF SAN DIEGO SEALY MATTRESS COMPANY OF PUERTO RICO OHIO-SEALY MATTRESS MANUFACTURING CO. INC. OHIO-SEALY MATTRESS MANUFACTURING CO. -- FORT WORTH OHIO-SEALY MATTRESS MANUFACTURING CO. OHIO-SEALY MATTRESS MANUFACTURING CO. -- HOUSTON [OTHER GRANTORS] By: ____________________ Name: Title: Notice Address: _____________________ _____________________ _____________________ XX-28 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Secured Party By: ______________________ Name: Title: XX-29 SCHEDULE I TO SUBSIDIARY PATENT AND TRADEMARK SECURITY AGREEMENT
REGISTERED UNITED STATES TRADEMARK REGISTRATION REGISTRATION OWNER DESCRIPTION NUMBER DATE - ------------- ----------------------- ------------ ------------
XX-30 SCHEDULE II TO SUBSIDIARY PATENT AND SECURITY AGREEMENT PATENTS ISSUED -------------- Patent No. Issue Date Invention ---------- ---------- --------- PATENTS PENDING --------------- Applicant's Date Application Name Filed No. Invention Inventor - ----------- ----- ----------- --------- -------- XX-31 SCHEDULE III TO SUBSIDIARY PATENT AND TRADEMARK SECURITY AGREEMENT FILING OFFICES -------------- XX-32 SCHEDULE IV TO SUBSIDIARY PATENT AND TRADEMARK SECURITY AGREEMENT [FORM OF ACKNOWLEDGEMENT] This Acknowledgement, dated _______________, [199_] [200_], is delivered pursuant to Section 23 of the Patent and Trademark Security Agreement referred to below. The undersigned hereby agrees that this Acknowledgement may be attached to the Patent and Trademark Security Agreement dated December 18, 1996, by and among the Grantors referred to therein and Morgan Guaranty Trust Company of New York, as Collateral Agent (the "PATENT AND TRADEMARK SECURITY AGREEMENT", capitalized terms defined therein being used herein as therein defined), that the undersigned by executing and delivering this Acknowledgement hereby becomes a Grantor under the Patent and Trademark Security Agreement in accordance with Section 20 thereof and agrees to be bound by all of the terms thereof, and that the Patents, Registrations and Trademark Rights described on this Acknowledgement shall be deemed to be part of the and shall become part of the Collateral and shall secure all Secured Obligations. [NAME OF ADDITIONAL GRANTOR] By: _________________________________ Name: Title: Notice Address: ____________________________ ____________________________ ____________________________ ____________________________ TRADEMARK REGISTRATIONS ----------------------- REGISTERED TRADEMARK REGISTRATION REGISTRATION OWNER DESCRIPTION NUMBER DATE JURISDICTION - ------------- ----------- ------------ ------------ ------------ PATENTS ISSUED -------------- XX-33 PATENT NO. ISSUE DATE INVENTION INVENTOR ---------- ---------- --------- -------- PATENTS PENDING --------------- APPLICANT'S NAME DATE FILED APPLICATION NO. INVENTION INVENTOR - ---------------- ---------- --------------- --------- -------- XX-34 EXHIBIT XXI [FORM OF HOLDINGS GUARANTY] HOLDINGS GUARANTY This HOLDINGS GUARANTY is entered into as of December 18, 1997 and entered into by and between SEALY CORPORATION, a Delaware corporation ("GUARANTOR"), in favor and for the benefit of MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as collateral for and representative of (in such capacity herein called "GUARANTIED PARTY") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined), and, subject to subsection 3.12, for the benefit of the other Beneficiaries (as hereinafter defined). RECITALS A. Sealy Mattress Company, an Ohio corporation and a wholly-owned subsidiary of Guarantor ("COMPANY"), Guarantor, the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO."), as documentation agent (in such capacity, "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the ("CREDIT AGREEMENT") pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. B. Company, Guarantor, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity, "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "AXEL ADMINISTRATIVE AGENT"), and BTCo., as documentation agent (in such capacity, "AXEL DOCUMENTATION AGENT") have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, the CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL Lenders have made certain commitments, subject to the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Company. C. Company may from time to time enter into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with or one or more Credit Agreement Lenders or their Affiliates or AXEL Lenders or their Affiliates (in such XXI-1 capacity, collectively, "INTEREST RATE EXCHANGERS") in accordance with the terms of the Financing Agreements (as hereinafter defined), and it is desired that the obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments thereunder in the event of early termination thereof (all such obligations being the "INTEREST RATE OBLIGATIONS"), together with all obligations of Company under the Financing Agreements and any other Loan Documents, be guarantied hereunder. D. It is a condition precedent to the making of the initial Loans under the Financing Agreements that Company's obligations thereunder be guarantied by Guarantor. E. Guarantor is willing irrevocably and unconditionally to guaranty such obligations of Company. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of, the Company, (iii) the AXEL Administrative Agent, the AXEL Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement and (iv) the AXEL Lenders to make their respective loans to the Company, and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Guarantor hereby agrees as follows: SECTION 1. DEFINITIONS (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. "AGGREGATE PAYMENTS" has the meaning assigned to that term ins subsection 2.2. "AXEL COMMITMENTS" shall mean the "Commitments" as defined in the AXEL Credit Agreement. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. XXI-2 "AXEL OBLIGATIONS" shall mean the "Obligations" as defined in the AXEL Credit Agreement. "BENEFICIARIES" means Guarantied Party, Secured Parties and any Interest Rate Exchangers. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CONTRIBUTING GUARANTORS" has the meaning assigned to that term ins subsection 2.2. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. "FAIR SHARE" has the meaning assigned to that term ins subsection 2.2. "FAIR SHARE CONTRIBUTION AMOUNT" has the meaning assigned to that term ins subsection 2.2. "FINANCING AGREEMENT" means either the Credit Agreement or the AXEL Credit Agreement, and "Financing Agreements" means the Credit Agreement and the AXEL Credit Agreement, collectively. "FINANCING AGREEMENT OBLIGATIONS" means Credit Agreement Obligations and AXEL Obligations. XXI-3 "FRAUDULENT TRANSFER LAWS" has the meaning assigned to that term ins subsection 2.2. "FAIR SHARE SHORTFALL" has the meaning assigned to that term ins subsection 2.2. "FUNDING GUARANTOR" has the meaning assigned to that term ins subsection 2.2. "GUARANTIED OBLIGATIONS" has the meaning assigned to that term in subsection 2.1. "GUARANTY" means this Holdings Guaranty dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. "GRANTOR" has the meaning assigned to that term in the introduction of this Agreement. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL XXI-4 Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. "REQUISITE OBLIGEES" has the meaning assigned to that term in subsection 3.14 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. "PAYMENT IN FULL", "PAID IN FULL" or any similar term means payment in full of the Guarantied Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), including without limitation all principal, interest, costs, fees and expenses (including, without limitation, reasonable legal fees and expenses) of Beneficiaries as required under the Loan Documents and the Lender Interest Rate Agreements. 1.2 INTERPRETATION. References to "Sections" and "subsections" -------------- shall be to Sections and subsections, respectively, of this Guaranty unless otherwise specifically provided. SECTION 2. THE GUARANTY 2.1 GUARANTY OF THE GUARANTIED OBLIGATIONS. Guarantor hereby -------------------------------------- irrevocably and unconditionally guaranties, as primary obligor and not merely as surety, the due and punctual payment in full of all Guarantied Obligations when the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S) 362(a)). The term "GUARANTIED OBLIGATIONS" is used herein in its most comprehensive sense and includes: (a) any and all Financing Agreement Obligations of Company and any and all Interest Rate Obligations, in each case now or hereafter made, incurred or created, whether absolute or contingent, liquidated or unliquidated, whether due or not due, and however arising under or in connection with any Financing Agreement and any other Loan Documents and the Lender Interest Rate Agreements, including those arising under successive borrowing transactions under any Financing Agreement which shall either continue the Financing Agreement Obligations of Company or from time to time renew them after they have been satisfied and including interest which, but for the filing of a petition in bankruptcy with respect to Company, would have accrued on any Guarantied Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding; and (b) those expenses set forth in subsection 2.9 hereof. 2.2 CONTRIBUTION BY GUARANTOR. Guarantor under this Guaranty, and each ------------------------- Subsidiary Guarantor under the Subsidiary Guaranty, together desire to allocate among XXI-5 themselves (collectively, the "CONTRIBUTING GUARANTORS"), in a fair and equitable manner, their obligations arising under this Guaranty and the Subsidiary Guaranty. Accordingly, in the event any payment or distribution is made on any date by Guarantor under this Guaranty or a Subsidiary Guarantor under the Subsidiary Guaranty (a "FUNDING GUARANTOR") that exceeds its Fair Share (as defined below) as of such date, that Funding Guarantor shall be entitled to a contribution from each of the other Contributing Guarantors in the amount of such other Contributing Guarantor's Fair Share Shortfall (as defined below) as of such date, with the result that all such contributions will cause each Contributing Guarantor's Aggregate Payments (as defined below) to equal its Fair Share as of such date. "FAIR SHARE" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the ratio of (x) the Fair Share Contribution Amount (as defined below) with respect to such Contributing Guarantor to (y) the aggregate of the Fair Share Contribution Amounts with respect to all Contributing Guarantors multiplied by (ii) the ---------- -- aggregate amount paid or distributed on or before such date by all Funding Guarantors under this Guaranty and the Subsidiary Guaranty in respect of the obligations guarantied. "FAIR SHARE SHORTFALL" means, with respect to a Contributing Guarantor as of any date of determination, the excess, if any, of the Fair Share of such Contributing Guarantor over the Aggregate Payments of such Contributing Guarantor. "FAIR SHARE CONTRIBUTION AMOUNT" means, with respect to a Contributing Guarantor as of any date of determination, the maximum aggregate amount of the obligations of such Contributing Guarantor under this Guaranty or the Subsidiary Guaranty, as applicable, that would not render its obligations hereunder or thereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any applicable provisions of comparable state law; provided that, solely for -------- purposes of calculating the "Fair Share Contribution Amount" with respect to any Contributing Guarantor for purposes of this subsection 2.2, any assets or liabilities of such Contributing Guarantor arising by virtue of any rights to subrogation, reimbursement or indemnification or any rights to or obligations of contribution hereunder or under subsection 2.2(b) of the Subsidiary Guaranty shall not be considered as assets or liabilities of such Contributing Guarantor. "AGGREGATE PAYMENTS" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the aggregate amount of all payments and distributions made on or before such date by such Contributing Guarantor in respect of this Guaranty or the Subsidiary Guaranty, as applicable (including, without limitation, in respect of this subsection 2.2 or subsection 2.2(b) of the Subsidiary Guaranty), minus (ii) the aggregate amount of all ----- payments received on or before such date by such Contributing Guarantor from the other Contributing Guarantors as contributions under this subsection 2.2 or subsection 2.2(b) of the Subsidiary Guaranty. The amounts payable as contributions hereunder and under subsection 2.2(b) of the Subsidiary Guaranty shall be determined as of the date on which the related payment or distribution is made by the applicable Funding Guarantor. The allocation among Contributing Guarantors of their obligations as set forth in this subsection 2.2 and subsection 2.2(b) of the Subsidiary Guaranty shall not be construed in any way to limit the liability of any Contributing Guarantor hereunder or under the Subsidiary Guaranty. Each Subsidiary Guarantor is a third party beneficiary to the contribution agreement set forth in this subsection 2.2. 2.3 PAYMENT BY GUARANTOR; APPLICATION OF PAYMENTS. Guarantor hereby --------------------------------------------- agrees, in furtherance of the foregoing and not in limitation of any other right which any Beneficiary may have at law or in equity against Guarantor by virtue hereof, that upon the XXI-6 failure of Company to pay any of the Guarantied Obligations when and as the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S) 362(a)), Guarantor will promptly following written demand pay, or cause to be paid, in cash, to Guarantied Party for the ratable benefit of Beneficiaries, an amount equal to the sum of the unpaid principal amount of all Guarantied Obligations then due as aforesaid, accrued and unpaid interest on such Guarantied Obligations (including, without limitation, interest which, but for the filing of a petition in bankruptcy with respect to Company, would have accrued on such Guarantied Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding) and all other Guarantied Obligations then owed to Beneficiaries as aforesaid. All such payments shall be applied promptly from time to time by Guarantied Party as provided in subsection 3 of the Intercreditor Agreement. 2.4 LIABILITY OF GUARANTOR ABSOLUTE. Guarantor agrees that its ------------------------------- obligations hereunder are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than payment in full of the Guarantied Obligations. In furtherance of the foregoing and without limiting the generality thereof, Guarantor agrees as follows: (a) This Guaranty is a guaranty of payment when due and not of collectibility. (b) The obligations of Guarantor hereunder are independent of the obligations of Company under the Loan Documents or the Lender Interest Rate Agreements and the obligations of any other guarantor (including any Subsidiary Guarantor) of the obligations of Company under the Loan Documents or the Lender Interest Rate Agreements, and a separate action or actions may be brought and prosecuted against Guarantor whether or not any action is brought against Company or any of such other guarantors and whether or not Company is joined in any such action or actions. (c) Guarantor's payment of a portion, but not all, of the Guarantied Obligations shall in no way limit, affect, modify or abridge Guarantor's liability for any portion of the Guarantied Obligations which has not been paid. Without limiting the generality of the foregoing, if Guarantied Party is awarded a judgment in any suit brought to enforce Guarantor's covenant to pay a portion of the Guarantied Obligations, such judgment shall not be deemed to release Guarantor from its covenant to pay the portion of the Guarantied Obligations that is not the subject of such suit. (d) Any Beneficiary, upon such terms as it deems appropriate, without notice or demand and without affecting the validity or enforceability of this Guaranty or giving rise to any reduction, limitation, impairment, discharge or termination of Guarantor's liability hereunder, from time to time may (i) renew, extend, accelerate, increase the rate of interest on, or otherwise change the time, place, manner or terms of payment of the Guarantied Obligations, (ii) settle, compromise, release or discharge, or XXI-7 accept or refuse any offer of performance with respect to, or substitutions for, the Guarantied Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations; (iii) request and accept other guaranties of the Guarantied Obligations and take and hold security for the payment of this Guaranty or the Guarantied Obligations; (iv) release, surrender, exchange, substitute, compromise, settle, rescind, waive, alter, subordinate or modify, with or without consideration, any security for payment of the Guarantied Obligations, any other guaranties (including the Subsidiary Guaranty) of the Guarantied Obligations, or any other obligation of any Person with respect to the Guarantied Obligations; (v) enforce and apply any security now or hereafter held by or for the benefit of such Beneficiary in respect of this Guaranty or the Guarantied Obligations and direct the order or manner of sale thereof, or exercise any other right or remedy that such Beneficiary may have against any such security, in each case as such Beneficiary in its discretion may determine consistent with the applicable Financing Agreement or the applicable Lender Interest Rate Agreement and any applicable security agreement, including foreclosure on any such security pursuant to one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, and even though such action operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of Guarantor against Company or any security for the Guarantied Obligations; and (vi) exercise any other rights available to it under the Loan Documents or the Lender Interest Rate Agreements. (e) This Guaranty and the obligations of Guarantor hereunder shall be valid and enforceable and shall not be subject to any reduction, limitation, impairment, discharge or termination for any reason (other than payment in full of the Guarantied Obligations), including without limitation the occurrence of any of the following, whether or not Guarantor shall have had notice or knowledge of any of them: (i) any failure or omission to assert or enforce or agreement or election not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy (whether arising under the Loan Documents or the Lender Interest Rate Agreements, at law, in equity or otherwise) with respect to the Guarantied Obligations or any agreement relating thereto, or with respect to the Subsidiary Guaranty or any other guaranty of or security for the payment of the Guarantied Obligations; (ii) any rescis sion, waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including without limitation provisions relating to events of default) of any Financing Agreement, any of the other Loan Documents, any of the Lender Interest Rate Agreements or any agreement or instrument executed pursuant thereto, or of the Subsidiary Guaranty or any other guaranty or security for the Guarantied Obligations, in each case whether or not in accordance with the terms of such Financing Agreement or such Loan Document, such Lender Interest Rate Agreement or any agreement relating to the Subsidiary Guaranty or such other guaranty or security; (iii) the application of payments received from any source (other than payments received pursuant to the other Loan Documents or any of the Lender Interest Rate Agreements or from the proceeds of any security for the Guarantied Obligations, except to the extent such security also serves as collateral for indebtedness other than the Guarantied Obligations) to the XXI-8 payment of indebtedness other than the Guarantied Obligations, even though any Beneficiary might have elected to apply such payment to any part or all of the Guarantied Obligations; (iv) any Beneficiary's consent to the change, reorganization or termination of the corporate structure or existence of Company or any of its Subsidiaries and to any corresponding restructuring of the Guarantied Obligations; (v) any failure to perfect or continue perfection of a security interest in any collateral which secures any of the Guarantied Obligations; (vi) any defenses, set-offs or counterclaims which Company may allege or assert against any Beneficiary in respect of the Guarantied Obligations, including but not limited to failure of consideration, breach of warranty, payment, statute of frauds, statute of limitations, accord and satisfaction and usury; and (vii) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of Guarantor as an obligor in respect of the Guarantied Obligations. 2.5 WAIVERS BY GUARANTOR. Guarantor hereby waives, for the benefit of -------------------- Beneficiaries: (a) any right to require any Beneficiary, as a condition of payment or performance by Guarantor, to (i) proceed against Company, any other guarantor (including any Subsidiary Guarantor) of the Guarantied Obligations or any other Person, (ii) proceed against or exhaust any security held from Company, any such other guarantor or any other Person, (iii) proceed against or have resort to any balance of any deposit account or credit on the books of any Beneficiary in favor of Company or any other Person, or (iv) pursue any other remedy in the power of any Beneficiary whatsoever; (b) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of Company including, without limitation, any defense based on or arising out of the lack of validity or the unenforceability of the Guarantied Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of Company from any cause other than payment in full of the Guarantied Obligations; (c) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (d) any defense based upon any Beneficiary's errors or omissions in the administration of the Guarantied Obligations, except behavior which amounts to bad faith, gross negligence or willful misconduct; (e) (i) any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of this Guaranty, (ii) the benefit of any statute of limitations affecting Guarantor's liability hereunder or the enforcement hereof, (iii) any rights to set-offs, recoupments and counterclaims, and (iv) promptness, XXI-9 diligence and any requirement that any Beneficiary protect, secure, perfect or insure any security interest or lien or any property subject thereto; and (f) notices, demands, presentments, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance of this Guaranty, notices of default under the Financing Agreements, the Lender Interest Rate Agreements or any agreement or instrument related thereto, notices of any renewal, extension or modification of the Guarantied Obligations or any agreement related thereto, notices of any extension of credit to Company and notices of any of the matters referred to in subsection 2.4 and any right to consent to any thereof. 2.6 CERTAIN CALIFORNIA LAW WAIVERS. As used in this subsection 2.6, any ------------------------------ reference to "the principal" includes Company, and any reference to "the creditor" includes each Beneficiary. In accordance with Section 2856 of the California Civil Code: (a) Guarantor agrees (i) to waive any and all rights of subrogation and reimbursement against Company or against any collateral or security granted by Company for any of the Guarantied Obligations and (ii) to withhold the exercise of any and all rights of contribution against any other guarantor (including any Subsidiary Guarantor) of any of the Guarantied Obligations and against any collateral or security granted by any such other guarantor for any of the Guarantied Obligations until the Guarantied Obligations shall have been paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, all as more fully set forth in subsection 2.7; (b) Guarantor waives any and all other rights and defenses available to Guarantor by reason of Sections 2787 to 2855, inclusive, 2899 and 3433 of the California Civil Code, including without limitation any and all rights or defenses Guarantor may have by reason of protection afforded to the principal with respect to any of the Guarantied Obligations, or to any other guarantor (including any Subsidiary Guarantor) of any of the Guarantied Obligations with respect to any of such guarantor's obligations under its guaranty, in either case pursuant to the antideficiency or other laws of the State of California limiting or discharging the principal's indebtedness or such guarantor's obligations, including without limitation Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure; and (c) Guarantor waives all rights and defenses arising out of an election of remedies by the creditor, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for any Guarantied Obligation, has destroyed Guarantor's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the Code of Civil Procedure or otherwise; and even though that election of remedies by the creditor, such as nonjudicial foreclosure with respect to security for an obligation of any other guarantor (including any Subsidiary Guarantor) of any of the Guarantied Obligations, has destroyed Guarantor's rights of contribution against such other guarantor. XXI-10 No other provision of this Guaranty shall be construed as limiting the generality of any of the covenants and waivers set forth in this subsection 2.6. In accordance with subsection 3.6 below, this Guaranty shall be governed by, and shall be construed and enforced in accordance with, the internal laws of the State of New York, without regard to conflicts of laws principles. This subsection 2.6 is included solely out of an abundance of caution, and shall not be construed to mean that any of the above-referenced provisions of California law are in any way applicable to this Guaranty or to any of the Guarantied Obligations. 2.7 GUARANTOR'S RIGHTS OF SUBROGATION, CONTRIBUTION, ETC. Guarantor ---------------------------------------------------- hereby waives any claim, right or remedy, direct or indirect, that Guarantor now has or may hereafter have against Company or any of its assets in connection with this Guaranty or the performance by Guarantor of its obligations hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by statute (including without limitation under California Civil Code Section 2847, 2848 or 2849), under common law or otherwise and including without limitation (a) any right of subrogation, reimbursement or indemnification that Guarantor now has or may hereafter have against Company with respect to the Guarantied Obligations, (b) any right to enforce, or to participate in, any claim, right or remedy that any Beneficiary now has or may hereafter have against Company, and (c) any benefit of, and any right to participate in, any collateral or security now or hereafter held by any Beneficiary. In addition, until the Guarantied Obligations shall have been indefeasibly paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, Guarantor shall withhold exercise of any right of contribution Guarantor may have against any other guarantor of the Guarantied Obligations (including without limitation any such right of contribution under California Civil Code Section 2848 or under the Subsidiary Guaranty as contemplated by subsection 2.2). Guarantor further agrees that, to the extent the waiver or agreement to withhold the exercise of its rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification Guarantor may have against Company or against any collateral or security, and any rights of contribution Guarantor may have against any such other guarantor, shall be junior and subordinate to any rights any Beneficiary may have against Company, to all right, title and interest any Beneficiary may have in any such collateral or security, and to any right any Beneficiary may have against such other guarantor. If any amount shall be paid to Guarantor on account of any such subrogation, reimbursement, indemnification or contribution rights at any time when all Guarantied Obligations shall not have been paid in full, such amount shall be held in trust for Guarantied Party on behalf of Beneficiaries and shall forthwith be paid over to Guarantied Party for the benefit of Beneficiaries to be credited and applied against the Guarantied Obligations, whether matured or unmatured, in accordance with the terms hereof. XXI-11 2.8 SUBORDINATION OF OTHER OBLIGATIONS. Any indebtedness of Company now ---------------------------------- or hereafter held by Guarantor is hereby subordinated in right of payment to the Guarantied Obligations (except for indebtedness of Company arising from tax payments made by Guarantor on behalf of Company), and any such indebtedness of Company to Guarantor collected or received by Guarantor after an Event of Default has occurred and is continuing shall be held in trust for Guarantied Party on behalf of Beneficiaries and shall forthwith be paid over to Guarantied Party for the benefit of Beneficiaries to be credited and applied against the Guarantied Obligations but without affecting, impairing or limiting in any manner the liability of Guarantor under any other provision of this Guaranty. 2.9 EXPENSES. Guarantor agrees to pay, or cause to be paid, promptly -------- upon written demand, and to save Beneficiaries harmless against liability for, any and all reasonable costs and reasonable expenses (including reasonable fees and reasonable disbursements of counsel and allocated costs of internal counsel) incurred or expended by any Beneficiary in connection with the enforcement of or preservation of any rights under this Guaranty. 2.10 CONTINUING GUARANTY; TERMINATION OF GUARANTY. This Guaranty is a -------------------------------------------- continuing guaranty and shall remain in effect until all of the Guarantied Obligations shall have been paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled. Guarantor hereby irrevocably waives any right (including without limitation any such right arising under California Civil Code Section 2815) to revoke this Guaranty as to future transactions giving rise to any Guarantied Obligations. 2.11 AUTHORITY OF GUARANTOR OR COMPANY. It is not necessary for any --------------------------------- Beneficiary to inquire into the capacity or powers of Guarantor or Company or the officers, directors or any agents acting or purporting to act on behalf of any of them. 2.12 FINANCIAL CONDITION OF COMPANY. Any Loans may be granted to Company ------------------------------ or continued from time to time, and any Lender Interest Rate Agreements may be entered into from time to time, in each case without notice to or authorization from Guarantor regardless of the financial or other condition of Company at the time of any such grant or continuation or at the time such Lender Interest Rate Agreement is entered into, as the case may be. No Beneficiary shall have any obligation to disclose or discuss with Guarantor its assessment, or Guarantor's assessment, of the financial condition of Company. Guarantor has adequate means to obtain information from Company on a continuing basis concerning the financial condition of Company and its ability to perform its obligations under the Loan Documents and the Lender Interest Rate Agreements, and Guarantor assumes the responsibility for being and keeping informed of the financial condition of Company and of all circumstances bearing upon the risk of nonpayment of the Guarantied Obligations. Guarantor hereby waives and relinquishes any duty on the part of any Beneficiary to disclose any matter, fact or thing relating to the business, operations or conditions of Company now known or hereafter known by any Beneficiary. 2.13 RIGHTS CUMULATIVE. The rights, powers and remedies given to ----------------- Beneficiaries by this Guaranty are cumulative and shall be in addition to and independent of all rights, powers and remedies given to Beneficiaries by virtue of any statute or rule of law or in any of the other Loan Documents, any of the Lender Interest Rate Agreements or any agreement XXI-12 between Guarantor and any Beneficiary or Beneficiaries or between Company and any Beneficiary or Beneficiaries. Any forbearance or failure to exercise, and any delay by any Beneficiary in exercising, any right, power or remedy hereunder shall not impair any such right, power or remedy or be construed to be a waiver thereof, nor shall it preclude the further exercise of any such right, power or remedy. 2.14 BANKRUPTCY; POST-PETITION INTEREST; REINSTATEMENT OF GUARANTY. (a) ------------------------------------------------------------- So long as any Guarantied Obligations remain outstanding, Guarantor shall not, without the prior written consent of Guarantied Party acting pursuant to the instructions of Requisite Obligees (as defined in subsection 3.12), commence or join with any other Person in commencing any bankruptcy, reorganization or insolvency proceedings of or against Company. The obligations of Guarantor under this Guaranty shall not be reduced, limited, impaired, discharged, deferred, suspended or terminated by any proceeding, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement of Company or by any defense which Company may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding. The agreements of Guarantor in this subsection 2.14(a) shall not alter or impair its rights as a shareholder of Borrower. (b) Guarantor acknowledges and agrees that any interest on any portion of the Guarantied Obligations which accrues after the commencement of any proceeding referred to in clause (a) above (or, if interest on any portion of the Guarantied Obligations ceases to accrue by operation of law by reason of the commencement of said proceeding, such interest as would have accrued on such portion of the Guarantied Obligations if said proceedings had not been commenced) shall be included in the Guarantied Obligations because it is the intention of Guarantor and Beneficiaries that the Guarantied Obligations which are guarantied by Guarantor pursuant to this Guaranty should be determined without regard to any rule of law or order which may relieve Company of any portion of such Guarantied Obligations. Guarantor will permit any trustee in bankruptcy, receiver, debtor in possession, assignee for the benefit of creditors or similar person to pay Guarantied Party, or allow the claim of Guarantied Party in respect of, any such interest accruing after the date on which such proceeding is commenced. (c) In the event that all or any portion of the Guarantied Obligations are paid by Company, the obligations of Guarantor hereunder shall continue and remain in full force and effect or be reinstated, as the case may be, in the event that all or any part of such payment(s) are rescinded or recovered directly or indirectly from any Beneficiary as a preference, fraudulent transfer or otherwise, and any such payments which are so rescinded or recovered shall constitute Guarantied Obligations for all purposes under this Guaranty until indefeasibly paid in full. 2.15 SET OFF. In addition to any other rights any Beneficiary may have ------- under law or in equity, if any amount shall at any time be due and owing by Guarantor to any Beneficiary under this Guaranty, such Beneficiary is authorized at any time or from time to time, without notice (any such notice being hereby expressly waived), to set off and to appropriate and to apply any and all deposits (general or special, including but not limited to indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness of such Beneficiary owing to Guarantor and any other property of Guarantor held by any XXI-13 Beneficiary to or for the credit or the account of Guarantor against and on account of the Guarantied Obligations and liabilities of Guarantor to any Beneficiary under this Guaranty. SECTION 3. MISCELLANEOUS 3.1 SURVIVAL OF WARRANTIES. All agreements, representations and ---------------------- warranties made herein shall survive the execution and delivery of this Guaranty and the other Loan Documents and the Lender Interest Rate Agreements and any increase in the Commitments under any Financing Agreement. 3.2 NOTICES. Any communications between Guarantied Party and Guarantor ------- and any notices or requests provided herein to be given may be given by mailing the same, postage prepaid, or by telex, facsimile transmission or cable to each such party at its addresses set forth in the Financing Agreements, on the signature pages hereof or to such other addresses as each such party may in writing hereafter indicate. Any notice, request or demand to or upon Guarantied Party or Guarantor shall not be effective until received. 3.3 SEVERABILITY. In case any provision in or obligation under this ------------ Guaranty shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 3.4 AMENDMENTS AND WAIVERS. No amendment, modification, termination or ---------------------- waiver of any provision of this Guaranty, and no consent to any departure by Guarantor therefrom, shall in any event be effective without the written concurrence of Guarantied Party and, in the case of any such amendment or modification, Guarantor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. 3.5 HEADINGS. Section and subsection headings in this Guaranty are -------- included herein for convenience of reference only and shall not constitute a part of this Guaranty for any other purpose or be given any substantive effect. 3.6 APPLICABLE LAW. THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF -------------- GUARANTOR AND BENEFICIARIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. 3.7 SUCCESSORS AND ASSIGNS. This Guaranty is a continuing guaranty and ---------------------- shall be binding upon Guarantor and its successors and assigns. This Guaranty shall inure to the benefit of Beneficiaries and their respective successors and assigns. Guarantor shall not assign this Guaranty or any of the rights or obligations of Guarantor hereunder without the prior written consent of all Lenders. Any Beneficiary may, without notice or consent, assign its XXI-14 interest in this Guaranty in whole or in part. The terms and provisions of this Guaranty shall inure to the benefit of any transferee or assignee of any Loan, and in the event of such transfer or assignment the rights and privileges herein conferred upon such Beneficiary shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. 3.8 NO OTHER WRITING. This writing is intended by Guarantor and ---------------- Beneficiaries as the final expression of this Guaranty and is also intended as a complete and exclusive statement of the terms of their agreement with respect to the matters covered hereby. No course of dealing, course of performance or trade usage, and no parol evidence of any nature, shall be used to supplement or modify any terms of this Guaranty. There are no conditions to the full effectiveness of this Guaranty. 3.9 FURTHER ASSURANCES. At any time or from time to time, upon the ------------------ request of Guarantied Party, Guarantor shall execute and deliver such further documents and do such other acts and things as Guarantied Party may reasonably request in order to effect fully the purposes of this Guaranty. 3.10 GUARANTIED PARTY AS COLLATERAL AGENT. ------------------------------------ (a) Guarantied Party has been appointed to act as Guarantied Party hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and by AXEL Administrative Agent on behalf of the AXEL Lenders pursuant to the Intercreditor Agreement, and by their acceptance of the benefits hereof, Interest Rate Exchangers and shall be entitled to the benefits of the Intercreditor Agreement. Guarantied Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action, solely in accordance with this Guaranty and Intercreditor Agreement; provided -------- that Guarantied Party shall exercise, or refrain from exercising, any remedies hereunder in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this subsection 3.12, each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to enforce this Guaranty, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Guarantied Party for the benefit of Beneficiaries in accordance with the terms of this subsection 3.12. (b) Guarantied Party shall at all times be the same Person that is Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Written notice of resignation by Collateral Agent pursuant to the Intercreditor Agreement shall also constitute XXI-15 notice of resignation as Guarantied Party under this Guaranty; removal of Collateral Agent pursuant to the Intercreditor Agreement shall also constitute removal as Guarantied Party under this Guaranty; and appointment of a successor Collateral Agent pursuant to the Intercreditor Agreement shall also constitute appointment of a successor Guarantied Party under this Guaranty. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Guarantied Party under this Guaranty, and the retiring or removed Guarantied Party under this Guaranty shall promptly (i) transfer to such successor Guarantied Party all sums held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Guarantied Party under this Guaranty, and (ii) take such other actions as may be necessary or appropriate in connection with the assignment to such successor Guarantied Party of the rights created hereunder, whereupon such retiring or removed Guarantied Party shall be discharged from its duties and obligations under this Guaranty. After any retiring or removed Guarantied Party's resignation or removal hereunder as Guarantied Party, the provisions of this Guaranty shall inure to its benefit as to any actions taken or omitted to be taken by it under this Guaranty while it was Guarantied Party hereunder. [Remainder of page intentionally left blank] XXI-16 IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of the date first written above. SEALY CORPORATION By: ------------------------------------ Name: Title: XXI-17 EXHIBIT XXII [FORM OF HOLDINGS PLEDGE AGREEMENT] HOLDINGS PLEDGE AGREEMENT This HOLDINGS PLEDGE AGREEMENT (this "AGREEMENT") is dated as of December 18, 1997 and entered into by and between SEALY CORPORATION, a Delaware corporation ("PLEDGOR"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as Collateral Agent for and representative of (in such capacity herein called "COLLATERAL AGENT") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined). RECITALS A. Pledgor is the legal and beneficial owner of (i) the shares of stock (the "PLEDGED SHARES") described in Part A of Schedule I annexed hereto and ---------- issued by the corporations named therein and (ii) the indebtedness (the "PLEDGED DEBT") described in Part B of said Schedule I and issued by the ---------- obligors named therein. B. Sealy Mattress Company, an Ohio Corporation ("COMPANY"), Pledgor, the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO."), as documentation agent (in such capacity, "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the ("CREDIT AGREEMENT") pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. C. Company, Pledgor, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity, "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "AXEL ADMINISTRATIVE AGENT"), and BTCo., as documentation agent (in such capacity, "AXEL DOCUMENTATION AGENT") have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, the CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL XXII-1 Lenders have made certain commitments, subject to the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Company. D. Company may from time to time enter into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more CA Lenders or their Affiliates or AXEL Lenders or their Affiliates (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). E. Pledgor has executed and delivered that certain Holdings Guaranty dated as of December 18, 1997 (said Holdings Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "GUARANTY") in favor of Collateral Agent for the benefit of Secured Parties and any Interest Rate Exchangers, pursuant to which Pledgor has guarantied the prompt payment and performance when due of all obligations of Company under the Financing Agreements and all obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments, if any, thereunder in the event of early termination thereof. F. It is a condition precedent to the initial extensions of credit by Secured Parties under the Financing Agreements that Pledgor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of, the Company, (iii) the AXEL Administrative Agent, the AXEL Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement, (iv) the AXEL Lenders to make their respective loans to the Company and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor hereby agrees with Collateral Agent as follows: SECTION 1. DEFINED TERMS ------------- (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. XXII-2 "ADDITIONAL PLEDGED SHARES" has the meaning assigned to that term in Section 2(c) of this Agreement. "AGREEMENT" means this Company Pledge Agreement dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "AXEL COMMITMENTS" shall mean "Commitments" as defined in the AXEL Credit Agreement. "AXEL OBLIGATIONS" shall mean "Obligations" as defined in the AXEL Credit Agreement. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. "FINANCING AGREEMENT" means the Credit Agreement or the AXEL Credit Agreement, and "Financing Agreements" means the Credit Agreement and the AXEL Credit Agreement, collectively. "FINANCING AGREEMENT OBLIGATIONS" means Credit Agreement Obligations and AXEL Obligations. XXII-3 "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "NEW PLEDGED SHARES" has the meaning assigned to that term in Section 2(e) of this Agreement. "PLEDGE AMENDMENT" has the meaning assigned to that term in Section 7 of this Agreement. "PLEDGED COLLATERAL" has the meaning assigned to that term in Section 2 of this Agreement. "PLEDGED DEBT" has the meaning assigned to that term in the recitals to this Agreement. "PLEDGED SHARES" has the meaning assigned to that term in the recitals to this Agreement. "PLEDGOR" has the meaning assigned to that term in the introduction of this Agreement. