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Exhibit 10.16
EXECUTION COPY
OPTION AGREEMENT
This OPTION AGREEMENT is made as of November __, 1996, between
Sleepmaster Holdings L.L.C., a New Jersey limited liability company (the
"Company"), and Timothy DuPont ("Grantee"). Capitalized terms used
not otherwise defined herein shall have the meanings assigned
to such terms in Article 1.
In order to advance the Company's best interests by providing
additional incentives to certain key employees of the Company and its
Subsidiaries, the Company wishes to grant options to purchase additional
ownership interests in the Company subject to the terms and conditions of this
Agreement.
Article I
Definitions
For purposes of this Agreement the following terms are defined
as follows:
"Achieved Result" means, with respect to any Vesting Date:
(1 ) the product of (x) the arithmetic average of Actual EBITDA for each of the
two previous Fiscal Years prior to such Vesting Date and (y) seven,
minus (2) the sum of (A) all outstanding Indebtedness of the Company and its
Subsidiaries as of the Vesting Date and, (B) the liquidation value of the
Preferred Interests outstanding on such Vesting Date.
"Actual EBITDA" means the Company's and Sleepmaster L.L.C.'s
("Sleepmaster's") consolidated EBITDA for a particular Fiscal Year as set forth
on the Company's audited consolidated financial statements for such Fiscal Year;
provided, that for purposes of calculating the Company's and Sleepmaster's
consolidated EBITDA for a particular Fiscal Year, the Company shall give effect
to any acquisition of all of the capital stock or all, or substantially all, of
the consolidated assets of an unaffiliated Person (an "Acquired Business") by
the Company or Sleepmaster (whether such Acquired Business was acquired by means
of a merger, consolidation, asset purchase, security purchase or otherwise) on
an actual basis, as though such acquisition had occurred on the first day of
such Fiscal Year.
"Board" means the Board of Advisors of the Company.
"Cause" means (i) a breach of Grantee's covenants under this
Agreement or any other agreement with the Company or its Subsidiaries and such
breach shall not have been cured within 30 days after written notice to Grantee,
(ii) the commission by Grantee of a felony, a crime involving
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moral turpitude or other act causing material harm to the standing and
reputation of the Company or any of its Subsidiaries, or (iii) Grantee's
repeated wilful failure to comply with the reasonable and lawful written
directives of the Board.
"Class A Common" means the Company's Class A Common Interests,
or if the Class A Common is hereafter exchanged into or exchanged for different
units or securities of the Company, such other units or securities, all as
adjusted for any unit split, unit dividend, combination, exchange, conversion,
recapitalization, merger, consolidation or reorganization.
"Code" means the Internal Revenue Code of 1986, as amended,
and any successor statute.
"Committee" means the Compensation Committee or such other
committee of the Board as the Board may designate or, if for any reason the
Board has not designated such a committee, the Board. The Committee, if other
than the Board, shall be composed of two or more directors as appointed from
time to time by the Board.
"Common Interests" means the Class A Common and the Company's
Class B Common Interests, or if the outstanding Common Interests are hereafter
changed into or exchanged for different interests or securities of the Company,
such other interests or securities.
"Disability" shall mean the inability, due to illness,
accident, injury, physical or mental incapacity or other disability, of Grantee
to carry out effectively his duties and obligations to the Company or to
participate effectively and actively in the management of the Company or a
Subsidiary of the Company for a period of at least 90 consecutive days or for
shorter periods aggregating at least 120 days (whether or not consecutive)
during any twelve-month period, as determined in the reasonable) judgment of the
Board.
"EBITDA" means, for any period determined on a consolidated
basis, (a) net income determined in conformity with United States generally
accepted accounting principles; plus, (b) to the extent deducted in determining
net income for such period (i) federal and state income taxes, (ii) interest
expenses, (iii) amortization, depreciation, and similar non-cash charges; and
minus (c) to the extent included in determining net income for such period,
extraordinary or nonrecurring gains as set forth on the Company's consolidated
audited financial statement for such period;
"Employment Agreement" means the Employment Agreement dated as
of November __, 1996 by and among the Company, Grantee, Sleepmaster L.L.C. and
Sleep Investor L.L.C.
