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EXHIBIT 10.20
EXECUTION COPY
EMPLOYMENT AND STOCK PURCHASE AGREEMENT
This EMPLOYMENT AND STOCK PURCHASE AGREEMENT is dated as of
February 26, 1999, by and among Herr Manufacturing Company, a Pennsylvania
corporation (the "Company"), Sleepmaster Holdings L.L.C., a New Jersey limited
liability company ("Holdings"), Sleepmaster L.L.C., a New Jersey limited
liability company ("Sleepmaster"), John K. Herr III (the "Executive"), Charles
Schweitzer ("Schweitzer"), and Sleep Investor L.L.C., a Delaware limited
liability company (the "Investor").
WHEREAS the parties desire to enter into an agreement
regarding (i) the employment of the Executive as Chief Operating Officer of the
Company and (ii) the sale by Schweitzer and the purchase by the Executive of
21.16 units of Holdings' Class A Common Interests (the "Class A Common") upon
terms and conditions set forth herein;
WHEREAS, as an inducement to the Company Group to enter into
this Agreement, the Executive has agreed to the provisions of this Agreement
including, without limitation, Sections 3, 4 and 5; and
WHEREAS, certain provisions of this Agreement are intended for
the benefit of, and will be enforceable by, the Investor;
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. As used herein, the following terms shall have
the following meanings.
"Affiliate" means, as to any Person, any other Person which
directly or indirectly controls, or is under common control with, or is
controlled by, such Person. As used in this definition, "control" (including,
with its correlative meanings, "controlled by" and "under common control with")
shall mean possession, directly or indirectly, of power to direct or cause the
direction of management or policies (whether through ownership of securities or
partnership or other ownership interests, by contract or otherwise).
"Board" means Holding's board of advisors.
"Business Day" means any day other than a Saturday or Sunday
or a day on which commercial banks are required or authorized to close in New
York, New York.
"Cause" means (i) a material breach of the Executive's
covenants under this Agreement or any other agreements with the Company or its
Subsidiaries and such breach shall not have been cured within 30 days after
written notice to the Executive; provided that, a breach of any of the
Executive's covenants contained in Sections 3, 4 or 5 of this Agreement shall be
deemed material and the cure period for such breach shall be 5 days, (ii) the
commission by the Executive of a felony, a crime involving moral turpitude or
other act causing material harm to the standing and reputation of the Company or
any of its Subsidiaries, or (iii) the Executive's repeated wilful failure to
comply with the reasonable and lawful written directives of the Board.
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"Common Interests" means the Class A Common and Holdings'
Class B Common Interests, as adjusted for any unit split, unit dividend, or
other combination, exchange, conversion, recapitalization, merger, consolidation
or reorganization, or if such Common Interests are exchanged for different
interests or securities of Holdings, such other interests or securities and any
other Common Interests of Holdings hereinafter issued.
"Company Group" means the Company, Holdings, Sleepmaster and
their respective Subsidiaries.
"Disability" means the inability, due to illness, accident,
injury, physical or mental incapacity or other disability, of the Executive 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 150 days (whether or not consecutive)
during any twelve-month period, as determined in the reasonable judgment of the
Board.
"Executive Securities" means the Class A Common purchased by
the Executive and will include units of Holdings' Common Interests issued with
respect to Executive Securities by way of a split, dividend, combination,
exchange, conversion, or other recapitalization, merger, consolidation or
reorganization. Executive Securities will cease to be Executive Securities when
transferred pursuant to a Qualified Public Offering or Sale of Holdings.
Executive Securities will continue to be Executive Securities in the hands of
any holder other than the Executive, including all transferees of the Executive
(except for Holdings and the Investor (or its designee)), and except as
otherwise provided herein, each such other holder of Executive Securities will
succeed to all rights and obligations attributable to the Executive as a holder
of Executive Securities hereunder.