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL Lenders, and (B) XXII-4 if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. "REQUISITE OBLIGEES" has the meaning assigned to that term in Section 17(a) of this Agreement. "SECURED OBLIGATIONS" has the meaning assigned to that term in Section 3 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. SECTION 2. PLEDGE OF SECURITY. ------------------ Pledgor hereby pledges and assigns to Secured Party, and hereby grants to Collateral Agent a security interest in, all of Pledgor's right, title and interest in and to the following (the "PLEDGED COLLATERAL"): (a) the Pledged Shares and the certificates representing the Pledged Shares and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to the Pledged Shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; (b) the Pledged Debt and the instruments evidencing the Pledged Debt, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Debt; (c) all additional shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any issuer of the Pledged Shares from time to time acquired by Pledgor in any manner (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such additional shares, securities, warrants, options or other rights and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such additional shares (all such shares, securities, warrants, options, rights, certificates, instruments and interests collectively being "ADDITIONAL PLEDGED SHARES"), and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Additional Pledged Shares; (d) all additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt and the instruments evidencing such indebtedness, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; XXII-5 (e) all shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a Subsidiary of Pledgor (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such shares, securities, warrants, options or other rights and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such shares (all such shares, securities, warrants, options, rights, certificates, instruments and interests collectively being "NEW PLEDGED SHARES"), and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares, securities, warrants, options or other rights; (f) all indebtedness from time to time owed to Pledgor by any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a Subsidiary of Pledgor, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; and (g) to the extent not covered by clauses (a) through (f) above, all proceeds of any or all of the foregoing Pledged Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Pledged Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, proceeds of any indemnity or guaranty payable to Pledgor or Collateral Agent from time to time with respect to any of the Pledged Collateral. SECTION 3. SECURITY FOR OBLIGATIONS. ------------------------ This Agreement secures, and the Pledged Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all obligations and liabilities of every nature of Pledgor now or hereafter existing under or arising out of or in connection with the Guaranty and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Company, would accrue on such obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Collateral Agent or any Secured Party or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise, and all XXII-6 obligations of every nature of Pledgor now or hereafter existing under this Agreement (all such obligations of Pledgor being the "SECURED OBLIGATIONS"). SECTION 4. DELIVERY OF PLEDGED COLLATERAL. ------------------------------ All certificates or instruments representing or evidencing the Pledged Collateral shall be delivered to and held by or on behalf of Collateral Agent pursuant hereto and shall be in suitable form for transfer by delivery or, as applicable, shall be accompanied by Pledgor's endorsement, where necessary, or duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to Collateral Agent. Upon the occurrence and during the continuation of an Event of Default, Collateral Agent shall have the right, without notice to Pledgor, to transfer to or to register in the name of Collateral Agent or any of its nominees any or all of the Pledged Collateral, subject only to the revocable rights specified in Section 8(a). In addition, upon the occurrence and during the continuance of an Event of Default, Collateral Agent shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Collateral for certificates or instruments of smaller or larger denominations. SECTION 5. REPRESENTATIONS AND WARRANTIES. ------------------------------ Pledgor represents and warrants as follows: (a) Due Authorization, etc. of Pledged Collateral. All of the Pledged --------------------------------------------- Shares have been duly authorized and validly issued and are fully paid and non-assessable. All of the Pledged Debt has been duly authorized, authenticated or issued, and delivered and is the legal, valid and binding obligation of the issuers thereof and is not in default. (b) Description of Pledged Collateral. The Pledged Shares constitute the --------------------------------- percentage of the issued and outstanding shares of stock of each issuer thereof set forth on Schedule I annexed hereto, and there are no outstanding ---------- warrants, options or other rights to purchase, or other agreements outstanding with respect to, or property that is now or hereafter convertible into, or that requires the issuance or sale of, any Pledged Shares. The Pledged Debt constitutes all of the issued and outstanding intercompany indebtedness evidenced by a promissory note of the respective issuers thereof owing to Pledgor. (c) Ownership of Pledged Collateral. Pledgor is the legal, record and ------------------------------- beneficial owner of the Pledged Collateral free and clear of any Lien except for the security interest created by this Agreement. XXII-7 SECTION 6. TRANSFERS AND OTHER LIENS; ADDITIONAL PLEDGED COLLATERAL; ETC. -------------------------------------------------------------- Pledgor shall: (a) not, except as expressly permitted by the Financing Agreements (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral, (ii) create or suffer to exist any Lien upon or with respect to any of the Pledged Collateral, except for the security interest under this Agreement, or (iii) permit any issuer of Pledged Shares to merge or consolidate; (b) (i) cause each issuer of Pledged Shares not to issue any stock or other securities in addition to or in substitution for the Pledged Shares issued by such issuer, except to Pledgor, (ii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities of each issuer of Pledged Shares, and (iii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all shares of stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of Pledgor; (c) (i) pledge hereunder, immediately upon their issuance, any and all instruments or other evidences of additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt, and (ii) pledge hereunder, immediately upon their issuance, any and all instruments or other evidences of indebtedness from time to time owed to Pledgor by any Person that after the date of this Agreement becomes, as a result of any occurrence, a Subsidiary of Pledgor; (d) pay promptly when due all taxes, assessments and governmental charges or levies imposed upon, and all claims against, the Pledged Collateral, except to the extent the validity thereof is being contested in good faith. SECTION 7. FURTHER ASSURANCES; PLEDGE AMENDMENTS. ------------------------------------- (a) Pledgor agrees that from time to time, at the expense of Pledgor, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Without limiting the generality of the foregoing, Pledgor will: (i) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, or as Collateral Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby and (ii) at Secured Party's reasonable request, appear in and defend any action or proceeding that may affect Pledgor's title to or Secured Party's security interest in all or any part of the Pledged Collateral. XXII-8 (b) Pledgor further agrees that it will, upon obtaining any additional shares of stock or other securities required to be pledged hereunder as provided in Section 6(b) or (c), promptly (and in any event within five Business Days) deliver to Collateral Agent a Pledge Amendment, duly executed by Pledgor, in substantially the form of Schedule II annexed hereto (a "PLEDGE AMENDMENT"), ----------- in respect of the additional Pledged Shares or Pledged Debt to be pledged pursuant to this Agreement. Pledgor hereby authorizes Collateral Agent to attach each Pledge Amendment to this Agreement and agrees that all Pledged Shares or Pledged Debt listed on any Pledge Amendment delivered to Collateral Agent shall for all purposes hereunder be considered Pledged Collateral; provided that the failure of Pledgor to execute a Pledge Amendment with respect - -------- to any additional Pledged Shares or Pledged Debt pledged pursuant to this Agreement shall not impair the security interest of Collateral Agent therein or otherwise adversely affect the rights and remedies of Collateral Agent hereunder with respect thereto. SECTION 8. VOTING RIGHTS; DIVIDENDS; ETC. ------------------------------ (a) So long as no Event of Default shall have occurred and be continuing: (i) Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Financing Agreements; (ii) Pledgor shall be entitled to receive and retain, and to utilize free and clear of the lien of this Agreement, any and all dividends and interest paid in respect of the Pledged Collateral; provided, however, that any and -------- ------- all dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral, shall be, and shall forthwith be delivered to Collateral Agent to hold as, Pledged Collateral and shall, if received by Pledgor, be received in trust for the benefit of Collateral Agent, be segregated from the other property or funds of Pledgor and be forthwith delivered to Collateral Agent as Pledged Collateral in the same form as so received (with all necessary endorsements); and (iii) Collateral Agent shall promptly execute and deliver (or cause to be executed and delivered) to Pledgor all such proxies, dividend payment orders and other instruments as Pledgor may from time to time reasonably request for the purpose of enabling Pledgor to exercise the voting and other consensual rights which it is entitled to exercise pursuant to paragraph (i) above and to receive the dividends, principal or interest payments which it is authorized to receive and retain pursuant to paragraph (ii) above. (b) Upon the occurrence and during the continuation of an Event of Default: (i) upon written notice from Collateral Agent to Pledgor, all rights of Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 8(a)(i) shall cease, and all such rights shall XXII-9 thereupon become vested in Collateral Agent who shall thereupon have the sole right to exercise such voting and other consensual rights; (ii) all rights of Pledgor to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 8(a)(ii) shall cease, and all such rights shall thereupon become vested in Collateral Agent who shall thereupon have the sole right to receive and hold as Pledged Collateral such dividends and interest payments; and (iii) all dividends, principal and interest payments which are received by Pledgor contrary to the provisions of paragraph (ii) of this Section 8(b) shall be (A) forthwith (and in any event within two Business Days) deposited by the Pledgor to the exact form received, duly endorsed by the Pledgor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent for the account of the Secured Parties only as provided in Section 15, (B) until so turned over in accordance with the preceding subsection (A), all such amounts and proceeds received by Grantor shall be received in trust for the benefit of Collateral Agent hereunder -- and shall be segregated from other funds of Pledgor. (c) In order to permit Collateral Agent to exercise the voting and other consensual rights which it may be entitled to exercise pursuant to Section 8(b)(i) and to receive all dividends and other distributions which it may be entitled to receive under Section 8(a)(ii) or Section 8(b)(ii), (i) Pledgor shall promptly execute and deliver (or cause to be executed and delivered) to Collateral Agent all such proxies, dividend payment orders and other instruments as Collateral Agent may from time to time reasonably request and (ii) without limiting the effect of the immediately preceding clause (i), Pledgor hereby grants to Collateral Agent an irrevocable proxy to vote the Pledged Shares and to exercise all other rights, powers, privileges and remedies to which a holder of the Pledged Shares would be entitled (including, without limitation, giving or withholding written consents of shareholders, calling special meetings of shareholders and voting at such meetings), which proxy shall be effective, automatically and without the necessity of any action (including any transfer of any Pledged Shares on the record books of the issuer thereof) by any other Person (including the issuer of the Pledged Shares or any officer or agent thereof), upon the occurrence and during the continuance of an Event of Default and which proxy shall only terminate upon the payment in full of the Secured Obligations. SECTION 9. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. ------------------------------------------- Pledgor hereby irrevocably appoints Collateral Agent as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor, Collateral Agent or otherwise, from time to time, upon the occurrence and during the continuance of an Event of Default, in Collateral Agents's reasonable discretion to take any action and to execute any instrument that Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: XXII-10 (a) to file one or more financing or continuation statements, or amendments thereto, relative to all or any part of the Pledged Collateral without the signature of Pledgor; (b) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Pledged Collateral; (c) to receive, endorse and collect any instruments made payable to Pledgor representing any dividend, principal or interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same; and (d) to file any claims or take any action or institute any proceedings that Collateral Agent may reasonably deem necessary or desirable for the collection of any of the Pledged Collateral or otherwise to enforce the rights of Collateral Agent with respect to any of the Pledged Collateral. SECTION 10. COLLATERAL AGENT MAY PERFORM. ---------------------------- If Pledgor fails to perform any agreement contained herein, Collateral Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of Collateral Agent incurred in connection therewith shall be payable by Pledgor under Section 16(b). SECTION 11. STANDARD OF CARE. ---------------- The powers conferred on Collateral Agent hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Pledged Collateral in its possession and the accounting for moneys actually received by it hereunder, Collateral Agent shall have no duty as to any Pledged Collateral, it being understood that Collateral Agent shall have no responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Pledged Collateral, whether or not Collateral Agent has or is deemed to have knowledge of such matters, (b) taking any necessary steps (other than steps taken in accordance with the standard of care set forth above to maintain possession of the Pledged Collateral) to preserve rights against any parties with respect to any Pledged Collateral, (c) taking any necessary steps to collect or realize upon the Secured Obligations or any guarantee therefor, or any part thereof, or any of the Pledged Collateral, or (d) initiating any action to protect the Pledged Collateral against the possibility of a decline in market value. Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equal to that which Collateral Agent accords its own property consisting of negotiable securities. XXII-11 SECTION 12. REMEDIES. -------- (a) If any Event of Default shall have occurred and be continuing, Collateral Agent may exercise in respect of the Pledged Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Pledged Collateral), and Collateral Agent may also in its sole discretion, without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange or broker's board or at any of Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Collateral Agent may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Pledged Collateral. Collateral Agent or any Secured Party or Interest Rate Exchanger may be the purchaser of any or all of the Pledged Collateral at any such sale and Secured Party, as agent for and representative of Secured Parties and Interest Rate Exchangers (but not any Secured Party or Secured Parties or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Obligees (shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Pledged Collateral payable by Collateral Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Pledgor, and Pledgor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Collateral Agent shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Pledgor hereby waives any claims against Collateral Agent arising by reason of the fact that the price at which any Pledged Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Collateral Agent accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Pledged Collateral are insufficient to pay all the Secured Obligations, Pledgor shall be liable for the deficiency and the reasonable fees of any attorneys employed by Collateral Agent to collect such deficiency. (b) Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws, Collateral Agent may be compelled, with respect to any sale of all or any part of the Pledged Collateral conducted without prior registration or qualification of such Pledged Collateral under the Securities Act and/or such state securities laws, to limit purchasers to those who will agree, among other things, to acquire the Pledged Collateral for their own account, for investment and not with a view to the XXII-12 distribution or resale thereof. Pledgor acknowledges that any such private sales may be at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including, without limitation, a public offering made pursuant to a registration statement under the Securities Act) and, notwithstanding such circumstances and the regis tration rights granted to Collateral Agent by Pledgor pursuant to Section 13, Pledgor agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that Collateral Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Pledged Collateral for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would, or should, agree to so register it. (c) If Collateral Agent determines to exercise its right to sell any or all of the Pledged Collateral, upon written request, Pledgor shall and shall cause each issuer of any Pledged Shares to be sold hereunder from time to time to furnish to Collateral Agent all such information as Collateral Agent may reasonably request in order to determine the number of shares and other instruments included in the Pledged Collateral which may be sold by Collateral Agent in exempt transactions under the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder, as the same are from time to time in effect. SECTION 13. REGISTRATION RIGHTS. ------------------- If Collateral Agent shall determine to exercise its right to sell all or any of the Pledged Collateral pursuant to Section 12, Pledgor agrees that, upon request of Collateral Agent (which request may be made by Collateral Agent in its sole discretion), Pledgor will, at its own expense: (a) execute and deliver, and cause each issuer of the Pledged Collateral contemplated to be sold and the directors and officers thereof to execute and deliver, all such instruments and documents, and do or cause to be done all such other acts and things, as may be necessary or, in the opinion of Collateral Agent, advisable to register such Pledged Collateral under the provisions of the Securities Act and to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectus which, in the opinion of Collateral Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto; (b) use its best efforts to qualify the Pledged Collateral under all applicable state securities or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Pledged Collateral, as requested by Collateral Agent; (c) cause each such issuer to make available to its security holders, as soon as practicable, an earnings statement which will satisfy the provisions of Section 11(a) of the Securities Act; XXII-13 (d) do or cause to be done all such other acts and things as may be necessary to make such sale of the Pledged Collateral or any part thereof valid and binding and in compliance with applicable law; and (e) bear all costs and expenses, including reasonable attorneys' fees, of carrying out its obligations under this Section 13. Pledgor further agrees that a breach of any of the covenants contained in this Section 13 will cause irreparable injury to Collateral Agent, that Collateral Agent has no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 13 shall be specifically enforceable against Pledgor, and Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no default has occurred giving rise to the Secured Obligations becoming due and payable prior to their stated maturities. Nothing in this Section 13 shall in any way alter the rights of Collateral Agent under Section 13. SECTION 14. PROCEEDS TO BE TURNED OVER TO COLLATERAL AGENT. ---------------------------------------------- In addition to the rights of the Collateral Agent and the Secured Parties specified in Section 8(b), if an Event of Default shall occur and be continuing, upon request of the Collateral Agent, all proceeds received by the Pledgor consisting of cash, checks and other near-cash items shall be held by the Pledgor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of the Pledgor and shall, forthwith upon receipt by the Pledgor, be turned over to the Collateral Agent in the exact form received by the Pledgor (duly indorsed by the Pledgor to the Collateral Agent, if required) and held by the Collateral Agent in a Collateral Account maintained under the Intercreditor Agreement. All proceeds while held by the Collateral Agent in a Collateral Account (or by the Pledgor in trust for the Collateral Agent and the Secured Parties) shall continue to be held as collateral security for all the Secured Obligations and shall not constitute payment thereof until applied as provided in Section 15. SECTION 15. APPLICATION OF PROCEEDS. ----------------------- All proceeds held in any Collateral Account and all other proceeds received by Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral shall be applied as provided in subsection 3 of the Intercreditor Agreement. SECTION 16. INDEMNITY AND EXPENSES. ---------------------- (a) Pledgor agrees to indemnify Collateral Agent, each Secured Party and each Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Collateral Agents's or such Secured Party's or XXII-14 Interest Rate Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Pledgor shall pay to Collateral Agent promptly following written demand the amount of any and all reasonable costs and reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Pledged Collateral, (iii) the exercise or enforcement of any of the rights of Collateral Agent hereunder, or (iv) the failure by Pledgor to perform or observe any of the provisions hereof. (c) In the event of any public sale described in Section 13, Pledgor agrees to indemnify and hold harmless Collateral Agent, each Secured Party and each Interest Rate Exchanger and each of their respective directors, officers, employees and agents (collectively, called the "INDEMNITEES") from and against any and all Indemnified Liabilities (as hereinafter defined); provided that Pledgor shall not have an obligation to any Indemnitee hereunder with respect to any Indemnified Liabilities to the extent such Indemnified Liabilities arise from the bad faith, gross negligence or wilful misconduct of that Indemnitee as determined by a final, non-appealable judgement of a court of competent jurisdiction. This indemnity shall be in addition to any liability which Pledgor may otherwise have and shall extend upon the same terms and conditions to each Person, if any, that controls Collateral Agent or such Persons within the meaning of the Securities Act. As used herein, "INDEMNIFIED LIABILITIES" means, collectively any and all liabilities, obligations, losses, fees, costs, expenses, damages, or claims, joint or several, to which any such Indemnitee may become subject or for which any Indemnitee may be liable, under the Securities Act or otherwise, insofar as such losses, fees, costs, expenses, damages, liabilities or claims (or any litigation commenced or threatened in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact made by Pledgor or its Subsidiaries or based on information provided by Pledgor or its Subsidiaries, contained in any preliminary prospectus, registration statement, prospectus or other such document published or filed in connection with such public sale, or any amendment or supplement thereto, or arise out of or are based upon an omission or alleged omission by Pledgor or its Subsidiaries or caused by the inaction of Pledgor or its Subsidiaries to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and any legal or other expenses reasonably incurred by any Indemnitee in connection with any litigation, of any nature whatsoever, commenced or threatened in respect thereof (including without limitation any and all fees, costs and expenses whatsoever reasonably incurred by any Indemnitee and counsel for any Indemnitee in investigating, preparing for, defending against or providing evidence, producing documents or taking any other action in respect of, any such commenced or threatened litigation or any claims asserted). SECTION 17. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. ----------------------------------------------- This Agreement shall create a continuing security interest in the Pledged Collateral and shall (a) remain in full force and effect until the payment in full of all Secured Obligations XXII-15 (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Pledgor, its successors and assigns, and (c) inure, together with the rights and remedies of Collateral Agent hereunder, to the benefit of Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement and subsection 10.1 of the AXEL Credit Agreement, any Secured Party may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Pledged Collateral shall revert to Pledgor. Upon any such termination Collateral Agent will, at Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination in accordance with the terms of the Intercreditor Agreement and Pledgor shall be entitled to the return, upon its request and at its expense, against receipt and without recourse to Collateral Agent, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 18. COLLATERAL AGENT AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Collateral Agent has been appointed to act as Collateral Agent hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and AXEL Administrative Agent on behalf of the AXEL Lenders pursuant to Intercreditor Agreement and, by their acceptance of the benefits hereof, Interest Rate Exchangers and shall be entitled to the benefits of the Intercreditor Agreement. Collateral Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Pledged Collateral), solely in accordance with this Agreement and the Intercreditor Agreement; provided that Collateral Agent shall exercise, or refrain from -------- exercising, any remedies provided for in Section 12 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 18(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Pledged Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Collateral Agent for the benefit of Secured Parties and Interest Rate Exchangers in accordance with the terms of this Section 18(a). XXII-16 (b) Collateral Agent shall at all times be the same Person that is appointed Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent under this Agreement, and the retiring or removed Collateral Agent under this Agreement shall promptly (i) transfer to such successor Collateral Agent all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Collateral Agent under this Agreement, and (ii) execute and deliver to such successor Collateral Agent such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Collateral Agent of the security interests created hereunder, whereupon such retiring or removed Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Collateral Agent hereunder. SECTION 19. AMENDMENTS; ETC. --------------- No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Pledgor therefrom, shall in any event be effective unless the same shall be in writing and signed by Collateral Agent and, in the case of any such amendment or modification, by Pledgor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 20. NOTICES. ------- Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notice to -------- Collateral Agent and Pledgor shall not be effective until received. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto. SECTION 21. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. ----------------------------------------------------- No failure or delay on the part of Collateral Agent in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other XXII-17 power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 22. SEVERABILITY. ------------ In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 23. HEADINGS. -------- Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 24. GOVERNING LAW; TERMS. -------------------- THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 25. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] XXII-18 IN WITNESS WHEREOF, Pledgor and Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. SEALY CORPORATION By: --------------------------------- Name: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Collateral Agent By: --------------------------------- Name: Title: XXII-19 SCHEDULE I Attached to and forming a part of the Holdings Pledge Agreement dated as of December 18, 1997 between Sealy Corporation, as Pledgor, and Morgan Guaranty Trust Company of New York, as Collateral Agent. PART A
=========================================================================== PERCENTAGE OF STOCK NUMBER OUTSTANDING CLASS OF CERTIFICATE PAR OF SHARES STOCK ISSUER STOCK NOS. VALUE SHARES PLEDGED =========================================================================== - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- ===========================================================================
PART B
============================================================= AMOUNT OF DEBT ISSUER INDEBTEDNESS ============================================================= ------------------------------------------------------------- ------------------------------------------------------------- ------------------------------------------------------------- =============================================================
XXII-20 SCHEDULE II PLEDGE AMENDMENT This Pledge Amendment, dated ____________, [199_][200_], is delivered pursuant to Section 6(b) of the Pledge Agreement referred to below. The undersigned hereby agrees that this Pledge Amendment may be attached to the Holdings Pledge Agreement dated as of December 18, 1997, between the undersigned and Morgan Guaranty Trust Company of New York, as Collateral Agent (the "PLEDGE AGREEMENT," capitalized terms defined therein being used herein as therein defined), and that the [Pledged Shares] [Pledged Debt] listed on this Pledge Amendment shall be deemed to be part of the [Pledged Shares] [Pledged Debt] and shall become part of the Pledged Collateral and shall secure all Secured Obligations. SEALY CORPORATION By: ------------------------------- Name: Title:
========================================================================== CLASS STOCK NUMBER PERCENTAGE OF OF CERTIFICATE PAR OF OUTSTANDING STOCK ISSUER STOCK NOS. VALUE SHARES SHARES PLEDGED ========================================================================== - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- ==========================================================================
XXII-21 EXHIBIT XXIII [FORM OF HOLDINGS SECURITY AGREEMENT] HOLDINGS SECURITY AGREEMENT This HOLDINGS SECURITY AGREEMENT (this "AGREEMENT") is dated as of December 18, 1997 and entered into by and between SEALY CORPORATION, a Delaware corporation ("GRANTOR"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN GUARANTY"), as Collateral Agent, for and representative of (in such capacity herein called "COLLATERAL AGENT") the Secured Parties (as hereinafter defined) and any Interest Rate Exchangers (as hereinafter defined). RECITALS A. Sealy Mattress Company, an Ohio Corporation ("COMPANY"), Grantor, the financial institutions from time to time parties thereto (the "CREDIT AGREEMENT LENDERS"), Goldman Sachs Credit Partners L.P. ("GSCP"), as arranger and syndication agent (in such capacity, "CA SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "CA ADMINISTRATIVE AGENT"), and Bankers Trust Company ("BTCO."), as documentation agent (in such capacity, "CA DOCUMENTATION AGENT") have entered into a Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT") pursuant to which Credit Agreement Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. B. Company, Grantor, the financial institutions from time to time parties thereto (the "AXEL LENDERS"), GSCP, as arranger and syndication agent (in such capacity, "AXEL SYNDICATION AGENT"), Morgan Guaranty, as administrative agent (in such capacity, "AXEL ADMINISTRATIVE AGENT"), and BTCo., as documentation agent (in such capacity, "AXEL DOCUMENTATION AGENT") have entered into an AXEL Credit Agreement dated as of December 18, 1997 (said AXEL Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "AXEL CREDIT AGREEMENT"; the Credit Agreement Lenders, the CA Syndication Agent, the CA Administrative Agent, the CA Documentation Agent, the AXEL Lenders, the AXEL Syndication Agent, the AXEL Administrative Agent, and the AXEL Documentation Agent each being a "SECURED PARTY" and collectively the "SECURED PARTIES") pursuant to which AXEL Lenders have made certain commitments, subject to the terms and conditions set forth in the AXEL Credit Agreement, to extend certain credit facilities to Company. C. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE XXIII-1 AGREEMENTS") with one or more CA Lenders or their Affiliates or AXEL Lenders or their Affiliates (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). D. Grantor has executed and delivered that certain Holdings Guaranty dated as of December 18, 1997 (said Holdings Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "GUARANTY") in favor of Collateral Agent for the benefit of Secured Parties and any Interest Rate Exchangers, pursuant to which Grantor has guarantied the prompt payment and performance when due of all obligations of Company under the Finance Agreements and any other Loan Documents and all obligations of Company under the Lender Interest Rate Agreements, including without limitation the obligation of Company to make payments, if any, thereunder in the event of early termination thereof. E. It is a condition precedent to the initial extensions of credit by Secured Parties under the Financing Agreements that Grantor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and to induce (i) the CA Administrative Agent, the CA Syndication Agent and the Credit Agreement Lenders to enter into the Credit Agreement, (ii) the Credit Agreement Lenders to make their respective loans to, and issue Letters of Credit for the account of Company, (iii) the AXEL Administrative Agent, the AXEL Syndication Agent and the AXEL Lenders to enter into the AXEL Loan Agreement, (iv) the AXEL Lenders to make their respective loans to Company and (v) to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Grantor hereby agrees with the Collateral Agent as follows: SECTION 1. DEFINED TERMS. ------------- (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to such terms in the Credit Agreement; (b) The following terms shall have the following meanings: "ACCELERATION" shall mean any of the Credit Agreement Obligations or the AXEL Credit Agreement Obligations have been declared, or have become, immediately due and payable, or the commitments to extend credit of the Credit Agreement Lenders or the AXEL Lenders shall have been terminated under Section 8 of the Credit Agreement or Section 7 of the AXEL Credit Agreement, respectively. "ACCOUNTS" has the meaning assigned to that term in Section 2 of this Agreement. "AGREEMENT" means this Company Security Agreement dated as of December 18, 1997, as it may be amended, supplemented or otherwise modified from time to time. XXIII-2 "ASSIGNED AGREEMENT" has the meaning assigned to that term in Section 2 of this Agreement. "AXEL COMMITMENTS" shall mean the "Commitments" as defined in the AXEL Credit Agreement. "AXEL CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "AXEL OBLIGATIONS" shall mean the "Obligations" as defined in the AXEL Credit Agreement. "COLLATERAL" has the meaning assigned to that term in Section 2 of this Agreement. "COLLATERAL ACCOUNTS" shall mean "Collateral Accounts" as defined in the Intercreditor Agreement. "COMMITMENTS" means the Credit Agreement Commitments and the AXEL Commitments. "CREDIT AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "CREDIT AGREEMENT COMMITMENTS" shall mean the "Commitments" as defined in the Credit Agreement. "CREDIT AGREEMENT OBLIGATIONS" shall mean the "Obligations" as defined in the Credit Agreement. "EQUIPMENT" has the meaning assigned to that term in Section 2 of this Agreement. "EVENT OF DEFAULT" means any "Event of Default" as defined in any Financing Agreement or the occurrence of an Event of Default in which Company is the Defaulting Party and which results in the designation of an Early Termination Date (as such terms are defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement. "FINANCING AGREEMENT" means either the Credit Agreement or the AXEL Credit Agreement, and "Financing Agreements" means the Credit Agreement and the AXEL Credit Agreement, collectively. "FINANCING AGREEMENT OBLIGATIONS" means Credit Agreement Obligations and AXEL Obligations. XXIII-3 "GRANTOR" has the meaning assigned to that term in the introduction of this Agreement. "HOLDINGS" has the meaning assigned to that term in the recitals to this Agreement. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement, dated as of December 18, 1997, by and among CA Administrative Agent, AXEL Administrative Agent and Collateral Agent. "INTEREST RATE EXCHANGERS" has the meaning assigned to that term in the recitals to this Agreement. "INVENTORY" has the meaning assigned to that term in Section 2 of this Agreement. "LENDER INTEREST RATE AGREEMENT" has the meaning assigned to that term in the recitals to this Agreement. "LOAN" means any "Loan" as defined in any Financing Agreement, and "LOANS" means all such Loans collectively. "LOAN DOCUMENT" means any "Loan Document" as defined in any Financing Agreement, and "LOAN DOCUMENTS" means all such Loan Documents collectively. "NEGOTIABLE DOCUMENT OF TITLE" has the meaning assigned to that term in Section 2 of this Agreement. "POTENTIAL EVENT OF DEFAULT" means any "Potential Event of Default" as defined in any Financing Agreement. "RELATED CONTRACTS" has the meaning assigned to that term in Section 2 of this Agreement. "REQUISITE AXEL LENDERS" means "Requisite Lenders" as defined in the AXEL Credit Agreement. "REQUISITE CREDIT AGREEMENT LENDERS" means "Requisite Lenders" as defined in the Credit Agreement. "REQUISITE LENDERS" means (A) unless an Acceleration shall have occurred and be continuing, the Requisite Credit Agreement Lenders and the Requisite AXEL Lenders, and (B) if an Acceleration has occurred and is continuing, Secured Parties holding more than 50% of the Financing Agreement Obligations. XXIII-4 "REQUISITE OBLIGEES" has the meaning assigned to that term in Section 23 of this Agreement. "SECURED OBLIGATIONS" has the meaning assigned to that term in Section 2 of this Agreement. "SECURED PARTIES" has the meaning assigned to that term in the recitals to this Agreement. SECTION 2. GRANT OF SECURITY. ----------------- Grantor hereby assigns to Collateral Agent, and hereby grants to Collateral Agent a security interest in, all of Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Grantor now has or hereafter acquires an interest and wherever the same may be located (the "COLLATERAL"): (a) all equipment in all of its forms, all parts thereof and all accessions thereto (any and all such equipment, parts and accessions being the "EQUIPMENT"); (b) all inventory in all of its forms (including, but not limited to, (i) all goods held by Grantor for sale or lease or to be furnished under contracts of service or so leased or furnished, (ii) all raw materials, work in process, finished goods, and materials used or consumed in the manufacture, packing, shipping, advertising, selling, leasing, furnishing or production of such inventory or otherwise used or consumed in Grantor's business, (iii) all goods in which Grantor has an interest in mass or a joint or other interest or right of any kind, and (iv) all goods which are returned to or repossessed by Grantor) and all accessions thereto and products thereof (all such inventory, accessions and products being the "INVENTORY") and all negotiable and non-negotiable documents of title (including without limitation warehouse receipts, dock receipts and bills of lading) issued by any Person covering any Inventory (any such negotiable document of title being a "NEGOTIABLE DOCUMENT OF TITLE"); (c) all accounts, contract rights, chattel paper, documents, instruments, general intangibles and other rights and obligations of any kind and all rights in, to and under all security agreements, leases and other contracts securing or otherwise relating to any such accounts, contract rights, chattel paper, documents, instruments, general intangibles or other obligations (any and all such accounts, contract rights, chattel paper, documents, instruments, general intangibles and other obligations being the "ACCOUNTS", and any and all such security agreements, leases and other contracts being the "RELATED CONTRACTS"); (d) all agreements and contracts to which Grantor is a party as of the date hereof or becomes a party after the date hereof, as each such agreement may be amended, supplemented or otherwise modified from time to time (said agreements, as so amended, supplemented or otherwise modified, being referred to herein individually as an "ASSIGNED AGREEMENT" and collectively as the "ASSIGNED AGREEMENTS"), including (i) all rights of Grantor to receive moneys due or to become due under or pursuant to the Assigned Agreements, (ii) all rights of Grantor to receive proceeds of any insurance, indemnity, warranty or guaranty with respect to the Assigned Agreements, (iii) all claims of Grantor for damages arising out of any breach of or default under the Assigned Agreements, and (iv) all rights of Grantor to terminate, amend, supplement, modify or exercise rights or options under the Assigned Agreements, to perform thereunder and to compel performance and otherwise exercise all remedies thereunder; (e) all deposit accounts, including without limitation all deposit accounts maintained with Collateral Agent; (f) all trademarks, tradenames, tradesecrets, business names, patents, patent applications, licenses, copyrights, registrations and franchise rights, and all goodwill associated with any of the foregoing; (g) to the extent not included in any other paragraph of this Section 2, all other general intangibles (including without limitation tax refunds, rights to payment or performance, choses in action and judgments taken on any rights or claims included in the Collateral); (h) all plant fixtures, business fixtures and other fixtures and storage and office facilities, and all accessions thereto and products thereof; (i) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; and (j) all proceeds, products, rents and profits of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Collateral Agent is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. Notwithstanding anything herein to the contrary, in no event shall the Collateral include, and Grantor shall not be deemed to have granted a security interest in, any of Grantor's rights or interests in any license, contract or agreement to which Grantor is a party or any of its rights or interests thereunder to the extent, but only to the extent, that such a grant would, under the terms of such license, contract or agreement or otherwise, result in a breach of the terms of, or constitute a default under any license, contract or agreement to which Grantor is a party (other than to the extent that any such term would be rendered ineffective pursuant to Section 9-318(4) of the Uniform Commercial Code of any relevant jurisdiction or any other applicable law (including the Bankruptcy Code) or principles of equity); provided, -------- XXIII-6 that immediately upon the ineffectiveness, lapse or termination of any such provision, the Collateral shall include, and Grantor shall be deemed to have granted a security interest in, all such rights and interests as if such provision had never been in effect. SECTION 3. SECURITY FOR OBLIGATIONS. ------------------------ This Agreement secures, and the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all obligations and liabilities of every nature of Grantor now or hereafter existing under or arising out of or in connection with the Guaranty and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Company, would accrue on such obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Collateral Agent or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise and all obligations of every nature of Grantor now or hereafter existing under this Agreement (all such obligations of Grantor being the "SECURED OBLIGATIONS"). SECTION 4. GRANTOR REMAINS LIABLE. ---------------------- Anything contained herein to the contrary notwithstanding, (a) Grantor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Collateral Agent of any of its rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Collateral Agent shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Collateral Agent be obligated to perform any of the obligations or duties of Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 5. REPRESENTATIONS AND WARRANTIES. ------------------------------ Grantor represents and warrants as follows: (a) Ownership of Collateral. Except for the security interest created by ----------------------- this Agreement, Grantor owns the Collateral free and clear of any Lien subject to Liens permitted by the Financing Agreements. XXIII-7 (b) Location of Equipment and Inventory. All of the Equipment and ----------------------------------- Inventory is, as of the date hereof, located at the places specified in Schedule 5(b) annexed hereto. ------------- (c) Negotiable Documents of Title. No Negotiable Documents of Title are ----------------------------- outstanding with respect to any of the Inventory (other than in respect of (i) Inventory with an aggregate value not in excess of $1,000,000 or (ii) Inventory which, in the ordinary course of business, is in transit either (A) from a supplier to Grantor, (B) between the locations specified in Schedule 5(b) hereto, or (C) to customers of Grantor). ------------- (d) Office Locations; Other Names. The chief place of business, the ----------------------------- chief executive office and the office where Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts is, and has been for the four month period preceding the date hereof, located at the places indicated on Schedule 5d. Grantor has not in ----------- the past done, and does not now do, business under any other name (including any trade-name or fictitious business name) except for those names set forth on Schedule 5d. ----------- XXIII-8 SECTION 6. FURTHER ASSURANCES. ------------------ (a) Grantor agrees that from time to time, at the expense of Grantor, Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Grantor will: (i) mark conspicuously each item of chattel paper included in the Accounts, each Related Contract and, at the reasonable request of Collateral Agent, each of its records pertaining to the Collateral, with a legend, in form and substance reasonably satisfactory to Collateral Agent, indicating that such Collateral is subject to the security interest granted hereby, (ii) at the reasonable request of Collateral Agent, deliver and pledge to Collateral Agent hereunder all promissory notes and other instruments (excluding checks) and all original counterparts of chattel paper constituting Collateral, duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance reasonably satisfactory to Collateral Agent, (iii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, or as Collateral Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iv) after the acquisition by Grantor of any item of Equipment which is covered by a certificate of title under a statute of any jurisdiction under the law of which indication of a security interest on such certificate is required as a condition of perfection thereof, upon the reasonable request of Collateral Agent, execute and file with the registrar of motor vehicles or other appropriate authority in such jurisdiction an application or other document requesting the notation or other indication of the security interest created hereunder on such certificate of title, (v) upon the reasonable request of Collateral Agent, deliver to Collateral Agent copies of all such applications or other documents filed during such calendar quarter and copies of all such certificates of title issued during such calendar quarter indicating the security interest created hereunder in the items of Equipment covered thereby, and (vi) at Collateral Agent's reasonable request, appear in and defend any action or proceeding that may affect Grantor's title to or Collateral Agent's security interest in all or any part of the Collateral. (b) Grantor hereby authorizes Collateral Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Grantor to the extent permitted by applicable law. Grantor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by Grantor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. SECTION 7. CERTAIN COVENANTS OF GRANTOR. ---------------------------- Grantor shall: (a) notify Collateral Agent of any change in Grantor's name, identity or corporate structure within 30 days of such change; XXIII-9 (b) give Collateral Agent 30 days' written notice following any change in Grantor's chief place of business, chief executive office or residence or the office where Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts; (c) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent the validity thereof is being contested in good faith. SECTION 8. SPECIAL COVENANTS WITH RESPECT TO EQUIPMENT AND INVENTORY. --------------------------------------------------------- Grantor shall: (a) keep the Equipment and Inventory at the places therefor specified on Schedule 5(b) annexed hereto or, upon 30 days' written notice ------------- to Collateral Agent following any change in location, at such other places in jurisdictions where all action that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder, with respect to such Equipment and Inventory shall have been taken; (b) cause the Equipment to be maintained and preserved in working order, ordinary wear and tear and damage by casualty excepted, and in accordance with Grantor's past practices, and shall forthwith make or cause to be made all repairs, replacements and other improvements in connection therewith that are necessary in the Grantor's reasonable business judgment to such end. (c) keep correct and accurate records of the Inventory, itemizing and describing the kind, type and quantity of Inventory, Grantor's cost therefor and (where applicable) the current list prices for the Inventory; (d) if any Inventory is in possession or control of any of Grantor's agents or processors, upon the occurrence of an Event of Default, instruct such agent or processor to hold all such Inventory for the account of Collateral Agent and subject to the instructions of Collateral Agent; and (e) promptly upon the issuance and delivery to Grantor of any Negotiable Document of Title (other than any one or more Negotiable Documents of Title covering (i) Inventory with an aggregate value not in excess of $1,000,000 or (ii) Inventory which, in the ordinary course of business, is in transit either (A) from a supplier to Grantor, (B) between the locations specified in Schedule 5(b) hereto, or (C) to customers of ------------- Grantor), deliver such Negotiable Document of Title to Collateral Agent. SECTION 9. INSURANCE. --------- XXIII-10 Grantor shall, at its own expense, maintain insurance with respect to the Equipment and Inventory in accordance with the terms of the Financing Agreements. SECTION 10. SPECIAL COVENANTS WITH RESPECT TO ACCOUNTS AND RELATED CONTRACTS. ---------------------------------------------------------------- (a) Grantor shall keep its chief place of business and chief executive office and the office where it keeps its records concerning the Accounts and Related Contracts, and all originals of all chattel paper that evidence Accounts, at the location therefor specified in Section 4 or, upon 30 days' written notice to Collateral Agent following any change in location, at such other location in a jurisdiction where all action that Collateral Agent may request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder, with respect to such Accounts and Related Contracts shall have been taken. Promptly upon the reasonable request of Collateral Agent, Grantor shall deliver to Collateral Agent complete and correct copies of each Related Contract. (b) Grantor shall, maintain (i) complete records of each Account, including records of all payments received, credits granted and merchandise returned, and (ii) all documentation relating thereto in accordance with prudent business practices. (c) Except as otherwise provided in this subsection (c), Grantor shall continue to collect, at its own expense, all amounts due or to become due to Grantor under the Accounts and Related Contracts. In connection with such collections, Grantor shall take such action as Grantor or Collateral Agent may deem necessary or advisable to enforce collection of amounts due or to become due under the Accounts; provided, however, that Collateral Agent shall have the -------- ------- right at any time, upon the occurrence and during the continuation of an Event of Default and upon written notice to Grantor of its intention to do so, to notify the account debtors or obligors under any Accounts of the assignment of such Accounts to Collateral Agent and to direct such account debtors or obligors to make payment of all amounts due or to become due to Grantor thereunder directly to Collateral Agent, to notify each Person maintaining a lockbox or similar arrangement to which account debtors or obligors under any Accounts have been directed to make payment to remit all amounts representing collections on checks and other payment items from time to time sent to or deposited in such lockbox or other arrangement directly to Collateral Agent and, upon such notification and at the expense of Grantor, to enforce collection of any such Accounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Grantor might have done. After receipt by Grantor of the notice from Collateral Agent referred to in the proviso to the preceding sentence, (i) any payments of Accounts, received by the - ------- Grantor shall be forthwith (and in any event within two Business Days) deposited by the Grantor in the exact form received, duly indorsed by the Grantor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of the Secured Parties only as provided in Section 20, (ii) until so turned over in accordance with the proceeding subsection (i), all amounts and proceeds (including checks and other instruments) received by Grantor in respect of the Accounts and the Related Contracts shall be received in trust for the benefit of Collateral Agent hereunder and shall be segregated from other funds of Grantor and (iii) Grantor shall not XXIII-11 adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon. SECTION 11. DEPOSIT ACCOUNTS. ---------------- Upon the occurrence and during the continuation of an Event of Default, Collateral Agent may exercise dominion and control over, and refuse to permit further withdrawals (whether of money, securities, instruments or other property) from any deposit accounts maintained with Collateral Agent constituting part of the Collateral. SECTION 12. LICENSE OF PATENTS, TRADEMARKS, COPYRIGHTS, ETC. ----------------------------------------------- Grantor hereby assigns, transfers and conveys to Collateral Agent, effective upon the occurrence of any Event of Default, the nonexclusive right and license to use all trademarks, tradenames, copyrights, patents or technical processes owned or used by Grantor that relate to the Collateral and any other collateral granted by Grantor as security for the Secured Obligations, together with any goodwill associated therewith, all to the extent necessary to enable Collateral Agent to use, possess and realize on the Collateral and to enable any successor or assign to enjoy the benefits of the Collateral. This right and license shall inure to the benefit of all successors, assigns and transferees of Collateral Agent and its successors, assigns and transferees, whether by voluntary conveyance, operation of law, assignment, transfer, foreclosure, deed in lieu of foreclosure or otherwise. Such right and license is granted free of charge, without requirement that any monetary payment whatsoever be made to Grantor. SECTION 13. TRANSFERS AND OTHER LIENS. ------------------------- Grantor shall not: (a) sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Financing Agreements; or (b) except for the security interest created by this Agreement and Liens permitted by the Financing Agreements, create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person. SECTION 14. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. ------------------------------------------- Grantor hereby irrevocably appoints Collateral Agent as Grantor's attorney-in-fact, with full authority in the place and stead of Grantor and in the name of Grantor, Collateral Agent or otherwise, from time to time, upon the occurrence and during the continuance of an Event of Default, in Collateral Agent's reasonable discretion to take any action and to execute any instrument that Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: XXIII-12 (a) to obtain and adjust insurance required to be maintained by Grantor or paid to Collateral Agent pursuant to Section 9; (b) to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (c) to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clauses (a) and (b) above; (d) to file any claims or take any action or institute any proceedings that Collateral Agent may reasonably deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Collateral Agent with respect to any of the Collateral; (e) to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Credit Agreements) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Collateral Agent in its reasonable discretion, any such payments made by Collateral Agent to become obligations of Grantor to Collateral Agent, due and payable immediately without demand; (f) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with Accounts and other documents relating to the Collateral; and (g) upon the occurrence and during the continuation of an Event of Default, generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Collateral Agent were the absolute owner thereof for all purposes, and to do, at Collateral Agent's option and Grantor's expense, at any time or from time to time, all acts and things that Collateral Agent reasonably deems necessary to protect, preserve or realize upon the Collateral and Collateral Agent's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as Grantor might do. SECTION 15. COLLATERAL AGENT MAY PERFORM. ---------------------------- If Grantor fails to perform any agreement contained herein, Collateral Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of Collateral Agent incurred in connection therewith shall be payable by Grantor under Section 21. XXIII-13 SECTION 16. STANDARD OF CARE. ---------------- The powers conferred on Collateral Agent hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Collateral Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Collateral Agent accords its own property. SECTION 17. REMEDIES. -------- If any Event of Default shall have occurred and be continuing, Collateral Agent may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Collateral), and also may (a) require Grantor to, and Grantor hereby agrees that it will at its expense and upon request of Collateral Agent forthwith, assemble all or part of the Collateral as directed by Collateral Agent and make it available to Collateral Agent at a place to be designated by Collateral Agent that is reasonably convenient to both parties, (b) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (c) prior to the disposition of the Collateral, store, process, repair or recondition the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Collateral Agent deems appropriate, (d) take possession of Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same and any of Grantor's equipment for the purpose of completing any work in process, taking any actions described in the preceding clause (c) and collecting any Secured Obligation, and (e) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Collateral Agent may deem commercially reasonable. Collateral Agent or any Secured Party or Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Collateral Agent, as agent for and representative of Secured Parties and Interest Rate Exchangers (but not any Secured Party or Secured Parties or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Obligees shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Collateral Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Grantor, and Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Grantor agrees that, to the extent notice of sale shall be required by law, at least ten XXIII-14 days' notice to Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Collateral Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Grantor hereby waives any claims against Collateral Agent arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Collateral Agent accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantor shall be liable for the deficiency and the reasonable fees of any attorneys employed by Collateral Agent to collect such deficiency. SECTION 18. PROCEEDS TO BE TURNED OVER TO COLLATERAL AGENT. ---------------------------------------------- In addition to the rights of the Collateral Agent and the Secured Parties specified in Section 10 with respect to payments of Accounts, if an Event of Default shall occur and be continuing, upon request of the Collateral Agent, all proceeds received by the Grantor consisting of cash, checks and other near-cash items shall be held by the Grantor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of the Grantor, and shall, forthwith upon receipt by the Grantor, be turned over to the Collateral Agent in the exact form received by the Grantor (duly indorsed by the Grantor to the Collateral Agent, if required) and held by the Collateral Agent in a Collateral Account maintained under the Intercreditor Agreement. All proceeds while held by the Collateral Agent in a Collateral Account (or by the Grantor in trust for the Collateral Agent and the Secured Parties) shall continue to be held as collateral security for all the Secured Obligations and shall not constitute payment thereof until applied as provided in Section 20. SECTION 19. APPLICATION OF PROCEEDS. ----------------------- Except as expressly provided elsewhere in this Agreement, all proceeds held in any Collateral Account and all other proceeds received by Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in subsection 3 of the Intercreditor Agreement. SECTION 20. INDEMNITY AND EXPENSES. ---------------------- (a) Grantor agrees to indemnify Collateral Agent, each Secured Party Lender and each Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result from Collateral Agent's or such Secured Party's or Interest Rate Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. XXIII-15 (b) Grantor shall pay to Collateral Agent promptly following written demand the amount of any and all reasonable costs and reasonable expenses, including the reasonable fees and reasonable expenses of its counsel and of any experts and agents, that Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Collateral Agent hereunder, or (iv) the failure by Grantor to perform or observe any of the provisions hereof. SECTION 21. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. ----------------------------------------------- This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of the Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantor, its successors and assigns, and (c) inure, together with the rights and remedies of Collateral Agent hereunder, to the benefit of Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement and subsection 10.1 of the AXEL Credit Agreement, any Secured Party may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Secured Parties herein or otherwise. Upon the payment in full of all Secured Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to Grantor. Upon any such termination Collateral Agent will, at Grantor's expense, execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination in accordance with the terms of the Intercreditor Agreement. SECTION 22. COLLATERAL AGENT AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Collateral Agent has been appointed to act as Collateral Agent hereunder by CA Administrative Agent on behalf of the Credit Agreement Lenders and AXEL Administrative Agent on behalf of the AXEL Lenders pursuant to the Intercreditor Agreement and, by their acceptance of the benefits hereof, Interest Rate Exchangers, and shall be entitled to the benefits of the Intercreditor Agreement. Collateral Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Collateral), solely in accordance with this Agreement and the Intercreditor Agreement; provided that Collateral Agent shall exercise, or refrain from exercising, any - -------- remedies provided for in Section 18 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Financing Agreement Obligations under the Financing Agreements and any other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar XXIII-16 payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 23(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Collateral Agent for the benefit of Secured Parties and Interest Rate Exchangers in accordance with the terms of this Section 23(a). (b) Collateral Agent shall at all times be the same Person that is appointed Collateral Agent under the Intercreditor Agreement. The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Intercreditor Agreement. Upon the acceptance of any appointment as Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent under this Agreement, and the retiring or removed Collateral Agent under this Agreement shall promptly (i) transfer to such successor Collateral Agent all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Collateral Agent under this Agreement, and (ii) execute and deliver to such successor Collateral Agent such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Collateral Agent of the security interests created hereunder, whereupon such retiring or removed Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Collateral Agent hereunder. SECTION 23. AMENDMENTS; ETC. --------------- No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Grantor therefrom, shall in any event be effective unless the same shall be in writing and signed by Collateral Agent and, in the case of any such amendment or modification, by Grantor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. XXIII-17 SECTION 24. NOTICES. ------- Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices -------- to Collateral Agent and Grantor shall not be effective until received. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto. SECTION 25. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. ----------------------------------------------------- No failure or delay on the part of Collateral Agent in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 26. SEVERABILITY. ------------ In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 27. HEADINGS. -------- Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 28. GOVERNING LAW; TERMS. -------------------- THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined XXIII-18 herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 29. COUNTERPARTS. ------------ This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] XXIII-19 IN WITNESS WHEREOF, Grantor and Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. SEALY CORPORATION By: ________________________________ Name: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Collateral Agent By: ________________________________ Name: Title: XXIII-20 SCHEDULE 5(b) TO HOLDINGS SECURITY AGREEMENT Locations of Equipment: Locations of Inventory: XXIII-21 EXHIBIT XXIV [FORM OF MORTGAGE] -------------------------------------------------------- MORTGAGE, ASSIGNMENT OF RENTS AND LEASES, SECURITY AGREEMENT AND FIXTURE FILING ([**STATE**]) made from [** SEALY OWNERSHIP ENTITY **], "Mortgagor" to MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent, "Mortgagee" Date: As of December 18, 1997 -------------------------------------------------------- PREPARED BY, RECORDING REQUESTED BY, AND WHEN RECORDED MAIL TO: O'Melveny & Myers LLP 153 East 53rd Street New York, New York 10022-4611 Attention: Francis J. Burgweger, Esq. File #317,790-084[1] - ------------------- [16]NOTE: If this Mortgage or the Notes which this Mortgage secures are in your possession, DO NOT DESTROY THEM. State law may require presentation of this Mortgage and/or the Notes in order to obtain a termination or release of this Mortgage upon satisfaction of the indebtedness secured hereby. The termination or release must be recorded in the city, town, county or parish records for the jurisdiction in which the land described in the Exhibit A is --------- located. XXIV-1 TABLE OF CONTENTS
Page Definition of Mortgaged Property, Granting Clauses......................................................................... 1 SECTION 1 OBLIGATIONS OF BORROWER UNDER THE CREDIT AGREEMENT.......................... 8 SECTION 2 COVENANTS AND AGREEMENTS OF MORTGAGOR....................................... 8 2.1 Payment and Performance of Obligations......................................... 8 2.2 Assignment of Policies Upon Foreclosure........................................ 8 2.3 Inspections.................................................................... 9 2.4 Actions by Mortgagee To Preserve Mortgaged Property............................ 10 2.5 Action by Mortgagee to Protect Interests; Subrogation; Waiver of Offset........ 11 2.6 Restrictions on Transfer of Mortgaged Property by Mortgagor.................... 12 2.7 Incorporation by Reference; Full Performance Required; Survival of Warranties.. 13 2.8 Additional Security............................................................ 13 2.9 Further Acts................................................................... 13 2.10 Offsite Improvements........................................................... 14 2.11 Utilities...................................................................... 15 2.12 Leasehold Estate............................................................... 15 SECTION 3 ASSIGNMENT OF RENTS AND LEASES.............................................. 22 3.1 Assignment of Rents and Leases................................................. 22
XXIV-i
Page 3.2 No Limitation of Rights......................................................... 22 3.3 Sale of Mortgaged Property...................................................... 23 3.4 Term of Assignment.............................................................. 23 3.5 Perfection Upon Recordation..................................................... 24 3.6 Bankruptcy Provisions........................................................... 24 SECTION 4 SECURITY AGREEMENT.......................................................... 24 4.1 Grant of Security; Incorporation by Reference................................... 24 4.2 Fixture Filing Financing Statements............................................. 25 4.3 Mortgagee as Secured Party...................................................... 25 SECTION 5 DEFAULTS AND REMEDIES....................................................... 25 5.1 Events of Default............................................................... 25 5.2 Fixtures........................................................................ 26 5.3 Remedies........................................................................ 26 5.4 Costs and Expenses.............................................................. 32 5.5 Additional Rights of Mortgagee.................................................. 32 5.6 Application of Proceeds......................................................... 32 SECTION 6 INDEMNIFICATION............................... 33 SECTION 7 TERMINATION................................... 33
XXIV-ii
Page SECTION 8 MISCELLANEOUS COVENANTS AND AGREEMENTS...................................... 34 8.1 Cumulative Rights; Waivers; Modifications....................................... 34 8.2 Partial Releases................................................................ 34 8.3 Severability.................................................................... 34 8.4 Subrogation..................................................................... 35 8.5 Mortgagee's Powers.............................................................. 35 8.6 Enforceability of Mortgage...................................................... 36 8.7 Interest........................................................................ 36 8.8 Choice of Law................................................................... 36 8.9 Counterparts.................................................................... 36 8.10 Recording References............................................................ 37 8.11 Notices......................................................................... 37 8.12 Successors and Assigns.......................................................... 37 8.13 Expenses........................................................................ 38 8.14 Nonforeign Entity............................................................... 38 8.15 Purpose of the Loans............................................................ 38 8.16 No Joint Venture or Partnership................................................. 39 8.17 Amendments and Waivers.......................................................... 39 8.18 Covenants and Agreements Run with Land.......................................... 39
XXIV-iii
Page 8.19 Statements by Mortgagor......................................................... 39 8.20 Non-Waiver...................................................................... 39 8.21 Survival of Obligations......................................................... 40 8.22 Consent to Jurisdiction and Service of Process.................................. 40 8.23 Waiver of Jury Trial............................................................ 41
EXHIBIT A - LEGAL DESCRIPTION OF LAND EXHIBIT B - DESCRIPTION OF ADDITIONAL MORTGAGED PROPERTY EXHIBIT C - UCC INFORMATION SCHEDULE I - MORTGAGEE'S ADDITIONAL RIGHTS XXIV-iv MORTGAGE, ASSIGNMENT OF RENTS AND LEASES, SECURITY AGREEMENT AND FIXTURE FILING ([**STATE**]) THIS MORTGAGE, ASSIGNMENT OF RENTS AND LEASES, SECURITY AGREEMENT AND FIXTURE FILING ([**STATE**]) (this "MORTGAGE") is dated as of December 18, 1997, from [** SEALY OWNERSHIP ENTITY **], a _________ corporation ("MORTGAGOR"), whose address is [** ________ **], to MORGAN GUARANTY TRUST COMPANY OF NEW YORK, a [** ________ **] corporation, as Administrative Agent for the Lenders listed in the Credit Agreement (as hereinafter defined), having an address at [** _____ **] and all successors and assigns as agents (in such capacity, "AGENT"; Agent, together with its successors and assigns, "MORTGAGEE"). All capitalized terms used but not otherwise defined herein shall have the same meanings ascribed to such terms in the Credit Agreement. MORTGAGOR IS THE OWNER OF THE RECORD INTEREST IN THE PARCELS OF LAND AS INDICATED IN EXHIBIT A HERETO. --------- THIS MORTGAGE COVERS GOODS WHICH ARE OR ARE TO BECOME AFFIXED TO OR FIXTURES ON THE LAND DESCRIBED IN EXHIBIT A HERETO. THIS MORTGAGE IS A FIXTURE FILING AND --------- IS TO BE INDEXED, AMONG OTHER PLACES, IN THE REAL ESTATE RECORDS OF EACH COUNTY (OR, TO THE EXTENT SIMILAR RECORDS ARE MAINTAINED AT THE CITY OR TOWN LEVEL INSTEAD OF THE COUNTY LEVEL, EACH SUCH CITY OR TOWN) IN WHICH SAID LAND OR ANY PORTION THEREOF IS LOCATED. NOW, THEREFORE, for good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, and the mutual covenants herein contained, and in order to secure the Obligations (as hereinafter defined), MORTGAGOR HEREBY COVENANTS AND AGREES WITH AND REPRESENTS AND WARRANTS TO MORTGAGEE AS FOLLOWS: LVII. GRANTING CLAUSES. Mortgagor hereby: (i) grants, bargains, sells, assigns, pledges, transfers, mortgages and conveys, as security for the Obligations, those portions of the following described Mortgaged Property (as hereinafter defined) that constitute real property under the laws of the State wherein located to Mortgagee, WITH POWER OF SALE, pursuant to this Mortgage and Applicable Law, but subject to the Security Agreement (as hereinafter defined) and the assignment made in paragraph (iii) --------------- below, and subject to the Permitted Encumbrances, TO HAVE AND TO HOLD such portions of the Mortgaged Property, to Mortgagee and its successors and assigns forever, subject to all of the terms, conditions, covenants and agreements herein set forth, for the security and benefit of Mortgagee and its successors and assigns; and (ii) grants, as security for the Obligations, a security interest to Mortgagee in that portion of the Mortgaged Property constituting fixtures or personal property; and (iii) assigns and transfers to Mortgagee, as security for the Obligations, all of the Leases (as defined in Exhibit B) and all of the Rents --------- (as hereinafter defined) and other benefits derived from any Leases, whether now existing or hereafter created. All of Mortgagor's right, title and interest in and to the following described property now or hereafter located upon the Premises (as hereinafter defined), or appurtenant thereto, or used or to be used in connection with the present or future use, construction upon, leasing, sale, operation or occupancy of the Premises is herein collectively referred to as the "MORTGAGED PROPERTY": GRANTING CLAUSE FIRST LAND 1. The parcel of land located at ______________ in the City of_______________, County of _______________________ and State of _________________, as more particularly described in Exhibit A attached hereto --------- and by this reference incorporated herein, together with all strips and gores within or adjoining such property, all estate, right, title, interest, claim or demand whatsoever of Mortgagor in the streets, roads, sidewalks, alleys, and ways adjacent thereto (whether or not vacated and whether public or private and whether open or proposed), all vaults or chutes adjoining such land, all of the tenements, hereditaments, easements, reciprocal easement agreements, rights pursuant to any trackage agreement, rights to the use of common drive entries, rights-of-way and other rights, privileges and appurtenances thereunto belonging or in any way pertaining thereto, all reversions, remainders, dower and right of dower, curtesy and right of curtesy, all of the air space and right to use said air space above such property, all transferable development rights arising therefrom or transferred thereto, all water and water rights (whether riparian, appropriative or otherwise, and whether or not appurtenant) and shares of stock evidencing the same, all mineral, mining, gravel, oil, gas, hydrocarbon substances and other rights to produce or share in the production of anything related to such property, all drainage, crop, timber, agricultural, and horticultural rights with respect to such property, and all other appurtenances appurtenant to such property, including without limitation, any now or hereafter belonging or in anywise appertaining thereto, and all claims or demands of Mortgagor, either at law or in equity, in possession or expectancy, now or hereafter acquired, of, in or to the same (all of the foregoing being referred to herein, collectively, as the "LAND"); GRANTING CLAUSE SECOND IMPROVEMENTS 2. The Improvements described in Exhibit B attached hereto and by this --------- reference incorporated herein. The Land and the Improvements are referred to herein, collectively, as the "PREMISES"; XXIV-2 GRANTING CLAUSE THIRD RENTS, LEASES AND LEASE PROVISIONS 3. The Rents, Leases and Lease Provisions described in Exhibit B --------- attached hereto and by this reference incorporated herein, and that certain Subsidiary Pledge Agreement dated as of even date herewith from Mortgagor and the other pledgors listed on the signature pages thereof, as debtors, to Mortgagee, as secured party and as executed by any additional Subsidiary Guarantor from time to time thereafter as the same may hereafter be amended, modified, supplemented, restated or renewed (such Subsidiary Pledge Agreement, together with any and all amendments, modifications, supplements, restatements, extensions, renewals or replacements thereof are collectively referred to herein as the "SUBSIDIARY PLEDGE AGREEMENT" and that certain Subsidiary Security Agreement dated as of even date herewith from Mortgagor and the other grantors listed on the signature pages thereof, as debtors, to Mortgagee, as secured party, as the same may hereafter be amended, modified, supplemented, restated or renewed (such Subsidiary Security Agreement, together with any and all amendments, modifications, supplements, restatements, extensions, renewals or replacements thereof are collectively referred to herein as the "SUBSIDIARY SECURITY AGREEMENT") (the Subsidiary Pledge Agreement and the Subsidiary Security Agreement are collectively referred to as the "SECURITY AGREEMENT"); GRANTING CLAUSE FOURTH VARIOUS COLLATERAL 4. The Equipment, Materials, Specifications, Security Deposits, Financing Commitments, Inventory, Negotiable Documents of Title, Rolling Stock, Payment Rights, Accounts, Related Contracts, Assigned Related Agreements, Deposit Accounts, Deposit Account Collateral, Intellectual Property and General Intangibles described in Exhibit B attached hereto and by this reference --------- incorporated herein and any other property described in Exhibit B and not --------- described in any other Granting Clause (collectively, the "VARIOUS COLLATERAL"), subject to the terms and provisions of the Security Agreement; GRANTING CLAUSE FIFTH REFUNDS 5. The Refunds described in Exhibit B attached hereto and by this --------- reference incorporated herein, subject to the terms and provisions of the Security Agreement; GRANTING CLAUSE SIXTH INSURANCE/CONDEMNATION PROCEEDS 6. The Insurance/Condemnation Proceeds described in Exhibit B --------- attached hereto and by this reference incorporated herein, subject to the terms and provisions of the Security Agreement and Section 6.11 of the Credit ------------ Agreement; XXIV-3 GRANTING CLAUSE SEVENTH RECORDS AND PERMITS 7. The Records and Permits described in Exhibit B attached hereto and --------- by this reference incorporated herein, subject to the terms and provisions of the Security Agreement; GRANTING CLAUSE EIGHTH OPTIONS 8. The Options described in Exhibit B attached hereto and by this --------- reference incorporated herein, subject to the terms and provisions of the Security Agreement; GRANTING CLAUSE NINTH PROCEEDING RIGHTS 9. The Proceeding Rights described in Exhibit B attached hereto and by --------- this reference incorporated herein, subject to the terms and provisions of the Security Agreement; GRANTING CLAUSE TENTH ENCUMBRANCE RIGHTS 10. The Encumbrance Rights described in Exhibit B attached hereto and by --------- this reference incorporated herein, subject to the terms and provisions of the Security Agreement; GRANTING CLAUSE ELEVENTH GREATER ESTATE RIGHTS 11. The Greater Estate Rights described in Exhibit B attached hereto and --------- by this reference incorporated herein, subject to the terms and provisions of the Security Agreement; GRANTING CLAUSE TWELFTH AFTER ACQUIRED PROPERTY 12. All property hereafter acquired or constructed by Mortgagor of the type described in the foregoing Granting Clauses and located upon the Premises, or appurtenant thereto, or used or to be used in connection with the present or future use, construction upon, leasing, sale, operation or occupancy of the Premises, which shall forthwith, upon acquisition or construction thereof by Mortgagor and without any act or deed by Mortgagor or Mortgagee, become subject to the lien and security interest of this Mortgage as if such property were now owned by Mortgagor and were specifically described in this Mortgage and were specifically conveyed or encumbered hereby; and XXIV-4 GRANTING CLAUSE THIRTEENTH ACCESSIONS AND PROCEEDS 13. All accessions, additions, replacements, substitutions, renewals or attachments to, and proceeds of, any of the foregoing, TO HAVE AND TO HOLD the Mortgaged Property unto Mortgagee and its successors and assigns, for the uses and purposes set forth herein, forever. B. OBLIGATIONS. This Mortgage is given to secure ratably and equally the payment and performance of the following obligations (collectively referred to as the "OBLIGATIONS"): 1. Payment of and performance of (a) all "Guarantied Obligations" (the "GUARANTIED OBLIGATIONS") of Mortgagor under, and as defined in, that certain Subsidiary Guaranty dated as of even date herewith (the "SUBSIDIARY GUARANTY") from Mortgagor and other subsidiaries of Company and Holdings (Company and Holdings collectively, "BORROWER") in favor of and for the benefit of Mortgagee, pursuant to which Mortgagor is unconditionally and irrevocably, as a primary obligor and not merely as a surety, guarantying the due and punctual payment in full of the "Obligations" of Borrower under and as defined in that certain Credit Agreement dated as of even date herewith by and among Borrower, as borrower, Goldman Sachs Credit Partners, as syndication agent and arranger, the financial institutions listed on the signature pages thereof (each individually referred to herein as a "LENDER" and collectively as "LENDERS") and Mortgagee, and any and all amendments, modifications, supplements, restatements, extensions, renewals or replacements thereof (such Senior Secured Revolving Credit Agreement and any and all amendments, modifications, supplements, restatements, extensions, renewals or replacements thereof are collectively referred to herein as the "CREDIT AGREEMENT"); and (b) all obligations of Mortgagor under, with respect to or arising in connection with this Mortgage, including, without limitation, all obligations to Mortgagee for fees, costs and expenses (including attorneys' fees and disbursements) as provided therein and herein; 2. Payment and performance of all obligations of Mortgagor to the Lenders and/or Mortgagee for fees, costs and expenses required to be paid by Mortgagor under the other Loan Documents including, without limitation fees, costs and expenses (including attorneys' fees and disbursements), all becoming due as provided therein; XXIV-5 3. Payment of all sums advanced by the Lenders or Mortgagee in accordance with the provisions of this Mortgage or the other Loan Documents to protect the Mortgaged Property, with interest thereon at the rate specified in Section 2.2.E of the Credit Agreement (the "AGREED RATE"); ------------- 4. Payment of all sums advanced and costs and expenses incurred by the Lenders or Mortgagee in accordance with the terms of the Loan Documents in connection with the Obligations or any part thereof, any renewal, extension or change of or substitution for the Obligations or any part thereof, or the acquisition or perfection of the security therefor, whether such advances, costs and expenses were made or incurred at the request of Borrower, Mortgagor, Mortgagee or any Lender; 5. Payment of all other sums, with interest thereon, which may hereafter be loaned to Mortgagor, or its successors or assigns, by the Lenders or Mortgagee, or their respective successors or assigns, or by the holder of any of the Notes, pursuant to an agreement that recites that the repayment of such sums and Mortgagor's other obligations under such agreement are secured by this Mortgage; 6. Payment of all sums with respect to the Obligations that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a), including, without limitation, interest, fees and other charges that, but for the filing of a petition in bankruptcy with respect to Mortgagor would accrue on the Obligations, whether or not a claim is alleged against Mortgagor for such sums in any such bankruptcy proceeding; 7. Due, prompt and complete performance of every obligation, covenant and agreement of Mortgagor contained in any agreement now or hereafter executed by Mortgagor which recites that the obligations thereunder are secured by this Mortgage from and after the date on which all mortgage recording taxes, general intangible taxes or other taxes payable in respect of obligations have been paid; and 8. All renewals, extensions, amendments, modifications and changes and supplements of, or substitutions or replacements for, all or any part of the items described in Paragraphs 1 through 7 above. ---------------------- C. FUTURE ADVANCES. In addition to all other indebtedness secured by this Mortgage, this Mortgage shall also secure and constitute a first Lien on the Mortgaged Property for: XXIV-6 1. Mortgagor's guaranty of all future advances (including all extensions, renewals and modifications of such future advances) that relate directly or indirectly to the Credit Agreement (including advances pursuant to Section 2.1 thereof) or to this Mortgage and are made as provided in any ----------- of the Loan Documents by the Lenders or Mortgagee to Borrower or Mortgagor or otherwise as provided in any of the Loan Documents for any purpose so related after the date of this Mortgage, and Mortgagor acknowledges that the irrevocable and unconditional guaranty of such future advances is among the Obligations; and 2. all sums advanced or paid pursuant to the terms of this Mortgage by Mortgagee upon a default or Event of Default under the terms of this Mortgage (a) for real estate taxes, charges and assessments that may be imposed by law upon the Premises, (b) for premiums on insurance policies covering the Premises, (c) for expenses incurred in upholding the Lien of this Mortgage, including but not limited to the expenses of any litigation to prosecute or defend the rights and Lien created by this Mortgage, (d) to which Mortgagee becomes subrogated, upon payment, under recognized principles of law or equity, or under express statutory authority or (e) for any other purpose, in each case, with interest thereon at the Agreed Rate; and 3. all other sums expended by Mortgagee in accordance with the terms of this Mortgage (including without limitation the amounts advanced pursuant to Sections 2.3, 2.4, 2.5 and 5.5 hereof), ------------ --- --- --- just as if such advances were made on the date of this Mortgage. Any future advances may be made in accordance with the terms of the Credit Agreement, or at the option of Mortgagee, as provided herein or in the other Loan Documents. The total amount of the indebtedness that may be secured by this Mortgage may increase or decrease from time to time. D. DEFINITIONS AND INTERPRETATION. Supplementing the definitions listed below in this Paragraph D, the ----------- definitions set forth in Section 1.1 of the Credit Agreement and the provisions ----------- with respect to interpretation and construction of the Loan Documents as set forth in Sections 1.3 and 9.16 of the Credit Agreement are hereby incorporated ------------ ---- by reference into this Mortgage with the same effect as if set forth in full herein. The following terms used in this Mortgage shall have the following meanings: "APPLICABLE LAW" means, collectively, all statutes, laws, rules, regulations, ordinances, orders, decisions, writs, judgments, decrees and injunctions of governmental authorities (including Environmental Laws) affecting Borrower or the Collateral or any part thereof (including the acquisition, development, construction, renovation, occupancy, use, improvement, alteration, management, operation, maintenance, repair or restoration thereof), whether now or hereafter enacted and in force, and all authorizations relating thereto, and all covenants, conditions and restrictions contained in any instruments, either of record or known to Borrower, at any time in XXIV-7 force affecting any Property or any part thereof, including any such covenants, conditions and restrictions which may (i) require improvements, repairs or alterations in or to such Property or any part thereof or (ii) in any way limit the use and enjoyment thereof; for purposes of usury, Applicable Law means the law of the State of New York applicable to maximum rates of interest. "SECURED PARTY" means Mortgagee, in its capacity as administrative agent for and representative of the Lenders and any Interest Rate Exchangers (as defined in the Security Agreement (defined below)). "SECURITY AGREEMENT" means the Security Agreement executed and delivered by Borrower and the Mortgagee on or before the Closing Date, pursuant to which Borrower will pledge and grant a security interest in the Collateral described therein to Mortgagee for the benefit of the Mortgagee and the Lenders, as such Security Agreement may be amended, restated, supplemented or otherwise modified from time to time in accordance with the terms thereof and hereof. "TRANSFER" means any conveyance, assignment, sale, mortgaging, encumbrance, pledging, hypothecation, granting of a security interest in, granting of options with respect to or other disposition of (directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, and whether or not for consideration or of record) all or any portion of any legal or beneficial interest (i) in all or any portion of any Property or (ii) in any other assets of Borrower or any of Borrower's subsidiaries. Section 1 OBLIGATIONS OF BORROWER UNDER THE CREDIT AGREEMENT The "Obligations" of Borrower under and as defined in the Credit Agreement include, without limitation: (a) the due and punctual payment of the indebtedness, together with interest thereon and other amounts payable with respect thereto, owed under the Notes up to the maximum aggregate principal amount set forth in Section 2.1 of the Credit Agreement; (b) the due and ----------- punctual payment of all reimbursement obligations in respect of Letters of Credit together with interest thereon and other amounts payable with respect thereto; and (c) the due and punctual payment of any fee payable in accordance with Section 2.4 of the Credit Agreement (together with interest thereon and ----------- other amounts payable with respect thereto). XXIV-8 Section 2 COVENANTS AND AGREEMENTS OF MORTGAGOR 2.1 PAYMENT AND PERFORMANCE OF OBLIGATIONS. -------------------------------------- Mortgagor shall pay when due and perform the Obligations, including, without limitation, all amounts payable under and with respect to the Subsidiary Guaranty (including interest thereon as provided in the Subsidiary Guaranty); all charges, fees and other sums (including, without limitation, attorneys' fees and disbursements, late charges, prepayment charges and other amounts and all costs of collection) to be paid by Mortgagor as provided in this Mortgage or in the other Loan Documents; the principal and interest on any future advances secured by this Mortgage; and the principal of and interest on any other indebtedness secured by this Mortgage. 2.2 ASSIGNMENT OF POLICIES UPON FORECLOSURE. --------------------------------------- In the event of foreclosure of this Mortgage or other transfer of title or assignment of the Mortgaged Property, the acceptance by Mortgagee (or a nominee of Mortgagee) of a deed to any part of the Mortgaged Property in lieu of foreclosure of this Mortgage or in connection with a plan of reorganization filed under Chapter 11 of the Bankruptcy Code, or the exercise by Mortgagee of any remedy set forth herein, in extinguishment, in whole or in part, of the debt secured hereby or upon the acceptance by Mortgagee (or a nominee of Mortgagee) of a deed to any part of the Mortgaged Property in lieu of foreclosure of this Mortgage but not in extinguishment, in whole or in part, of the debt secured hereby, all right, title and interest of Mortgagor in and to all policies of insurance required pursuant to Section 6.4 of the Credit Agreement shall inure ----------- to the benefit of and pass to the successor in interest to Mortgagor or the purchaser or grantee of the Mortgaged Property. XXIV-9 2.3 INSPECTIONS. ----------- Mortgagee and its agents, representatives and employees are authorized to enter, at any reasonable time and upon reasonable prior notice to Mortgagor, upon or in any part of the Mortgaged Property as set forth in the Credit Agreement for the purpose of inspecting the same and for the purpose of performing any of the acts they are authorized to perform hereunder or under the terms of the Loan Documents, including performing any architectural, environmental and engineering audits and assessments. Mortgagee agrees that employees of Mortgagor shall be entitled to accompany Mortgagee and its agents, representatives and employees during any such inspection or other entry upon the Mortgaged Property, and Mortgagee and its agents, representatives and employees shall use reasonable efforts not to interfere with Mortgagor's operations at the Premises in connection with such inspection or other entry. Mortgagor shall, at Mortgagor's sole expense, conduct and complete all environmental investigations (including Phase I, Phase II and Phase III environmental investigations), inspections, monitoring, studies, sampling, testing, boring, reporting, clean up, containment, remediation and/or removal of any Hazardous Materials as and when required, and if the same are not timely conducted and completed by Mortgagor due to the fault of Mortgagor or any of its employees, then Mortgagee shall have the right to do so (at Mortgagee's option and without any obligation to do so) on Mortgagor's behalf and at Mortgagor's expense. Mortgagor hereby grants Mortgagee and its employees and agents an irrevocable and non-exclusive royalty-free license, to enter the Mortgaged Property and to investigate (including conducting Phase I, Phase II and Phase III environmental investigations), inspect, monitor, study, sample, test and conduct borings, to make such reports of the findings as may be required by Applicable Law, and to clean up, contain, remediate and/or remove Hazardous Materials (but Mortgagee shall have no obligation to do so). Without limitation of any other rights or remedies of Mortgagee, Mortgagor hereby irrevocably appoints and constitutes Mortgagee as its lawful attorney-in-fact, coupled with an interest and with full power of substitution, for the purpose of taking any of the actions described in the immediately preceding sentence and all acts incidental thereto. The costs of any investigation, inspection, monitoring, studying, sampling, testing, boring, clean-up, containment, remediation and/or removal shall be paid by Mortgagor and shall be secured by this Mortgage. Notwithstanding the foregoing, Mortgagee shall have no duty to make any inspection of the Mortgaged Property (including, without limitation, any environmental inspection) and shall not incur any liability for making or not making any such inspection, and shall not be required to report the results of any such inspection to Mortgagor. XXIV-10 2.4 ACTIONS BY MORTGAGEE TO PRESERVE MORTGAGED PROPERTY. --------------------------------------------------- From and after the occurrence of an Event of Default, Mortgagee may, without obligation so to do and without releasing Mortgagor from any Obligation, make any payment or perform any act required to be paid or performed by Mortgagor under the terms of any of the Loan Documents, if Mortgagee in its sole discretion shall deem such payment or act necessary or proper to protect the security hereof. In connection therewith (without limiting its general and other powers, whether conferred herein, in any other Loan Document or by law), Mortgagee shall have and is hereby given the right (without limiting the rights otherwise available to Mortgagee under any of the other Loan Documents or any other provisions of this Mortgage), but not the obligation, after Mortgagor's failure to cure within the period described above, and upon the occurrence and during the continuance of an Event of Default: (a) to enter upon and take possession of the Mortgaged Property, (b) to make additions, alterations, repairs and improvements to the Mortgaged Property which Mortgagee may consider necessary or proper to keep the Mortgaged Property in good condition and repair, (c) to appear and participate in any action or proceeding affecting or which may affect the security hereof or the rights or powers of Mortgagee, (d) to pay, purchase, contest or compromise any claim, charge, Lien or debt which in the judgment of Mortgagee may materially and adversely affect or appears to materially and adversely affect the security of this Mortgage or to be prior or superior hereto except for any claims, charges, Liens or debts being diligently contested in good faith by Mortgagor in appropriate proceedings in accordance with the terms of Sections 6.3 or 6.6 of the Credit Agreement, (e) to pay any Impositions except those Impositions being diligently contested in good faith by Mortgagor in appropriate proceedings in accordance with the terms of Section 6.3 of the Credit Agreement and to procure, maintain and pay premiums on the insurance policies referred to herein, and (f) in exercising such powers, to pay necessary expenses, including fees and disbursements of counsel or other necessary and desirable consultants. No such advance or performance shall be deemed to have cured any or Event of Default. Mortgagor shall, within ten (10) days after Mortgagee's written demand therefor, pay to Mortgagee an amount equal to all costs and expenses actually incurred by Mortgagee in accordance with the provisions set forth herein and in the other Loan Documents in connection with the exercise by Mortgagee of the foregoing rights including, without limitation, costs of evidence of title and of endorsements to the Closing Date Mortgage Policies, court costs, architectural or engineering studies, appraisals, surveys and architect's, engineer's, accountant's, receiver's, trustee's and attorneys' fees, together with interest thereon from the date of such expenditures at the Agreed Rate. All sums advanced and all expenses incurred by Mortgagee in accordance with the provisions set forth herein and in the other Loan Documents in connection with such advances or actions and all other sums advanced or expenses incurred by Mortgagee hereunder in accordance with the provisions set forth herein and in the other Loan Documents (whether required or optional and whether indemnified hereunder or not) shall be deemed Obligations owing by Mortgagor and shall bear interest from the date incurred or paid by Mortgagee until paid by Mortgagor at the Agreed Rate. All such amounts advanced or incurred, and all such interest thereon, shall be a part of the Obligations and shall be secured by this Mortgage. Mortgagee, upon making such advance, shall be subrogated to all of the rights of the person receiving such advance. XXIV-11 2.5 ACTION BY MORTGAGEE TO PROTECT INTERESTS; SUBROGATION; WAIVER OF ---------------------------------------------------------------- OFFSET. ------ 1. ACTION BY MORTGAGEE TO PROTECT INTERESTS. If the title, interest or Lien, as the case may be, of Mortgagor or Mortgagee in and to the Mortgaged Property or any part thereof, or the security of this Mortgage, or the rights or powers of Mortgagee or Mortgagor hereunder, shall be attacked, either directly or indirectly, or if any legal proceedings are commenced involving Mortgagor (which proceedings require notice to Agent or the Lenders pursuant to Section 6.1(x) of the Credit Agreement), Mortgagee or the Mortgaged Property, Mortgagor shall promptly upon obtaining knowledge of the same give written notice thereof to Mortgagee and at Mortgagor's own expense shall take all reasonable steps diligently to defend against any such attack or proceedings, employing attorneys reasonably acceptable to Mortgagee; and if an Event of Default shall have occurred and be continuing, Mortgagee may take such independent action in connection therewith as it may in its discretion deem advisable, and all reasonable costs and expenses, including, without limitation, reasonable attorneys' fees and disbursements, actually incurred by Mortgagee in connection therewith shall be an Obligation owing by Mortgagor and payable to Mortgagee, within ten (10) days of Mortgagee's written demand for payment, and shall bear interest at the Agreed Rate. Mortgagor agrees that, if Mortgagor fails to perform any act which Mortgagor is required to perform under this Section 2.5A, Mortgagee may (after ten (10) days' written notice to Mortgagor), - ------------ but shall not be obligated to, perform or cause to be performed such act, and any expense actually incurred by Mortgagee in connection therewith shall be an Obligation owing by Mortgagor and payable to Mortgagee within ten (10) days of Mortgagee's written demand for payment, and shall bear interest at the Agreed Rate, and shall be secured by this Mortgage, and Mortgagee shall be subrogated to all of the rights of the party receiving such payment. The liabilities of Mortgagor as set forth in this Section 2.5 shall survive the termination of this ----------- Mortgage or of any other Loan Document. 