"Expiration Date" means the close of business on November 1,
2006, subject to earlier expiration as provided in Section 5.
"Fair Market Value" per unit on any given date, means the fair
market value of such unit as shall be determined by the Committee or the Board
in its good faith business judgment.
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"Family Group" means Grantee's spouse and descendants (whether
natural or adopted) and any trust solely for the benefit of Grantee, Grantee's
spouse, and/or their descendants.
"Fiscal Year" means, for the Company, a twelve month
accounting period ending on the last day of December in each year.
"Form" means those forms of the Internal Revenue Service used
by taxpayers to file federal income tax returns or reports required under the
Code or applicable Treasury Regulations promulgated thereunder.
"Indebtedness" shall mean all indebtedness of the Company or
any of its Subsidiaries including, without limitation (i) all obligations for
borrowed money or evidenced by bonds, debentures, notes, letters of credit or
other similar instruments, (ii) obligations as lessee under capital leases,
(iii) obligations to pay the deferred purchase price of property or services,
except accounts payable arising in the ordinary course of business, (iv) all
debt of other Persons guaranteed or otherwise supported by the Company or any of
its Subsidiaries, and (v) any interest, principal, prepayment penalty, fees or
expenses in respect of items listed in clauses (i) through (iv).
"Measurement Date" means the date on which any taxable income
resulting from the exercise of an Option is determined under applicable federal
income tax law.
"Option Shares" means (i) all units of Class A Common issued
or issuable upon the exercise of an Option, and (ii) all units of Class A Common
issued with respect to the Class A Common referred to in clause (i) above by way
of a unit dividend or unit split or in connection with any combination,
exchange, conversion, merger, consolidation, recapitalization, or other
reorganization affecting the Class A Common. Option Shares will continue to be
Option Shares ill the hands of any holder other than Grantee (except for the
Company), and each such transferee thereof will succeed to the rights and
obligations of a holder of Option Shares hereunder.
"Permitted Transferee" means those persons to whom the Grantee
is authorized (1) pursuant to terms and conditions of the Securityholders
Agreement, to transfer Option Shares, or (2) pursuant to Section 5, to transfer
Options.
"Preferred Interests" means the Company's Series A Preferred Interests,
or if the Series A Preferred Interests are hereafter changed into or exchanged
for different interests or securities of the Company, such other interests or
securities, and any other Preferred Interests of the Company hereinafter issued.
"Sale of the Company" means the sale of the Company, in a
single transaction or a series of related transactions, to a third party (which
is not an Affiliate of the Investor) pursuant to which such third party proposes
to acquire all or substantially all of the outstanding Common Interests (whether
by merger, consolidation, recapitalization, reorganization, purchase of title
outstanding Common Interests or otherwise) or all or substantially all of the
consolidated assets of the Company or Sleepmaster.
"Securities Act" means the Securities Act of 1933, as amended.
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"Securityholders Agreement" means the Securityholders Agreement dated
as of the date hereof by and among Grantee, the Company, Sleep Investor L.L.C.
and certain other parties thereto.
"Subsidiary" means, with respect to any Person, any
corporation, partnership, limited liability company association or other
business entity of which (i) if a corporation or a limited liability company, a
majority of the total voting power of securities entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof 'is at the time owned or controlled, directly or indirectly, by
that Person or one or more of the other Subsidiaries of that Person or a
combination thereof, or (ii) if a partnership, association or other business
entity, a majority of the partnership or other similar ownership interest
thereof is at the time owned or controlled, directly or indirectly, by any
Person or one or more Subsidiaries of that Person or a combination thereof. For
purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a partnership, association or other business entity if
such Person or Persons shall be allocated a majority of partnership, association
or other business entity gains or losses or shall be or control the managing
director or general partner of such partnership, association or other business
entity.