"Fair Value" of each unit of Class A Common means the average
of the closing prices of the sales of Holdings' membership interests on all
securities exchanges on which the membership interests may at the time be
listed, or, if there have been no sales on any such exchange on any day, the
average of the highest bid and lowest asked prices on all such exchanges at the
end of such day, or, if on any day the membership interests are not so listed,
the average of the representative bid and asked prices quoted on the Nasdaq
National Market System ("Nasdaq NMS") as of 4:00 P.M., New York time, or, if on
any day the membership interests are not quoted in the Nasdaq NMS, the average
of the highest bid and lowest asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau
Incorporated, or any similar successor organization, in each such case averaged
over a period of 21 days consisting of the day as of which the Fair Value is
being determined and the 20 consecutive business days prior to such day. If at
any time the Class A Common is not listed on any securities exchange or quoted
in the Nasdaq NMS or the over-the-counter market, the Fair Value of each unit of
Class A Common shall be the fair market value of such unit as determined by the
Board in its good faith judgment; provided, that in the event the Executive
disagrees with the determination of the Board, and the Executive and the Board
are unable to resolve their disagreement within twenty (20) days of such
determination, then the determination of Fair Value shall be submitted to an
independent valuation firm selected by the Executive from three valuation firms
proposed by the Board (it being understood that none of the three proposed
valuation firms shall have been hired by any member of the Company Group within
the prior twenty-four (24) month period) (the "Valuation Specialist") who shall
make a determination of Fair Value as soon as practicable and, in any event,
within thirty (30) days. The fees and expenses
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of the Valuation Specialist shall be borne by the Company unless the difference
between the determination of the Board and the determination of the Valuation
Specialist is less than 15% more than the determination of the Board, in which
case, the fees and expenses of the Valuation Specialist shall be borne by the
Executive. In any such determination of Fair Value, whether by the Board or by
the Valuation Specialist, the determination shall be made based on the value of
Holdings as a going concern and no discount for lack of marketability or
minority interest shall be applied.
"Full Cost " shall mean (x) in the case where such medical
insurance benefits are being provided under the medical insurance plan sponsored
by the Company Group, 100% of the applicable cost of such benefits determined
under COBRA (or any superseding statute), or (y) in the case where such medical
insurance benefits are not being provided under the medical insurance plan
sponsored by the Company Group (and subject to the commercially reasonable best
efforts obligation of the Company Group as described in Section 2(d)(v)), then
the full cost of such medical insurance benefits.
"GAAP" means U.S. generally accepted accounting principles, as
in effect from time to time and as adopted by the Company with the consent of
its independent public accountants, consistently applied.
"Good Reason Event" means (i) a material breach (and a breach
of Section 2(c)(i) or Section 2(c)(iii) shall be material) of this Agreement by
the Company which is not cured within 30 days after written notice to the
Company, (ii) the relocation of the Executive's office more than 30 miles from
Lancaster, Pennsylvania, (iii) travel requiring the Executive to spend more than
four (4) days per month or twenty (20) days per year a distance of over fifty
(50) miles from Lancaster, Pennsylvania,(iv) a substantial reduction by the
Company of the Executive's job responsibilities which is not cured within 30
days after written notice to the Company, or (v) a substantial reduction by the
Company of the Executive's job responsibilities which is not connected to the
Executive's illness or disability (prior to a determination that the Executive
has a Disability).
"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 or a governmental entity or any
department, agency or political subdivision thereof.
"Public Offering" means any sale of securities of Holdings in
an underwritten public offering.
"Qualified Public Offering" means any sale, in an underwritten
public offering registered under the Securities Act, of equity securities of
Holdings having an aggregate value of at least $20 million.
"Sale of Holdings" means the sale of Holdings, 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 the
outstanding Common Interests or otherwise) or all or substantially all of the
consolidated assets of the Holdings.
"Securities Act" means the Securities Act of 1933, as amended
from time to time.
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"Securityholders Agreement" means the Securityholders
Agreement dated as of March 3, 1998 by and among the Company, the Investor and
certain other parties thereto.