2. SUBROGATION. Mortgagor hereby waives any and all right to claim or recover against Mortgagee and the Lenders, and their respective officers, employees, agents and representatives, for loss of or damage to Mortgagor, the Mortgaged Property, Mortgagor's other property or the property of others under Mortgagor's control from any cause insured against or required to be insured against by the provisions of this Mortgage. 3. WAIVER OF OFFSET. All sums payable by Mortgagor pursuant to this Mortgage shall be paid (except as otherwise expressly provided herein or in any other Loan Document) without notice, demand, counterclaim, setoff, deduction or defense and without abatement, suspension, deferment, diminution or reduction, and the Obligations and liabilities of Mortgagor hereunder shall in no way be released, discharged or otherwise affected (except as otherwise expressly provided herein) by reason of: (i) any damage to or destruction of or any condemnation or similar taking of the Mortgaged Property or any part thereof; (ii) any restriction or prevention of or interference by any third party with any use of the Mortgaged Property or any part thereof; (iii) any title defect or encumbrance or any eviction from the Premises or any part thereof by title paramount or otherwise; (iv) any bankruptcy, insolvency, reorganization, XXIV-12 composition, adjustment, dissolution, liquidation or other like proceeding relating to Mortgagee or the Lenders, or any action taken with respect to this Mortgage by any trustee or receiver of Mortgagee, or by any court, in any such proceeding; (v) any claim which Mortgagor has or might have against Mortgagee; (vi) any default or failure on the part of Mortgagee to perform or comply with any of the terms hereof or of any other agreement with Mortgagor; or (vii) any other occurrence whatsoever, whether or not Mortgagor shall have notice or knowledge of any of the foregoing. Except as expressly provided herein, Mortgagor waives all rights now or hereafter conferred by statute or otherwise to any abatement, suspension, deferment, diminution or reduction of any sum secured hereby and payable by Mortgagor. 2.6 RESTRICTIONS ON TRANSFER OF MORTGAGED PROPERTY BY MORTGAGOR. ----------------------------------------------------------- The financial stability and managerial and operational ability of Mortgagor are substantial and material considerations to Mortgagee and the Lenders in their agreement to accept the Notes from Borrower and other Loan Documents from Mortgagor and Borrower and to enter into the transactions contemplated thereby. Mortgagor understands and acknowledges that a Transfer of the Mortgaged Property may significantly and materially alter and reduce Mortgagee's security for the Obligations. Therefore, in order to induce Mortgagee and the Lenders to make the loans secured hereby, Mortgagor agrees that, except as expressly permitted under the terms of the Credit Agreement, Mortgagor will not Transfer the Mortgaged Property, or any portion thereof, without the prior written consent of Mortgagee. In the event of any Transfer of the Mortgaged Property, or any portion thereof, that is not expressly permitted under the terms of the Credit Agreement, or consented to by Mortgagee in writing, Mortgagee shall have the absolute right at its option, without prior demand or notice, to declare all of the Obligations immediately due and payable. Consent to one such Transfer shall not be deemed to be a waiver of the right to require consent to future or successive Transfers. If consent should be given to a Transfer and if this Mortgage is not released to the extent of the transferred portion of the Mortgaged Property by a writing signed by Mortgagee, as required by Applicable Law, and recorded in the proper city, town, county or parish records, then (unless otherwise provided in the Credit Agreement) any such Transfer shall be subject to this Mortgage and any such transferee shall assume all obligations hereunder and agree to be bound by all provisions contained herein. Any such assumption shall not, however, release Mortgagor or any maker or guarantor of the Obligations from any liability thereunder without the prior written consent of Mortgagee. This covenant shall run with the land and remain in full force and effect until all of the Obligations are fully paid (or this Mortgage is released of record), and Mortgagee may, without notice to Mortgagor, deal with any transferees with reference to the Obligations in the same manner as Mortgagor, without in any way altering or discharging Mortgagor's liability or the liability of any guarantor of Mortgagor with respect thereto. The provisions of this Section 2.6 shall apply to each and every Transfer of the ----------- Mortgaged Property or any portion thereof, regardless of whether or not Mortgagee has consented to or waived, by its action or inaction, its rights with respect to any previous Transfer. XXIV-13 2.7 INCORPORATION BY REFERENCE; FULL PERFORMANCE REQUIRED; SURVIVAL OF ------------------------------------------------------------------ WARRANTIES. ---------- Mortgagor hereby makes to Mortgagee all of the affirmative and negative covenants relating to the Mortgaged Property that are set forth in Sections 6 and 7 of the Credit Agreement, which affirmative and negative - ---------- - covenants are incorporated herein by reference as of the date hereof. All representations, warranties and covenants of Mortgagor made to Mortgagee in the Loan Documents or incorporated by reference therein shall run to the benefit of Mortgagee, shall survive the execution and delivery of this Mortgage and shall remain continuing obligations, warranties and representations of Mortgagor so long as any portion of the Obligations has accrued and remains outstanding and Mortgagor shall fully and faithfully satisfy and perform all such Obligations, representations, warranties and covenants as required by the terms of the Loan Documents. In the event of a conflict between the provisions of this Mortgage and the Credit Agreement, it is the intention of Mortgagor and Mortgagee that both such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of a conflict that cannot be resolved as aforesaid, the provisions of the Credit Agreement shall control and govern and Mortgagor shall comply therewith. 2.8 ADDITIONAL SECURITY. ------------------- No other security now existing, or hereafter taken, to secure the Obligations shall be impaired or affected by the execution of this Mortgage; and all additional security shall be taken, considered and held as cumulative. The taking of additional security, execution of partial releases of the security, or any extension of the time of payment or performance of the Obligations shall not diminish the force, effect or Lien of this Mortgage and shall not affect or impair the liability of any maker, surety, guarantor or endorser for the payment or performance of said Obligations. Neither the acceptance of this Mortgage nor its enforcement, whether by court action or pursuant to the power of sale or other powers herein contained, shall prejudice or in any manner affect Mortgagee's right, to realize upon or enforce any other security now or hereafter held by Mortgagee, it being agreed that Mortgagee shall be entitled to enforce this Mortgage and any other security now or hereafter held by Mortgagee in such order and manner as it may in its absolute discretion determine. XXIV-14 2.9 FURTHER ACTS. ------------ XXIV-15 Mortgagor shall do and perform all acts as required under Section 7.2 ----------- of the Credit Agreement or as necessary to keep valid and effective the Lien hereof and to carry into effect its objective and purposes, in order to protect the lawful owner and holder of this Mortgage and the other Obligations. Promptly upon request, from time to time, of Mortgagee and at Mortgagor's expense, Mortgagor shall execute, acknowledge and deliver to Mortgagee such other and further instruments and do such other acts as in the reasonable opinion of Mortgagee may be necessary or reasonably requested by Mortgagee to (a) grant to Mortgagee a first priority perfected Lien on all of the Mortgaged Property to secure all of the Obligations, (b) grant to Mortgagee, to the fullest extent permitted by Applicable Law, the right to foreclose on the Mortgaged Property nonjudicially, upon the occurrence and during the continuance of an Event of Default, (c) correct any defect or error which may be discovered in the contents of this Mortgage (including, without limitation, all exhibits and/or schedules hereto) or any other Loan Document or in the recording or filing of this Mortgage or any other Loan Document, (d) identify more fully and subject to the Liens created hereby and by the other Loan Documents any property intended by the terms hereof and of the other Loan Documents to be covered hereby and thereby (including any renewals, additions, substitutions, replacements or appurtenances to the Mortgaged Property), (e) assure the first priority of this Mortgage and of such Liens, and (f) otherwise effectuate the intent of this Mortgage. In the event of the acquisition by Mortgagor or any affiliate of Mortgagor of any greater estate in the Premises or in any other part of the Mortgaged Property or the acquisition by Mortgagor of any after acquired property as described in Granting Clause Twelfth, Mortgagor shall ----------------------- notify Mortgagee and, concurrently with the consummation of such acquisition, shall execute and record (and shall cause Grantor's affiliate, as the case may be, to execute and record) an instrument sufficient in Mortgagee's sole discretion to extend and spread the Lien of this Mortgage to encumber such acquired interest or after acquired interest as a first priority mortgage Lien. To the full extent permitted under Applicable Law and in accordance with the grants made by Mortgagor in Granting Clause Eleventh and Granting Clause Twelfth ------------------------ ----------------------- whether or not Mortgagor has executed and recorded the instrument described in the preceding sentence, this Mortgage shall automatically be a Lien on such acquired interest or after acquired interest. Upon request by Mortgagee, Mortgagor shall supply evidence of fulfillment of each of the covenants herein contained concerning which a request for such evidence has been made. Mortgagor hereby irrevocably appoints Mortgagee as its attorney-in-fact, coupled with an interest and with full power of substitution, to take the above actions and to perform such obligations on behalf of Mortgagor, at Mortgagor's sole expense, if Mortgagor fails to fully comply with Mortgagor's obligations under this Section ------- 2.9. Without limiting the generality of the foregoing, Mortgagor shall promptly - --- and, insofar as not contrary to Applicable Law, at Mortgagor's own expense, record, rerecord, file and refile in such offices, at such times and as often as may be necessary, this Mortgage, additional mortgages, deeds of trust and deeds to secure debt, and every other instrument in addition or supplemental hereto, including applicable financing statements, as may be necessary to create, perfect, maintain and preserve the Liens (and priority thereof) intended to be created hereby and by the other Loan Documents and the rights and remedies of Mortgagee hereunder and thereunder. Upon request by Mortgagee, Mortgagor shall supply evidence reasonably satisfactory to Mortgagee of fulfillment of each of the covenants herein contained concerning which a request for such evidence has been made. XXIV-16 2.10 OFFSITE IMPROVEMENTS. -------------------- Mortgagor shall not construct or install improvements or Equipment (as defined in Exhibit B hereto) necessary or desirable for the operation of the --------- Premises on real property or any interest in real property (for example, an easement, license or lease) that is not subject to the Lien of this Mortgage without the prior written consent of Mortgagee (which consent may be granted or withheld in Mortgagee's sole discretion), but only to the extent that: (a) the construction or installation of such improvements or Equipment on such other real property is commercially reasonable when compared to, and commercially preferable to, construction or installation on the real property that is subject to the Lien of this Mortgage; and (b) Mortgagor grants Mortgagee rights (including, but not limited to, easements or reciprocal easement agreements) with respect to such improvements, Equipment and land that are appurtenant to the Land encumbered by this Mortgage and are sufficient in Mortgagee's judgment (i) to enable Mortgagee and any future owner or holder of Mortgagor's interest in the Premises to enjoy the full and unrestricted use of such improvements and Equipment and (ii) to continue Mortgagee's first priority Lien on any such Equipment. Mortgagor's obligations under this Section 2.10 shall be full ------------ recourse obligations of Mortgagor and shall survive any assignment or foreclosure of this Mortgage, the acceptance by Mortgagee (or a nominee of Mortgagee) of a deed to any part of the Mortgaged Property in lieu of foreclosure or in connection with a plan of reorganization filed under Chapter 11 of the Bankruptcy Code, or the exercise by Mortgagee of any remedy set forth herein. 2.11 UTILITIES. --------- Mortgagor shall pay or cause to be paid prior to becoming delinquent all utility charges which are incurred for the benefit of the Mortgaged Property or which may become a Lien against the Mortgaged Property for gas, steam, electricity, telephone, water, sewer services and all other utilities furnished to the Mortgaged Property and all other assessments or charges of a similar nature, whether public or private, affecting or related to the Mortgaged Property or any portion thereof, whether or not such taxes, assessments or charges are or may become Liens thereon. 2.12 HAZARDOUS MATERIALS AND ENVIRONMENTAL LAWS. ------------------------------------------ Mortgagor shall exercise all due diligence in order to comply with any and all applicable Environmental Laws. Without limiting the foregoing, Mortgagor shall comply with the provisions of Section 6.7 of the Credit ----------- Agreement. 2.13 LEASEHOLD ESTATE. ---------------- This Section 2.13 shall apply only if Mortgagor's interest in either ------------ the Land or the Improvements is as the tenant under a leasehold estate at the Premises (the "SUBJECT LEASE"). If Mortgagor is a tenant under a Subject Lease, Mortgagor hereby covenants, represents and warrants to Mortgagee with respect to the Subject Lease as follows: XXIV-17 A. No default by Mortgagor as lessee has occurred and is continuing under the Subject Lease and no event has occurred which, with the passage of time or service of notice, or both would constitute an event of default under the Subject Lease. The Subject Lease is in full force and effect. Mortgagor has obtained from the lessor with respect to the Subject Lease all consents to this Mortgage required to be obtained from such lessor and Mortgagor has provided (or within 5 days from the date hereof shall provide) such lessor with all notices required to be given to such lessor with respect to this Mortgage together with copies of all documents required to be delivered to such lessor with respect to this Mortgage under the terms of the Subject Lease. B. All rents, additional rents, percentage rents and all other charges due and payable under the Subject Lease have been fully paid through a date no earlier than 30 days before the date hereof. C. The Subject Lease covers 100% of that part of the Land and Improvements that are not owned in fee by Mortgagor, and Mortgagor is the owner of the entire lessee's interest in and under the Subject Lease and has the right and authority under the Subject Lease to execute this Mortgage and to encumber Mortgagor's interest therein. D. Mortgagor shall, at its sole cost and expense, promptly and timely perform and observe all the terms, covenants and conditions required to be performed and observed by Mortgagor as lessee under the Subject Lease (including, but not limited to, the payment of all rent, additional rent, percentage rent and other charges required to be paid under the Subject Lease). E. If Mortgagor shall violate any of the covenants specified in Section 2.13D above, Mortgagor grants Mortgagee the right (but not the ------------- obligation), to take any action as may be necessary to prevent or cure any default of Mortgagor under the Subject Lease, if necessary to protect Mortgagee's interest hereunder, and Mortgagee shall have the right to enter all or any portion of the Premises at such times and in such manner as Mortgagee deems necessary, in order to prevent or to cure any such default. Mortgagee may exercise its rights under this Section 2.12E at any time ------------- after, but only after, Mortgagor shall have (i) received from the lessor under the Subject Lease or any other Person notice of such default, and (ii) failed to promptly commence curing such default. F. No action taken or payment or made by Mortgagee to prevent any default by Mortgagor under the Subject Lease shall remove or waive, as between Mortgagor and Mortgagee, the default which occurred hereunder by virtue of the default by Mortgagor under the Subject Lease. All sums actually expended by Mortgagee in accordance with the terms of this Section ------- 2.13 in order to cure any such default shall be paid by Mortgagor to ---- Mortgagee, within ten (10) days of Mortgagee's written demand, with interest thereon at the Agreed Rate. All such indebtedness shall be deemed to be secured by this Mortgage. XXIV-18 G. Mortgagor shall, promptly upon obtaining knowledge of the following events, notify Mortgagee in writing of (i) the occurrence of any material default by the lessor under the Subject Lease or the occurrence of any event which, with the passage of time or service of notice, or both, would constitute a material default by the lessor under the Subject Lease, and (ii) the receipt by Mortgagor of any notice (written or otherwise) from the lessor under the Subject Lease noting or claiming the occurrence of any default by Mortgagor under the Subject Lease or the occurrence of any event which, with the passage of time or service of notice, or both, would constitute a default by Mortgagor under the Subject Lease. Mortgagor shall deliver to Mortgagee a copy of any such written notice of default. H. Promptly upon demand by Mortgagee from time to time, Mortgagor shall use reasonable efforts (other than payment to the lessor) to obtain from the lessor under the Subject Lease and furnish to Mortgagee the estoppel certificate of such lessor stating the date through which rent has been paid and whether or not there are any defaults under its lease and specifying the nature of such claimed defaults, if any, and stating any other information that the lessor is obligated to provide. I. Mortgagor shall promptly notify Mortgagee, in writing, of any request made by either party to the Subject Lease for arbitration or appraisal proceedings pursuant to the Subject Lease and of the institution of any arbitration or appraisal proceedings, as well as of all proceedings thereunder, and shall promptly deliver to Mortgagee a copy of the determination of the arbitrators or appraisers in each such arbitration or appraisal proceeding. Mortgagee shall have the right (but not the obligation), following the delivery of written notice by Mortgagor, to participate in the appointment of any arbitrator or appraiser to be appointed by Mortgagor and (to the extent permitted under the Subject Lease) to participate (at Mortgagee's expense unless an Event of Default shall have occurred and be continuing, in which case at Mortgagor's expense) in such arbitration or appraisal proceedings in association with Mortgagor or on its own behalf as an interested party. Mortgagor shall promptly notify Mortgagee, in writing, upon learning of the institution of any legal proceedings involving obligations under the Subject Lease. Mortgagee may intervene (at Mortgagee's expense unless an Event of Default shall have occurred and be continuing, in which case at Mortgagor's expense) in any such legal proceedings and be made a party to them. Mortgagor shall promptly provide Mortgagee with a copy of any decision rendered in connection with such proceedings. J. Mortgagor shall promptly execute, acknowledge and deliver to Mortgagee such instruments as may reasonably be required to permit Mortgagee (subject to the provisions of Section 2.13E above) (i) to cure ------------- any default under the Subject Lease or (ii) to take such other action required to enable Mortgagee to cure or remedy the matter in default and preserve the security interest of Mortgagee under this Mortgage with respect to the Subject Lease. Mortgagor hereby irrevocably appoints Mortgagee as its true and lawful XXIV-19 attorney-in-fact, coupled with an interest and with full power of substitution, to do, in its name or otherwise, any and all acts and to execute any and all documents (in each case only upon Mortgagor's failure or refusal to do so) which are necessary to preserve any rights of Mortgagor under or with respect to the Subject Lease, including, without limitation, the right to effectuate any extension or renewal of the Subject Lease, or to preserve any rights of Mortgagor whatsoever in respect of any part of the Subject Lease. K. Mortgagor shall not, without Mortgagee's prior written consent, surrender, terminate, forfeit, or suffer or permit the surrender, termination or forfeiture of, or change, modify or amend in a material or adverse manner, the Subject Lease. Consent to one amendment, change, agreement or modification shall not be deemed to be a waiver of the right to require consent to other, future or successive amendments, changes, agreements or modifications. The acquisition by Mortgagor or any affiliate of Mortgagor of any lessor's interest in the Subject Lease or of any fee holder's interest in the property subject to the Subject Lease shall not require Mortgagee's consent and shall not be a breach of the covenants set forth in this Section 2.13K provided that: (i) such acquisition is ------------- accomplished by Mortgagor in such a manner so as to avoid a merger of the interests of lessor and lessee in the Subject Lease; and (ii) Mortgagor, concurrently with the consummation of such acquisition, executes and records an instrument sufficient in Mortgagee's sole discretion to extend and spread the Lien of this Mortgage to encumber such acquired interest as a first priority mortgage Lien. To the full extent permitted under Applicable Law and in accordance with the grant made by Mortgagor in Granting Clause Twelfth, whether or not Mortgagor has executed and recorded ----------------------- the instrument described in the preceding sentence, this Mortgage shall automatically be a Lien on such acquired interest. L. Notwithstanding anything to the contrary herein contained with respect to the Subject Lease: (i) The Lien of this Mortgage attaches to all of Mortgagor's rights and remedies at any time arising under or pursuant to Subsection 365(h) of the Bankruptcy Code, including, without limitation, all of Mortgagor's rights to remain in possession of the Land. (ii) Mortgagor shall not, without Mortgagee's written consent, elect to treat the Subject Lease as terminated under Subsection 365(h)(1) of the Bankruptcy Code. Any such election made without Mortgagee's prior written consent shall be void. If any lessor of the Subject Lease rejects the Subject Lease under Section 365 of the Bankruptcy Code, Mortgagor shall remain in possession of the Premises. Neither the Lien of this Mortgage nor Mortgagee's rights with respect to the Subject Lease shall be affected or impaired by any lessor's rejection of the Subject Lease under Section 365 of the Bankruptcy Code. XXIV-20 (iii) As security for the Obligations, Mortgagor hereby unconditionally assigns, transfers and sets over to Mortgagee all of Mortgagor's claims and rights to the payment of damages arising from any rejection by any lessor of the Subject Lease under the Bankruptcy Code. Mortgagee and Mortgagor shall proceed jointly or in the name of Mortgagor (and Mortgagor hereby irrevocably appoints Mortgagee as its attorney-in-fact, coupled with an interest and with full power of substitution, from and after the occurrence of an Event of Default, to proceed in the name of Mortgagor and to otherwise take such actions as Mortgagee may deem necessary or desirable) in respect of any claim, suit, action or proceeding relating to the rejection of the Subject Lease, including, without limitation, the right to file and prosecute any proofs of claim, complaints, motions, applications, notices and other documents in any case in respect of such lessor under the Bankruptcy Code. This assignment constitutes a present, irrevocable and unconditional assignment of the foregoing claims, rights and remedies, and shall continue in effect until this Mortgage has been released of record or all of the Obligations secured by this Mortgage shall have been satisfied and discharged in full. Any amounts received by Mortgagee or Mortgagor as damages arising out of the rejection of the Subject Lease as aforesaid shall be applied first to all reasonable costs and expenses of Mortgagee (including, without limitation, attorneys' fees and costs) incurred in connection with the exercise of any of its rights or remedies under this Section 2.13L and ------------- then in accordance with the other applicable provisions of this Mortgage. (iv) If, pursuant to Subsection 365(h)(2) of the Bankruptcy Code, Mortgagor seeks to offset, against the rent reserved in the Subject Lease, the amount of any damages caused by the nonperformance by the lessor thereunder of any of such lessor's obligations under the Subject Lease after the rejection by lessor of the Subject Lease under the Bankruptcy Code, Mortgagor shall, prior to effecting such offset, notify Mortgagee in writing of its intent so to do, setting forth the amounts proposed to be so offset, and, in the event Mortgagee objects, Mortgagor shall not effect any offset of the amounts so objected to by Mortgagee. If Mortgagee has failed to object as aforesaid within ten (10) days after notice from Mortgagor in accordance with the first sentence of this Section 2.13L(iv), Mortgagor may proceed to offset ----------------- the amounts set forth in Mortgagor's notice. (v) If any action, proceeding, motion or notice shall be commenced or filed in respect of any lessor or the Land or any portion thereof in connection with any case under the Bankruptcy Code, Mortgagee and Mortgagor shall cooperatively conduct and control any such litigation (provided that after the occurrence and during the continuance of an Event of Default, Mortgagee shall have the exclusive right (but not the obligation) to control such litigation, and Mortgagor hereby irrevocably appoints Mortgagee as its attorney-in- fact, coupled with an interest and with full power of substitution for such purpose) with counsel agreed upon between XXIV-21 Mortgagor and Mortgagee (or, if an Event of Default shall then have occurred and be continuing, counsel selected by Mortgagee) in connection therewith. Within ten (10) days after Mortgagee's written demand upon Mortgagor, Mortgagor shall pay to Mortgagee, as applicable, all reasonable costs and expenses (including reasonable attorneys' fees and costs) actually paid or incurred by Mortgagee in connection with the cooperative prosecution or conduct of any such proceedings. All such costs and expenses shall be secured by the Lien of this Mortgage. (vi) Mortgagor shall promptly, after obtaining knowledge thereof, notify Mortgagee orally of any filing by or against any lessor of a petition under the Bankruptcy Code. Mortgagor shall thereafter promptly give written notice of such filing to Mortgagee, setting forth any information available to Mortgagor as to the date of such filing, the court in which such petition was filed, and the relief sought therein. Mortgagor shall promptly deliver to Mortgagee, following its receipt thereof, copies of any and all notices, summonses, pleadings, applications and other documents received by Mortgagor in connection with any such petition and any proceedings relating thereto. M. The occurrence of any of the following events shall, at Mortgagee's option, constitute an "Event of Default" hereunder in which event Mortgagee shall have all of the rights and remedies available to it under Section 5 hereof: --------- (i) A breach or default under any material condition or obligation contained in the Subject Lease which is not cured within any applicable cure period provided therein to Mortgagor (provided, -------- however, that upon the occurrence and during the continuance of any ------- breach or default under any condition or obligation contained in the Subject Lease, and prior to the expiration of all applicable cure periods, Mortgagee shall have the cure rights set forth in Section ------- 2.13E of this Mortgage); ----- (ii) The occurrence of any event or condition which gives the lessor under the Subject Lease a right to terminate or cancel, as against Mortgagor, the Subject Lease and the expiration of any notice, grace or cure period with respect thereto; or (iii) Mortgagor's failure to permit Mortgagee and/or its representatives at all reasonable times upon reasonable prior written notice to make investigation or examination concerning Mortgagor's performance and observance of the terms, covenants and conditions of the Subject Lease. N. To the extent permitted by Applicable Law, the price payable by Mortgagor or any other party in the exercise of the right of redemption, if any (which right Mortgagor has waived), from any sale under or decree of foreclosure of this Mortgage shall include all rents and other amounts paid and other sums advanced by Mortgagee on behalf of XXIV-22 Mortgagor as the lessee under the Subject Lease in accordance with the provisions of this Mortgage and the other Loan Documents. O. Mortgagor hereby grants and assigns to Mortgagee a security interest in all prepaid rent and security deposits and all other security which the lessor under the Subject Lease may hold now or later for the performance of Mortgagor's obligations as the lessee under the Subject Lease. P. Mortgagor shall not, without Mortgagee's written consent, fail to exercise any option or right to renew or extend the term of the Subject Lease if such renewal or extension is necessary to extend the term of the Subject Lease to a date which is at least twelve (12) months after the Maturity Date (any such renewal or extension, a "REQUIRED EXTENSION"). Mortgagor shall effect each Required Extension at least six (6) months (or the earliest date permitted under the Subject Lease, if later) prior to the date of termination of any such option or right, shall give immediate written notice thereof to Mortgagee, and shall execute, acknowledge, deliver and record any document reasonably requested by Mortgagee to evidence the Lien of this Mortgage on such extended or renewed lease term; provided, however, Mortgagor shall not be required to effect any -------- ------- particular Required Extension to the extent Mortgagor shall have received the prior written consent of Mortgagee (which consent may be withheld by Mortgagee in its sole and absolute discretion) allowing Mortgagor to forego effecting such Required Extension. If Mortgagor shall fail to exercise any such option or right to effect any Required Extension as aforesaid, Mortgagee may exercise the option or right to effect any Required Extension (provided that unless an Event of Default shall have occurred and be continuing, Mortgagee shall have no right to determine the amount of rent payable under the Subject Lease during any such extension period without Mortgagor's prior written consent thereto, which consent shall not be unreasonably withheld or delayed) as Mortgagor's agent and attorney-in-fact pursuant to Section 2.13J of this Mortgage, or in Mortgagee's own name or ------------- in the name of and on behalf of a nominee of Mortgagee, as Mortgagee may determine in the exercise of its sole and absolute discretion. Q. Subject to the provisions of the Credit Agreement, Mortgagor shall not assign its interest in the Subject Lease or sublease all or any of the Mortgaged Property without the prior written consent of Mortgagee, which consent may be withheld by Mortgagee in its sole discretion. All subleases entered into by Mortgagor after the date of this Mortgage shall provide, and Mortgagor shall use reasonable efforts to ensure that all existing subleases modified, amended or renewed by Mortgagor after the date of this Mortgage shall provide, that such subleases are, at the option and election of Mortgagee, subordinate to the Lien of this Mortgage and any extensions, replacements and modifications of this Mortgage and the Obligations and that if Mortgagee forecloses under this Mortgage or enters into a new lease with the lessor under the Subject Lease whether or not pursuant to the provisions for a new lease, if any, contained in the Subject Lease, then the sublessee shall attorn to Mortgagee or its assignee(s) and the sublease will remain in full XXIV-23 force and effect in accordance with its terms notwithstanding the termination of the Subject Lease. R. Mortgagor hereby represents that the Subject Lease has not been amended, modified, extended, renewed, substituted or assigned except as described in Exhibit A-2 hereto and that Mortgagor has delivered to ----------- Mortgagee true, accurate and complete copies of all items noted on Exhibit ------- A-2. Upon the request of Mortgagee, Mortgagor shall deposit with Mortgagee --- the tenant's original fully executed copy of the Subject Lease, as further security to Mortgagee, until this Mortgage is released of record or all of the Obligations are fully paid and performed. Mortgagor hereby represents that the Subject Lease or a legally valid memorandum thereof has been properly filed or recorded in the city, town, county or parish records (as appropriate) in which the Land covered thereby is located and that the filing and recording data for the same is accurately set forth in Exhibit ------- A-2 hereto. --- S. Mortgagor shall not waive, excuse, condone or in any way release or discharge the lessor under the Subject Lease of or from such lessor's material obligations, covenants and/or conditions under the Subject Lease without the prior written consent of Mortgagee. The generality of the provisions of this Section 2.13 relating to the Subject ------------ Lease shall not be limited by other provisions of this Mortgage setting forth particular obligations of Mortgagor which are also required of Mortgagor with respect to the Subject Lease or the Premises. XXIV-24 Section 3 ASSIGNMENT OF RENTS AND LEASES 3.1. ASSIGNMENT OF RENTS AND LEASES. ------------------------------ In furtherance of and in addition to the assignment made by Mortgagor in Granting Clause Third of this Mortgage, Mortgagor hereby absolutely and --------------------- unconditionally assigns, sells, transfers and conveys to Mortgagee all of its right, title and interest in and to all Leases, whether now existing or hereafter entered into, and all of its right, title and interest in and to all Rents. It is the intention of Mortgagor and Mortgagee that this assignment be treated and construed as an absolute assignment and not an assignment for additional security only. So long as no Event of Default shall have occurred and be continuing, Mortgagor shall have a revocable license from Mortgagee to exercise all rights extended to the landlord under the Leases, including the right to observe, perform, comply with and discharge all of the obligations of the landlord thereunder, the right to demand and receive performance under the Leases, the right to enforce all rights and exercise all remedies under the Leases, the right to terminate or amend any Lease and the right to receive and collect all Rents and to hold the Rents in trust for use in the payment and performance of the Obligations and to otherwise use the same; provided, however, -------- ------- that such rights may be exercised by Mortgagor only to the extent they are not restricted under Section 7.9 of the Credit Agreement. The foregoing license is granted subject to the conditional limitation that no Event of Default shall have occurred and be continuing. Upon the occurrence and during the continuance of an Event of Default, whether or not legal proceedings have commenced, and without regard to waste, adequacy of security for the Obligations or solvency of Mortgagor, the license herein granted shall automatically expire and terminate, without notice by Mortgagee (any such notice being hereby expressly waived by Mortgagor). 3.2. NO LIMITATION OF RIGHTS. ----------------------- The assignment of Rents and Leases herein made shall not be construed to limit in any way Mortgagee's other rights hereunder, including the right to accelerate the Obligations upon an Event of Default. Monies received under the assignments herein made shall not be deemed to have been applied in payment of any portion of the Obligations unless and until such monies actually are applied thereto by Mortgagee. 3.3. SALE OF MORTGAGED PROPERTY. -------------------------- A. FREE AND CLEAR OF ASSIGNMENTS. Upon any sale of any of the Mortgaged Property by or for the benefit of Mortgagee pursuant to Section 5 --------- hereof, the Rents attributable to the part of the Mortgaged Property so sold shall be included in such sale and shall pass to the purchaser free and clear of (i) the assignment by Mortgagor in Granting Clause Third of this Mortgage and --------------------- (ii) the provisions of this Section 3. --------- XXIV-25 B. NO OBLIGATIONS ON MORTGAGEE. It is neither the intent nor the effect of this Mortgage nor the other Loan Documents (other than any Subordination, Non-Disturbance and Attornment Agreement between Mortgagee and any Tenant) to impose any obligation on Mortgagee, including (i) any liability under the covenant of quiet enjoyment contained in any Lease or contained in any Applicable Law, in the event of a sale of the Mortgaged Property or any part thereof pursuant to this Mortgage or (ii) any liability to any Tenant arising (whether in connection with the elimination of such Tenant's equity of redemption in the Mortgaged Property or otherwise) out of (A) the naming of such Tenant as a party defendant in any action to foreclose this Mortgage, or (B) the sale of the Mortgaged Property pursuant to the power of sale reserved to Mortgagee herein. Notwithstanding anything herein to the contrary, under no circumstances shall Mortgagee be subject to any offsets, claims or defenses which a Tenant might have against Mortgagor or any prior landlord with respect to any Lease, whether or not Mortgagee shall have succeeded to the interests of landlord under any such Lease. 3.4. TERM OF ASSIGNMENT. ------------------ The assignment and grant made in Granting Clause Third of this --------------------- Mortgage and in this Section 3 shall continue in effect until release of this --------- Mortgage of record or indefeasible payment in full of the Obligations. The execution of this Mortgage constitutes and evidences the irrevocable consent of Mortgagor to the entry upon and the taking possession of the Premises, or any part thereof, by Mortgagee pursuant to such grant in accordance with the terms set forth in this Mortgage and the terms hereof whether by foreclosure or other remedy and at Mortgagee's option and election, with or without application for a receiver. Mortgagor represents and warrants to Mortgagee that Mortgagee has taken all actions necessary to obtain, and Mortgagee shall (upon recordation of this Mortgage) have, as and to the extent permitted under Applicable Law, a valid and fully perfected, first priority, present assignment of the Rents arising out of the Leases and all security for such Leases, including cash or securities deposited as security under such Leases subject to the prior right of the Tenants making such deposits. Mortgagee has no obligation whatsoever in respect of security for any Leases except and only to the extent such security is actually delivered to Mortgagee, whether or not Mortgagor now has or previously had possession of such security. 3.5. PERFECTION UPON RECORDATION. --------------------------- Mortgagor acknowledges and agrees that, upon recordation of this Mortgage, Mortgagee's interest in the Rents shall be deemed to be fully perfected, ``choate" and enforced as to Mortgagor and all third parties, including, without limitation, any subsequently appointed trustee in any case under the Bankruptcy Code, without the necessity of (a) commencing a foreclosure action with respect to this Mortgage, (b) furnishing notice to Mortgagor or Tenants under the Leases, (c) making formal demand for the Rents, (d) taking possession of the Premises as a lender-in-possession, (e) obtaining the appointment of a receiver of the rents and profits of the Premises, (f) sequestering or impounding the Rents or (g) taking any other affirmative action. XXIV-26 3.6. BANKRUPTCY PROVISIONS. --------------------- Without limitation of the provisions of Section 4 hereof or the --------- absolute nature of the assignment of the Rents hereunder, Mortgagor and Mortgagee agree that (a) this Mortgage shall constitute a "security agreement" for purposes of Section 552(b) of the Bankruptcy Code, (b) the security interest created by this Mortgage extends to property of Mortgagor acquired before the commencement of a case in bankruptcy and to all amounts paid as Rents and (c) such security interest shall extend to all Rents acquired by the estate after the commencement of any case in bankruptcy. Without limitation of the absolute nature of the assignment of the Rents hereunder, to the extent Mortgagor (or Mortgagor's bankruptcy estate) shall be deemed to hold any interest in the Rents after the commencement of a voluntary or involuntary bankruptcy case, Mortgagor hereby acknowledges and agrees that such Rents are and shall be deemed to be "cash collateral" under Section 363 of the Bankruptcy Code. Mortgagor may not use the cash collateral without the consent of Mortgagee and/or an order of any bankruptcy court pursuant to 11 U.S.C. 363(c)(2), and Mortgagor hereby waives any right it may have to assert that such Rents do not constitute cash collateral. No consent by Mortgagee to the use of cash collateral by Mortgagor shall be deemed to constitute Mortgagee's approval, as the case may be, of the purpose for which such cash collateral was expended. XXIV-27 Section 4 SECURITY AGREEMENT 4.1. GRANT OF SECURITY; INCORPORATION BY REFERENCE. --------------------------------------------- This Mortgage shall, in addition to constituting a mortgage Lien as to those parts of the Mortgaged Property classified as real property (including fixtures to the extent they are real property), constitute a security agreement within the meaning of the Uniform Commercial Code or within the meaning of the common law with respect to those parts of the Mortgaged Property classified as personal property (including fixtures to the extent they are personal property). Mortgagor hereby grants Mortgagee a security interest in and to those parts of the Mortgaged Property classified as personal property (including (a) fixtures to the extent they are personal property and (b) personal property and fixtures that are leased, but only to the extent Mortgagor can grant to Mortgagee a security interest therein without breaching the terms of such lease) (collectively, the "PERSONAL PROPERTY COLLATERAL") for the benefit of Mortgagee to further secure the payment and performance of the Obligations and the performance of all of Mortgagor's Obligations, covenants and agreements under the other Loan Documents. Mortgagee shall have all rights granted to the Secured Party pursuant to the Security Agreement. The provisions set forth in the Security Agreement are hereby incorporated by reference into this Mortgage with the same effect as if set forth in full herein. In the event of a conflict between the provisions of Section 4 of this Mortgage and the Security Agreement, --------- it is the intention of Mortgagor and Mortgagee that both such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of a conflict that cannot be resolved as aforesaid, the provisions of the Security Agreement shall control and govern and Mortgagor shall comply therewith. 