"Termination Date" means the date upon which Grantee's
employment with the Company terminated including by reason of death or
Disability.
"Vesting Date" means either December 31, 1999 or December 31,
2001 as the context requires.
Article II
1. Grant of Option. The Company hereby grants to Grantee, as
of the date first above written, an option (the "Option") to purchase 106 units
of the Company's Class A Common (which number of units may be adjusted as
provided in Section 13 below) at the exercise price per unit of $100, subject to
the terms and conditions set forth herein. The Option is intended to be a
nonqualified stock option for purposes of the Code.
2. Vesting of Options.
(a) Except as provided in Section 2(b), no portion of
the Option shall vest prior to December 31, 1999. The Option shall vest based
upon the achievement by the Company of certain targets for the 24 month period
preceding each Vesting Date as set forth below (each, a "Target"), if as of each
such date the Grantee is still employed by the Company or a Subsidiary of the
Company. On each Vesting Date 50% of the Option shall vest if as of such Vesting
Date the Achieved Result equals or exceeds the Target set forth opposite such
Vesting Date in the table below:
Target
Percent of Option
Vesting Date Target Subject to Vesting
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12/31/99 $60,000,000 50% of original Option
12/31/01 $115,000,000 50% of original Option
provided, that if the Achieved Result at December 31, 1999 does not equal or
exceed the Target for such date, but at December 31, 2001 the Achieved Result
equals or exceeds $130,000,000, then 100% of the Option shall vest.
(b) (i) In the event of a Sale of the Company at any time
prior to December 31, 1999, if the aggregate cash consideration received by the
holders of the Company's Common Interests equals or exceeds either the Target
for December 31, 1999 or the Target for December 31, 2001, then the applicable
portion(s) of the Option shall vest upon the consummation of such Sale of the
Company, and (ii) in the event of a Sale of the Company after December 31, 1999
but before December 31, 2001, if the aggregate cash consideration received by
the holders of' the Company's Common Interests equals or exceeds the Target for
December 31, 2001, then 50% of the Option shall vest upon the consummation of
such Sale of the Company; provided, that if a Sale of the Company does not occur
prior to December 31, 2001, then this Section 2(b) shall he of no further force
or effect.
(c) If as of December 31, 2001 any portion of the Option has
not vested, such portion shall, at the option of the Company, be automatically
transferred to the Company without consideration and the Committee (in its sole
discretion) may regret such portion of the Option.
3. Conditions to Exercise. Subject to the conditions
set forth in this Section 33 and in Section 4 of this Agreement, the Option may
be exercised by written notice to the Company's Secretary, at any time and from
time to time but only to the extent it has become vested. An Option shall not be
exercisable, in any event, after the tenth anniversary of the date of the grant.
Options are subject to cancellation as provided herein. The Option may not be
exercised by Grantee until the Company has received payment from the Executive
in an amount equal to the full purchase price for the units of Common Interests
being acquired hereunder. Payment of such exercise price may be made in cash
(including check, bank draft, or money order).
4. Withholding Tax Requirements.
(a) Amount of Withholding. It shall be a condition to
the exercise of any Option that Grantee make appropriate payment or other
provision acceptable to the Company with respect to any withholding tax
requirement arising from such exercise. The amount of withholding tax required,
if any, with respect to any Option exercise (the "Withholding Amount") shall be
determined by the Treasurer or other appropriate officer of the Company, and
Grantee shall furnish such information and make such representations as such
officer requires to make such determination.