"Stock Purchase Agreement" means the Stock Purchase Agreement
dated as of February 26, 1999 by and among the Company, Sleepmaster, and the
Stockholders listed on the Seller signature page attached 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
(with voting securities), 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,
limited liability company (without voting securities), 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, limited liability company (without voting
securities), association or other business entity if such Person or Persons
shall be allocated a majority of partnership, limited liability company,
association or other business entity gains or losses or shall be or control the
managing director or general partner of such partnership, limited liability
company, association or other business entity.
"Termination Year" means that fiscal year of the Company
during which the Employment Period ends pursuant to the terms of Section 2(d)
hereof.
2. Employment.
(a) Employment. The Company agrees to employ the Executive,
and the Executive hereby accepts employment with the Company, upon the terms and
conditions set forth in this Agreement for the period beginning on the date
hereof and ending as provided in Section 2(d) (the "Employment Period").
(b) Position and Duties.
(i) Commencing on the date hereof and continuing during
the Employment Period, the Executive shall serve as Chief Operating Officer of
the Company under the supervision and direction of the Board.
(ii) The Executive shall devote his best efforts and his
full business time and attention (except for permitted vacation periods and
reasonable periods of illness other than Disability) to the business and affairs
of the Company. The Executive shall perform his duties and responsibilities to
the best of his abilities in a diligent, trustworthy, businesslike and efficient
manner. Subject to the provisions of Section 5 of this Agreement, nothing in
this Section 2(b) will prevent the Executive from volunteering in community
activities and serving on the board of directors of non-profit organizations.
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(c) Base Salary and Benefits.
(i) Base Salary. During the Employment Period, the
Executive's base salary shall be $175,000 per annum (the "Base Salary"), which
salary shall be paid by the Company in regular installments in accordance with
the Company's general payroll practices and shall be subject to customary
withholding.
(ii) Executive Bonus Plan. For each fiscal year during the
Employment Period, the Executive will be eligible to receive a bonus based on
the Company's achievement of the Target EBITDA for such fiscal year. Other than
fiscal year 1999, in the event the Termination Year is less than the Company's
full fiscal year the Executive shall be entitled to receive a portion of the
bonus earned for such fiscal year pro rated based on the number of days in the
Termination Year prior to the date of termination, which such bonus shall be
determined in accordance with Section 2(c)(ii)(A). "Target EBITDA" for the
Company shall be $4.4 million for fiscal year 1999 and for each subsequent
fiscal year shall be determined by the Board no later than March 31st of such
fiscal year. In the event Sleepmaster transfers any of its accounts to the
Company, the Target EBITDA will be adjusted in good faith by the Board, and such
adjusted Target EBITDA shall be the Target EBITDA for such fiscal year.
(A) Once the Board has determined (which
determination shall be made within thirty (30) days from the issuance of the
Company's audited financial statements) the percentage of EBITDA achieved for
such fiscal year as compared to the Target EBITDA for such fiscal year (the
"Achieved EBITDA Percentage"), so long as the Achieved EBITDA Percentage for
such fiscal year equals or exceeds 80%, the Executive shall be entitled to
receive a bonus payment in an amount equal to the product of (x) the Bonus
Multiple (as set forth opposite the Achieved EBITDA Percentage below), (y) 30%,
and (z) the Executive's Base Salary for such fiscal year. The bonus payment
shall be made within five (5) days of the Board's determination and in any event
on or prior to May 1. The method used to calculate EBITDA shall be consistent
with the method used by the Company Group to calculate EBITDA in determining
bonus payments due to other senior executives of the Company Group; provided,
that the Executive acknowledges that any such bonus payments due to the
Executive hereunder will be based on the Company's EBITDA. The bonus payment
shall be subject to customary withholding.