4.2. FIXTURE FILING FINANCING STATEMENTS. ----------------------------------- Portions of the Mortgaged Property are goods which are or are to become fixtures, and the real estate concerned is described in Exhibit A hereto, --------- Mortgagor expressly covenants and agrees that the filing of this Mortgage in the real property records of the county where the Premises is located shall operate, at the time of filing therein, as a financing statement filed as a fixture filing in accordance with Section 9-401(1)(b) of the Uniform Commercial Code of the state in which the Premises is located. The address of Mortgagor (the debtor) and the address of Mortgagee (the secured party) appear in Exhibit C --------- attached to this Mortgage. The name of the record owner of the Land appears in Exhibit A attached hereto. - --------- 4.3. MORTGAGEE AS SECURED PARTY. -------------------------- If and to the extent that Mortgagee shall act as the secured party for any security interest created in the Mortgaged Property, Mortgagor acknowledges and agrees that Mortgagee may do so. As such, Mortgagee shall have all the rights of the secured party, and shall observe all of the requirements of the secured party, contained in this Section 4 and the Security Agreement. --------- XXIV-28 Section 5 DEFAULTS AND REMEDIES 5.1. EVENTS OF DEFAULT. ----------------- The occurrence of any of the following events ("EVENTS OF DEFAULT") shall, as provided in the Credit Agreement, make all amounts then remaining unpaid on the Obligations due and payable, all without further demand, presentment, notice or other requirements of any kind, all of which are hereby expressly waived by Mortgagor, and this Mortgage and the Lien evidenced or created hereby shall be subject to foreclosure and may be foreclosed or the Mortgaged Property may be sold pursuant to the power of sale reserved to Mortgagee herein, in any manner provided for herein or provided for by law: (A) Any "Event of Default" as defined in the Credit Agreement shall occur (after giving effect to any applicable notice or grace periods provided therein), including, without limitation, any such event caused by a failure to pay when due any fee due under the Credit Agreement or any installment of principal of or interest on the Obligations; or (B) Any "Event of Default" described in Section 2.12M hereof ------------- shall occur, if Mortgagor is the tenant under a Subject Lease. 5.2. FIXTURES. -------- Upon the occurrence and during the continuance of any of the Events of Default, Mortgagee may, to the extent permitted under Applicable Law, elect to treat the fixtures included in the Mortgaged Property either as real property or as personal property, or both, and proceed to exercise such rights as apply thereto. With respect to any sale of real property included in the Mortgaged Property made under the powers of sale herein granted and conferred, Mortgagee may, to the extent permitted by Applicable Law, include in such sale any personal property and fixtures included in the Mortgaged Property and relating to such real property. XXIV-29 5.3. REMEDIES. -------- A. RIGHTS OF MORTGAGEE; RIGHTS OF ENTRY; RIGHTS OF SALE. Upon the occurrence and during the continuance of any of the Events of Default, in addition to all other powers, rights and remedies herein granted or by law or at equity conferred, Mortgagee, in its sole discretion and at its sole election and without further demand, may do any one or more of the following in any order or manner that Mortgagee elects, it being expressly understood that no remedy provided herein is intended to be exclusive of any other remedy provided herein or in any of the other Loan Documents, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given herein or now or hereafter existing under Applicable Law (including all rights and remedies provided under the applicable provisions of the laws of the state in which the Premises is located): (i) Mortgagee may either foreclose upon all or any portion of the Mortgaged Property or sell all or any portion of the Mortgaged Property pursuant to the power of sale granted to Mortgagee herein (the power of sale permitted and provided by applicable statute being hereby expressly granted by Mortgagor to Mortgagee) with respect to all or any portion of the Mortgaged Property, provided that Mortgagee may proceed -------- as to both real and personal property in accordance with its and their rights and remedies as to real property as required by Applicable Law, and no such sale shall affect any other rights which Mortgagee may have or enjoy at law or pursuant to this Mortgage, including, without limitation, the right to seek a personal or deficiency judgment against Mortgagor. And in addition Mortgagee shall have all of the rights and remedies of a mortgagee under a mortgage granted, conferred or permitted by Applicable Law, and shall, to the extent permitted by Applicable Law, have the right and power, but not the obligation, to enter upon and take immediate possession of the Premises or any part thereof, without interference from Mortgagor to exclude Mortgagor therefrom, to hold, use, operate, manage and control such real property, to make all such repairs, replacements, additions and improvements to the same as Mortgagee in its sole discretion deems necessary, and to demand, collect and retain the Rents as provided in Section 3 hereof. --------- (ii) Mortgagee, with respect to any or all of the Mortgaged Property, in lieu of or in addition to exercising any other power, right or remedy herein granted or by law or equity conferred, may, without notice, demand or declaration of default, which are hereby waived by Mortgagor, and without regard to the solvency of Mortgagor and without regard to the then value of the Mortgaged Property or waste, proceed by an action or actions in equity or at law for the seizure and sale of the Mortgaged Property or any part thereof, for the specific performance of any covenant or agreement herein contained or in aid of the execution of any power, right or remedy herein granted or by law or equity conferred, for the foreclosure or sale of the Mortgaged Property or any part thereof under the judgment or decree of any court of competent jurisdiction, for the appointment of a receiver (without any requirement to post a receiver's bond and without regard to the value of the Mortgaged XXIV-30 Property or solvency of Mortgagor) pending any foreclosure hereunder or the sale of any Mortgaged Property or any part thereof or for the enforcement of any other appropriate equitable or legal remedy. Such receiver shall have the power to collect the rents, issues, profits, earnings, and income from the Mortgaged Property and shall have all other powers which may be necessary or usual in such cases for the protection, possession, control, management and operation of the Mortgaged Property. Such receiver may apply the net income from the Mortgaged Property as payment of the Obligations secured hereby in the manner and order set forth in the applicable Loan Documents. Mortgagor agrees that a receiver may be appointed without any notice to Mortgagor whatsoever and hereby waives notice. (iii) Mortgagee shall have all of the rights and remedies of an assignee and secured party granted by Applicable Law, including the Uniform Commercial Code, and shall, to the extent permitted by Applicable Law, have the right and power, but not the obligation, to take possession of the Personal Property Collateral, and for that purpose Mortgagee may enter upon any premises on which any or all of the Personal Property Collateral is located and take possession of and operate such Personal Property Collateral or remove the same therefrom. Mortgagee, pursuant to Section 9- 501(4) of the Uniform Commercial Code, as such Section is currently constituted or may be hereafter amended, shall have the option of proceeding under the Uniform Commercial Code as to that portion of the Mortgaged Property constituting personal property or of proceeding as to the Mortgaged Property and without regard to the adequacy of Mortgagee's security for the Obligations, or any part or component thereof, including both the real and personal property, in accordance with Mortgagee's rights and remedies in respect of the real property. Mortgagee may require Mortgagor to assemble the Personal Property Collateral and make it available to Mortgagee at a place to be designated by Mortgagee which is reasonably convenient to both parties. The following presumptions shall exist and shall be deemed conclusive with regard to the exercise by Mortgagee of any of its remedies with respect to the Personal Property Collateral: XXIV-31 (a) If notice is required by Applicable Law, ten (10) days' prior written notice of the time and place of any public sale or of the time after which any private sale or any other intended disposition thereof is to be made shall be reasonable notice to Mortgagor. No such notice is necessary if such property is perishable, threatens to decline speedily in value or is of a type customarily sold on a recognized market. (b) Without in any way limiting the right and authority of Mortgagee to sell or otherwise dispose of Personal Property Collateral in a commercially reasonable manner, the following, or any of them, shall be considered commercially reasonable: (1) Mortgagee may hold a public sale of the Personal Property Collateral in New York, New York or in the city, town or county where the Personal Property Collateral is located or in the city, town or county where the Premises to which such Personal Property Collateral relates, if any, is located, after having provided Mortgagor with ten (10) days' notice of such sale and after having published notice of such sale by an advertisement not less than three inches in height and one column in width in a newspaper of general circulation where the Personal Property Collateral is located or where the Premises to which such Personal Property Collateral relates, if any, is located, as Mortgagee determines to be appropriate (which advertisement may be placed in the "classified" section), for a period of not less than five issues commencing not more than ten days prior to the sale; (2) the Personal Property Collateral may be sold for cash; and (3) Mortgagee or any other person owning, directly or indirectly, any interest in any of the Obligations may be a purchaser at such sale. (c) If Mortgagee in good faith believes that the Securities Act of 1933 or any other state or Federal law prohibits or restricts the customary manner of sale or distribution of any of such property, Mortgagee may sell such property privately in a commercially reasonable manner or in any other commercially reasonable manner deemed advisable by Mortgagee at such price or prices as Mortgagee determines in the sole discretion of Mortgagee. Mortgagor recognizes that such prohibition or restriction may cause such property to have less value than it otherwise would have and that, consequently, such sale or disposition by Mortgagee may result in a lower sales price than if the sale were otherwise held. (iv) Mortgagee shall, subject to any mandatory requirements of Applicable Law, sell or have sold the Mortgaged Property or interests therein or any part thereof at one or more sales, as an entirety or in separate parcels, at such place or places and otherwise in such manner and upon such notice as may be required by law or by this Mortgage, or, in the absence of any such requirement, as Mortgagee may deem appropriate. Mortgagee shall make a conveyance to the purchaser or purchasers thereof without, to the extent permitted by Applicable Law, any warranties express or implied. Subject to Applicable XXIV-32 Law, Mortgagee may postpone the sale of such Mortgaged Property or interests therein or any part thereof by public announcement at the time and place of such sale, and from time to time thereafter may further postpone such sale by public announcement made at the time of sale fixed by the preceding postponement. Sale of a part of the Mortgaged Property or interests therein or any defective or irregular sale hereunder will not exhaust the power of sale, and sales may be made from time to time until all such property is sold without defect or irregularity or the Obligations are paid and performed in full. Mortgagee shall have the right to appoint one or more auctioneers or attorneys-in-fact to act in conducting the foreclosure sale and executing a deed to the purchaser. It shall not be necessary for any of the Mortgaged Property at any such sale to be physically present or constructively in the possession of Mortgagee and, subject to Applicable Law, Mortgagor shall deliver all of the Mortgaged Property to the purchaser at such sale. If it should be impossible or impracticable to take actual delivery of the Mortgaged Property, then the title and right of possession to the Mortgaged Property shall pass to the purchaser at such sale as completely as if the same had been actually present and delivered. (v) Mortgagee may, personally or by its agents or attorneys, take such steps to protect and enforce its rights whether by action, suit or proceeding in equity or at law for the specific performance of any covenant, condition or agreement in the Subsidiary Guaranty, in this Mortgage or in any of the other Loan Documents or in aid of the execution of any power herein or therein granted, or sale of the Mortgaged Property as herein permitted or for any foreclosure hereunder, or for the enforcement of any other appropriate legal or equitable remedy or otherwise as Mortgagee shall elect. (vi) In the event Mortgagor shall fail to pay any amounts due and owing in accordance with the terms of this Mortgage, the Subsidiary Guaranty or the other Loan Documents, Mortgagee, at its right and option, may institute an action or proceeding at law or in equity for the collection of any sums due and unpaid and may prosecute any such action or proceeding to judgment or final decree. Mortgagee may enforce any such judgment or final decree against Mortgagor as provided in this Mortgage, and against any guarantor of the Obligations, as provided in any guarantee. Mortgagee may collect moneys adjudged or decreed to be payable to Mortgagee and shall be entitled to recover such judgment either before, after or during the pendency of any proceeding for the enforcement of the provisions of this Mortgage or any such guarantee. The right of Mortgagee to recover such judgment shall not be affected by any entry or sale, by the exercise of any other right, power or remedy provided by and for the enforcement of the provisions of this Mortgage or of the Loan Documents or the foreclosure of the Lien hereof or sale of the Mortgaged Property hereunder. In case of insolvency or bankruptcy proceedings against Mortgagor or any reorganization or liquidation proceedings, Mortgagee shall be entitled to prove the whole amount of Obligations due and owing under this Mortgage and any of the other Loan Documents without deducting therefrom any proceeds obtained from the sale of the whole or any part of the Mortgaged Property; provided, however, that in no instance shall Mortgagee receive a greater -------- ------- amount than the Obligations and any other payments, XXIV-33 charges or costs due and owing to Mortgagee under any of the Loan Documents from the aggregate amount of the proceeds of the sale of the Mortgaged Property and the distribution from the estates of Mortgagor. B. RIGHT TO PURCHASE. Mortgagee (or any other person owning, directly or indirectly, any interest in any of the Obligations) and its agents and attorneys shall have the right to become the purchaser at any sale made pursuant to the provisions of this Section 5.3 and shall have the right to ----------- credit upon the amount of the bid made therefor the amount payable to it out of the net proceeds of such sale. All other sales shall be, to the extent permitted by Applicable Law, on a cash basis. Recitals contained in any conveyance to any purchaser at any sale made hereunder will conclusively establish the truth and accuracy of the matters therein stated, including without limitation nonpayment of the Obligations and advertisement and conduct of such sale in the manner provided herein or provided by law. Mortgagor does hereby ratify and confirm all legal acts that Mortgagee may do in carrying out the provisions of this Mortgage. C. CONVEYANCE OF TITLE UPON SALE. Any sale of the Mortgaged Property or any part thereof in accordance with the provisions of this Section ------- 5.3 will operate to divest all right, title, interest, claim and demand of - --- Mortgagor in and to the property sold and will be a perpetual bar against Mortgagor. Nevertheless, if requested by Mortgagee so to do, Mortgagor shall join in the execution, acknowledgement and delivery of all proper conveyances, assignments and transfers of the property so sold. Subject to Applicable Law, any purchaser at a foreclosure sale will receive immediate possession of the property purchased, and Mortgagor agrees that if Mortgagor retains possession of the property or any part thereof subsequent to such sale, Mortgagor will be considered a tenant at sufferance of the purchaser, and will, if Mortgagor remains in possession after demand to remove, be guilty of forcible detainer and will be subject to eviction and removal, forcible or otherwise, with or without process of law, and all damages to Mortgagor by reason thereof are hereby expressly waived by Mortgagor. D. WAIVER OF RIGHTS AND DEFENSES. Mortgagor acknowledges that it is aware of and has had the advice of counsel of its choice with respect to its rights under Applicable Law with respect to this Mortgage, the Obligations and the Mortgaged Property. Nevertheless, Mortgagor hereby (i) waives and relinquishes (to the maximum extent permitted by Applicable Law) and (ii) agrees that Mortgagor shall not (subject to any mandatory requirements of Applicable Law) at any time hereafter have or assert, any right under any Applicable Law pertaining to: marshalling, whether of assets or Liens, the sale of property in the inverse order of alienation, the exemption of homesteads, the administration of estates of decedents, appraisement, valuation, stay, extension, redemption, statutory right of redemption, the maturing or declaring due of the whole or any part of the Obligations, notice of intention of such maturing or declaring due, other notice (whether of defaults, advances, the creation, existence, extension or renewal of any of the Obligations or otherwise, except for rights to notices expressly granted in the Credit Agreement, herein or in the other Loan Documents), subrogation, or abatement, suspension, deferment, diminution or reduction of any of the Obligations (including, without limitation, set-off), now or hereafter in force. XXIV-34 E. RIGHT TO SUBORDINATE. Mortgagee, at its option, is authorized to foreclose this Mortgage or sell the Mortgaged Property or any portion thereof, subject to the rights of any tenants of the Premises, and the failure to make any such tenants parties to any such foreclosure or sale proceedings and to foreclose their rights will not be, nor be asserted by Mortgagor to be, a defense to any proceedings instituted by Mortgagee to collect the Obligations. F. RIGHT TO PRESERVE OBLIGATIONS. Mortgagee shall, to the extent permitted by Applicable Law, have the option to proceed with foreclosure or to exercise the power of sale in satisfaction of any installment or part of the Obligations that has not been paid or performed without declaring the whole of the Obligations as immediately mature, and such foreclosure or sale may be made subject to the unmatured part of the Obligations, and it is agreed that such foreclosure, if so made, shall not in any manner affect the unmatured part of the Obligations, but as to such unmatured part of the Obligations, this Mortgage, the Subsidiary Guaranty and the Credit Agreement shall remain in full force and effect just as though no foreclosure or sale had been made. Several foreclosures or sales may be made without exhausting the right of foreclosure or the power of sale for any unmatured part of the Obligations, it being the purpose to provide for a foreclosure and sale of the security for any matured portion of the Obligations without exhausting the power of foreclosure and the power to sell the Mortgaged Property for any other part of the Obligations. G. NO WAIVER. No delay or omission of Mortgagee to exercise any right or power accruing upon any Event of Default shall impair any such right or power, or shall be construed to be a waiver of any such right or power or any such Event of Default or an acquiescence thereto. Every power and remedy provided by this Mortgage may be exercised, from time to time, as often as may be deemed expedient by Mortgagee. Nothing in this Mortgage, the Subsidiary Guaranty or any of the other Loan Documents shall affect the obligation of Mortgagor to pay and perform the Obligations in the manner and at the time and place, respectively, expressed therein. H. RIGHT TO DISCONTINUE PROCEEDINGS. If Mortgagee shall have proceeded to enforce any right or remedy under this Mortgage by foreclosure, entry or otherwise and such proceedings shall have been discontinued or abandoned for any reason or such proceedings shall have resulted in a final determination adverse to Mortgagee, then and in every such case Mortgagor and Mortgagee shall be restored to their former positions and rights hereunder, and all rights, power and remedies of Mortgagee shall continue as if no such proceedings had occurred or had been taken. XXIV-35 I. NOTICES TO THIRD PARTIES. Mortgagee shall have the right, but not the obligation, to notify franchisors or ground lessors of any Event of Default or any exercise of remedies by Mortgagee hereunder, and Mortgagee shall have the right, but not the obligation, to notify other third parties of any Event of Default or exercise of remedies by Mortgagee hereunder, whether or not Mortgagee has agreed with any franchisor, ground lessor or other third party to provide such notice. 5.4. COSTS AND EXPENSES. ------------------ All costs and expenses (including, without limitation, reasonable attorneys' fees, legal expenses, title premiums, title report and work charges, filing fees, general intangible taxes and mortgage, mortgage registration, transfer, stamp and other excise taxes) actually incurred by Mortgagee in perfecting, protecting, or enforcing its rights hereunder, whether or not an Event of Default shall have occurred, shall be payable by Mortgagor within ten (10) days after written demand by Mortgagee accompanied by (upon Mortgagor's request) such reasonable documentation of such costs and expenses as is reasonably available to Mortgagee, as the case may be, and shall bear interest at the Agreed Rate from the date such cost or expense is incurred until the date of payment. All such costs, expenses and interest, shall be part of the Obligations and shall be secured by this Mortgage. 5.5. ADDITIONAL RIGHTS OF MORTGAGEE. ------------------------------ Mortgagee shall have the right, at its election, to exercise any and all other remedies in the Subsidiary Guaranty, in the Credit Agreement or in any of the Loan Documents or available at law or in equity, including, but not limited to, the additional rights if any set forth on Schedule I attached hereto ---------- and by this reference incorporated herein. 5.6. APPLICATION OF PROCEEDS. ----------------------- A. The proceeds of any sale of the Mortgaged Property or any part thereof made pursuant to this Section 5 shall be applied as follows: --------- FIRST: to the payment of all costs and expenses incident to the enforcement of this Mortgage, including, a reasonable compensation to the agents, attorneys and in-house counsel of Mortgagee; SECOND: to the payment or prepayment of the Obligations, in such order as Mortgagee shall elect; and THIRD: the remainder, if any, after full and final payment of the Obligations shall be paid to Mortgagor or such other person or persons as may be entitled thereto by law; XXIV-36 provided, however, that if Applicable Law require such proceeds to be paid or - -------- ------- applied in a manner other than as set forth above in this Section 5.6A, then ------------ such proceeds shall be paid or applied in accordance with such Applicable Law. B. Upon any sale made under the powers of sale herein granted and conferred, the receipt of Mortgagee will be sufficient discharge to the purchaser or purchasers at any sale for the purchase money, and such purchaser or purchasers and the heirs, devisees, personal representatives, successors and assigns thereof will not, after paying such purchase money and receiving such receipt of Mortgagee, be obligated to see to the application thereof or be in any way answerable for any loss, misapplication or non-application thereof. Section 6 INDEMNIFICATION Pursuant to and in accordance with the provisions set forth more fully in Section 10.3 of the Credit Agreement, Mortgagor shall defend, indemnify, pay and hold harmless Mortgagee and the other Indemnitees (as defined in the Credit Agreement) from and against any and all claims, liabilities, losses, damages, penalties, fines, forfeitures, judgments, and expenses or other Obligations of any kind or nature whatsoever (including reasonable fees and disbursements of counsel to such Indemnitees) incurred on account of any matter or thing or alleged action or failure to act by Mortgagee, whether in suit or not, arising out of the operation, leasing, management, maintenance, repair, use or occupancy of the Premises (should Mortgagee elect to enter upon and assume the same upon an Event of Default), the construction of Improvements on or about the Premises, any accident, injury, death or damage to any Person or property occurring in, on or about the Premises or any street, drive, sidewalk, curb or passageway adjacent thereto, any misappropriation by Mortgagor of any prepayments of Rent or Security Deposits paid or payable by Mortgagor pursuant to this Mortgage, prior to payment in full of the Obligations of Mortgagor to Mortgagee or in connection therewith, except to the extent that such suit, claim or damage is caused by the gross negligence or willful misconduct of Mortgagee. XXIV-37 Section 7 TERMINATION If all of the Obligations shall be paid in full pursuant to the terms and conditions of this Mortgage and the other Loan Documents, or if this Mortgage shall be released of record in accordance with the provisions of the Credit Agreement or the other Loan Documents, then Mortgagee shall, promptly after the request of Mortgagor, execute, acknowledge and deliver to Mortgagor proper instruments evidencing the termination and release of this Mortgage. Mortgagor shall pay all reasonable legal fees and other expenses incurred by Mortgagee for preparing and reviewing such instruments and the execution and delivery thereof, and Mortgagee may require payment of the same prior to delivery of such instruments. Upon the receipt by Mortgagor of terminations or releases signed by Mortgagee, and in recordable form and evidencing the termination of this Mortgage, Mortgagor shall promptly and at its own expense record or file such terminations or releases in each of the cities, towns, counties and parishes, as appropriate, in which portions of the Mortgaged Property may be located, in such a manner so as to effect a release of all of the Mortgaged Property of record. Upon the request of Mortgagee, Mortgagor shall promptly deliver to Mortgagee evidence reasonably satisfactory to Mortgagee of such recordation or filing. The obligations of Mortgagor under this Section 7 shall survive the termination of this Mortgage. - --------- Section 8 MISCELLANEOUS COVENANTS AND AGREEMENTS 8.1. CUMULATIVE RIGHTS; WAIVERS; MODIFICATIONS. ----------------------------------------- Each and every right, power and remedy hereby granted to Mortgagee shall be cumulative and not exclusive, and each and every right, power and remedy whether specifically hereby granted or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by Mortgagee, and the exercise of any such right, power or remedy will not be deemed a waiver of the right to exercise, at the same time or thereafter, any other right, power or remedy. No delay or omission by Mortgagee in the exercise of any right, power or remedy will impair any such right, power or remedy or operate as a waiver thereof or of any other right, power or remedy then or thereafter existing. All changes to and modifications of this Mortgage must be in writing and signed by Mortgagor and Mortgagee. 8.2. PARTIAL RELEASES. ---------------- No release from the Lien of this Mortgage of any part of the Mortgaged Property by Mortgagee shall in any way alter, vary or diminish the force or effect of this Mortgage on the balance of the Mortgaged Property or the priority of the Lien of this Mortgage on the balance of the Mortgaged Property. XXIV-38 8.3. SEVERABILITY. ------------ In case any provision in or obligation under this Mortgage shall be invalid, illegal or unenforceable in any jurisdiction or under any set of circumstances, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction or under any other set of circumstances, shall not in any way be affected or impaired thereby. If any Lien evidenced or created by this Mortgage is invalid or unenforceable, in whole or in part, as to any part of the Obligations, or is invalid or unenforceable, in whole or in part, as to any part of the Mortgaged Property, such portion, if any, of the Obligations as is not secured by all of the Mortgaged Property hereunder shall be paid prior to the payment of the portion of the Obligations secured by all of the Mortgaged Property, and all payments made on the Obligations (including, without limitation, cash and/or property received in connection with sales of Mortgaged Property pursuant to Section 5 hereof) shall, unless prohibited by Applicable --------- Law or unless Mortgagee, in its sole and absolute discretion, otherwise elects, be deemed to have been first paid on and applied to payment in full of the unsecured or partially secured portion of the Obligations, and the remainder to the secured portion of the Obligations. 8.4. SUBROGATION. ----------- This Mortgage is made with full substitution and subrogation of Mortgagee in and to all covenants and warranties by others heretofore given or made in respect of the Mortgaged Property or any part thereof. If any or all of the proceeds of the indebtedness secured hereby have been used to extinguish, extend or renew any indebtedness heretofore existing against all or any portion of the Mortgaged Property or to satisfy any indebtedness or obligation secured by a Lien of any kind (including Liens securing the payment of any taxes), such proceeds have been advanced by Mortgagee at Mortgagor's request and, to the extent of such funds so used, the indebtedness and obligations in this Mortgage shall be subrogated to and extend to all of the rights, claim, Liens, titles and interests heretofore existing against the Mortgaged Property (or such portion thereof) to secure the indebtedness or obligation so extinguished, paid, extended or renewed, and the former rights, claims, Liens, titles and interests, if any, shall not be waived but rather shall be continued in full force and effect and in favor of Mortgagee and shall be merged with the Lien created herein as cumulative security for the repayment of the indebtedness and satisfaction of the Obligations, but the terms of the Loan Documents shall govern and control the relationship between Mortgagor and Mortgagee. XXIV-39 8.5. MORTGAGEE'S POWERS. ------------------ Without affecting the liability of any other Person liable for the payment of any obligations herein mentioned and without affecting the Lien of this Mortgage upon any portion of the Mortgaged Property not then or theretofore released as security for the full amount of all unpaid Obligations, from time to time, regardless of consideration and without notice to or consent by the holder of any subordinate Lien, right, title or interest in or to the Mortgaged Property, Mortgagee may, (a) release any persons liable, (b) extend the maturity or alter any of the terms of any such Obligation, (c) modify the interest rate payable on the principal balance of the Obligations, (d) grant other indulgences, (e) release or reconvey, or cause to be released or reconveyed at any time at Mortgagee's option any parcel, portion or all of the Mortgaged Property, (f) take or release any other or additional security for any obligations herein mentioned, or (g) make compositions or other arrangements with debtors in relation thereto. 8.6. ENFORCEABILITY OF MORTGAGE. -------------------------- This Mortgage is deemed to be and may be enforced from time to time as an assignment, chattel mortgage, contract, deed of trust, deed to secure debt, financing statement, real estate mortgage, or security agreement, and from time to time as any one or more thereof, as is appropriate under Applicable Law. A carbon, photographic or other reproduction of this Mortgage or any financing statement in connection herewith shall be sufficient as a financing statement for any and all purposes. 8.7. INTEREST. -------- NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, THE AMOUNT OF INTEREST REQUIRED HEREUNDER OR UNDER THE CREDIT AGREEMENT, THE NOTES OR ANY OF THE OTHER LOAN DOCUMENTS SHALL BE LIMITED TO THE MAXIMUM AMOUNT IN ACCORDANCE WITH SECTION [** _____ **] OF THE CREDIT AGREEMENT. ONE OF THE PURPOSES OF THIS PARAGRAPH IS TO PROVIDE RECORD NOTICE OF THE RIGHT OF MORTGAGEE TO INCREASE OR DECREASE THE INTEREST RATE ON ANY OF THE OBLIGATIONS IN ACCORDANCE WITH THE TERMS OF THE LOAN DOCUMENTS WHERE THE TERMS AND PROVISIONS OF SUCH LOAN DOCUMENTS PROVIDE FOR A VARIABLE INTEREST RATE. XXIV-40 8.8. CHOICE OF LAW. ------------- Insofar as permitted by otherwise Applicable Law, this Mortgage and the Obligations shall be and the other Loan Documents provide that they are to be construed under and governed by the laws of the State of New York without regard to conflict of law rules and principles; provided, however, that the laws -------- ------- of the place in which the Mortgaged Property is located shall apply to the extent, and only to the extent, necessary to permit Mortgagor to create the Lien of this Mortgage and to permit Mortgagee to perfect the Lien of this Mortgage and to enforce or realize upon their rights and remedies hereunder with respect to such Mortgaged Property. 8.9. COUNTERPARTS. ------------ This Mortgage and any amendments, waivers, consents or supplements hereto or in connection herewith may be executed and acknowledged in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature and acknowledgement pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature and acknowledgement pages are physically attached to the same document. Mortgagee shall also have the option to exercise all rights and remedies available to Mortgagee hereunder and under Applicable Law as though each counterpart hereof were a separate mortgage, deed of trust, deed to secure debt, chattel mortgage or other security instrument covering only the portions of the Mortgaged Property located in the city, town, county or parish wherein such counterpart is recorded. 8.10. RECORDING REFERENCES. -------------------- Unless otherwise specified in Exhibit A hereto, all recording --------- references in Exhibit A are to the official real property records of the city, --------- town, county or parish, as appropriate, in which the Land is located. XXIV-41 8.11. NOTICES. ------- All notices, requests and demands to be made hereunder shall be made in accordance with Section 10.8 of the Credit Agreement. 8.12. SUCCESSORS AND ASSIGNS. ---------------------- This Mortgage shall be the joint and several obligation of Mortgagor and all of its heirs, devisees, representatives, trustees, successors and assigns, including successors in interest of Mortgagor in and to any part of the Mortgaged Property, and all references in this Mortgage to Mortgagor shall be deemed to include all of the foregoing Persons. This Mortgage shall be assignable by Mortgagee in accordance with the provisions for assignment of the Loans set forth in the Credit Agreement and shall inure to the benefit of Mortgagee, and all of its heirs, successors, substitutes and assigns including, without limitation, (a) any other Eligible Assignee under the terms of the Credit Agreement, and (b) any and all other banks, lending institutions and parties which may participate in the indebtedness evidenced by the Notes or any of them (all such banks, lending institutions and parties who participate in the indebtedness evidenced by the Notes or any of them being referred to herein as the "PARTICIPANTS"). The Participants may, by agreement among them, provide for and regulate the exercise of their rights and remedies hereunder, but Mortgagor and all others shall be entitled to rely on the releases, waivers, consents, approvals, notifications and other acts of Mortgagee, without inquiry into any such agreements or the existence of required consents or approvals of the Participants therefor. As used herein, the term "MORTGAGEE" shall mean, at any particular time, any Person holding any interest of Mortgagee hereunder (as provided in and subject to the provisions of Sections 9.5 and 10.1 of the Credit Agreement) at that time including, without limitation, any Eligible Assignee designated as Agent under the Credit Agreement. Any waiver, consent, approval, notification or other action required or permitted to be obtained from or taken by Mortgagee may be obtained from or taken by the agent or agents of Mortgagee appointed from time to time for that purpose. Mortgagor and all others shall be entitled to rely on the waivers, consents, approvals, notifications and other acts of Mortgagee. As of the date of this Mortgage, Mortgagee is the Person identified as Mortgagee in the introductory paragraph of this Mortgage. Notwithstanding any other provision contained herein, if any property interest granted by this Mortgage does not vest on the execution and delivery of this Mortgage, it shall vest, if at all, no later than 20 years and 364 days after the death of the last surviving descendant of Joseph P. Kennedy (the late father of the former President of the United States) who is alive on the execution and delivery of this Mortgage. 8.13. EXPENSES. -------- The provisions set forth in Section 10.2 of the Credit Agreement are incorporated herein by this reference and shall apply with the same force and effect as if the terms of such section was set forth herein in full. XXIV-42 8.14. NONFOREIGN ENTITY. ----------------- Section 1445 of the Internal Revenue Code of 1986, as amended (the "INTERNAL REVENUE CODE") provides that a transferee of a U.S. real property interest must withhold tax if the transferor is a foreign person. To inform Mortgagee that the withholding of tax will not be required in the event of the disposition of the Premises, or any portion thereof, pursuant to the terms of this Mortgage, Mortgagor hereby certifies, under penalty of perjury, that: (i) Mortgagor is not a foreign corporation, foreign partnership, foreign trust or foreign estate, as those terms are defined in the Internal Revenue Code and the regulations promulgated thereunder; and (ii) Mortgagor's U.S. employer identification number is _______________; and (iii) Mortgagor's principal place of business is [** _______ **]. It is understood that Mortgagee may disclose the contents of this certification to the Internal Revenue Service and that any false statement contained herein could be punished by fine, imprisonment or both. Mortgagor covenants and agrees to execute such further certificates, which shall be signed under penalty of perjury, as Mortgagee shall reasonably require. The covenant set forth herein shall survive the foreclosure of the Lien of this Mortgage or acceptance of a deed in lieu thereof. 8.15. PURPOSE OF THE LOANS. -------------------- Mortgagor hereby represents and agrees that the Loans evidenced or guaranteed by the Loan Documents and secured by this Mortgage are being obtained for business or commercial purposes, and the proceeds thereof will not be used for personal, family, residential, household or agricultural purposes. 8.16. NO JOINT VENTURE OR PARTNERSHIP. ------------------------------- The relationship created hereunder or under the other Loan Documents is that of creditor/debtor. The Lenders individually and collectively, do not owe any fiduciary or special obligation to Mortgagor and/or any of Borrower's partners, agents, or representatives. Nothing herein or in any other Loan Document is intended to create a joint venture, partnership, tenancy-in-common, or joint tenancy relationship between Mortgagor, any other Loan Party or Subsidiary thereof and Agent and the Lenders nor to grant the Agent or the Lenders any interest in the Mortgaged Property other than that of mortgagee or lender. XXIV-43 8.17. AMENDMENTS AND WAIVERS. ---------------------- No amendment, modification, termination or waiver of any provision of this Mortgage or consent to any departure by any Loan Party therefrom, shall in any event be effective without the written concurrence of Mortgagee. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on Mortgagor in any case shall entitle Mortgagor to any other or further notice or demand in similar or other circumstances. 8.18. COVENANTS AND AGREEMENTS RUN WITH LAND. -------------------------------------- All of Mortgagor's covenants and agreements hereunder shall run with the land. 8.19. STATEMENTS BY MORTGAGOR. ----------------------- Mortgagor shall, within ten (10) days after written notice thereof from Mortgagee, deliver to Mortgagee a written statement stating the outstanding principal amount of the Guarantied Obligations under the Subsidiary Guaranty, any accrued and unpaid interest thereon and any other amounts secured by this Mortgage and stating whether any offset or defense then known to Mortgagor after inquiry exists against such principal and interest. 8.20. NON-WAIVER. ---------- A. CERTAIN ACTIONS NOT A RELEASE OF MORTGAGOR. Mortgagor shall not be relieved of Mortgagor's obligation to pay and perform the Obligations at the time and in the manner provided in the Subsidiary Guaranty and the other Loan Documents by reason of, and the rights of Mortgagee hereunder shall not be affected by, (i) any failure of Mortgagee to comply with any request of Mortgagor or any guarantor to take any action to foreclose this Mortgage or otherwise enforce any of the provisions of the Subsidiary Guaranty, the Credit Agreement or any other Loan Document, (ii) any release, regardless of consideration, of the whole or any part of the Mortgaged Property or any other security for the Obligations, (iii) any alteration, extension, renewal, change, modification, release, amendment, compromise or cancellation, in whole or in part, of any term, covenant or provision of any of the Loan Documents, including any increase or decrease in the principal amount of the Obligations or any increase or decrease in the rate of interest applicable thereto or any extension of time for payment thereof, or (iv) any agreement or stipulation between Mortgagee and any subsequent owner or owners of the Mortgaged Property or other Person extending the time of payment or otherwise modifying or supplementing the terms of this Mortgage, the Subsidiary Guaranty, the Credit Agreement or any other Loan Document, without first having obtained the consent of Mortgagor, and in the latter event, Mortgagor shall continue to be obligated to pay and perform the Obligations at the time and in the manner provided in the Subsidiary Guaranty and the other Loan Documents, as so extended, modified and supplemented, unless expressly released and discharged from such obligation by Mortgagee in writing. XXIV-44 B. PRIORITY OVER SUBORDINATE LIENS. Without affecting the liability of any other Person liable for the payment and performance of the Obligations and without affecting the Lien of this Mortgage or of any other Loan Document upon any portion of the Mortgaged Property not then or theretofore released as security for the payment and performance in full of all of the Obligations, from time to time, regardless of consideration and without notice to or consent by the holder of any subordinate Lien, encumbrance, right, title or interest in or to the Mortgaged Property, Mortgagee may, (i) release any persons liable for the payment or performance of the Obligations, (ii) extend the maturity or alter any of the terms of any of the Obligations as provided in the Loan Documents, (iii) modify the interest rate payable on the principal balance of the Obligations as provided in the Loan Documents, (iv) grant other indulgences, (v) release or reconvey, or cause to be released or reconveyed at any time at Mortgagee's option any parcel, portion or all of the Mortgaged Property, (vi) take or release any other or additional security for the Obligations herein mentioned, or (vii) make compositions or other arrangements with debtors in relation thereto. 8.21. SURVIVAL OF OBLIGATIONS. ----------------------- This Mortgage shall continue to secure the entire Obligations until the entire Obligations are paid in full or until this Mortgage has been released of record by Mortgagee pursuant to the terms of the Credit Agreement or any of the other Loan Documents. 8.22. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ---------------------------------------------- ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST MORTGAGOR ARISING OUT OF OR RELATING TO THE SUBSIDIARY GUARANTY, THIS MORTGAGE OR ANY OTHER LOAN DOCUMENT, OR ANY OBLIGATIONS THEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS MORTGAGE, MORTGAGOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY: (i) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (ii) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (iii) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO MORTGAGOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 10.8 OF THE CREDIT AGREEMENT; XXIV-45 d. AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER MORTGAGOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; e. AGREES THAT MORTGAGEE RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST MORTGAGOR IN THE COURTS OF ANY OTHER JURISDICTION; AND f. AGREES THAT THE PROVISIONS OF THIS SECTION 8.22 RELATING TO ------------ JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. 8.23 WAIVER OF JURY TRIAL. -------------------- EACH OF THE PARTIES TO THIS MORTGAGE HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THE SUBSIDIARY GUARANTY, THIS MORTGAGE OR ANY OTHER LOAN DOCUMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR THE LENDER/GUARANTOR RELATIONSHIP THAT IS BEING ESTABLISHED HEREBY AND THEREBY. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each party hereto acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already relied on this waiver in entering into this Mortgage and the other Loan Documents, and that each will continue to rely on this waiver in their related future dealings. Each party hereto further warrants and represents that it has reviewed this waiver with its legal counsel and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 8.23 AND EXECUTED BY EACH OF THE ------------ PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS MORTGAGE OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS MADE UNDER THE CREDIT AGREEMENT OR GUARANTIED UNDER THE SUBSIDIARY GUARANTY. In the event of litigation, this Mortgage may be filed as a written consent to a trial by the court. XXIV-46 8.24 MORTGAGEE'S ADDITIONAL RIGHTS. ----------------------------- The provisions of Schedule I attached hereto are made a part hereof. ---------- Section 9 MISCELLANEOUS COVENANTS AND AGREEMENTS [TO COME.] [ THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY ] XXIV-47 IN WITNESS WHEREOF, Mortgagor has on the date set forth in the acknowledgement hereto, effective as of the date first above written, caused this instrument to be duly EXECUTED AND DELIVERED. Mortgagor: --------- [** SEALY OWNERSHIP ENTITY **], a _____________ By: By: By:______________________________________ Name: Title: S-1 STATE OF NEW YORK ) ) SS.: COUNTY OF NEW YORK ) ON THE ____ DAY OF ___________ IN THE YEAR 1997 BEFORE ME, THE UNDERSIGNED, A NOTARY PUBLIC IN AND FOR SAID STATE, PERSONALLY APPEARED __________________, PERSONALLY KNOWN TO ME OR PROVED TO ME ON THE BASIS OF SATISFACTORY EVIDENCE TO BE THE INDIVIDUALS WHOSE NAMES ARE SUBSCRIBED TO THE WITHIN INSTRUMENT AND ACKNOWLEDGED TO ME THAT THEY EXECUTED THE SAME IN THEIR CAPACITIES, AND THAT BY THEIR SIGNATURES ON THE INSTRUMENT, THE INDIVIDUALS EXECUTED THE INSTRUMENT. __________________________________________________ (SIGNATURE AND OFFICE OF INDIVIDUAL TAKING ACKNOWLEDGEMENT) STATE OF NEW YORK ) ) SS.: COUNTY OF NEW YORK ) ON THE ____ DAY OF __________ IN THE YEAR 1997 BEFORE ME, THE UNDERSIGNED, A NOTARY PUBLIC IN AND FOR SAID STATE, PERSONALLY APPEARED ______________, PERSONALLY KNOWN TO ME OR PROVED TO ME ON THE BASIS OF SATISFACTORY EVIDENCE TO BE THE INDIVIDUAL WHOSE NAME IS SUBSCRIBED TO THE WITHIN INSTRUMENT AND ACKNOWLEDGED TO ME THAT HE EXECUTED THE SAME IN HIS CAPACITY, AND THAT BY HIS SIGNATURE ON THE INSTRUMENT, THE INDIVIDUAL EXECUTED THE INSTRUMENT. __________________________________________________ (SIGNATURE AND OFFICE OF INDIVIDUAL TAKING N-1 EXHIBIT A --------- LEGAL DESCRIPTION OF LAND The Name of the Record Owner of the Land is [** SEALY OWNERSHIP ENTITY. **] [See Attached Page(s) for Legal Description] Exh. A-1 EXHIBIT B --------- DESCRIPTION OF ADDITIONAL MORTGAGED PROPERTY All of Mortgagor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Mortgagor now has or hereafter acquires an interest, now or hereafter located upon or attached to or to be incorporated in (regardless of where located) the Premises or appurtenant thereto, or used or to be used in connection with the present or future use, construction upon, leasing, sale, operation or occupancy of the Premises: (1) all right, title and interest of Mortgagor in and to all buildings, structures, fixtures, tenant improvements and other improvements of every kind and description now or hereafter located in or on the Premises, including all Materials, water, sanitary and storm sewers, drainage, electricity, steam, gas, telephone and other utility facilities, parking areas, roads, driveways, walks and other site improvements; and all additions and betterments thereto and all renewals, substitutions and replacements thereof, owned or to be owned by Mortgagor or in which Mortgagor has or shall acquire an interest, to the extent of Mortgagor's interest therein (all of the foregoing being referred to herein, collectively, as the "IMPROVEMENTS"); (2) all supplies and materials in which Mortgagor has an interest arising in conjunction with Mortgagor's ownership or operation of the Premises, including any supplies or materials intended for incorporation or installation in the Improvements, prior to the time the same are so incorporated or installed, including building materials and components (all of the foregoing being referred to herein, collectively, as the "MATERIALS"); (3) all equipment, machinery, apparatus, fittings, fixtures, furniture, furnishings and articles of personal property of every kind and nature whatsoever owned or leased (but only to the extent Mortgagor can grant to Mortgagee a security interest therein without breaching the terms of such lease) now or in the future by Mortgagor, and either located upon the Premises, or any part thereof, or used in connection with the present use, maintenance, operation or occupancy of the Improvements as a manufacturing plant and/or warehouse or any other future occupancy or use of the Improvements, including all heating, lighting, laundry, incinerating, compacting, loading, unloading, landscaping, garage and power equipment and supplies, tools, engines, pipes, pumps, tanks, motors, generators, conduits, switchboards, plumbing, fittings, lifting, cleaning, fire prevention, fire extinguishing, refrigerating, ventilating, and communications apparatus, rack and shelving systems, air cooling and air conditioning apparatus, elevators, escalators, shades, awnings, screens, storm doors and windows, carpeting, computers, software, telephone switchboards, partitions, ducts, compressors, cables, boilers, stokers, furnaces, tables, desks, chairs, telephones, bathroom fixtures, cleaning equipment and supplies, and all additions, substitutions and Exh. B-1 replacements thereof, wherever located, together with all attachments, components, parts, equipment and accessories installed thereon or affixed thereto and all of Mortgagor's present and future "goods", "equipment" and "fixtures" (as such terms are defined in the Uniform Commercial Code) and other personal property, including without limitation any such personal property and fixtures which are leased (but only to the extent Mortgagor can grant to Mortgagee a security interest therein without breaching the terms of such lease), and all repairs, attachments, betterments, renewals, replacements, substitutions and accessions thereof and thereto (all of the foregoing being referred to herein, collectively, as the "EQUIPMENT"); Exh. B-2 (4) all right, title and interest now owned or hereafter acquired by Mortgagor in and to all options and rights of first refusal to purchase or lease any Mortgaged Property or any portion thereof or interest therein, and in and to any greater estate in the Premises or any other part of any Mortgaged Property including, but not limited to all rights of first refusal to purchase the fee estate in the Land (all of the foregoing being referred to herein as the "OPTIONS"); (5) all the right, in the name and on behalf of Mortgagor, to appear in and defend any action or proceeding brought with respect to any Mortgaged Property, and to commence any action or proceeding to protect the interest of Mortgagor in any Mortgaged Property (collectively, the "PROCEEDING RIGHTS"); (6) subject to the terms of the Credit Agreement, all of Mortgagor's right and power to encumber further any Mortgaged Property or any part thereof (the "ENCUMBRANCE RIGHTS"); (7) all rights, titles, interests, estates or other claims, both in law and in equity, which Mortgagor now has or may hereafter acquire in the Premises or in and to any greater estate in the Premises or in and to any greater estate in any Mortgaged Property (the "GREATER ESTATE RIGHTS"); (8) all prepaid rent and security deposits and all other security which the lessor under any ground lease may hold now or later for the performance of Mortgagor's obligations as the lessee under any such ground lease ("SECURITY DEPOSITS"); (9) subject to the terms of Section 6.4 of the Credit Agreement, all insurance policies and the proceeds thereof, now or hereafter in effect with respect to the Premises or any other Mortgaged Property, including, without limitation, any and all title insurance proceeds, and all unearned premiums and premium refunds, accrued, accruing or to accrue under insurance policies, and all awards made for any taking of or damage to all or any part of the Premises or any other Mortgaged Property by eminent domain, or by any purchase in lieu thereof, and all awards resulting from a change of grade of streets or for severance damages, and all other proceeds of the conversion, voluntary or involuntary, of any Mortgaged Property into cash or other liquidated claims, and all judgments, damages, awards, settlements and compensation (including interest thereon) heretofore or hereafter made to the present and all subsequent owners of any Mortgaged Property or any part thereof for any injury to or decrease in the value thereof for any reason (collectively, the "INSURANCE/CONDEMNATION PROCEEDS"); (10) all right, title and interest of Mortgagor as landlord in and to all leaseholds and all leases, subleases, licenses, franchises, concessions or grants of other possessory interests, tenancies, and any other agreements affecting the use, possession or occupancy of the Premises (or any other part of any Mortgaged Property) or any part thereof, whether now or Exh. B-3 hereafter existing or entered into (including, without limitation, any use or occupancy arrangements created pursuant to Section 365(d) of the Bankruptcy Code or otherwise in connection with the commencement or continuance of any bankruptcy, reorganization, arrangement, insolvency, dissolution, receivership or similar proceedings, or any assignment for the benefit of creditors, in respect of any tenant or occupant of any portion of the Premises (or any other part of any Mortgaged Property)) and all amendments, modifications, supplements, extensions or renewals thereof, and all guaranties thereof or of leasing commissions, whether now or hereafter existing and all amendments, modifications, supplements, extensions or renewals thereof, (all of the foregoing being collectively referred to as the "LEASES"), and all rents, issues, profits, royalties (including all oil and gas or other hydrocarbon substances), earnings, receipts, revenues, accounts, accounts receivable, security deposits and other deposits (subject to the prior right of the tenants making such deposits) and income, including, without limitation, fixed, additional and percentage rents, vending receipts, service charges, telephone charges, and all other fees, charges, accounts and other payments for the use or occupancy of facilities and/or the services rendered and goods provided in connection therewith, and all operating expense reimbursements, reimbursements for increases in taxes, sums paid by tenants to Mortgagor to reimburse Mortgagor for amounts originally paid or to be paid by Mortgagor or Mortgagor's agents or affiliates for which such tenants were liable, as, for example, tenant improvements costs in excess of any work letter, lease takeover costs, moving expenses and tax and operating expense pass-throughs for which a tenant is solely liable, parking, maintenance, common area, tax, insurance, utility and service charges and contributions, proceeds of sale of electricity, gas, heating, air- conditioning and other utilities and services, deficiency rents and liquidated damages, and other benefits now or hereafter derived from any portion of the Premises or otherwise due and payable or to become due and payable as a result of any ownership, use, possession, occupancy or operation thereof and/or services rendered, goods provided and business conducted in connection therewith (including any payments received pursuant to Section 502(b) of the Bankruptcy Code or otherwise in connection with the commencement or continuance of any bankruptcy, reorganization, arrangement, insolvency, dissolution, receivership or similar proceedings, or any assignment for the benefit of creditors, in respect of any tenant or other occupants of any portion of the Premises and all claims as a creditor in connection with any of the foregoing) and all cash or security deposits, advance rentals, and all deposits or payments of a similar nature relating thereto, now or hereafter, including during any period of redemption, derived from the Premises or any other portion of any Mortgaged Property and all proceeds from the cancellation, surrender, sale or other disposition of the Leases (all of the foregoing being referred to collectively, as the "RENTS") and the right to receive and apply the Rents to the payment of the Obligations, subject to the right hereinafter given to Mortgagor to collect the Rents; (11) the right to enforce, whether at law or in equity or by any other means, all terms, covenants and provisions of the Leases (collectively, the "LEASE PROVISIONS"); Exh. B-4 (12) all impounds paid by Mortgagor pursuant to the provisions of the Mortgage and all refunds or rebates of real and personal property taxes or charges in lieu of taxes, heretofore or now or hereafter assessed or levied against the Premises or any other part of any Mortgaged Property, including interest thereon, and the right to receive the same, whether such refunds or rebates relate to fiscal periods before or during the term hereof (collectively, the "REFUNDS"); (13) any loan commitment for financing of the Improvements, including refinancing of any existing loans, and all amounts to be advanced to or on behalf of Mortgagor thereunder (collectively, the "FINANCING COMMITMENTS"); (14) all motor vehicle equipment in all of its forms, wherever located, now or hereafter existing (including, but not limited to, all trucks, tractors, trailers, forklifts and automobiles), and all parts thereof (whether or not at any time of determination incorporated or installed therein or attached thereto, and including, without limitation, spare parts and tires), and all additions and accessions to, and replacements for, any of the foregoing Mortgaged Property (any and all such motor vehicle equipment, parts, additions, accessions and replacements being the "ROLLING STOCK"); (15) any and all accounts receivable and rights to payment for use or occupancy of space or for goods sold or leased or for services rendered, whether or not yet earned by performance, arising from the operation of the Improvements (including the use or occupancy thereof) or any other facility on the Premises, including, without limitation, (a) all accounts arising from the operation of any Improvements (specifically including any accounts receivable) and (b) all rights to receive payment under Leases, all substitutions therefor, proceeds thereof (whether cash or non-cash, movable or immovable, tangible or intangible) received upon the sale, exchange, transfer, collection or other disposition or substitution thereof and any and all of the foregoing and proceeds therefrom (all of the foregoing being referred to herein, collectively, as the "PAYMENT RIGHTS"); (16) subject to the terms of the Credit Agreement, all accounts, goods, contract rights, chattel paper, documents, instruments, general intangibles, accounts receivable, other rights to payment of any nature and other rights and obligations of any kind and all rights in, to and under all security agreements, pledges, chattel mortgages, leases and other contracts securing or otherwise relating to any such accounts, goods, contract rights, chattel paper, documents, instruments, general intangibles, accounts receivable, other rights to payment of any nature or other obligations (any and all such accounts, goods, contract rights, chattel paper, documents, instruments, general intangibles, accounts receivable, other rights to payment of any nature and other obligations, together with the Payment Rights being the "ACCOUNTS", and any and all such security agreements, pledges, chattel mortgages, leases and other contracts being the "RELATED CONTRACTS"); Exh. B-5 (17) all franchise agreements, management agreements, agreements for the acquisition of the Mortgaged Property or any portion thereof, license agreements and all similar future agreements, as each such agreement may be amended, supplemented, replaced or otherwise modified from time to time (said agreements, as so amended, supplemented, replaced or otherwise modified, being referred to herein individually as an "ASSIGNED RELATED AGREEMENT" and collectively as the "ASSIGNED RELATED AGREEMENTS"), including without limitation (i) all rights of Mortgagor to receive moneys due or to become due under or pursuant to the Assigned Related Agreements, (ii) all rights of Mortgagor to receive proceeds of any insurance, indemnity, warranty or guaranty with respect to the Assigned Related Agreements, (iii) all claims of Mortgagor for damages arising out of any breach of or default under the Assigned Related Agreements, and (iv) all rights of Mortgagor to terminate, amend, supplement, modify or exercise rights or options under the Assigned Related Agreements, to perform thereunder and to compel performance and otherwise exercise all remedies thereunder; (18) all abstracts of title, plans, specifications, operating manuals, computer programs, computer data, maps, surveys, studies, reports, appraisals, architectural, engineering and construction drawings and contracts, or whatever kind or character, whether now or hereafter existing, relating to the Premises (all of the foregoing being referred to herein as the "SPECIFICATIONS"); (19) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Mortgaged Property or are otherwise necessary or helpful in the collection thereof or realization thereupon (collectively, the "RECORDS"); (20) at such times and to the extent the granting of a security interest therein is permitted by Applicable Law, all approvals, authorizations, building permits, certifications, entitlements, exemptions, franchises, licenses, orders, variances, plat plan approvals, environmental approvals (including, without limitation, an environmental impact statement or report if required under Applicable Law), air pollution authorities to construct and permits to operate, sewer and waste discharge permits, national pollutant discharge elimination system permits, water permits, zoning and land use entitlements and all other permits, whether now existing or hereafter issued to or obtained by or on behalf of Mortgagor, that relate to or concern in any way the Premises and are given or issued by any governmental or quasi- governmental authority, whether now existing or hereafter created (as the same may be amended, modified, renewed or extended from time to time, and including all substitutions and replacements therefor) (collectively, the "PERMITS"); (21) subject to the terms of the Credit Agreement, all proceeds, products, rents and profits of or from any and all of the foregoing Mortgaged Property and, to the extent not Exh. B-6 otherwise included, all payments under insurance (whether or not Mortgagee is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Mortgaged Property. For purposes hereof, the term "PROCEEDS" includes whatever is receivable or received when Mortgaged Property or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary; provided, however, that in no event shall the Mortgaged Property include, and no - -------- ------- Mortgagor shall be deemed to have granted a security interest in, any of Mortgagor's rights or interests in any agreement to which Mortgagor is a party or any of its rights or interests thereunder to the extent but only to the extent that such a grant would result in a breach of the terms of, or constitute a default under, any such agreement, and the other party to such agreement has not consented to the granting of such security interest in such agreement (other than to the extent that any such term would be rendered ineffective pursuant to Section 9-318(4) of the Uniform Commercial Code of any relevant jurisdiction or any other Applicable Law (including the Bankruptcy Code) or principles of equity); and provided further, that immediately upon the ineffectiveness, lapse -------- ------- or termination of any such provision, the Mortgaged Property shall include and Mortgagor shall be deemed to have granted a security interest in, all such rights or interests in the applicable Mortgaged Property as if such provision had never been in effect. The term "Premises" means the Premises described in the Mortgage to which this Exhibit B is attached. - --------- Exh. B-7 EXHIBIT C --------- UCC INFORMATION DEBTOR: - ------ Name: [** Sealy Ownership Entity **] Corporate Structure: Notice Address: Principal Place of Business: SECURED PARTY: - ------------- Secured Party acts as Agent for the Lenders (the "LENDERS") party from time to time to the Credit Agreement dated as of even date herewith among [** _____ **] the Lenders and Secured Party, as it may hereafter be amended, restated, replaced, supplemented or otherwise modified from time to time. Information regarding the security interest held by the Lenders, for which Secured Party acts as Agent, may be obtained by contacting Secured Party at the address set forth above. Exh. C-1 SCHEDULE I MORTGAGEE'S ADDITIONAL RIGHTS [To Come] Sch.I-1 EXHIBIT XXV [FORM OF COLLATERAL ACCESS AGREEMENT] RECORDING REQUESTED BY: O'Melveny & Myers LLP AND WHEN RECORDED MAIL TO: O'Melveny & Myers LLP 153 East 53rd Street New York, New York 10022 Attn: _____________________ Re: [Name of Company] - -------------------------------------------------------------------------------- Space above this line for recorder's use only REAL PROPERTY HOLDER'S WAIVER AND CONSENT AGREEMENT This REAL PROPERTY HOLDER'S WAIVER AND CONSENT AGREEMENT (this "AGREEMENT") is dated as of ___________, [199 ][200 ] and entered into by _________________________, a ____________________ ("REAL PROPERTY HOLDER"), to and for the benefit of MORGAN GUARANTY TRUST COMPANY OF NEW YORK, a ___________________ having offices at ______________________________ ("ADMINISTRATIVE AGENT"), as administrative agent for the financial institutions ("LENDERS") which are or may hereafter become parties to the Credit Agreement (as hereinafter defined). R E C I T A L S --------------- 9.1. ____________________, a _______________ corporation ("COMPANY"), has possession of and occupies all or a portion of the property described on Exhibit A annexed hereto (the "PREMISES"). --------- 9.2. Company's interest in the Premises [arises under the lease agreement (the "LEASE")][is subject to the [mortgage][deed of trust] (the "MORTGAGE")] more particularly described on Exhibit B annexed hereto, --------- pursuant to which Real Property Holder has rights, upon the terms and conditions set forth therein, to take possession of, and otherwise assert control over, the Premises. Sch.I-1 9.3. Administrative Agent and Lenders have entered into that certain Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT") with [Company], [Sealy Mattress Company, an Ohio corporation of which Company is a subsidiary ("BORROWER")], Sealy Corporation, a Delaware corporation ("HOLDINGS"), and Company has executed [a guaranty,] a security agreement and other collateral documents in relation to the Credit Agreement. 9.4. [Company's guaranty of] the extensions of credit made by Lenders to [Company] [Borrower] under the Credit Agreement will be secured, in part, by all raw materials, work-in-process and finished goods inventory of Company (including, without limitation, all inventory of Company now or hereafter located on the Premises (the "INVENTORY")) and all equipment, machinery and other goods used in Company's business (including, without limitation, all equipment of Company now or hereafter located on the Premises (the "EQUIPMENT" and, together with the Inventory, the "COLLATERAL")). 9.5. Administrative Agent has requested that Real Property Holder execute this Agreement as a condition to the extension of credit to [Company] [Borrower] under the Credit Agreement. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Real Property Holder hereby represents and warrants to, and covenants and agrees with, Administrative Agent as follows: 1. Real Property Holder hereby (a) waives and releases unto Administrative Agent and its successors and assigns any and all rights granted by or under any present or future laws to levy or distraint for rent or any other charges which may be due to Real Property Holder against the Collateral, and any and all other claims, liens and demands of every kind which it now has or may hereafter have against the Collateral, and (b) agrees that any rights it may have in or to the Collateral, no matter how arising (to the extent not effectively waived pursuant to clause (a) of this paragraph 1), shall be second and subordinate to the rights of Administrative Agent in respect thereof. Real Property Holder acknowledges that the Collateral is and will remain personal property and not fixtures even though it may be affixed to or placed on the Premises. 2. Real Property Holder certifies that (a) Real Property Holder is the [landlord under the Lease][beneficiary under the Mortgage], (b) the [Lease][Mortgage] is in full force and effect and has not been amended, modified, or supplemented except as set forth on Exhibit B annexed hereto, (c) --------- there is no defense, offset, claim or counterclaim by or in favor of Real Property Holder against Company under the [Lease][Mortgage] or against the obligations of Real Property Holder under the [Lease][Mortgage], (d) no notice of default has been given under or in connection with the [Lease][Mortgage] which has not been cured, and Real Property Holder has no knowledge of Sch.I-2 the occurrence of any other default under or in connection with the [Lease][Mortgage], and (e) except as disclosed to Administrative Agent, no portion of the Premises is encumbered in any way by any deed of trust or mortgage lien or ground or superior lease. 3. Real Property Holder consents to the installation or placement of the Collateral on the Premises, and Real Property Holder grants to Administrative Agent a license to enter upon and into the Premises to do any or all of the following with respect to the Collateral: assemble, have appraised, display, remove, maintain, prepare for sale or lease, repair, transfer, or sell (at public or private sale). In entering upon or into the Premises, Administrative Agent hereby agrees to indemnify, defend and hold Real Property Holder harmless from and against any and all claims, judgments, liabilities, costs and expenses incurred by Real Property Holder caused solely by Administrative Agent's entering upon or into the Premises and taking any of the foregoing actions with respect to the Collateral. Such costs shall include, without limitation, any damage to the Premises made by Administrative Agent in severing and/or removing the Collateral therefrom. 4. Real Property Holder agrees that it will not prevent Administrative Agent or its designee from entering upon the Premises at all reasonable times to inspect or remove the Collateral. In the event that Real Property Holder has the right to, and desires to, obtain possession of the Premises [(either through expiration of the Lease or termination thereof due to the default of Company thereunder)] [(through the exercise of its rights under the Mortgage upon a default by Company thereunder)], Real Property Holder will deliver notice (the "REAL PROPERTY HOLDER'S NOTICE") to Administrative Agent to that effect. Within the 45 day period after Administrative Agent receives the Real Property Holder's Notice, Administrative Agent shall have the right, but not the obligation, to cause the Collateral to be removed from the Premises. During such 45 day period, Real Property Holder will not remove the Collateral from the Premises nor interfere with Administrative Agent's actions in removing the Collateral from the Premises or Administrative Agent's actions in otherwise enforcing its security interest in the Collateral. Notwithstanding anything to the contrary in this paragraph, Administrative Agent shall at no time have any obligation to remove the Collateral from the Premises. 5. Real Property Holder shall send to Administrative Agent a copy of any notice of default under the [Lease][Mortgage] sent by Real Property Holder to Company. In addition, Real Property Holder shall send to Administrative Agent a copy of any notice received by Real Property Holder of a breach or default under any other lease, mortgage, deed of trust, security agreement or other instrument to which Real Property Holder is a party which may affect Company's rights in, or possession of, the Premises. 6. All notices to Administrative Agent under this Agreement shall be in writing and sent to Administrative Agent at its address set forth on the signature page hereof by telefacsimile, by United States mail, or by overnight delivery service. Sch.I-3 7. The provisions of this Agreement shall continue in effect until Real Property Holder shall have received Administrative Agent's written certification that all amounts advanced under the Credit Agreement have been paid in full. 8. This Agreement and the rights and obligations of the parties hereunder shall be governed by, and shall be construed and enforced in accordance with, the internal laws of the State of ___________, without regard to conflicts of laws principles. IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered as of the day and year first set forth above. [NAME OF REAL PROPERTY HOLDER] By: _______________________________ Name: Title: By its acceptance hereof, as of the day and year first set forth above, Administrative Agent agrees to be bound by the provisions hereof. MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By: _______________________________ Name: Title: Sch.I-4 EXHIBIT A --------- LEGAL DESCRIPTION OF PREMISES Sch.I-5 EXHIBIT B --------- DESCRIPTION OF [LEASE] [MORTGAGE] Sch.I-6 EXHIBIT XXV [FORM OF COLLATERAL ACCESS AGREEMENT] RECORDING REQUESTED BY: O'Melveny & Myers LLP AND WHEN RECORDED MAIL TO: O'Melveny & Myers LLP 153 East 53rd Street New York, New York 10022 Attn: _____________________ Re: [Name of Company] - ------------------------------------------------------------------------------- Space above this line for recorder's use only REAL PROPERTY HOLDER'S WAIVER AND CONSENT AGREEMENT This REAL PROPERTY HOLDER'S WAIVER AND CONSENT AGREEMENT (this "AGREEMENT") is dated as of ___________, [199_][200_] and entered into by _________________________, a ____________________ ("REAL PROPERTY HOLDER"), to and for the benefit of MORGAN GUARANTY TRUST COMPANY OF NEW YORK, a ___________________ having offices at ______________________________ ("ADMINISTRATIVE AGENT"), as administrative agent for the financial institutions ("LENDERS") which are or may hereafter become parties to the Credit Agreement (as hereinafter defined). R E C I T A L S - - - - - - - - 9.1 ____________________, a _______________ corporation ("COMPANY"), has possession of and occupies all or a portion of the property described on Exhibit A annexed hereto (the "PREMISES"). --------- 9.2 Company's interest in the Premises [arises under the lease agreement (the "LEASE")][is subject to the [mortgage][deed of trust] (the "MORTGAGE")] more particularly described on Exhibit B annexed hereto, --------- pursuant to which Real Property Holder has rights, upon the terms and conditions set forth therein, to take possession of, and otherwise assert control over, the Premises. 9.3 Administrative Agent and Lenders have entered into that certain Credit Agreement dated as of December 18, 1997 (said Credit Agreement, as amended, supplemented XXV-1 or otherwise modified from time to time, being the "CREDIT AGREEMENT") with [Company], [Sealy Mattress Company, an Ohio corporation of which Company is a subsidiary ("BORROWER")], Sealy Corporation, a Delaware corporation ("HOLDINGS"), and Company has executed [a guaranty,] a security agreement and other collateral documents in relation to the Credit Agreement. 9.4 [Company's guaranty of] the extensions of credit made by Lenders to [Company] [Borrower] under the Credit Agreement will be secured, in part, by all raw materials, work-in-process and finished goods inventory of Company (including, without limitation, all inventory of Company now or hereafter located on the Premises (the "INVENTORY")) and all equipment, machinery and other goods used in Company's business (including, without limitation, all equipment of Company now or hereafter located on the Premises (the "EQUIPMENT" and, together with the Inventory, the "COLLATERAL")). 9.5 Administrative Agent has requested that Real Property Holder execute this Agreement as a condition to the extension of credit to [Company] [Borrower] under the Credit Agreement. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Real Property Holder hereby represents and warrants to, and covenants and agrees with, Administrative Agent as follows: 1. Real Property Holder hereby (a) waives and releases unto Administrative Agent and its successors and assigns any and all rights granted by or under any present or future laws to levy or distraint for rent or any other charges which may be due to Real Property Holder against the Collateral, and any and all other claims, liens and demands of every kind which it now has or may hereafter have against the Collateral, and (b) agrees that any rights it may have in or to the Collateral, no matter how arising (to the extent not effectively waived pursuant to clause (a) of this paragraph 1), shall be second and subordinate to the rights of Administrative Agent in respect thereof. Real Property Holder acknowledges that the Collateral is and will remain personal property and not fixtures even though it may be affixed to or placed on the Premises. 2. Real Property Holder certifies that (a) Real Property Holder is the [landlord under the Lease][beneficiary under the Mortgage], (b) the [Lease][Mortgage] is in full force and effect and has not been amended, modified, or supplemented except as set forth on Exhibit B annexed hereto, (c) --------- there is no defense, offset, claim or counterclaim by or in favor of Real Property Holder against Company under the [Lease][Mortgage] or against the obligations of Real Property Holder under the [Lease][Mortgage], (d) no notice of default has been given under or in connection with the [Lease][Mortgage] which has not been cured, and Real Property Holder has no knowledge of the occurrence of any other default under or in connection with the [Lease][Mortgage], and (e) except as disclosed to Administrative Agent, no portion of the Premises is encumbered in any way by any deed of trust or mortgage lien or ground or superior lease. XXV-2 3. Real Property Holder consents to the installation or placement of the Collateral on the Premises, and Real Property Holder grants to Administrative Agent a license to enter upon and into the Premises to do any or all of the following with respect to the Collateral: assemble, have appraised, display, remove, maintain, prepare for sale or lease, repair, transfer, or sell (at public or private sale). In entering upon or into the Premises, Administrative Agent hereby agrees to indemnify, defend and hold Real Property Holder harmless from and against any and all claims, judgments, liabilities, costs and expenses incurred by Real Property Holder caused solely by Administrative Agent's entering upon or into the Premises and taking any of the foregoing actions with respect to the Collateral. Such costs shall include, without limitation, any damage to the Premises made by Administrative Agent in severing and/or removing the Collateral therefrom. 4. Real Property Holder agrees that it will not prevent Administrative Agent or its designee from entering upon the Premises at all reasonable times to inspect or remove the Collateral. In the event that Real Property Holder has the right to, and desires to, obtain possession of the Premises [(either through expiration of the Lease or termination thereof due to the default of Company thereunder)] [(through the exercise of its rights under the Mortgage upon a default by Company thereunder)], Real Property Holder will deliver notice (the "REAL PROPERTY HOLDER'S NOTICE") to Administrative Agent to that effect. Within the 45 day period after Administrative Agent receives the Real Property Holder's Notice, Administrative Agent shall have the right, but not the obligation, to cause the Collateral to be removed from the Premises. During such 45 day period, Real Property Holder will not remove the Collateral from the Premises nor interfere with Administrative Agent's actions in removing the Collateral from the Premises or Administrative Agent's actions in otherwise enforcing its security interest in the Collateral. Notwithstanding anything to the contrary in this paragraph, Administrative Agent shall at no time have any obligation to remove the Collateral from the Premises. 5. Real Property Holder shall send to Administrative Agent a copy of any notice of default under the [Lease][Mortgage] sent by Real Property Holder to Company. In addition, Real Property Holder shall send to Administrative Agent a copy of any notice received by Real Property Holder of a breach or default under any other lease, mortgage, deed of trust, security agreement or other instrument to which Real Property Holder is a party which may affect Company's rights in, or possession of, the Premises. 6. All notices to Administrative Agent under this Agreement shall be in writing and sent to Administrative Agent at its address set forth on the signature page hereof by telefacsimile, by United States mail, or by overnight delivery service. 7. The provisions of this Agreement shall continue in effect until Real Property Holder shall have received Administrative Agent's written certification that all amounts advanced under the Credit Agreement have been paid in full. 8. This Agreement and the rights and obligations of the parties hereunder shall be governed by, and shall be construed and enforced in accordance with, the internal laws of the State of ___________, without regard to conflicts of laws principles. XXV-3 IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered as of the day and year first set forth above. [NAME OF REAL PROPERTY HOLDER] By: ----------------------------- Name: Title: By its acceptance hereof, as of the day and year first set forth above, Administrative Agent agrees to be bound by the provisions hereof. MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By: ----------------------------- Name: Title: XXV-4 EXHIBIT A --------- LEGAL DESCRIPTION OF PREMISES XXV-5 EXHIBIT B --------- DESCRIPTION OF [LEASE] [MORTGAGE] XXV-6 EXHIBIT 10.4.XXVI EXHIBIT XXVI [FORM OF SUBORDINATION PROVISIONS] "INDEBTEDNESS" means (i) all obligations for borrowed money or for the deferred purchase price of property or services (including, without limitation, all obligations contingent or otherwise in connection with acceptance, letter of credit or similar facilities, but excluding any such obligations incurred under ERISA and any accrued expenses or trade payables, (ii) all obligations evidenced by bonds, notes, debentures or other similar instruments, (iii) all indebtedness created or arising under any sale and leaseback arrangement, conditional sale or other title retention agreement with respect to property owned or acquired (whether or not the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (iv) all rental obligations under capital leases to the extent not included in clause (iii) above to the extent properly classified as a liability on a balance sheet in conformity with GAAP, (v) all guarantees (direct or indirect) to the extent properly classified as a liability on a balance sheet in conformity with GAAP, all contingent reimbursement obligations under undrawn letters of credit and all other contingent obligations in respect of, or obligations to purchase or otherwise acquire or to assure payment of, Indebtedness of others and (vi) indebtedness of others secured by any lien upon property, whether or not assumed, but only to the extent of the lesser of such property's fair market value and the stated amount of such obligation. "PERSON" means an individual, a partnership, a corporation, an association, a limited liability company, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "SENIOR AGENT" shall mean Morgan Guaranty Trust Company of New York, as Administrative Agent for the Lenders under the Senior Credit Agreements, and its successors in such capacity, or if there is then no acting Administrative Agent under the Senior Credit Agreements, financial institutions holding a majority in principal amount of the Senior Debt outstanding thereunder. "SENIOR CREDIT AGREEMENTS" shall mean, collectively, (i) the Credit Agreement dated as of December 18, 1997 and (ii) the AXEL Credit Agreement dated as of December 18, 1997, in each case by and among the Borrower, Sealy Corporation, the financial institutions listed therein as Lenders, Senior Agent, Goldman Sachs Credit Partners L.P., as Syndication Agent, and Bankers Trust Company, as Documentation Agent, as each such agreement has heretofore been and may hereafter be amended, restated, modified or supplemented from time to time, together with any credit agreement or similar document from time to time executed by the Borrower to evidence any Refinancing (as defined in the definition of Senior Indebtedness) or successive Refinancings. "SENIOR DEBT DOCUMENTS" shall mean the Senior Credit Agreements and all other documents and instruments delivered or filed in connection with the creation or incurrence of any Senior Indebtedness (including, without limitation, the promissory notes, guaranties, security agreements, pledge agreements and mortgages executed and delivered by the Borrower, Sealy Corporation and the subsidiaries of the Borrower in respect of the Obligations under the Senior Credit Agreements). "SENIOR INDEBTEDNESS" shall mean (i) all Obligations (as defined in the Senior Credit Agreements) now or hereafter incurred pursuant to and in accordance with the terms of the Senior Debt Documents, (ii) any additional Indebtedness incurred under or pursuant to the Senior Credit Agreements and the other Senior Debt Documents whether such Obligations or additional Indebtedness involve principal prepayment charges, interest (including, without limitation, interest accruing after the filing of a petition initiating any proceeding under the Bankruptcy Code, whether or not allowed as a claim in such proceeding), indemnities (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen after all other Obligations have been repaid in full and all commitments to lend thereunder have terminated) or reimbursement of fees, expenses or other amounts, and (iii) any indebtedness incurred (other than those not due and payable when all other Obligations have been repaid and Commitments are terminated) for the purpose of refinancing, restructuring, extending or renewing (collectively, "Refinancing") the obligations of the Borrower under the Senior Credit Agreements as set forth in clauses (i) and (ii) above. "SENIOR LENDERS" shall mean the financial institutions party to either of the Senior Credit Agreements as "Lenders" from time to time. 1. SUBORDINATION. ------------- (a) Agreement to Subordinate. The Borrower and, by its acceptance hereof, ------------------------ each Holder agree that the indebtedness of the Borrower evidenced by this Note, whether for principal, interest on any other amount payable under or in respect hereof and all rights or claims arising out of or associated with such Indebtedness (the "Subordinated Obligations"), shall be junior and subordinate in right of payment to the prior payment in full in cash of all Senior Indebtedness, in accordance with the provisions of this Section X. Each holder of Senior Indebtedness shall be deemed to have acquired Senior Indebtedness in reliance upon the agreements of the Borrower and the holder of this Note contained in this Section X. The provisions of this Section X shall be reinstated if at any time any payment of any of the Senior Indebtedness is rescinded or must otherwise be returned by any holder of Senior Indebtedness or any representative of such holder upon the insolvency, bankruptcy or reorganization of the Borrower. Any provision of this Note to the contrary notwithstanding, the Borrower shall not make, and no Holder shall accept, any payment or prepayment of principal, or prepayment of other amounts due thereunder, of any kind whatsoever (including without limitation by distribution of assets, set off, exchange or any other manner) with respect to the Subordinated Obligations at any time when any of the Senior Indebtedness remains outstanding. Holder may receive interest payments in respect of the Subordinated Obligations in accordance with the 2 terms of this Note except to the extent and at the times prohibited or restricted by the provisions of this Section X. In no event shall the Holder commence any action or proceeding to contest the provisions of this Section X or the priority of the Liens (as defined in the Senior Credit Agreements) granted to the holders of the Senior Indebtedness by the Borrower. No Holder shall take, accept or receive any collateral security from the Borrower for the payment of the Subordinated Obligations. (b) Liquidation Dissolution. Bankruptcy. In the event of any insolvency, ----------------------- bankruptcy, dissolution, winding up, liquidation, arrangement, reorganization, marshalling of assets or liabilities, composition, assignment for the benefit of creditors or other similar proceedings relating to the Borrower, its debts, its property or its operations, whether voluntary or involuntary, including, without limitation the filing of any petition or the taking of any action to commence any of the foregoing (which, in the case of action by a third party, is not dismissed within 60 days) (a "Bankruptcy Event"), all Senior Indebtedness shall first be paid in full in cash or other immediately available funds before Holder shall be entitled to receive or retain any payment or distribution of assets of the Borrower with respect to any Subordinated Obligations. In the event of any such Bankruptcy Event, any payment or distribution of assets to which Holder would be entitled if the Subordinated Obligations were not subordinated to the Senior Indebtedness in accordance with this Section X, whether in cash, property, securities or otherwise, shall be paid or delivered by the debtor, custodian, trustee or agent or other Person making such payment or distribution, or by the Holder if received by it, directly to the Senior Agent on behalf of the holders of the Senior Indebtedness for application to the payment of the Senior Indebtedness remaining unpaid, to the extent necessary to make payment in full in cash or other immediately available funds of all Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution to or for the holders of the Senior Indebtedness. (c) No Payments with Respect to Subordinated Obligations in Certain --------------------------------------------------------------- Circumstances. - ------------- (i) In circumstances in which Section X(b) is not applicable, no payment of any nature (including, without limitation, any distribution of assets) in respect of the Subordinated Obligations (including, without limitation, pursuant to any judgment with respect thereto or on account of the purchase or redemption or other acquisition of Subordinated Obligations, by set off, prepayment exchange or other manner) shall be made by or on behalf of the Borrower if, at the time of such payment: (A) a default in the payment when due (whether at the maturity thereof, or upon acceleration of maturity or otherwise and without giving effect to any applicable grace periods) of all or any portion of the Senior Indebtedness (whether of principal, interest or any other amount with respect thereto) shall have occurred, and such default shall not have been cured or waived in accordance with the terms of the Senior Debt Documents; or (B) subject to the last sentence of this Section X(c), (x) the Borrower shall have received notice from the Senior Agent or the Lenders of the occurrence 3 of one or more Events of Default (as defined in either of the Senior Credit Agreement) in respect of any Senior Indebtedness (other than payment defaults described in Section X(c)(i)(A) above), (y) each such Event of Default shall not have been cured or waived in accordance with the terms of the Senior Debt Documents, and (z) 180 days shall not have elapsed since the date such notice was received. The Borrower may resume payments (and may make any payments missed due to the application of Section X(c)(i) in respect of the Subordinated Obligations or any judgment with respect thereto: (A) in the case of a default referred to in clause (A) of this Section X(c)(i), upon a cure or waiver thereof in accordance with the terms of the Senior Debt Documents; or (B) in the case of an Event of Default or Events of Default referred to in clause (B) of this Section X(c)(i), upon the earlier to occur of (1) the cure or waiver of all such Events of Default in accordance with the terms of the Senior Debt Documents, or (2) the expiration of such period of 180 days. (ii) Following any acceleration of the maturity of any Senior Indebtedness and as long as such acceleration shall continue unrescinded and unannulled, such Senior Indebtedness shall first be paid in full in cash, or provision for such payment shall be made in a manner reasonably satisfactory to the holders of the Senior Indebtedness, before any payment is made on account of or applied on the Subordinated Obligations. (iii) The Borrower shall give prompt written notice to the Holder of (i) any default in respect of Senior Obligations referred to in Section X(c)(i)(A) and (ii) any notice of the type described in Section X(c)(i)(B) from the Senior Agent. (d) When Distribution Must Be Paid Over. In the event that Holder shall ----------------------------------- receive any payment or distribution of assets that Holder is not entitled to receive or retain under the provisions of this Note, Holder shall hold any amount so received in trust for the holders of Senior Indebtedness, shall segregate such assets from other assets held by Holder and shall forthwith turn over such payment or distribution (without liability for interest thereon) to the Senior Agent on behalf of the holders of Senior Indebtedness in the form received (with any necessary endorsement) to be applied to Senior Indebtedness. (e) Exercise of Remedies. So long as any Senior Indebtedness is -------------------- outstanding (including any loans, any letters of credit, any commitments to lend or any lender guarantees), Holder (solely in its capacity as a holder of this Note) shall not exercise any rights or remedies with respect to an Event of Default under this Note, including, without limitation, any action (l) to demand or sue for collection of amounts payable hereunder, (2) to accelerate the principal of this Note, or (3) to commence or join with any other creditor (other than the holder of a majority 4 in principal amount of the Senior Indebtedness) in commencing any proceeding in connection with or premised on the occurrence of a Bankruptcy Event prior to the earlier of: (A) the payment in full in cash or other immediately available funds of all Senior Indebtedness; (B) the initiation of a proceeding (other than a proceeding prohibited by clause (3) of this Section X(e)) in connection with or premised upon the occurrence of a Bankruptcy Event; (C) the expiration of 180 days immediately following the receipt by the Senior Agent of notice of the occurrence of such Event of Default from the Holder; and (D) the acceleration of the maturity of the Senior Indebtedness; provided, however, that if, with respect to (B) and (D) above, such proceeding - -------- ------- or acceleration, respectively, is rescinded, or with respect to (C) above, during such 180-day period such Event of Default has been cured or waived, the prohibition against taking the actions described in this Section X(e) shall automatically be reinstated as of the date of the rescission, cure or waiver, as applicable. In all events, unless an event described in clause (A), (B) or (D) above has occurred and not been rescinded, the Holder shall give thirty (30) days prior written notice to the Senior Agent before taking any action described in this Section X(e), which notice shall describe with specificity the action that the Holder in good faith intends to take. (f) Acceleration of Payment of Note. If this Note is declared due and ------------------------------- payable prior to the Maturity Date, no direct or indirect payment that is due solely by reason of such declaration shall be made, nor shall application be made of any distribution of assets of the Borrower (whether by set off or in any other manner, including, without limitation, from or by way of collateral) to the payment, purchase or other acquisition or retirement of this Note, unless, in either case, (i) all amounts due or to become due on or in respect of the Senior Indebtedness (including with respect to any outstanding letters of credit) shall have been previously paid in full in cash or other immediately available funds or in any other manner satisfactory to all holders of such Senior Indebtedness, (ii) all commitments to lend under Senior Indebtedness shall have been terminated and (iii) all guarantees constituting Senior Indebtedness shall have been terminated. (g) Proceedings Against Borrower. So long as any Senior Indebtedness is ---------------------------- outstanding (including any loans, any commitments to lend or open lender guarantees or any lender guarantees, Holder (solely in its capacity as a holder of this Note) shall not commence any bankruptcy, insolvency, reorganization or other similar proceeding against Borrower. (h) Amending Senior Indebtedness. Any holder of Senior Indebtedness may, ---------------------------- at any time and from time to time, without the consent of or notice to Holder (i) modify or amend the terms of the Senior Indebtedness, (ii) sell, exchange, release, fail to perfect a lien on or a security 5 interest in or otherwise in any manner deal with or apply any property pledged or mortgaged to secure, or otherwise securing, Senior Indebtedness, (iii) release any guarantor or any other person liable in any manner for the Senior Indebtedness, (iv) exercise or refrain from exercising any rights against Borrower or any other person, (v) apply any sums by whomever paid or however realized to Senior Indebtedness or (vi) take any other action that might be deemed to impair in any way the rights of the holder of this Note. Any and all of such actions may be taken by the holders of Senior Indebtedness without incurring responsibility to Holder and without impairing or releasing the obligations of Holder to the holders of Senior Indebtedness. (i) Certain Rights in Bankruptcy. Holder hereby irrevocably authorizes and ---------------------------- empowers each holder of Senior Indebtedness (and its representative or representatives) to demand, sue for, collect and receive all payments and distributions under the terms of this Note, to file and prove all claims (including claims in bankruptcy) relating to this Note, to exercise any right to vote arising with respect to this Note and any claims hereunder in any bankruptcy, insolvency or similar proceeding and take any and all other actions in the name of Holder (solely in its capacity as a holder of this Note), as such holder of Senior Indebtedness determines to be necessary or appropriate. (j) Subrogation. No payment or distribution to any holder of Senior ----------- Indebtedness pursuant to the provisions of this Note shall entitle Holder to exercise any right of subrogation in respect thereof until (i)(x) all Senior Indebtedness shall have been paid in full in cash or other immediately available funds or in any other manner satisfactory to all holders of Senior Indebtedness, (y) all commitments to lend under Senior Indebtedness shall have been terminated and (z) all guarantees constituting Senior Indebtedness shall have been terminated or (ii) all holders of Senior Indebtedness have consented in writing to the taking of such action. (k) Relative Rights. The provisions of this Section X are for the benefit --------------- of the holders of Senior Indebtedness (and their successors and assigns) and shall be enforceable by them directly against Holder. Holder acknowledges and agrees that any breach of the provisions of this Section X will cause irreparable harm for which the payment of monetary damages may be inadequate. For this reason, Holder agrees that, in addition to any remedies at law or equity to which a holder of the Senior Indebtedness may be entitled, a holder of the Senior Indebtedness will be entitled to an injunction or other equitable relief to prevent breaches of the provisions of this Section X and/or to compel specific performance of such provisions. The provisions of this Section X shall continue to be effective or be reinstated, as the case may be, if at any time any payment of Senior Indebtedness is rescinded or must otherwise be returned by any holder of Senior Indebtedness upon the occurrence of a Bankruptcy Event or otherwise, all as though such payment had not been made. The provisions of this Section X are not intended to impair and shall not impair as between Borrower and Holder, the obligation of Borrower, which is absolute and unconditional, to pay Holder all amounts owing under this Note. (l) Reliance on Orders and Decrees. Subject to the provisions of Section ------------------------------ X(d) hereof, upon any payment or distribution of assets of Borrower, whether in cash, property, securities or otherwise, Holder shall be entitled to rely upon any order or decree entered by any 6 court of competent jurisdiction in which any insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to Holder for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section X. 7 SCHEDULE 1.1(I) Addbacks to EBITIDA ------------------- Without duplication: (i) MIS Upgrade Expenditures, Year 2000 Expenditures, EITF 97-13 Expenditures and Other MIS Expenditures, in each case to the extent deducted in determining Consolidated Net Income; (ii) any bad debt and factoring losses incurred specifically with respect to the bankruptcy of Montgomery Ward; (iii) items classified as unusual or nonrecurring gains and losses (including restructuring costs, severance and relocation costs, any one-time expenses related to (or resulting from) any merger, recapitalization or Permitted Acquisition); (iv) one-time compensation charges, including any arising from any recapitalization of Holdings' special bonus program or existing stock options, performance share or restricted stock plans resulting from any merger or recapitalization transaction or expensed in any period prior to the consummation of the Merger; (v) non-recurring cash restructuring charges incurred in connection with the Recapitalization Transactions and related transactions to the extent deducted in determining Consolidated Net Income; provided that such -------- charges are incurred on or before December 18, 1998 and do not exceed in the aggregate the sum of (a) premiums paid in connection with the Debt Tender Offer plus (b) $1,000,000; ---- (vi) non-recurring cash restructuring charges incurred in connection with Permitted Acquisitions to the extent deducted in determining Consolidated Net Income; and (vii) Bain Management Fees (excluding any portion thereof representing --------- reimbursement of expenses or fees for acquisitions, financings or divestitures) paid during such period under the Bain Advisory Services Agreement, and any Harvard Management Fees (excluding any portion --------- thereof representing reimbursement of expenses paid during such period); (viii) non-recurring cash charges incurred prior to June 18, 1999 in connection with the relocation of any of Company's facilities and transition expenses related thereto, but only to the extent that such non-recurring charges do not exceed $6,000,000; and (ix) to the extent deducted in determining Consolidated Net Income, premiums and transaction costs on Existing Subordinated Notes not tendered in the Debt Tender Offer. SCHEDULE 1.1(II) Recapitalization Transactions Immediately prior to the Closing Date, Holdings will contribute (the "Capital Contribution") all of the issued and outstanding capital stock of Sealy, Inc., an Ohio corporation, The Stearns & Foster Bedding Company, a Delaware corporation, Advanced Sleep Products, a California corporation, Sealy Components-Pads, Inc., a Delaware corporation, and Sealy Mattress Company of San Diego, a California corporation, to the capital of the Company. Immediately after the Capital Contribution, Company will be the only direct subsidiary of Holdings and will own 100% of the operations of Holdings. On the Closing Date Merger Corp. will be merged with and into Holdings with Holdings being the surviving corporation. 