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(b) Withholding Procedure. If the Company determines that
withholding tax is required with respect to any Option exercise, the Company
shall notify Grantee of the Withholding Amount, and Grantee shall pay to the
Company an amount not less than the Withholding Amount. In lieu of making such
payment, the Grantee may pay the Withholding Amount by either (i) delivering to
the Company a number of units of Class A Common having an aggregate Fair Market
Value as of the Measurement Date not less than the Withholding Amount, or (ii)
directing the Company to withhold and not deliver or issue to the Grantee a
number of units of Class A Common, otherwise issuable upon the exercise of the
Option, having an aggregate Fair Market Value as of the Measurement Date not
less than the Withholding Amount. In addition, if the Committee approves, the
Grantee may elect pursuant to the prior sentence to deliver or direct the
withholding of units of Class A Common having an aggregate Fair Market Value in
excess of the minimum Withholding Amount but not in excess of the Grantee's
applicable highest marginal combined federal income and state income tax rate,
as estimated in good faith by such Grantee. Any fractional interests resulting
from the delivery or withholding of units of Class A Common to meet withholding
tax requirements shall be settled in cash. All amounts paid to or withheld by
the Company and the value of all units of Class A Common delivered to or
withheld by the Company pursuant to this Section 4 shall be deposited in
accordance with applicable law by the Company, as withholding tax for Grantee's
account. If the Treasurer or other appropriate officer of the Company determines
that no withholding tax is required with respect to the exercise of any Option,
but it is determined subsequently that the exercise resulted in taxable income
as to which withholding is required (as a result of a disposition of the Option
Shares or otherwise), Grantee shall promptly required. Upon being notified of
the withholding requirement, pay to the Company (by means acceptable to the
Company) the amount required to be withheld, and the Company may, at its
election, condition any transfer of Option Share, issued upon exercise of the
Option upon receipt of such payment.
(c) Notification of Inquiries and Agreements. Grantee and each
Permitted Transferee shall notify the Company in writing within 10 days after
the date Grantee or any such Permitted Transferee (i) first obtains knowledge of
any Internal Revenue Service inquiry, audit, assertion, determination,
investigation, or question relating in any manner to the value of Options
granted hereunder, (ii) includes or agrees (including, without limitation, in
any settlement, closing, or other similar agreement) to include in gross income
with respect to any Option granted under this Agreement (A) any amount in excess
of the amount reported on Form 1099 or Form W-2 to the Grantee by the Company,
or (B) if the Grantee received no such Form, any amount; or (iii) sells,
disposes, or otherwise transfers Option Shares acquired pursuant to this
Agreement. Upon request, Grantee or any such Permitted Transferee shall provide
to the Company any information or document relating to any event described in
the preceding sentence which the Company (in its sole discretion) requires in
order to calculate and substantiate any change in the Company's tax liability as
a result of such event.
5. Expiration of Options. Any part of any Option that was not
vested and exercisable on Grantee's Termination Date shall expire and be
forfeited on such date, and any part of any Option that was vested and
exercisable on Grantee's Termination Date shall also expire and be forfeited;
provided, however, that if Grantee (i) dies or becomes subject to an),
Disability, the part of the Option that is vested and exercisable shall expire
180 days from the date of death or Disability, but in no event after the
Expiration Date, (ii) retires (with the approval of the Committee), the part
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of the Option that is vested and exercisable shall expire 90 days from the date
of retirement, and (iii) is discharged other than for Cause, the part of the
Option that is vested and exercisable shall expire 30 days from the date of
discharge, but in no event after the Expiration Date. In the event of the death
of Grantee, Options that are not vested and exercisable on the date of death
shall terminate and Options that are vested as of the date of death may be
exercised by only the executor or administrator of Grantee's estate or the
person or persons to whom Grantee's rights under the Options pass by will or by
the laws of descent and distribution. In the event that Grantee (or Grantee's
executor, administrator or permitted successor as described in the immediately
preceding sentence) exercises any vested Option following Grantee's Termination
Date, the repurchase right of the Company and Sleep Investor L.L.C. set forth in
Section 8 of the Employment Agreement shall be extended for a period of sixty
(60) days.
6. Right to Repurchase Option Shares Upon Termination of
Employment. In the event Grantee's employment with the Company is terminated for
any reason (including death or disability), the Option Shares actually issued
(whether held by Grantee or one or more Permitted Transferees and including any
Option Shares acquired subsequent to such termination of employment) will be
subject to repurchase by the Company pursuant to the terms and conditions of
Section 8 of Grantee's Employment Agreement and shall be deemed "Vested
Interests" for all purposes thereunder (including, without limitation, Section
9(f) of the Employment Agreement).