Achieved EBITDA Percentage Bonus Multiple
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80% 50%
100% 100%
110% 125%
120% 150%
(B) Each Bonus Multiple set forth above shall
increase linearly as the Achieved EBITDA Percentage increases; therefore, so
long as the Achieved EBITDA Percentage equals or exceeds 80%, in the event the
actual Achieved EBITDA Percentage falls between any of the target Achieved
EBITDA Percentages set forth above, the applicable Bonus Multiple shall be
adjusted accordingly; provided, that in no event shall the Bonus Multiple exceed
150%. For example, (1) in the event the actual Achieved EBITDA Percentage is
90%, the Bonus Multiple shall
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be 75% or (2) in the event the actual Achieved EBITDA Percentage is 115%, the
Bonus Multiple shall be 137.5%.
(iii) Benefits. In addition to the Base Salary and any
bonuses payable to the Executive pursuant to Section 2(c)(ii), the Executive
shall be entitled, during the Employment Period, to all benefits set forth on
Schedule A hereto (the "Benefits").
(iv) Expenses. The Company shall reimburse the Executive
for all reasonable expenses incurred by him in the course of performing his
duties under this Agreement which are consistent with the Company Group's
policies in effect from time to time with respect to travel, entertainment and
other business expenses for executive employees, subject to the requirements of
the Company Group with respect to reporting and documentation of such expenses.
(d) Term. The Employment Period shall end on February 26,
2004, subject to earlier termination (x) by reason of the Executive's death or
Disability, (y) by resolution of the Board, with or without Cause or (z) upon
the Executive's voluntary resignation with or without a Good Reason Event.
(i) If the Employment Period is terminated on or before
February 26, 2004:
(A) by resolution of the Board other than for Cause
or as a result of the Executive's voluntary resignation within 60 days following
a Good Reason Event, the Executive shall be entitled to receive (1) all
previously earned and accrued but unpaid Base Salary up to the date of such
termination, (2) a portion of the bonus payment earned by the Executive during
the Termination Year pro rated based on the number of days of the Termination
Year prior to the date of termination, which such payment will be made when the
bonus payments for such Termination Year are otherwise due, and (3) an amount
equal to the Base Salary from the date of termination through the fifth
anniversary of the date of this Agreement.
(B) as a result of the Executive's death or
Disability, the Executive or the Executive's estate, as applicable, shall be
entitled to (1) all previously earned and accrued but unpaid Base Salary up to
the date of such termination and (2) a portion of the bonus payment earned by
the Executive during the Termination Year pro rated based on the number of days
of the Termination Year prior to the date of termination, which such payment
will be made when the bonus payments for such Termination Year are otherwise
due. The Executive shall not be entitled to any further Base Salary, bonus
payments or Benefits for that year or any future year, or to any other severance
compensation of any kind, nature or amount.
(C) as a result of the Executive's voluntary
resignation other than within 60 days following a Good Reason Event, or by
resolution of the Board for Cause, the Executive shall be entitled to all
previously earned and accrued but unpaid Base Salary up to the date of such
termination but shall not be entitled to any further Base Salary, bonus payments
or Benefits for that year or any future year, or to any other severance
compensation of any kind, nature or amount.
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(ii) Following the termination of the Employment
Period:
(A) the Executive agrees that: (1) the Executive
shall be entitled to the payments provided for in Section 2(d)(i)(A) and Section
2(d)(i)(B), if any, if and only if Executive has not breached as of the date of
termination of the Employment Period the provisions of Sections 3, 4 and 5
hereof and does not breach such sections at any time during the period for which
such payments are to be made and (2) the Company's obligation to make such
payments will terminate upon the occurrence of any such breach during any such
severance period.
(B) any payments with respect to Base Salary
pursuant to Section 2(d)(i)(A) shall be paid by the Company in regular
installments and any other payments pursuant to Section 2(d)(i)(A) or 2(d)(i)(B)
shall be paid by the Company in accordance with the Company's general payroll
practices and shall be subject to customary withholding, and following such
payments none of the Company Group shall have any further obligation to the
Executive pursuant to this Section 2(d) except as provided by law.