2 SCHEDULE 2.1 Lenders' Commitments, Loans and Pro Rata Shares
LENDER REVOLVING PRO RATA SHARE TRANCHE A PRO RATA PRO RATA LOAN RE REVOLVING TERM LOANS SHARE RE SHARE RE ALL COMMITMENT LOAN TRANCHE A LOANS COMMITMENT TERM LOANS - ---------------------------------------------------------------------------------------------------------------- Goldman Sachs Credit Partners $5,227,270 5.2% $6,272,730 5.2% 32.6% L.P. - ---------------------------------------------------------------------------------------------------------------- Morgan Guaranty Trust Company $5,227,270 5.2% $6,272,730 5.2% 6.8% of New York - ---------------------------------------------------------------------------------------------------------------- Bankers Trust Company $7,727,273 7.7% $9,272,727 7.7% 4.0% - ---------------------------------------------------------------------------------------------------------------- General Electric Capital $7,727,273 7.7% $9,272,727 7.7% 4.0% Corporation - ---------------------------------------------------------------------------------------------------------------- Merita Bank Ltd. $6,818,182 6.8% $8,181,818 6.8% 3.3% - ---------------------------------------------------------------------------------------------------------------- Royal Bank of Canada $6,818,182 6.8% $8,181 818 6.8% 3.3% - ---------------------------------------------------------------------------------------------------------------- The Sakura Bank, Limited $6,818,182 6.8% $8,181 818 6.8% 2.7% - ---------------------------------------------------------------------------------------------------------------- Southern Pacific Bank $6,818,182 6.8% $8,181,818 6.8% 2.7% - ---------------------------------------------------------------------------------------------------------------- Wells Fargo Bank $6,818,182 6.8% $8,181,818 6.8% 3.3% - ---------------------------------------------------------------------------------------------------------------- BankBoston, N.A. $3,636,364 3.6% $4,363,636 3.6% 2.4% - ---------------------------------------------------------------------------------------------------------------- C1BC Inc. $3,636,364 3.6% $4,363,636 3.6% 1.5% - ---------------------------------------------------------------------------------------------------------------- City National Bank $3,636,364 3.6% $4,363,636 3.6% 1.5% - ---------------------------------------------------------------------------------------------------------------- Comerica Bank $3,636,364 3.6% $4,363,636 3.6% 1.5% - ---------------------------------------------------------------------------------------------------------------- Commerzbank AG $3,636,364 3.6% $4,363,636 3.6% 2.2% - ---------------------------------------------------------------------------------------------------------------- Credit Agricole Indosuez $3,636,364 3.6% $4,383,636 3.6% 2.2% - ---------------------------------------------------------------------------------------------------------------- Creditanstalt Corporate Finance, $3,636,364 3.6% $4,363,636 3.6% 1.5% Inc. - ---------------------------------------------------------------------------------------------------------------- National Bank of Canada $3,636,364 3.6% $4,363,636 3.6% 1.5% - ---------------------------------------------------------------------------------------------------------------- Sanwa Business Credit $3,636,364 3.6% $4,363,636 3.6% 1.5% Corporation - ---------------------------------------------------------------------------------------------------------------- Skandinaviska Enskilda Banken, $3,636,364 3.6% $4,363,636 3.6% 2.0% New York Branch - ---------------------------------------------------------------------------------------------------------------- Summit Bank $3,636,364 3.6% $4,363,636 3.6% 1.5% - ----------------------------------------------------------------------------------------------------------------
3 SCHEDULE 4.1C Corporate and Capital Structure; Ownership
Company Ownership/1/ - ---------------------------------------------------------- -------------------------------------------- Sealy Corporation Bain Funds (49%)/2/ Sealy Investors LLC (17%) Harvard Private Capital Holdings, Inc.(l 9%) ZelUChilmark Fund, L.P. (14%) Sealy Mattress Company Sealy Corporation The Sealy Mattress Company of Puerto Rico Sealy Mattress Company Ohio-Sealy Mattress Manufacturing Co., Inc. - Randolph Sealy Mattress Company Ohio-Sealy Mattress Manufacturing Co. -- Fort Worth Sealy Mattress Company Ohio-Sealy Mattress Manufacturing Co. Sealy Mattress Company Ohio-Sealy Mattress Manufacturing Co. -- Houston Sealy Mattress Company Sealy Mattress Company of Michigan, Inc. Sealy Mattress Company Sealy Mattress Company of S.W. Virginia Sealy Mattress Company Sealy Connecticut, Inc. Sealy Mattress Company Sealy Mattress Company of Kansas City, Inc. Sealy Mattress Company Sealy of Maryland and Virginia, Inc. Sealy Mattress Company Sealy Mattress Company of Illinois Sealy Mattress Company A. Brandwein & Company Sealy Mattress Company of Illinois Sealy Mattress Company of Albany, Inc. Sealy Mattress Company Sealy of Minnesota, Inc. Sealy Mattress Company Sealy Mattress Company of Memphis Sealy Mattress Company The Ohio Mattress Company Licensing and Components Group Sealy Mattress Company
1. The stock records of the Subsidiaries are incomplete. During the decade or more that Holdings has owned the Subsidiaries, however, to the knowledge of Holdings, no third party has made any claim with respect to its ownership of stock of any of the Subsidiaries. 2. The percentage ownership of Sealy Corporation are rough estimates. 4
Company Ownership - --------------------------------------------------- ------------------------------------- Sealy Mattress Manufacturing Company, Inc. Ohio Mattress Company Licensing and Components Group Sealy Canada, Ltd. Ohio Mattress Company Licensing and Components Group Gestion Centurion, Inc. Sealy Canada, Ltd. Sealy Descanso S.A. Ohio Mattress Company Licensing and Components Group Sealy, Inc. Sealy Mattress Company Sealy Mattress Company Mexico S. de R.L. de C.V. Sealy, Inc./3/ The Stearns & Foster Bedding Company Sealy Mattress Company The Stearns & Foster Upholstery Furniture Company The Stearns &: Foster Bedding Company Advanced Sleep Products Sealy Mattress Company Sealy Components - Pads, Inc. Sealy Mattress Company Sealy Mattress Company of San Diego Sealy Mattress Company
3. 999 shares held by Sealy Inc.; 1 share by the Ohio Mattress Licensing and Components Group. 5 SCHEDULE 4.11 Closing Date Mortgaged Properties THE STEARNS & FOSTER BEDDING COMPANY - ------------------------------------ 4802 West Van Buren Street Phoenix, AZ 85043 1705 Rockdale Ind. Blvd. Conyers, GA 30207 SEALY MATTRESS COMPANY - ---------------------- 1070 Lake Road Medina, OH 44258 THE SEALY MATTRESS COMPANY OF PUERTO RICO - ----------------------------------------- El Comandante Industrial Center #1 San Marcos Carolina, Puerto Rico 00982 OHIO-SEALY MATTRESS MANUFACTURING CO., INC.- RANDOLPH - ----------------------------------------------------- 671 North Street One Posturepedic Drive Randolph, MA 02368 OHIO-SEALY MATTRESS MANUFACTURING CO., INC. -- FORT WORTH - --------------------------------------------------------- 6550 Wuliger Way North Richland Hills, TX 76180 OHIO-SEALY MATTRESS MANUFACTURING CO., INC. - HOUSTON - ----------------------------------------------------- Highway Loop 290 Brenham, TX 77833 SEALY MATTRESS COMPANY OF CONNECTICUT. INC. - ------------------------------------------- 100 Canal Street Putnam, CT. 06260 SEALY MATTRESS COMPANY OF ALBANY, INC. - -------------------------------------- 99 Railroad Avenue Albany, NY 12205 SEALY OF MINNESOTA. INC. - ------------------------ 825 Transfer Road St. Paul, MN. 55114 6 SEALY MATTRESS COMPANY OF MEMPHIS, INC. - --------------------------------------- 4120 Air Trans Road Memphis, TN 38118 THE OHIO MATTRESS COMPANY LICENSING AND COMPONENTS GROUP - -------------------------------------------------------- 6275 Lake Shore Court Colorado Springs, CO 80915 1132 North Cullen Street Rensselaer, IN 47978 1133 North Cullen Street Rensselaer, IN 47978 Magic Industrial Park Delano, PA 18220 SEALY MATTRESS MANUFACTURING COMPANY, INC. - ------------------------------------------ 1130 Seventh Street Richmond, CA 94801 4361 East Firestone Blvd. South Gate, CA. 90280 12555 East ,9th Avenue Denver. CO. 80239 11220 Space Blvd. Regency Industrial Park Orlando, FL 32821 700 South State St. at 7th Avenue Lexington, NC 27293 13635 N. Lombard Rivergate Industrial Dis. Portland, OR 97203 RD# I, Rt. 322 Clarion, PA. 16214 SEALY MATTRESS COMPANY OF KANSAS CITY, INC. - ------------------------------------------- 3100 Fairfax Traffic Way Kansas City, KS 66115 7 SCHEDULE 4.1K Closing Date Environmental Report 1. 4802 West Van Buren Street Phoenix, AZ 85043 2. 1130 Seventh Street Richmond, CA 94801 3. 4361 East Firestone Blvd. South Gate, CA. 90280 4. 6275 Lake Shore Court Colorado Springs, CO 80915 5. 12555 East 39th Avenue Denver, CO. 80239 6. 100 Canal Street Putnam, CT. 06260 7. 11220 Space Blvd. Regency Industrial Park Orlando, FL 32821 8. 1705 Rockdale Ind. Blvd. Conyers, GA 30207 9. 1030 East Fabyan Parkway Batavia. IL 10. 1132 & 1133 North Cullen Street Rensselaer, IN 47978 11. 3100 Fairfax Traffic Way Kansas City, KS 12. 16114 Elliot Parkway 70-81 Industrial Park Williamsport, MD 8 13. 671 North Street One Posturepedic Drive Randolph, MA 02368 14. 21450 Trolley Industrial Drive Taylor, Ml 15. 825 Transfer Road St. Paul, MN 55114 16. 99 Railroad Avenue Albany, NY 12205 17. 700 South State St. at 7th Avenue Lexington, NC 27293 18. 1070 Lake Road Medina, OH 44258 19. 13635 N. Lombard Rivergate Industrial Dis. Portland, OR 97203 20. RD#I, Rt. 322 Clarion, PA. 16214 21. Magic Industrial Park Delano, PA 18220 22. 4120 Air Trans Road Memphis, TN 38118 23. Highway Loop 290 Brenham. TX 77833 24. 6550 Wuliger Way North Richland Hills, TX 76180 25. 14550 112th Avenue, NW Edmonton, Alberta, Canada 9 26. 555 Rue Panneton St. Narcisse, Quebec, Canada 27. 685 Warden Avenue Toronto, Ontario, Canada 28. Lots 17 & 18 Exportec 11 industrial Park Toluca, Mexico 29. El Comandante Industrial Center # I San Marcos Carolina, Puerto Rico 00982 10 SCHEDULE 5.1 Subsidiaries
SUBSIDIARY DIRECT OWNER OF SUBSIDIARY/4/ JURISDICTION OF INCORPORATION - ------------------------------------ ---------------------------------- ----------------------------- - ------------------------------------------------------------------------------------------------------- Sealy Mattress Company Sealy Corporation Ohio The Sealy Mattress Company of Sealy Mattress Company Ohio Puerto Rico Ohio-Sealy Mattress Manufacturing Sealy Mattress Company Massachusetts Co., Inc. - Randolph Ohio-Sealy Mattress Manufacturing Sealy Mattress Company Texas Co. -- Fort Worth Ohio-Sealy Mattress Manufacturing Sealy Mattress Company Georgia Co. Ohio-Sealy Mattress Manufacturing Sealy Mattress Company Texas Co. -- Houston Sealy Mattress Company of Sealy Mattress Company Michigan Michigan, Inc. Sealy Mattress Company of S.W. Sealy Mattress Company Virginia Virginia Sealy Connecticut, Inc. Sealy Mattress Company Connecticut Sealy Mattress Company of Kansas Sealy Mattress Company Missouri City, Inc. Sealy of Maryland and Virginia, Sealy Mattress Company Maryland Inc. Sealy Mattress Company of Illinois Sealy Mattress Company Illinois A. Brandwein & Company Sealy Mattress Company of Illinois Illinois Sealy Mattress Company of Sealy Mattress Company New York Albany, Inc. Sealy of Minnesota, Inc. Sealy Mattress Company Minnesota
4. The stock records of the Subsidiaries are incomplete. During the decade or more that Holdings has owned the Subsidiaries, however, to the knowledge of Holdings, no third party has made any claim with respect to its ownership of stock of any of the Subsidiaries. All ownership interests are 100%, except as indicated. 11
SUBSIDIARY DIRECT OWNER OF SUBSIDIARY JURISDICTION OF INCORPORATION - ----------------------------------------------------------------- ----------------------------- Sealy Mattress Company of Sealy Mattress Company Tennessee Memphis The Ohio Mattress Company Sealy Mattress Company Delaware Licensing and Components Group Sealy Mattress Manufacturing Ohio Mattress Company Licensing Delaware Sealy Mattress Manufacturing Ohio Mattress Company Licensing Delaware Company, Inc. and Components Group Sealy Canada, Ltd. Ohio Mattress Company Alberta Licensing and Components Group Gestion Centurion, Inc. Sealy Canada, Ltd. Quebec Sealy Descanso S.A. Ohio Mattress Company Spain Licensing and Components Group Sealy, Inc. Sealy Mattress Company Ohio Sealy Mattress Company Mexico S. Sealy, Inc. Mexico de R.L. de C.V. The Stearns & Foster Bedding Sealy Mattress Company Delaware Company The Stearns &: Foster Upholstery The Stearns & Foster Bedding Ohio Furniture Company Company Advanced Sleep Products Sealy Mattress Company California Sealy Components - Pads. Inc. Sealy Mattress Company Delaware Sealy Mattress Company of San Sealy Mattress Company California Diego
- ------------- /5/ 999 shares held by Sealy Inc.; I share by The Ohio Mattress Licensing and Components Group. 12 SCHEDULE 5.5 Real Property COMPANY LOCATION LEASED/OWNED TENANT/LANDLORD - ------------------------------------------------------------------------------ SEALY, INC. - ------------ International Home Leased Tenant Furnishings Center High Point, NC 27261 10th Floor/4th Floor, Halle Bldg. Leased Tenant 1228 Euclid Avenue Cleveland, OH 44115 12th Floor Storage, Halle Bldg. Leased Tenant 1228 Euclid Avenue Cleveland, OH 44115 17500 Engle Lake Dr. Leased Tenant Middleburg Hts., OH 44130 17520 Engle Lake Dr. Leased Tenant Middleburg Hts., OH 44190 THE STEARNS & FOSTER BEDDING COMPANY - ------------------------------------- 4802 West Van Buren Street Owned Phoenix, AZ 85043 1705 Rockdale Ind. Blvd. Owned Conyers, GA 30207 1030 Fabyan Parkway Leased Tenant (with Batavia. IL 60510 100,000 square feet subleased to Legget & Platt) ADVANCED SLEEP PRODUCTS - ------------------------ 1261 Industrial Parkway North Leased Tenant Brunswick, OH 44212 SEALY MATTRESS COMPANY - ---------------------- 1070 Lake Road Owned Leased Tenant Medina, OH 44258 18-22 Main Street Extension Tenant Plymouth, MA 4100 Spring Valley Rd. Leased Suite 800 Dallas, TX 75244 13 COMPANY LOCATION LEASED/OWNED TENANT/LANDLORD - ----------------------------------------------------------------------------- SEALY MATTRESS COMPANY - ---------------------- 48 South Service Road Leased Tenant Melville, NY 11747 200 CenterPort Drive Leased Tenant Greensboro, NC 27409 THE SEALY MATTRESS COMPANY OF PUERTO RICO - ----------------------------------------- El Comandante Industrial Center Owned # 1 San Marcos Carolina, Puerto Rico 00982 OHIO-SEALY MATTRESS MANUFACTURING CO., INC. - RANDOLPH - ------------------------------------------------------- One Posturepedic Drive Owned Randolph, MA 02368 OHIO-SEALY MATTRESS MANUFACTURING CO., INC. -- FORT WORTH - --------------------------------------------------------- 6550 Wuliger Way Owned North Richland Hills, TX 76180 6400-J Wuliger Way Leased Tenant North Richland Hills, TX 76180 OHIO-SEALY MATTRESS MANUFACTURING CO.. INC.-- HOUSTON - ------------------------------------------------------ Highway Loop 290 Owned Brenham, TX 77833 13111 Westheimer Suite 118 Leased Tenant Houston, TX 77077 SEALY MATTRESS COMPANY OF MICHIGAN. INC. - ----------------------------------------- 21450 Trolley Industrial Drive Leased Tenant Taylor, MI 48180 SEALY MATTRESS COMPANY OF CONNECTICUT' INC. - -------------------------------------------- 25 Hillside Avenue Owned Leased to private Oakville, CT 06779 family 31 Hillside Avenue Owned Leased to private Oakville, CT 06779 family I 00 Canal Street Owned Leased to Nutmeg Putnam, CT 06260 Realty Co. SEALY MATTRESS COMPANY OF KANSAS CITY, INC. - -------------------------------------------- 3100 Fairfax Traffic Way Leased Tenant Kansas City, KS 66115 14 COMPANY LOCATION LEASED/OWNED TENANT/LANDLORD - ------------------------------------------------------------------------------ SEALY OF MARYLAND AND VIRGINIA, INC. - ------------------------------------ 70-81 Industrial Park Leased Tenant Williamsport, MD 21795 11606 Greencastle Pike Leased Tenant Hagerstown, MD 21740 16121 Business Parkway Leased Tenant Hagerstown, MD 21740 Topflight Air Park Leased Tenant 18450 Showalter Rd. Hagerstown, MD 21740 SEALY MATTRESS COMPANY OF ILLINOIS - ----------------------------------- 1130 Lake Cook Rd. #170 Leased Tenant Buffalo Grove, IL 60089 SEALY MATTRESS COMPANY OF ALBANY. INC. - -------------------------------------- 99 Railroad Avenue Owned (Railroad Avenue & Brown Road) Albany, NY 12205 45 Railroad Avenue Leased Tenant Colonie, NY SEALY OF MINNESOTA, INC. - --------------------------- 825 Transfer Road Owned St. Paul, MN 55114 SEALY MATTRESS COMPANY OF MEMPHIS - --------------------------------- 4120 Air Trans Road Owned Memphis, TN 38118 4401 N. Roman Street Leased Tenant New Orleans, La THE OHIO MATTRESS COMPANY LICENSING AND COMPONENTS GROUP - -------------------------------------------------------- 6275 Lake Shore Court Owned Colorado Springs, CO 80915 Vapor Trail Bldg. Leased Tenant Colorado Springs, CO 80915 525 West Monroe Leased Assigned to Chicago, IL 60606 Katten, Muchin & Zavis 15 COMPANY LOCATION LEASED/OWNED TENANT/LANDLORD - ------------------------------------------------------------------------------ 111 N. Canal Street Leased Tenant Chicago, IL 60606 1132 North Cullen Street Owned Rensselaer, IN 47978 1133 North Cullen Street Owned Rensselaer, IN 47978 Magic Industrial Park Owned Delano, PA 18220 Rt. 54 & 309 Leased Tenant Hometown, PA SEALY MATTRESS MANUFACTURING COMPANY, INC. 1130 7th Street Owned Richmond, CA 94801 4361 East Firestone Blvd. Owned South Gate, CA 90280 12555 East 39th Avenue Owned Denver, CO 80239 11220 Space Blvd. Owned Regency Industrial Park Orlando, FL 32821 1440 Central Florida Parkway Leased Tenant Orlando, FL 32821 700 S. State St. Owned at 7th Avenue Lexington, NC 27293 3 East First Street Leased Tenant Lexington, NC 27293 Industrial Drive Leased Tenant Welcome, NC 8th Ave./State Street Leased Tenant Lexington 13635 N. Lombard Owned Rivergate Industrial Dis. Portland, OR 97203 (U.S. Route 322 & Owned Washington Avenue) R.D. #I Rte. 322 Clarion, PA 16214 16 COMPANY LOCATION LEASED/OWNED TENANT/LANDLORD - ------------------------------------------------------------------------------ R.D. #1, Rt. 32 Leased Tenant Clarion, PA 16214 San Francisco Mart Leased Tenant San Francisco, CA 17291 Irvine Road Leased Tenant Tustin, CA 92680 1930 E. Mariton Pike Leased Tenant Cherry Hill, NJ SEALY CANADA, LTD. - ------------------ 685 Warden Avenue Leased Tenant Scarborough, Ontario M I L 3Z5 1 4550 11 2th Avenue Owned Edmonton, Alberta TSM 2VI 431 Thames Avenue Leased Tenant Winnipeg, Manitoba 14550-112 Ave. Leased Tenant Edmonton, Alberta TSM 2V 1 SEALY MATTRESS COMPANY (MEXICO) - ------------------------------- Lot 18 Owned Industrial Park Exportec 11 Toulcam Mexico 17 SCHEDULE 5.12 Certain Fees 1. Approximately $5,600,000 fee to Merrill Lynch for representation in the sale of Holdings. 2. Approximately $250,000 fee to NationsBanc Montgomery Securities, Inc. for warrant valuation. 3. Approximately $251,550 fee to ABN Ambro for warrant valuation. 4. Approximately $3,663,830 in payments made to certain employees as a result of the change in control caused by the Recapitalization Transactions. 18 SCHEDULE 5.13 Environmental Matters South Brunswick. NJ. A Holdings subsidiary is the former owner of a - ------------------- commercial/industrial facility in Monmouth Junction (South Brunswick Township), New Jersey ("Property"). Prior to 1953, the Property was used as a horse farm. In 1953, the original portion of the current main building was constructed and thereafter operated until 1979 by Stop-Fire, Inc., a fire extinguisher manufacturer. The Property was purchased in 1979 by The Stearns & Foster Bedding Company (which was acquired by Holdings in 1983) and the Property was used as a mattress assembly facility until 1991. After being vacant for four (4) years, Holdings reopened the Property as a mattress pad manufacturing facility in 1995. In 1997, Holdings sold the business and Property to Leggett & Platt which has continued to use the Property for pad manufacturing. Holdings believes that operation/disposal practices by Stop-Fire at the Property resulted in the release of volatile organic compounds to the soil and groundwater. Solvents used to clean factory machinery and degrease fire extinguisher casings prior to painting were reportedly disposed on-site in a large area south of the secondary building and in the area outside the exit door at the former paint room. Paint sludge was also reportedly disposed through a wooded area at the Property near the large spent solvent disposal area. Holdings's environmental consultant has indicated that spent solvents were disposed at a rate of three to four 55 gallon drums per month over a 25 year period. In 1989, as the result of a leveraged buyout, a "triggering event" under New Jersey environmental law (Environmental Cleanup Responsibility Act; "ECRA", now known as the Industrial Site Recovery Act; "ISRA") the New Jersey Department of Environmental Protection ("NJDEP") required Holdings to conduct certain soil and groundwater testing activities that resulted in the discovery of volatile organic compounds in the impacted soil disposal areas and the groundwater. Pursuant to Administrative Consent Order ("ACO") signed by Holdings and its subsidiary, environmental investigation and focused remediation activities have continued at the facility through 1996. In 1995, NJDEP approved Holdings's soil remediation plan. As of July, 1997, Holdings completed required soil remediation at the Property. In August, 1997, NJDEP approved Holdings's interim groundwater remediation plan involving a pilot test program for groundwater containment and recycling of a portion of the contaminant plume with natural attenuation of the remaining plume. Installation of the pilot system is scheduled to begin in September, 1997 with full implementation planned for November or December, 1997. In January, 1997, Holdings settled a New Jersey U.S. District Court cost recovery litigation filed in March, 1994 against former owners of the Property and their lenders. Holdings is currently prosecuting a cost recovery action in New Jersey state court against certain insurance companies of The Steams & Foster Bedding Company. Holdings is also defending a declaratory judgment action filed in Ohio state court by the same insurance companies which seeks a determination of 19 non-liability under the policies. It is conceivable that NJ DEP may seek to intervene in the insurance cost recovery action and/or pursue a portion of the cost recovery award Holdings obtained in early 1997. Oakville. CT. Holdings is the owner of commercial/industrial property in - ------------ Oakville, Connecticut at which two vacant buildings are located ("Property"). Until 1993, Holdings used one of the buildings to assemble mattresses. The other building was used by various manufacturing companies as tenants ("Tenants") until 1991. None of the Tenants were affiliated with Holdings. There is soil and groundwater contamination at the Property under the Tenants' building which Holdings believes is attributable to the Tenants' metal plating operations which involved the use of various metals and organic chemical solvents. There is also possible PCB and PAH soil contamination at the transformer areas and parking lot areas of the Property resulting from historical use practices. As owner, Holdings has developed a remediation plan for both soil and groundwater that has been reviewed and approved by the Connecticut Department of Environmental Protection. The plan anticipates the demolition of the Tenants' building with the exception of the floor slab; the further delineation of impacted areas under the floor slab; and the removal of contaminated soils and the dewatering of areas with impacted groundwater. Demolition is scheduled for October, 1997. Additional delineation activities are planned for early Spring, 1998. Holdings has filed a cost recovery action in the Connecticut U.S. District Court seeking to require the Tenants to complete the remediation and/or reimburse Holdings for all site investigation and remedial costs. Oakville CT. In 1993, a Holdings subsidiary was identified as a Potential - ----------- Responsible Party ("PRP") at a municipal landfill in Naugatuck, Connecticut at which solid, non-hazardous waste from the Oakville plant was previously deposited. The landfill had been identified as a Superfund Site by U.S. EPA at the time of the notice. Holdings has received no further correspondence and is aware of no further activity on this matter since 1993. Lockland. OH. In 1991, Holdings received notice from U.S. EPA that a landfill - ------------ in West Chester, Ohio ("Skinner Landfill") - previously used by a textile and upholstered furniture manufacturing company purchased by Holdings in 1983 - had been identified as a Superfund Site. Holdings responded to U.S. EPA's CERCLA inquiry in 1991 and advised the former seller of U.S. EPA's interest and involvement in the Landfill. Since then, Holdings has heard nothing about this matter from either the U.S. EPA or the seller. On September 12, 1997, Holdings, Inc. was named as a defendant to a cost recovery action by certain Potential Responsible Parties ("PRP's") that had, by order of the U.S. EPA, commenced clean-up of the Skinner Landfill. Holdings intends to vigorously defend the action. St. Paul, MN. In 1994, a Holdings subsidiary was identified as a Potentially - ------------ Responsible Party ("PRP") at a municipal landfill in Minneapolis, MN at which solid, non-hazardous waste from 20 the St. Paul plant was previously deposited. In 1994, the landfill was identified as subject to the Minnesota Landfill Clean-up Act under which the State takes responsibility for the cleanup. As part of this State program, Holdings recently responded to an information request by the Minnesota Department of Environmental Protection as to prior use of the landfill by Holdings's subsidiary. St. Paul, MN. A 1997 environmental report indicated that the Pine Bend Sanitary - ------------ Landfill in Inver Grove Heights used by the plant in 1993 is on the Natural Priorities List ("NPL"). The plant has confirmed that it has not used this landfill since 1994 and has to present used scrap metal dealers as an alternative disposal method. Rensselaer, IN. A 1997 environmental report revealed that the Rensselaer - -------------- facility leased by Holdings (from October, 1995 to October, 1997 when the site was purchased by Holdings) was previously used as an amusement train manufacturing plant from 1947 through 1957. Such activities routinely involve hazardous materials such as paints, solvents and metal waste which may serve as the basis for possible subsurface contamination. Rensselaer, IN. A 1995 environmental report revealed that the Rensselaer - -------------- facility leased by Holdings was previously used as a porcelain fixture and wood cabinet manufacturing plant from 1954 to 1994. Such activities routinely involve hazardous materials such as paints. solvents, acetone, toluene (and perhaps other flammable solids) and dichloromethane, i.e., methylene chloride which may serve as a basis for possible subsurface contamination. Rensselaer, IN. A 1997 environmental report suggested that certain chemical - -------------- constituents of the isocyanate and resin compounds used at the newly-purchased plant location for the manufacture of foam encased mattress units may be present in quantities at or above the specified reporting threshold levels in SARA Title III (Sections 312 and 313). Purchase and production information was reviewed and the 312/313 reporting forms for the years 1995 and 1996 as required by SARA Title III were submitted to the appropriate agencies. Colorado Springs, CO. A 1997 environmental report reflected the fact that the - -------------------- Holdings property abuts railroad property used as a railcar dismantling area and that approximately one (1) acre of the Holdings site was previously owned by the railroad. The report noted that railcar facilities generally deal with a wide assortment of hazardous materials and suggested the potential of railcar-related contamination issues. The 1997 report also noted that prior to 1987, Holdings stored incoming raw materials and waste outdoors on paved areas now used for parking, shipping and receiving. Although no spills or releases were identified, the report suggested the potential of subsurface contamination. Finally, the 1997 report noted the existence of oil stains on soil resulting from the past unprotected discharge of oil from the Holdings plant air compressor. Soil aeration on-site is being employed to address this air compressor discharge matter. Delano, PA. A 1993 environmental report noted that three (3) waste disposal - ---------- facilities used by 21 the Holdings plant for waste oil disposal listed on the Comprehensive Environmental Response, Compensation and Liability Information System (CERCLIS) database. Of these, one facility (and the then transporter utilized by the Holdings plant) have been designated as requiring no further action. At the second facility, an environmental investigation begun in 1986, continued in 1990, and remained ongoing in 1993. The third disposal facility underwent initial site investigation in February, 1992. The Holdings plant no longer utilizes any of these CERCLIS landfills and no notice of a possible recovery action based upon past use has been received. The 1993 report also noted minor areas of oil-stained soil which have since been addressed. Richmond, CA. A 1997 environmental report indicated that prior to Holdings's - ------------ purchase of the property in 1973, a variety of operations were conducted at the plant including the manufacture of plumbing fixtures and. later, steel bath tubs. No spills or releases were identified. A prior 1993 report also noted the abutting property as being owned and operated by a registered hazardous waste transfer/hazardous material handling company. Although neither the 1993 or 1997 database search revealed any documented spills or releases, the Holdings plant manager recalls an acid release in the area in 1993 which resulted in a cloud cast over the Holdings plant and the neighboring area. The plant manager also recalls: (a) a mercaptan drum spill in either 1989 or 1990 which caused a strong odor to be present for some time; and (b) a diesel fuel spill of approximately 5 gallons a few years ago from a storage tanker in the driveway of the plant. The diesel fuel spill was immediately contained and the area cleaned by the adjacent hazardous material handling company. The 1997 environmental report also suggested that certain chemical constituents of the isocyanate and resin components used at the facility for the manufacture of foam encased mattress units may be present in quantities at or above the specified reporting threshold levels in SARA Title III, Section 313. Purchase and production information was reviewed and the 313 reporting forms for the years 1994, 1995 and 1996 as required by SARA Title III were submitted to the appropriate agency. Southgate, CA. A 1997 environmental report indicated that prior to Holdings's - ------------- purchase of the property in 1973, the plant was owned by the Holley division of Lear Sigler Co., which manufactured air conditioner units. A prior 1993 report also noted that a former tenant of Holdings at the plant, Hall Metals Company, used the leased area as an engine and scrap metal storage site. When the business failed, Holdings evicted the tenant and cleared the leased area of the stored engines, scrap metal and various other materials, including some unidentified chemicals. The 1993 and 1997 reports suggested that these historical activities could have resulted in possible subsurface contamination. Convers, GA. The rear portion of the Holdings plant was leased to a urethane - ----------- foam manufacturer from 1980 to 1997. A 1997 environmental report noted that the tenants' facility was listed on the CERCLIS database and the Toxic Release Inventory System ("TRIS") database, and that the U.S. EPA had designated the site as requiring no further action after three (3) site assessments in 1980, 1985 and 1989. The TRIS report noted the release of dichloromethane, toluene-2, 6-diisocyanate and toluene-2, 4-diisucyanate. Recent testing by the tenant as part of its cessation of business at the property and the termination of the lease revealed 22 no adverse environmental conditions. Orlando, FL. A urethane foam manufacturer owns and operates the property to the - ----------- rear of the Holdings plant. A spill in 1992 at the foam manufacturer's property resulted in the commencement of environmental investigation under a consent order with the Florida Department of Environmental Protection which investigation, over the past four (4) years, has confirmed the migration of groundwater contamination in the form of 1,1 dichloroethylene, vinyl chloride, acetone, 2-butanone, formaldehyde, toluene and 1,2, dichlorethane under the Holdings property. In 1997, Holdings requested the foam manufacturer to advise Holdings of its future investigation and remediation plan before Holdings allows continued access to Holdings's property. Clarion, PA. A 1997 environmental report revealed that the property was owned - ----------- and operated by a trailer and mobile home manufacturer from 1968 to 1983. Although such an operation was noted to have likely made use of hazardous materials, the 1997 report indicated no spills or other contamination problems. Carolina, Puerto Rico. A 1997 environmental report revealed that of the three - --------------------- (3 ) buildings presently occupied by Holdings at this location, one building was used previously as a printing shop and another was used as a machine shop and as an office and warehouse for an air conditioner service company. The third building had no significant prior use history. The 1997 report noted that while these operations commonly handle hazardous materials, no report of environmental problems were revealed by an environmental database search. Ft. Worth, TX. A diesel fuel spill occurred on June 8, 1996 as the result of a - ------------- vehicle accident involving a Holdings delivery truck in Longview, Texas. The authorities were notified and the spill area cleaned. The resultant report was submitted to Texas authorities. Holdings is awaiting a no further action letter. Batavia, IL. A diesel fuel spill occurred on May 21, 1996 as the result of a - ----------- vehicle accident involving a Holdings delivery truck in Sturtevant, Wisconsin. The authorities were notified and the spill area cleaned. The resultant report was submitted to Wisconsin authorities. A no further action letter was issued on August 19, 1996. Randolph, MA. A diesel fuel spill occurred on June 30, 1994 as the result of a - ------------ fuel tank rupture at Holdings's Randolph plant. The authorities were notified and the spill area was cleaned. A 1997 database review confirmed the matter was closed by Massachusetts authorities. Randolph, MA. In 1996, the asbestos containing material in the Holdings plant - ------------ boiler room was removed as part of the boiler decommission and overflow tank removal. Beginning June 1996 and continuing to completion in 1997, the outside above ground 20,000 storage tank for #2 heating oil to power the boiler was decommissioned; the 10,000 outside above ground diesel fuel tank and fuel pump were removed: and the associated lines closed in place. Random and isolated 23 oil stained areas were addressed by soil removal as part of these environmental activities. Kansas City, KS. A 1997 environmental report indicated the possible migration - --------------- of subsurface contamination from an automobile manufacturing facility one- quarter mile north of the plant. The manufacturing site is listed on multiple environmental databases and both soil and groundwater contamination has been confirmed to exist at the manufacturing site at concentrations above regulatory action levels. Putnam, CT. Environmental reports from 1993 and 1994 revealed that the Holdings - ---------- property in Putnam, Connecticut was used in the 1920's by a manufacturer of fabric inserts for rubber tires and from the late 1940's to the 1970's (until purchased by Holdings) by a safety material manufacturer, i.e., safety goggle, glove and helmet assembly. The 1994 report noted that the use of chemicals and the generation of wastes by the first manufacturer was unknown. The same report also stated that while no industrial wastes were generated by the second manufacturer, trichloroethylene was used as a degreasing solvent on site. A 1992 environmental report revealed that land adjacent to the Putnam property was used as a steel manufacturing facility and that waste from metal working processes and/or process wastewater of steel pickling may have discharged to the groundwater and may potentially impact the Holdings property. A 1997 environmental report revealed no additional information regarding the site. Phoenix, AZ. The Arizona Department of Environmental Quality (ADEQ) is - ----------- conducting a groundwater contamination study in a roughly 45 square mile area that includes the Holdings plant. The effort is known as the West Van Buren Study. Several contaminated wells have been identified including one well located approximately one-quarter mile south of the Holdings plant. Using 1994 data, the groundwater contamination plume has been identified by ADEQ on an isoconcentration map which shows a PCE plume at the boundary line of the plant and moving in a westerly direction under the plant site. Numerous sources of groundwater contamination have been identified although neither Holdings nor the plant has been listed as a contributor to the contamination. Other principal contaminants are 1,1, DCE; TCA; TCE and their breakdown products. These compounds are not consistent with materials used at the plant. Woodstuff Manufacturing Oak/Pine Plants: Phoenix, AZ. In 1997, Holdings sold - ---------------------------------------------------- the assets of its furniture manufacturing subsidiary, Woodstuff Manufacturing, Inc., to Sammy, Inc. Holdings agreed to indemnify Sammy from: All Losses (including reasonable legal and accounting fees, resulting from or arising out of (1 ) limitations, reductions or other adverse changes in the permissible level of emissions or other terms and conditions of the Original Pine Plant Permit (as such term is defined in Section 7.3(k) above) as in effect ------------- as of the Closing if such changes (a) result from violations of Air Quality Regulations by the Company of the Seller prior to the Closing and (b) are imposed in connection with the Company's original application for a Title 5 Permit for the Pine Plant or the processing thereof or any related review by the Maricopa County Environmental Services Department of Air Pollution Control (the "Company's Original Title 5 Application"), or (2) 24 violations of Air Quality Regulations by the Company or the Seller prior to the Closing, or government or private actions or suits alleging such violations, which violations are alleged or asserted in connection with the Company's Original Title 5 Application or any related review by the Maricopa County Environmental Services Department of Air Pollution Control; provided, however, -------- ------- that this Section 8.1 (iv) shall not cover any Losses resulting from or arising --------------- out of any changes in the terms, application or interpretation of any Air Quality Regulations that become effective after the Closing. Environmental investigations and resultant reports conducted in 1997 revealed the existence of the West Van Buren Study and the location of one contaminated well approximately one-half mile north of the Oak plant and one mile north of the Pine plant. Subsurface investigations at both the Pine and Oak plants did not reveal petroleum hydrocarbons or volatile organic compounds at concentrations above regulatory action levels. As of the 1997 divestment, the following Hazardous Substances have been used by or located at the Company's Oak plant: ethyl benzene; toluene; xylene; 1,1,1 - trichloroethane (1, 1,1 TCA); freon 11 (TCFM). freon 113 (TCFE); benzene, dibromochloromethane; and methyl tert butyl ether. As of the 1997 divestment, the following Hazardous Substances have not, to Holdings's knowledge, been used by or located at the Company's Oak plant: tetrachloroethene (PCE); trichloroethene (TCE); 1,1-dichloroethane (1,1 DCA); 1,2-dichloroethane (1,2 DCA); ,1 dichloroethene (l,lI DCE); 1,2-dichloroethene (1,2 DCE); bromodichloromethane (BDCM); carbon tetrachloride; chloroform; 1,1,2 trichloroethane (1,1,2 TCA); and vinyl chloride. The current management of Woodstuff Manufacturing intends to file the Title V Permit Application in early October, 1997. The State of Arizona is under no time obligation to act upon the Application, however, the current management has indicated that it intends to seek an expedited conclusion. Lexinoton, NC. In 1997, Holdings conducted soil and groundwater investigation - ------------- for petroleum hydrocarbon contamination at three (3) former UST removal areas at the Lexington plant. Groundwater analytical data indicated contamination. Soil analytical data revealed only one of six samples to contain total petroleum hydrocarbons at 1500 ppm, 300 ppm in excess of the 1200 ppm State standard. Holdings's environmental consultant concluded that this isolated reading is not representative of a contamination problem and Holdings has requested a no further action determination from North Carolina. Lexington, NC. A 1997 environmental report indicated the possible migration of - ------------- subsurface contamination from three (3) upgradient sites listed as active LUST (Leaking Underground Storage Tank) sites with the North Carolina authorities. Southgate, CA. In 1994, the three (3) underground storage tanks located under - ------------- the area leased to 25 a tenant of Holdings were removed. Soil contamination caused by gasoline, diesel fuel and waste oil releases at the tank pit area was addressed by the removal of the soil. Groundwater contamination involving the same contaminants is being addressed first by the passive removal of free products pending approval of a natural attenuation program by Los Angeles County. Renssealer, IN: A 1997 environmental report notes the possible existence of a - -------------- UST of approximately 1,000 gallons abandoned by prior owner. Possible underground storage tank abandoned by the prior owner. Toronto, Canada: A 1997 environmental report notes the possible existence of an - --------------- abandoned UST, size not specified, previously used to power the facility boiler. Quebec, Canada: A 1997 environmental report confirms that the facility boiler - -------------- is currently powered with heating fuel contained in existing 1,000 gallon UST. Edmonton, Canada: A 1997 environmental report notes the possible migration of - ---------------- subsurface contamination from two USTs (one for diesel fuel; the other for either gasoline or lubricating oil) removed by the City of Edmonton from its Public Works Department Facility in 1988. The report recommended that the matter be further investigated to determine what the City of Edmonton has done since a 1990 environmental report to the City recommended further investigation at the former UST location. Toronto, Canada: A 1997 environmental report indicated the existence of thermal - --------------- system insolation at the facility which, because of its age, may be asbestos- containing. The report recommends that an asbestos inspection be conducted. Quebec, Canada: A 1997 environmental report indicated the existence of spray- - -------------- applied fire proofing at the Facility which, because of its age, may be asbestors-containing. The report recommended that an asbestos inspection be conducted. Matters set forth in the report titled "Environmental Review of Sealy Corporation," prepared by ENVIRON Corporation, dated December 1997, and the Memorandum to File from Mark Grummer, Kirkland & Ellis, Regarding "Scaly Environmental Liabilities: Offsite and Former Facility," copies of which have been provided to Agent, are incorporated herein by reference and are deemed set forth on this Schedule 5.13. 