7. Restrictions on Transfer of Option. This Option
may not be sold, assigned, transferred, pledged, hypothecated, or otherwise
disposed of by Grantee, except by will or by the laws of descent and
distribution and is exercisable during Grantee's lifetime only by Grantee (or,
if Grantee is incapacitated, by Grantee's legal guardian or legal
representative). If Grantee or anyone claiming under or through Grantee attempts
to violate this Paragraph 7, such attempted violation shall be null, void, and
without effect, and the Company's obligation hereunder shall terminate.
8. Restrictions on Transfer of Option Shares. Except as
provided in the Securityholders Agreement and subject to Section 16 hereof, the
Grantee may not sell, pledge, or otherwise transfer any interest in any Option
Shares.
9. Administration. Any action taken or decision made by the
Company, the Board, or the Committee or its delegates arising out of or in
connection with the construction, administration, interpretation or effect of
this Agreement shall lie within its sole and absolute discretion, as the case
may be, and shall be final, conclusive, and binding on Grantee and all persons
claiming under or through Grantee. By accepting this grant, Grantee and each
person claiming under or through Grantee shall be conclusively deemed to have
indicated acceptance and ratification of, and consent to, any action taken by
the Company, the Board, or the Committee or its delegates with respect to this
Agreement.
10. Rights as Securityholder. Unless and until a certificate
or certificates representing the Option Shares shall have been issued to
Grantee, Grantee shall not be a securityholder or have any of the rights or
privileges of a securityholder of the Company with respect to units of Common
Interests acquired upon exercise of the Option. Once a certificate or
certificates representing the Option Shares have been issued to Grantee, the
securities underlying such certificate
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or certificates shall be (i) "Executive Interests" for all purposes of the
Securityholder Agreement and (ii) "Executive Securities" for all purposes of
Grantee's Employment Agreement, and with respect to such securities, Grantee
shall have all of the rights and obligations thereunder.
11. Investment Representation. Grantee hereby acknowledges
that the Option Shares that Grantee may acquire by exercising the Option shall
be acquired for investment without a view to distribution, within the meaning of
the Securities Act, and shall not be sold, transferred, assigned, pledged, or
hypothecated in the absence of an effective registration statement for the
Option Shares under the Securities Act and applicable state securities laws or
an applicable exemption from the registration requirements of the Act and any
applicable state securities laws. Grantee also agrees that the Option Shares
that Grantee may acquire by exercising the Option will not be sold or otherwise
disposed of in any manner that would constitute a violation of any applicable
federal or state securities laws.
12. Listing, Registration, and Legal Compliance. If at any
time the Committee, in its discretion, determines that the listing,
registration, or qualification of the Option Shares upon any securities exchange
or under any state or federal securities or other law or regulation, or the
consent, or approval of any governmental regulatory body, is necessary or
desirable as a condition to or in connection with the granting of Options or the
purchase or issuance of Option Shares thereunder, no Options may he granted or
exercised, in whole or in part, unless such listing, registration,
qualification, consent, or approval shall have been effected or obtained free of
any conditions not acceptable to the Committee. Grantee agrees to supply the
Company with such certificates, representations, and information as the Company
shall request and shall otherwise cooperate, with the Company in obtaining such
listing, registration, qualification, consent, or approval. In the case of
officers and other persons subject to Section 16(b) of the Securities Exchange
Act of 1934, as amended, the Committee may impose, at any time, any limitations
upon the exercise of Options that, in the Committee's discretion, are necessary
or desirable in order to comply with such Section I 6(h) and the rules and
regulations thereunder. If the Company, as part of an offering of securities or
otherwise finds it desirable because of federal or state regulatory requirements
to reduce the period during which any Options may be exercised, the Committee
may, in its discretion and without Grantee's consent, so reduce such period on
not less than 15 days' written notice to the holders thereof.