(iii) THE EXECUTIVE HEREBY AGREES THAT EXCEPT AS EXPRESSLY
PROVIDED HEREIN, NO SEVERANCE COMPENSATION OF ANY KIND, NATURE OR AMOUNT SHALL
BE PAYABLE TO THE EXECUTIVE AND EXCEPT AS EXPRESSLY PROVIDED HEREIN, THE
EXECUTIVE HEREBY IRREVOCABLY WAIVES ANY CLAIM FOR SEVERANCE COMPENSATION.
(iv) Except as provided in Section 2(d)(v) below, all of
the Executive's rights to Benefits hereunder (if any) shall cease upon the
termination of the Employment Period.
(v) If the Executive's employment is terminated other than
by (A) resolution of the Board for Cause or (B) the Executive's voluntary
resignation other than within 60 days following a Good Reason Event, the
Executive and his spouse (and the Executive's eligible family members) shall be
entitled to continue to participate in the medical insurance plan sponsored by
the Company Group and to receive the level of medical insurance benefits
afforded to the other executives in the Company Group until, with respect to
each of the Executive and his spouse, the date that such person reaches the age
at which he or she becomes eligible for Medicare benefits (or, if the Medicare
program is no longer in existence, any government sponsored successor to the
Medicare program) or if the Medicare program is no longer in existence and no
successor program exists, the age of 70 (the "Insurance Termination Date");
provided, that the Executive shall pay the Full Cost of such medical insurance
benefits relating to the continuance of the Executive's and his spouse's (and,
if applicable the Executive's other family members) medical insurance following
termination. The Company Group agrees to use commercially reasonable best
efforts to provide such benefits under its medical insurance plan which shall
include engaging a qualified broker or consultant to seek to obtain such
benefits under a Company group plan or program, obtaining quotations from group
carriers, individual carriers and third party administrators, and keeping the
Executive informed as to and, insofar as practicable, involving the Executive in
the process of obtaining such benefits. The Company Group shall not be obligated
to provide medical insurance benefits to any of the Executive's family members
(other than the Executive's spouse as provided herein) after the Insurance
Termination Date as it applies to the Executive.
(vi) The Executive has no obligation to seek or obtain
other engagements or employment to mitigate any damages to which the Executive
may be entitled by reason of any
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termination of this Agreement pursuant to Section 2(d)(i)(A). If the Executive
does obtain other engagements or employment of any nature and in any location,
the total cash payments received by the Executive as wages or salary from such
other employment or engagements, as reported to the Internal Revenue Service on
the Executive's Form 1040, during the period that he is to receive payments, if
any, pursuant to Section 2(d)(i)(A) shall reduce any amounts which the Company
would otherwise be required to pay the Executive under this Agreement.
3. Confidential Information. The Executive acknowledges that the
information, observations and data obtained by him while employed by the Company
Group concerning the business or affairs of the Company Group (including the
Company Group's technology, computer programs, know-how, designs, inventions,
methods of doing business and supplier and customer information) ("Confidential
Information") are the property of such member of the Company Group. Therefore,
the Executive agrees that, except as required by law or court order, he shall
not disclose to any unauthorized person or use for his own account any
Confidential Information without the prior written consent of the Board, unless
and to the extent that the aforementioned matters become generally known to and
available for use by the public other than as a result of the Executive's acts
or omissions to act. The Executive shall deliver to the Company at the
termination of such Executive's employment, or at any other time the Company may
request, all memoranda, notes, plans, records, reports, computer tapes and
software and other documents and data (and copies thereof) relating to the
Confidential Information, Work Product (as defined below) and the business of
the Company Group which he may then possess or have under his control.
4. Inventions and Patents. The Executive agrees that all inventions,
innovations, improvements, developments, methods, designs, analyses, drawings,
reports, and all similar or related information which relates to the Company
Group's actual or anticipated business, research and development or existing or
future products or services and which are conceived, developed or made by the
Executive while employed by the Company Group ("Work Product") belong to such
member of the Company Group and the Executive hereby assigns all right, title
and interest in and to such work product to such member of the Company Group.