26 SCHEDULE 6.12 POST-CLOSING DELIVERIES ----------------------- A. Company shall deliver, and shall cause its Subsidiaries to deliver, each of the following items to Administrative Agent no later than 30 days after the Closing Date, in each case in form and substance reasonably satisfactory to Administrative Agent: 1. A Mortgage, in proper form for recording, encumbering the following Real Property Assets: . El Comandante Industrial Center, #1 San Marcos, Carolina, Puerto Rico . Additional Properties at 11220 Space Blvd., Regency Industrial Park, Orlando, Florida . Highway Loop 290, Brenham, Texas (satisfactory survey not yet received) . 100 Canal Street, Putnam, Connecticut (title being transferred to another Subsidiary Guarantor) 2. A Closing Date Mortgage Policy for each of the Closing Date Mortgaged Properties described in paragraph A.1 above. 3. The results of a recent search (and copies of all such filings disclosed by such search), by a Person reasonably satisfactory to Syndication Agent and Administrative Agent, of all effective UCC financing statements and fixture filings and all judgment and tax lien filings which may have been made with respect to any personal or mixed property of the Loan Parties listed below in the jurisdictions set forth on Annex A hereto. 4. Any UCC termination statements, duly executed by all applicable Persons for filing in all applicable jurisdictions as may be necessary to terminate any effective UCC financing statements or fixture filings disclosed in any search described in paragraph A.3 above (other than any such financing statements or fixture filings in respect of Liens permitted to remain outstanding pursuant to the terms of this Agreement). 5. Executed fixture filings with respect to all mixed property Collateral of The Sealy Mattress Company of Puerto Rico, for filing in Puerto Rico. 6. Executed fixture filings with respect to all mixed property Collateral of Sealy Mattress Manufacturing Company, Inc. at the Orlando, Florida additional 27 properties described in paragraph A.1 above, for filing in Orange County, Florida. B. Company shall use, and shall cause its Subsidiaries to use, commercially reasonable efforts to deliver each of the following items to Administrative Agent no later than 30 days after the Closing Date, in each case in form and substance reasonably satisfactory to Administrative Agent: 1. At least one original of a memorandum of lease for the property at 3100 Fairfax Traffic Way, Kansas City, Kansas, in a form acceptable for recording in the applicable jurisdiction. 2. A Mortgage, in proper form for recording, encumbering the leasehold Closing Date Mortgaged Property described in paragraph B.1 above. 3. A Closing Date Mortgage Policy containing a survey exception in the form set forth in the Global Title Letter for the Closing Date Mortgaged Property described in paragraph B.2 above. 4. A Collateral Access Agreement with respect to the properties at Industrial Drive, Welcome, North Carolina. Notwithstanding the foregoing, if Company fails to deliver any of the foregoing items to Administrative Agent within such 30 day period, Administrative Agent may (but shall not be obligated to) (i) consent to an additional period of time for such delivery, in the case of failure to deliver an item described in any of paragraphs A.1 through A.6, or (ii) consent to an additional period of time for such delivery or waive the delivery requirement as set forth in this Schedule, in the case of failure to deliver an item described in any of paragraphs B.1 through B.4. C. In the event that Company and its Subsidiaries shall fail to sell the 31 Hillside Avenue, Oakville, Connecticut property to a third party by November 30, 1998, Company shall no later than December 1, 1998 deliver, or shall cause its applicable Subsidiary to deliver, each of the items set forth in subsection 6.9 of the Credit Agreement with respect to such properties as if they were an Additional Mortgaged Properties as defined in such subsection. D. Company shall, and shall cause its Subsidiaries to, use commercially reasonable efforts to commence and consummate such corporate and other proceedings as Company and its counsel shall determine to be advisable to ratify the issuances of outstanding capital stock of Company and its Subsidiaries as set forth in the applicable Schedules to the Holdings Pledge Agreement, the Company Pledge Agreement and the Subsidiary Pledge Agreement. 28 ENTITIES & JURISDICTIONS NOT SEARCHED Sealy of Maryland and Virginia Inc. - ----------------------------------- State of Delaware State of Virginia Independent City of Richmond Ohio Sealy Mattress Manufacturing Co. Inc. - ------------------------------------------ State of Connecticut The Stearns & Foster Beddine Company - ------------------------------------ DeKalb County, Georgia Hall County, Georgia Richmond County, Georgia Dougherty County, Georgia Chatham County, Georgia Fulton County, Georgia State of Florida State of Alabama State of Tennessee Sealy Mattress Manufacturing Company, Inc. - ------------------------------------------ Mecklenburg County, North Carolina Forsyth County, North Carolina New Hanover County, North Carolina State of South Carolina State of Virginia Independent City of Chesapeake State of Florida State of Hawaii State of Washington State of Utah Sealy Mattress Company of Kansas City. Inc. - ------------------------------------------- State of Missouri Independent City of St. Louis Ohio-Sealy Mattress Manufacturing Co. - Fort Worth - -------------------------------------------------- State of Louisiana - ------------------------------- /6/ Clerk's Cooperative was searched. No records found. 29 Sealy Mattress Company of Memphis - --------------------------------- State of Mississippi Madison County, Mississippi State of Alabama State of Arkansas Pulaski County, Arkansas Jefferson County, Arkansas State of Florida State of Kentucky 30 SCHEDULE 7.1(V) Existing Foreign Subsidiary Intercompany Indebtedness None 31 SCHEDULE 7.1(XV) Certain Existing Indebtedness 1. Note by The Sealy Mattress Company Licensing and Components Group payable to Jose Ades Tawil, a former licensee, with an outstanding principal balance of $1,200,000. 2. Note from The Sealy Mattress Company of Puerto Rico to Sealy Corporation with an outstanding principal balance of $2,500,000. 3. Letters of Credit issued by Banque Paribas for Sealy Corporation: BENEFICIARY LC NUMBER AMOUNT EFFECTIVE DATE MATURITY TRUE - --------------- --------- -------------- -------------- -------- ------- - ----------------------------------------------------------------------------- Lumbermen's 21365/93 $ 426,994.00 517/93 5/6/98 Standby Mutual - ----------------------------------------------------------------------------- Hartford Fire 21369/93 $54,739,577.00 6/1/93 6/2/98 Standby Insurance - ----------------------------------------------------------------------------- Hartford Fire 21375/94 $ 3,360,423.00 8/18/94 8/19/98 Standby Insurance - ----------------------------------------------------------------------------- Transconti 21404/96 $ 382,000.00 9/20/96 9/19/98 Standby nental Tech. - ----------------------------------------------------------------------------- Continental 21405/96 $ 2,831,000.00 9/20/96 9/19/98 Standby Casualty - ----------------------------------------------------------------------------- 32 SCHEDULE 7.3(VII) Certain Existing Investments OWNER INVESTMENT - --------------------------- -------------------------------------------- Gestion Centurion, Inc. One-third ownership of outstanding stock of Alpha Springs, Ltd. The Ohio Mattress Company 14 shares of Southwest Ohio Water Class "A" common stock Sealy, Inc. Ownership of personal residences in connection with corporate relocation program 33 SCHEDULE 7.3(XIII) Existing Foreign Subsidiary Capital Contributions CONTRIBUTOR AMOUNT FOREIGN SUBSIDIARY - --------------------------------- ----------- ------------------ The Ohio Mattress Company $31,000,000 Sealy Canada, Ltd. Licensing and Components Group 34 SCHEDULE 7.3(XVIII) Certain Proposed Investments 1. The Ohio Mattress Company Licensing and Components Group and Kurlon Limited executed a letter of intent dated October 20, 1997 for a joint venture in India to produce and market inner-spring mattresses under the Sealy brand name. 35 SCHEDULE 7.4 Certain Existing Contingent Obligations None 36 SCHEDULE 7.9 Sale-Leaseback Transactions Proposed relocation of certain of Sealy Mattress Company's assets may involve the purchase of an existing facility, with the subsequent sale and leaseback of the same facility. 37 EX-10.51 8 PURCHASE AGREEMENT EXHIBIT 10.51 PURCHASE AGREEMENT (Commercial Property) THIS AGREEMENT, dated JANUARY 1, 1998 , between -------------------------------- HOLLINGSWORTH AND STOUT ENTERPRISES, LLC ,(the - ------------------------------------------------------------------------ "Seller"), whose address is 1 OFFICE PARKWAY, TRINITY, NC 27370 -------------------------------------------- and SEALY, INC. - ------ -------------------------------------------------------------- ,(the "Buyer"), whose address is C/O KEZIAH, GATES & SAMET, - ---- -------------------------- POST OFFICE BOX 2608, HIGH POINT, NC 27261; - ------------------------------------------- WITNESSETH THAT: WHEREAS, Seller is the owner in fee simple of certain real property known as DAR/RAN PLANT AND OFFICES, 1 OFFICE PARKWAY, TRINITY, North Carolina (the - ------------------------------------------- ------- "Land") CONSISTING OF APPROXIMATELY 68.51 ACRES, and more particularly described in A SURVEY PREPARED BY MARK TERRY & ASSOCIATES DATED FEBRUARY 4, 1994, DESIGNATED JOB NO. 3585-51-02 AND IN A DEED RECORDED AT DEED BOOK 1390, PAGE 606 IN THE OFFICE OF THE REGISTER OF DEEDS FOR RANDOLPH COUNTY, NORTH CAROLINA , WHICH IS INCORPORATED BY REFERENCE IN THIS AGREEMENT. Seller has agreed to sell and Buyer has agreed to purchase the Land, the improvements located on the Land, WHICH IMPROVEMENTS CONSIST OF A MANUFACTURING PLANT CONTAINING APPROXIMATELY 165,240 SQUARE FEET AND AN OFFICE BUILDING CONTAINING APPROXIMATELY 28,450 SQUARE FEET, and certain other property upon the terms and conditions stated in this agreement. NOW, THEREFORE, in consideration of their mutual promises contained in this agreement, the parties agree as follows: PURCHASE AND SALE. Seller agrees to sell to Buyer and Buyer agrees to purchase, upon the terms and conditions stated in this agreement, the following (collectively, the "Property"): a. the Land; b. all buildings or other improvements located on the Land (the "Improvements)"; c. all personal property owned by Seller and located on and used in connection with the operation of the buildings on the Land, including but not limited to all apparatus, machinery, equipment, motors, elevators, fittings, radiators, built-in appliances, signs, awnings, shades, screens, blinds, carpeting, and all plumbing, heating, lighting, ventilating, air conditioning and sprinkler equipment USED IN CONNECTION WITH THE OPERATION OF THE IMPROVEMENTS, whether or not attached to the Land and improvements, AND SPECIFICALLY INCLUDING ALL EXISTING ELECTRICAL PANELS, BUS DUCTS AND WIRING WHICH HAVE BEEN INSTALLED TO PROVIDE POWER TO SELLER'S MANUFACTURING EQUIPMENT AND MACHINERY (the "Personal Property"), BUT EXCLUDING SELLER'S FURNITURE MANUFACTURING MACHINERY AND --------- EQUIPMENT; d. all right, title and interest of Seller in and to any right of access, street, roadway or alley abutting or adjoining the Land; and e. all other rights, permits (including without limitation all density, watershed and other development rights or permits), privileges, appurtenances, easements and rights of way owned by the Seller and appurtenant to or used in connection with the Land, the Improvements or the Personal Property. 2. PURCHASE PRICE. The Purchase Price for the Property is $8,250,000.00. - ------------- The Purchase Price is payable as follows: 2.1 DEPOSIT. a. Buyer has paid to SELLER the sum of $25,000.00 (the "Deposit"), ---------- to be held in escrow and applied in accordance with the terms of this agreement. b. The Deposit shall be applied as a credit against the Purchase Price at Closing. c. If this transaction does not close, the Deposit will be applied as provided in Paragraph 12. 2.2 BALANCE OF PURCHASE PRICE. Buyer will pay the balance of the Purchase Price, after crediting the Deposit and subject to all adjustments and prorations provided for in this Agreement, to Seller at Closing as provided in Section 11.3. 3. ACCEPTANCE BY SELLER. This Agreement shall be void unless Seller delivers to Buyer a duplicate original counterpart of this Agreement, properly executed by Seller, at or prior to 5:00 p.m. on JANUARY 9, 1998. --------------- 4. INVESTIGATIONS BY BUYER. 4.1 RIGHT OF ENTRY. Seller grants to Buyer and Buyer's agents, representatives, or designees, the right to enter upon the Property, at any time this agreement is in force, to inspect, examine, survey and test the Property as Buyer deems necessary or desirable, including without limitation, environmental studies and soils tests. Buyer agrees (i) to repair any damages to the Property resulting from, and restore the Property as nearly as possible to its condition prior, to Buyer's tests and inspections; and (ii) to defend, indemnify and hold harmless Seller from and against any claim, damage or liability incurred by or asserted against the Seller as a result of such activities on the Property pursuant to this Section. 4.2 INVESTIGATION PERIOD. During the period (the "Investigation Period") beginning on the date upon which this agreement has been executed by both parties and a fully executed original counterpart returned to Buyer (the "Effective Date") and ending at 4:00 p.m. on the day which is 60 days -- after the Effective Date, Buyer may seek commitments for financing satisfactory to Buyer, and may conduct such tests, studies and analyses as Buyer deems necessary or desirable in order to determine, in Buyer's sole discretion, whether the Property is suitable for Buyer's intended use of the Property (the "Intended Use") as A BEDDING MANUFACTURING PLANT AND OFFICE BUILDING and ------------------------------------------------- otherwise satisfactory to Buyer. Buyer shall have the right to review and inspect all leases, contracts, or other agreements affecting or relating to the Property, and all pertinent records of Seller relating to the operation or maintenance of the Property. 4.3 BUYER'S TERMINATION RIGHT. If, at any time prior to the close of the Investigation Period, Buyer, in Buyer's sole discretion, determines that satisfactory financing cannot be obtained or that the Property is unsuitable for Buyer's Intended Use, Buyer, by giving notice to Seller at any time prior to the Investigation Period, may elect to terminate this agreement, in which case the Seller will immediately disburse the Deposit as provided in Paragraph 12.1, and this agreement will terminate. 4.4 AS-IS SALE. Except as expressly otherwise provided in this agreement, Seller expressly disclaims any and all warranties, express or implied, of any nature with respect to the condition of the Property, including without limitation any warranties of merchantability, habitability or fitness, whether express or implied, and whether in regard to the improvements, the personal property or any other portion of the Property. If Buyer does not properly terminate this agreement as provided in the preceding Section, then Buyer will be conclusively deemed to have represented and warranted to Seller that: a. Buyer has had full opportunity to make such investigations of the condition of the Property as Buyer has deemed necessary; and b. Buyer is relying solely upon such investigations and has decided to purchase and will accept the Property in an "AS IS" condition, with no representations or warranties, except as expressly otherwise provided for in this agreement. 5. TITLE. 5.1 SELLER'S TITLE INFORMATION. Seller agrees to deliver to Buyer promptly after the Effective Date copies of all deeds, title insurance policies, and surveys relating to the Property in Seller's possession or readily available to Seller. 5.2 TITLE. Seller must convey title to Buyer at Closing by general warranty deed (the "Deed") in form and content satisfactory to Buyer's counsel, conveying to Buyer good and marketable indefeasible fee simple title to the Property, its appurtenances and improvements, insurable both as to fee and marketability at regular rates by a national title insurance company, selected by Buyer (the "Title Insurance Company"), without exception, other than the Permitted Exceptions as provided for in the following Section. The title insurance policy must provide full coverage against mechanics' or materialmen's liens and contain such other special endorsements as Buyer may reasonably require, including full survey coverage if Buyer obtains a Survey of the Land as provided for in Paragraph 6. 5.3 PERMITTED EXCEPTIONS. Seller must convey title to the Property to Buyer at Closing free and clear of all liens and encumbranc- es, subject only to the following exceptions (the "Permitted Exceptions"): a. public utility easements (water, sewer, electric, gas and telephone) of record in customary form to serve the Property which do not impair its use by the Buyer for the Intended Use; b. rights of way for public streets abutting the Land; c. applicable zoning ordinances of the zoning jurisdiction in which the Property is located, provided such ordinances do not prohibit or limit the use of the Property by Buyer for the Intended Use; d. ad valorem real property taxes on the Property for the calendar year in which the Closing Date occurs, which taxes shall be prorated on a calendar year basis up through the Closing Date; and e. such other exceptions as Buyer may approve in writing, or as are added pursuant to the provisions of the following Sections. 5.4 SPECIAL ASSESSMENTS. If, at the time of Closing, all or any part of the Property is affected by any special assessment payable in installments, or of which the first installment is then a charge or a lien, or has been paid, then for the purposes of this agreement, all unpaid installments of any such assessment, including those which are to become due and payable after the Closing, will be conclusively deemed to be due and payable and to be liens against the Property and must be paid by Seller at Closing. 5.5 TITLE OBJECTIONS. Buyer, at any time until one week prior to the Closing Date, may furnish Seller a written statement of objections to the title to the Property, if any, other than the Permitted Exceptions, which statement must be accompanied by a copy of Buyer's title report and any other materials disclosing such objections to title to the Property. Except for objections arising subsequent to the earlier of the effective date of Buyer's title report or one week prior to the Closing Date, Buyer shall be deemed to have waived all other objections to title which would be disclosed by an examination of title and which Buyer has not furnished to Seller as provided in this Section, and such objections shall be included in the Permitted Exceptions. 5.6 ADDITIONAL OBJECTIONS. Buyer may, at any time prior to the Closing, present Seller with a further statement of objections to title to the Property, provided, however, that any such statement of objections must be limited solely to matters arising after the earlier of the effective date of Buyer's title report or one week prior to the Closing Date. 5.7 SELLER'S OBLIGATIONS. Seller must pay or satisfy at or before Closing all liens, judgements mortgages, deeds of trust or other liens or encumbrances which can be satisfied by payment of a liquidated amount (the "Monetary Claims"). Seller shall not be required to cure other title objections. Seller, on or before the Closing Date, must notify Buyer of such title objections other than Monetary Claims that Seller will not satisfy prior to or at Closing (the "Unsatisfied Objections"). If Seller gives such notice to Buyer, then Buyer, at Buyer's election, by notice to Seller at any time prior to the Closing, will be entitled either to: a. waive the Unsatisfied Objections and proceed to close the purchase of the Property and accept the Property subject to the Unsatisfied Objections with no reduction in the Purchase Price, in which case the Unsatisfied Objections shall be included in the Permitted Exceptions; or b. terminate this agreement, in which case Buyer shall be entitled to a refund of the Deposit, as Buyer's sole remedy. 6. SURVEY. 6.1 SELLER'S SURVEY. Promptly after the Effective Date, Seller agrees to deliver to Buyer a copy of any survey in Seller's possession or readily available to Seller. 6.2 BUYER'S SURVEY. Buyer shall have the right to obtain a survey (the "Survey") of the Land prepared by a land surveyor or engineer, who must be registered and licensed in the State of North Carolina and approved by Seller in writing prior to commencement of the survey work (the "Surveyor"), such approval not to be unreasonably withheld or delayed, and to furnish a copy of the Survey to Seller. The Survey must depict boundaries, easements, improvements, if any, and rights-of-way adjoining or crossing the Property and shall contain a computation of the acreage of the Property to the nearest one-hundredth of an acre, certified by the Surveyor. 6.3 LEGAL DESCRIPTION. Prior to the Closing, Buyer may deliver to the Seller for Seller's review and approval, not to be unreasonably withheld or delayed, a copy of a legal description of the Property based upon the Survey. Unless objected to by Seller prior to Closing, this description, together with the Survey, will become a part of this agreement without the necessity of any further action by either of the parties. 6.4 SURVEY OBJECTIONS. If the Survey shows any encroachment on the Land, or that any improvement located on the Land encroaches on the land of others, or if the Survey shows any other defect which would affect the marketability of title to the Property, or material deviation from the boundaries as described in the deed by which Seller acquired title, and such defect is unacceptable to Buyer, Buyer must notify Seller of such defect within the time Buyer must give notice of title defects pursuant to Paragraph 5, and such encroachment or defect shall be treated in the same manner as title defects are treated under this agreement. Buyer shall be deemed to have waived any survey defects unless Buyer gives notice of such defects to Seller as provided in this Section, and such defects shall be included in the Permitted Exceptions. 7. WARRANTIES AND REPRESENTATIONS OF SELLER. Seller represents, warrants and covenants that: a. Seller has full right, power and authority to enter into this agreement and to consummate this transaction. b. The execution by Seller of, and the consummation of the transaction contemplated by, this agreement will not result in a breach of, or constitute a default (whether immediately or after the giving of notice or lapse of any time period) under, any indenture, agreement, instrument or obligation to which Seller is a party or by which Seller or the Property is bound and will not violate any order, rule or regulation of any court or any federal, state or municipal regulatory body or agency having jurisdiction over Seller or the Property. c. Seller owns and will convey title to the Property at Closing in accordance with the requirements of Paragraph 5. d. There are no parties other than Seller in possession of any portion of the Land or improvements as lessees, tenants at sufferance or trespassers, OTHER THAN DAR/RAN FURNITURE INDUSTRIES, INC., WHICH TENANCY WILL BE TERMINATED AT OR PRIOR TO CLOSING. e. There is no action or proceeding pending, or, to the knowledge of the Seller, threatened, against or affecting the Property, or relating to or arising out of the ownership of the Property. f. Seller has not received any notice of any pending or threatened eminent domain or zoning proceeding with respect to or affecting the Property, or any proposed change with respect to access from, or change of grade of, abutting public streets. g. Seller has conducted Seller's activities on the Property, and, to the best of Seller's knowledge, all Seller's tenants and all prior occupants of the Property have conducted their activities on the Property, in compliance with all applicable environmental laws and regulations. To the best of Seller's knowledge, there are no underground storage tanks, transformers or other devices containing PCB'S, or other hazardous substances of any kind, located on the Property (including subsurface strata and ground water beneath the Property). 8. WARRANTIES AND REPRESENTATIONS OF BUYER. Buyer represents, warrants and covenants that: a. UPON AND SUBJECT TO APPROVAL BY BUYER'S BOARD OF DIRECTORS, AS PROVIDED FOR IN SECTION 19.1, Buyer has full right, power and authority to enter into this agreement and to consummate this transaction. b. The execution by Buyer of, and the consummation of the transaction contemplated by, this agreement will not result in a breach of, or constitute a default (whether immediately or after the giving of notice or lapse of any time period) under, any indenture, agreement, instrument or obligation to which the Buyer is a party or by which Buyer is bound and will not violate any order, rule or regulation of any court or any federal, state or municipal regulatory body or agency having jurisdiction over Buyer. 9. CONDITIONS TO OBLIGATION OF BUYER. 9.1 CONDITIONS. The obligation of Buyer to close this transaction is subject to the following conditions, any of which may be waived by Buyer at or prior to the Closing: a. All of the representations and warranties of Seller set forth in this agreement must be true as of the Closing Date, as though made at that time. b. Seller shall have delivered, performed and complied with all items and obligations required to be delivered, performed or complied with by Seller at or before the Closing. c. The Property must be in the same condition as existing on the Effective Date, in all material respects. 9.2 SELLER'S DEFAULT. If Seller fails or is unable to satisfy any of the foregoing conditions as the result of any act or omission of Seller, such failure shall constitute a default of Seller unless waived by Buyer and shall entitle Buyer to exercise Buyer's remedies upon default as stated in Section 12.2. 9.3 BUYER'S ELECTION. If Seller fails or is unable to satisfy any of the foregoing conditions and such failure is not the result of any act or omission of Seller, Buyer, at Buyer's option, may either: a. waive such nonperformance as Seller is unable to cure and proceed to clo se the purchase of the Property and accept the Property subject to such nonperformance with no reduction in the Purchase Price; or b. terminate this agreement, in which case Buyer shall be entitled to a refund of the Deposit, as Buyer's sole remedy. 10. CONDITIONS TO OBLIGATION OF SELLER. 10.1 CONDITIONS. The obligation of Seller to close this transaction is subject to the following conditions, any of which may be waived by Seller at or prior to the Closing: a. All of the representations and warranties of Buyer set forth 2 in this agreement must be true as of the Closing Date, as though made at that time. b. Buyer shall have delivered, performed and complied with all of the terms and obligations required to be delivered, performed or complied with by Buyer at or before the Closing. 10.2 BUYER'S DEFAULT. If Buyer fails or is unable to satisfy any of the foregoing conditions, such failure shall constitute a default of Buyer unless waived by Seller and shall entitle Seller to exercise Seller's remedies upon default as stated in Section 12.3. 11. CLOSING. 11.1 CLOSING DATE. Closing is defined as the delivery in escrow of all closing documents and funds to Buyer's attorney, and the subsequent recording of the Deed. The Closing shall take place at a time and place in the City of HIGH ------- POINT, NC set by Buyer, on or before 30 DAYS AFTER THE CLOSE OF THE - --------- ------------------------------ INVESTIGATION PERIOD (the "Closing Date"). The Closing Date may be extended up - -------------------- to 15 days in order to permit Seller to cure any title objections which Seller has elected to cure; provided however, that Seller must give notice to Buyer of such extension prior to the Closing Date. 11.2 SELLER'S CLOSING DELIVERIES. At the Closing the Seller must deliver to the Buyer: a. the Deed, dated as of the Closing Date, duly executed and acknowledged by Seller, conveying title to the Property to the Buyer in accordance with Paragraph 5, subject only to the Permitted Exceptions, and in form and substance acceptable to counsel for Buyer; b. if requested by Buyer, a Bill of Sale, in form and substance satisfactory to Buyer conveying to Buyer good and marketable title, subject only to the Permitted Exceptions, to any part of the Property which is not, in Buyer's opinion, satisfactorily conveyed by the Deed; c. an affidavit and indemnity agreement acceptable to the Title Insurance Company showing that all labor and materials (other than any labor or materials ordered by Buyer), if any, furnished to the Property within 120 days prior to the Closing Date have been paid for and agreeing to indemnify Buyer and the Title Insurance Company against all loss from any cause or claim arising from any mechanics' or materialmens' liens; d. an affidavit or qualifying statement of Seller's non-foreign status, in form and substance satisfactory to Buyer's counsel. e. exclusive possession of the Property, WHICH MUST BE DELIVERED IN BROOM CLEAN CONDITION, WITH ALL PROPERTY OF SELLER (OR SELLER'S TENANT) NOT CONSTITUTING A PART OF THE PROPERTY, AND ALL TRASH AND REFUSE, REMOVED FROM THE PREMISES; f. a survey affidavit satisfactory and acceptable to the Title Insurance Company, showing no changes to the Property since the last survey; and g. such other instruments and documents as Buyer may reasonably require to carry out the terms of this agreement. 11.3 BUYER'S CLOSING DELIVERIES. At the Closing, Buyer must deliver to the Seller: a. the unpaid balance of the Purchase Price, subject to all adjustments and prorations provided for in this Agreement, in cash or immediately available funds; and b. such other instruments and documents as Seller may reasonably require to carry out the terms of this agreement. 11.4 PRORATIONS. Ad valorem real property taxes applicable to the Property will be prorated on a calendar year basis as of the Closing Date. Any other ad valorem taxes or interest or penalties which constitute a lien on any part of the Property must be paid by Seller or credited to Buyer as of the date of Closing. All rents will be adjusted and prorated as of the Closing Date. 11.5 EXPENSES. Seller will pay for preparation of the Deed, the excise tax (documentary stamps) required by law and Seller's brokers' commissions, attorneys' fees and any other expenses incurred by Seller. Buyer will pay recording fees for the Deed, title examination expenses, title insurance premiums, survey costs, the cost of the Survey, Buyer's investigations and tests, Buyer's attorneys' fees, and any other expenses incurred by Buyer. 12. DEFAULT AND REMEDIES. 12.1 TERMINATION BY BUYER. If Buyer elects to terminate this agreement pursuant to a right of Buyer to do so pursuant to Paragraphs 4, 5, 9, 13 or 14 of this agreement, the entire Deposit shall be refunded to Buyer, as Buyer's sole remedy. 12.2 SELLER'S FAILURE TO CLOSE. If Seller fails to close this transaction for any reason other than Buyer's default or an election by Buyer, pursuant to the terms of Paragraphs 4, 5, 9, 13 or 14 of this agreement, to terminate it, Buyer shall be entitled to an immediate refund of the Deposit, without prejudice to any other right or remedy Buyer may have at law or in equity by reason of Seller's failure to close, including, but not limited to, the right to recover damages or seek specific performance, and including Buyer's reasonable attorneys' fees and costs of litigation. 12.3 BUYER'S FAILURE TO CLOSE. If Buyer fails to close this transaction for any reason other than Seller's default, or Buyer's election, pursuant to the terms of Paragraphs 4, 5, 9 13 or 14 of this agreement, to terminate it, Seller, as Seller's sole remedy, shall be entitled to terminate this agreement and retain the Deposit as liquidated damages. 13. FIRE OR CASUALTY. The risk of loss prior to Closing shall be on the Seller. If, prior to the Closing, all of the Property (or such portion as will materially adversely affect Buyer's ability to use the Property for Buyer's Intended Use) is destroyed or damaged by fire or other casualty, Buyer, at Buyer's option may, by notice to Seller on or before the earlier of (i) the Closing Date or (ii) the date 20 days after the date of the casualty, elect to: a. terminate this agreement, in which case the Buyer will be entitled to a refund of the Deposit, and this agreement will terminate; or b. accept the Property in its damaged condition and proceed to closing, in which case: (1) the proceeds of all applicable insurance payable with respect to such casualty, together with the amount of all applicable policy deductibles or coinsurance, will be assigned or credited to Buyer at closing; and (2) Buyer will be entitled to extend the Closing Date to allow for appraisals of the damage and the amount of applicable insurance proceeds, policy deductibles and coinsurance to be determined. 14. EMINENT DOMAIN. 14.1 BUYER'S RIGHT TO TERMINATE. If, prior to the Closing, all of the Property (or such portion as will materially adversely affect Buyer's ability to use the Property for Buyer's Intended Use) is taken or appropriated by reason of eminent domain, or sold under threat of such taking, Buyer may terminate this agreement by notice to Seller within 5 days after the earlier of the date on which title passes under the taking or sale or the date on which Seller notifies Buyer that the taking or sale will occur, in which event Buyer shall be entitled to a refund of the Deposit and this agreement shall terminate. 14.2 NONEXERCISE OF BUYER'S TERMINATION RIGHT. If Buyer does not elect to terminate this agreement, it shall remain in full force and effect, and: a. Seller will convey the Property to Buyer at Closing, less any interest or portion taken or sold as provided in the preceding Section; b. Seller will assign or pay the proceeds of the taking or sale in lieu thereof to Buyer at Closing; and c. Seller will permit Buyer to participate in the condemnation proceedings or negotiations as if Buyer were an owner of the Property. 15. NOTICES. All notices required or permitted by the terms of this agreement shall be deemed given by personal delivery or when deposited in the United States Registered or Certified Mail, postage prepaid, or, with verification of delivery, by telegram, cable, telex, commercial courier or any other generally accepted means of business communication, to either party, at their respective addresses set forth on the signature page of this agreement. Either party may change the address to which notices must be sent by giving notice to the other party in accordance with this Section. 16. BROKERAGE COMMISSIONS. Each party warrants to the other that such party has not dealt with any broker in connection with this transaction, and agrees to indemnify and hold harmless the other party from and against any other claims, demands or liabilities, including reasonable attorneys' fees and expenses of litigation, arising out of any other alleged brokerage commission or fee claimed in connection with this transaction based upon any other agreement alleged to have been made or other action alleged to have been taken by the indemnifying party. 17. RECORDING. Buyer and Seller agree that this instrument may not be recorded; however, at Buyer's option, the parties will execute a Memorandum of Agreement and Buyer, but not Seller, may record the Memorandum of Agreement at Buyer's sole expense and discretion. Buyer agrees, upon the expiration or termination of this agreement by Buyer, but subject to performance of Seller's obligations upon such termination, to execute and deliver to Seller a recordable document provided by Seller at Seller's expense in form reasonably acceptable to Buyer evidencing such expiration or termination by Buyer, and Buyer will indemnify and save harmless Seller from any loss or damage suffered by Seller as a result of Buyer's failure to do so. 18. MISCELLANEOUS. 18.1 INTERPRETATION. This agreement (i) contains the entire understanding of the parties and there are no conditions precedent to its effectiveness or collateral understandings with respect to its subject 3 matter; (ii) may not be modified except by a writing signed by both parties; and (iii) binds the parties and their respective heirs, personal representatives, successors and permitted assigns. Where the context requires, the singular includes the plural and the masculine includes the feminine and the neuter. 18.2 TIME OF ESSENCE. Except as specifically otherwise provided, time is of the essence in every particular in the performance of the obligations of the parties under this agreement. 18.3 SURVIVAL OF WARRANTIES AND REPRESENTATIONS. All warranties and representations contained in this agreement shall, as applica ble, survive the Closing, the delivery of the Deed, and any investigation by Buyer. - ------------------------------------------------------------------------------- 19. ADDITIONAL PROVISIONS: 19.1 APPROVAL BY BUYER'S BOARD OF DIRECTORS. BUYER'S EXECUTION OF THIS -------------------------------------- AGREEMENT IS SUBJECT TO APPROVAL OF BUYER'S BOARD OF DIRECTORS WITHIN 10 DAYS AFTER THE EFFECTIVE DATE. IF BUYER FAILS TO NOTIFY SELLER OF THE APPROVAL OF THIS AGREEMENT BY BUYER'S BOARD OF DIRECTORS WITHIN SUCH TIME, THEN THE SELLER WILL RETURN THE DEPOSIT TO BUYER, AND THIS AGREEMENT WILL BE VOID. 19.2 ELECTION TO PURCHASE OFFICE IN FURNISHED CONDITION. BUYER, AT BUYER'S -------------------------------------------------- OPTION, MAY ELECT TO PURCHASE THE OFFICE BUILDING IN ITS FURNISHED STATE (AS EXISTS ON THE DATE OF THIS AGREEMENT), INCLUDING WITHOUT LIMITATION APPROXIMATELY 5 SOFAS, 150 CHAIRS, ALL WOOD CASE GOODS SHOWN TO BUYER DURING BUYER'S INITIAL VISUAL INSPECTION OF THE OFFICES, AND ALL WINDOW DRESSINGS, BLINDS, SHADES AND HARDWARE, AND ALL FLOOR COVERINGS, BUT EXCLUDING ALL REMOVABLE OPEN OFFICE SYSTEM PARTITIONS. BUYER MUST GIVE NOTICE OF SUCH ELECTION WITHIN 10 DAYS AFTER THE CLOSE OF THE INVESTIGATION PERIOD. IF BUYER ELECTS TO PURCHASE THE OFFICE BUILDING IN SUCH FURNISHED STATE, THE PURCHASE PRICE AS STATED IN PARAGRAPH 2 WILL BE INCREASED TO $8,375,000.00. 19.3 CONVERSION OF HVAC SYSTEM. NOTWITHSTANDING ANYTHING TO THE CONTRARY ------------------------- ELSEWHERE CONTAINED IN THIS AGREEMENT, SELLER WILL PAY AT CLOSING THE ESTIMATED COST, IF ANY, TO IMPLEMENT ANY RECOMMENDATION OF BUYER'S ENGINEERS THAT BUYER CONVERT THE EXISTING HVAC SYSTEM (WHICH BUYER HAS BEEN ADVISED UTILIZES "R-22" REFRIGERANT) TO THE USE OF AN APPROVED REFRIGERANT WHICH WOULD NOW BE REQUIRED FOR HVAC SYSTEMS IN CONNECTION WITH THE CONSTRUCTION OF NEW MANUFACTURING AND OFFICE FACILITIES COMPARABLE TO THE IMPROVEMENTS. BUYER WILL NOTIFY SELLER OF SUCH RECOMMENDATION, AND FURNISH SELLER WITH AN ESTIMATE OF THE COST OF SUCH CONVERSION FROM A REPUTABLE HVAC CONTRACTOR DOING BUSINESS IN THE HIGH POINT AREA PRIOR TO CLOSING. 19.4 CONFIDENTIALITY. SELLER AGREES TO KEEP IN STRICT CONFIDENCE THIS --------------- AGREEMENT AND THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT AT ALL TIMES PRIOR TO AND AFTER THE CLOSING, UNTIL SUCH TIME AS BUYER HAS MADE A PUBLIC ANNOUNCEMENT OF BUYER'S ACQUISITION OF THE PROPERTY. SELLER WILL NOT DISCLOSE THE EXISTENCE OF THIS AGREEMENT, NOR ANY INFORMATION RELATING TO THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT TO ANYONE OTHER THAN SELLER'S OFFICERS AND EMPLOYEES WHO HAVE A NEED FOR SUCH KNOWLEDGE BASED UPON THEIR DUTIES AND RESPONSIBILITIES, SELLER'S PROFESSIONAL ADVISORS AND ANY PERSON OR AGENCY TO WHOM DISCLOSURE IS REQUIRED BY LAW. SELLER WILL USE SELLER'S BEST EFFORTS TO CAUSE ALL SUCH PERSONS TO MAINTAIN IN STRICT CONFIDENCE ALL SUCH INFORMATION DISCLOSED TO THEM. 20. ADDENDA. List here any addenda that are attached to and made a part of this agreement: NONE. IN WITNESS WHEREOF, the parties have executed this agreement as a sealed instrument, as of the date first stated above. SELLER: BUYER: HOLLINGSWORTH AND STOUT ENTERPRISES, LLC (Seal) SEALY, INC. By: (Seal) By: ----------------------------- ----------------------------- Member/Manager President 4 AMENDMENT TO PURCHASE AGREEMENT AND ESCROW AGREEMENT The Purchase Agreement dated January 1, 1998 between Hollingsworth & Stout Enterprises, L.L.C. ("Seller") and Sealy, Inc. ("Buyer") as amended by Letter Agreement dated March 9, 1998 from Seller to Buyer is hereby amended further as follows: 1.Closing: Closing shall be held at the offices of Buyer's counsel, Gilbert "Skipper" Gates, Esq. Keziah, Gates & Samet, L.L.P., 400 High Point Bank Bldg., 300 North Main Street, High Point, NC 27261-2608 on Monday, April 13, 1998 at 1:30 p.m. ("Closing Date"). 2.Purchase Price and Escrow of Funds: (a) On the Closing Date, Buyer shall cause the net amount due as noted on the Closing Statement, said amount being sum of $8,340,395.97 to be sent by wire transfer to the Trust Account of Buyer's Counsel using the following wire transfer instructions: High Point Bank & Trust Company; High Point, North Carolina - ABA No. 053100685 for credit to Keziah, Gates & Samet, L.L.P., Real Estate Trust Account No. 040107892. (b) Provided all obligations of Seller under the Purchase Agreement have been satisfied by Seller as of the Closing Date, including the delivery of the Deed to Buyer, the sum of $3,312,299.34 shall be delivered to Seller after satisfaction of the outstanding mortgage liens on the Property and Seller shall be entitled to possession of the $25,000 Deposit. (c) The sum of $375,000 remaining in the Trust Account shall be trans ferred by Buyer's counsel to an escrow account bearing interest in favor of Buyer which sum (less interest and other deductions noted below) shall be paid to Seller by Buyer's counsel, as escrow agent, in accordance with the requirements noted below: (i) On April 22, 1998, the sum of $125,000 provided: (a) Seller and Buyer shall agree no later than April 20, 1998 either (1) as to the office furnishings and furniture which Buyer has agreed to buy and Seller has agreed to sell under Paragraph 19.2 of the Purchase Agreement ("Purchased Furniture") for the sum of $125,000; or (2) as to the amount by which the $125,000 sum shall be reduced to reflect the value of office furnishings and furniture which Seller shall not convey to Buyer (''Purchase Sum") in which event the amount in excess of the Purchase Sum shall be returned to Buyer; and (b) Seller delivers to Buyer a Bill of Sale transferring unencumbered title to and delivers possession of the Purchased Furni ture to Buyer. (ii) On May 4, 1998, the sum of $125,000 provided Dar-Ran furniture and Seller have vacated and delivered to Buyer possession of the manufacturing building located at the Property in its entirety as of 5:00 p.m. May 3, 1998 in the condition required by Paragraph 11.2 of the Purchase Agreement. In the event Seller fails to meet the May 3, 1998 deadline and later vacates and delivers possession of the manufacturing building to Buyer, the sum of $125,000 due Seller hereunder shall be reduced in accordance with Paragraph 3 below. (iii) On May 18, 1998, the sum of $125,000 provided Dar-Ran Furniture and Seller have vacated and delivered to Buyer possession of the office building located at the Property in its entirety as of 5:00 p.m. May 17, 1998 in the condition required by Paragraph 11.2 of the Purchase Agreement. In the event Seller fails to meet the May 17, 1998 deadline and later vacates and delivers possession of the existing office building to Buyer, the sum due Seller hereunder shall be further reduced in accordance with Paragraph 3 below. (iv) Notwithstanding the foregoing, Seller shall not be obligated to address by clean-up or otherwise any changes to the Property or alterations to either the manufacturing or office building caused by Buyer's contractors. 3. Liquidated Damages. Failure of Dar-Ran Furniture and/or Seller to vacate the manufacturing building and/or the office building by the dates and/or and/or in the manner required by Paragraphs 2(c) (ii) and/or (iii) shall result in Seller being liable to Buyer in the amount of $1,250 per day for the manufacturing building and $242 per day for the office building (based upon a lease rate of $3.00 per square foot) until possession and/or condition of the building or buildings not so delivered is delivered to Buyer. Such sums due to Buyer hereunder shall first be deducted from the amounts to be paid to Seller under Paragraph 2 (c) (ii) and/or (iii) with any balance being due and payable to Buyer within ten (10) business days after possession and/or condition is so delivered and shall bear interest at the rate of ten percent (10%) per annum until paid. IN WITNESS WHEREOF, Buyer and Seller have signed this Amendment to Purchase Agreement and Escrow Agreement as of April 13, 1998. HOLLINGSWORTH & STOUT ENTERPRISES, SEALY, INC. ("Buyer") L.L.C. ("Seller") By: ____________________________ By: _____________________________ Title: _________________________ Title: __________________________ EX-12 9 STATEMENT OF COMPUTATION OF RATIOS EXHIBIT 12.1 Registration Under The Securities Act of 1933 Section 2500 Ratio of Earnings to Fixed Charges Sealy Corporation Computation of Ratio of Earnings to Fixed Charges (dollars in thousands)
Proforma --------------- Two Ten Three Months Months Three Months Ended Months Ended Ended Fiscal Year -------------------- Fiscal Ended Jan. 31, Nov. 30, ------------------------------------- Mar. 2, Mar. 1, Year Mar. 1, 1993 1993 1994 1995 1996 1997 1997 1998 1997 1998 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Pre-tax income from continuing operations $2,637 $48,711 $56,090 $43,042 $24,773 $40,611 $ 6,352 $(18,512) $ 6,495 $(652) Fixed charges: Interest expense and amortization of debt discount and premium on all indebtedness 6,675 31,218 33,454 31,018 28,797 31,396 10,184 15,530 63,976 16,442 Rentals-33% (b) 551 2,757 3,295 3,265 3,523 3,470 767 1,010 3,470 1,010 ------- -------- -------- -------- -------- -------- ------- -------- ------- ------- Total fixed charges 7,226 33,975 36,749 34,283 32,320 34,866 10,951 16,540 67,446 17,452 ------- -------- -------- -------- -------- -------- ------- -------- ------- ------- Earnings before income taxes and fixed charges $9,863 $82,686 $92,839 $77,325 $57,093 $75,477 $17,303 $ (1,972) $73,941 $16,800 ======== ========= ======== ======== ======== ========= ======== ========= ======= ======= Ratio of earnings to fixed charges 1.4x 2.4x 2.5x 2.3x 1.8x 2.2x 1.6x (a) 1.1x 1.0x ======== ========= ======== ======== ======== ========= ======== ========= ======= =======
(a) Earnings for the quarter ended March 1, 1998 were insufficient to cover fixed charges by $18.5 million. (b) The precent of rent included in the calculation is a reasonable approximation of the interest factor in the Company's operating leases. EX-23.1 10 CONSENT OF KPMG PEAT MARWICK L.L.P. EXHIBIT 23.1 The Board of Directors Sealy Corporation: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP Cleveland, Ohio June 3, 1998 -----END PRIVACY-ENHANCED MESSAGE-----