13. Adjustment. In the event of a reorganization,
recapitalization, unit dividend, unit split, or such other combination or other
chant, in the units of Class A Common, the Board or the Committee may, in order
to prevent the dilution or enlargement of rights under outstanding Options, and
as such Board or Committee determines in good faith to be appropriate, adjust
(1) the number and type of units as to which options may be granted under the
Plan, (2) the number and type of units covered by outstanding Options, (3) the
exercise price specified herein, and (4) other provisions of this Agreement
specifying a number or percentage of units.
14. Rights of Grantee. Nothing in this Agreement shall
interfere with or limit In any way the right of the Company or any Subsidiary to
terminate Grantee's employment at any time (with or without Cause), or to confer
upon Grantee any right to continue in the employ of the
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Company or any Subsidiary for any period of time, or to continue to receive
Grantee's current (or other) rate of compensation.
15. Amendment of Outstanding Options. The Committee may amend
or modify any Option; provided, however, that except as expressly contemplated
elsewhere herein, no amendment or modification shall impair the rights of
Grantee without the consent of Grantee unless the holders of 80% of all Options
(based upon the number of Option Shares to be obtained upon exercise) granted by
the Company pursuant to the Option Agreements consent to such amendment in
writing and such amendment affects all Grantees under the Option Agreements
similarly. No amendment or modification to this Option Agreement shall be valid
without the prior written consent of Steep Investor L.L.C.
16. Restricted Securities. All Class A Common issued pursuant
to the terms of this Agreement shall constitute "restricted securities," as that
term is defined in Rule 144 promulgated by the Securities and Exchange
Commission pursuant to the Securities Act, and nim, not be transferred except in
compliance with the registration requirements of the Securities Act or an
exemption therefrom. In connection with any such transfer, the Company may
require the transferor to provide a written opinion of counsel to the effect
that such transfer complies with the Securities Act and other applicable
securities laws. If the units are certificated, certificates representing, the
Opt on Shares shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER
ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN EXEMPTION' FROM REGISTRATION THEREUNDER. THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER, CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN
AN OPTION GRANT MADE BY THE COMPANY, A COPY OF WHICH MAY BE OBTAINED BY THE
HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
In addition, Grantee agrees by acceptance of the Option not to
effect any public sale or distribution of any equity securities of the Company,
or any securities convertible into or exchangeable or exercisable for such
securities, during the seven days prior to and the 180 days after the
effectiveness of any underwritten registration, except as part of such
underwritten registration if otherwise permitted
17. Notices. Any notice hereunder to the Company shall be
addressed to the attention of the president of the Company, and any notice
hereunder to Grantee shall be addressed to Grantee at Grantee's last address on
the records of the Company, subject to the fight of the Company or Grantee to
designate at any time hereafter in writing some other address. Any notice shall
be deemed to have been duly given when delivered personally, one day following
dispatch if
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sent by reputable overnight courier, fees prepaid, or three days following
mailing if sent by registered mail, return receipt requested, postage prepaid
and addressed as set forth above.
18. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of any successors to the Company and all persons lawfully
claiming under Grantee.
19. Governing Law. All questions concerning the construction,
validity and interpretation of this Agreement and the exhibits hereto will be
governed by and construed in accordance with the domestic laws of the State of
New York, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of New York or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of New York; provided, that any questions requiring interpretation of the
laws governing limited liability companies shall be governed by the New Jersey
Limited Liability Company Act.
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IN WITNESS WHEREOF, the Company and Grantee have executed this
Option Agreement as of the date first above written.
SLEEPMASTER HOLDINGS L.LC.
/s/
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Name:
Title:
GRANTEE
Employee's Signature
Name of Employee (Print)
Accepted and agreed
solely for purposes
of Section 15 hereof
SLEEP INVESTOR L.L.C.
By:
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Name:
Title:
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