The Executive will promptly disclose such Work Product to the Board and perform
all actions reasonably requested by the Board (whether during or after the
Employment Period) to establish and confirm such ownership (including, without
limitation, assignments, consents, powers of attorney and other instruments).
5. Noncompete, Nonsolicitation.
(a) The Executive acknowledges that in the course of his
employment with the Company he has become familiar, and he will become familiar,
with the Company Group's trade secrets and with other Confidential Information
and that his services have been and will be of special, unique and extraordinary
value to the Company Group. Therefore, the Executive agrees that, during the
time he is employed by the Company Group and during any applicable
Post-Termination Period (the "Noncompete Period"), he shall not directly or
indirectly own, operate, manage, control, participate in, consult with, advise,
provide services for, or in any manner engage (including by himself or in
association with any person, firm, corporate or other business organization or
through any other entity) in (i) the manufacture or distribution of mattresses,
box springs, bedding products or other products competitive with such products
or (ii) any other business which competes with a business of the Company Group
in which the Executive actively participated as part of his employment with the
Company and/or the Company Group within any geographical
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area in which the Company Group has obtained or is in the process of obtaining a
Serta license as of the date of the termination of the Executive's employment.
Nothing herein shall prohibit the Executive from (x) being a passive owner of
not more than 2% of the outstanding stock of a corporation which is publicly
traded, so long as the Executive has no active participation in the business of
such corporation or (y) from owning an interest in Holdings. For purposes of
this Section 5, "Post-Termination Period" means, as applicable: the period
beginning on the date of termination through the later of (x) the last date on
which the Executive is restricted pursuant to the provisions of Section 5B of
the Stock Purchase Agreement or (y) the twelve-month anniversary date of the
date of termination.
(b) During the Noncompete Period, the Executive shall not
directly or indirectly through another entity (i) induce or attempt to induce
any employee of the Company Group to leave the employ of the Company Group, or
in any way interfere with the relationship between the Company Group and any
employee thereof, including without limitation, inducing or attempting to induce
any union, employee or group of employees to interfere with the business or
operations of the Company Group, (ii) hire any person who was an employee of the
Company Group at any time during the Executive's employment period, or (iii)
induce or attempt to induce any customer, supplier, distributor, franchisee,
licensee or other business relation of the Company Group to cease doing business
with the Company Group, or in any way interfere with the relationship between
any such customer, supplier, distributor, franchisee, licensee or business
relation and the Company Group.
(c) The Executive agrees that: (i) the covenants set forth in
this Section 5 are reasonable in geographical and temporal scope and in all
other respects, (ii) the Company Group would not have entered into this
Agreement but for the covenants of the Executive contained herein, and (iii) the
covenants contained herein have been made in order to induce the Company Group
to enter into this Agreement.
(d) If, at the time of enforcement of this Section 5, a court
shall hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area and that the court shall be
allowed to revise the restrictions contained herein to cover the maximum period,
scope and area permitted by law.
(e) The Executive recognizes and affirms that in the event of
his breach of any provision of this Section 5, money damages would be inadequate
and the Company Group and the Investor would have no adequate remedy at law.
Accordingly, the Executive agrees that in the event of a breach or a threatened
breach by the Executive of any of the provisions of this Section 5, the Company
Group, in addition and supplementary to other rights and remedies existing in
its favor, may apply to any court of law or equity of competent jurisdiction for
specific performance and/or injunctive or other relief in order to enforce or
prevent any violations of the provisions hereof (without posting a bond or other
security).
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6. Executive Securities.
(a) Upon execution of this Agreement, the Executive will
purchase from Schweitzer, and Schweitzer will sell to the Executive 21.16 units
of Class A Common at a price of $8,637.29 per unit for an aggregate price of
$182,765.0 (the "Purchase Price"). Schweitzer will deliver to the Executive
certificates representing such units (either duly endorsed in blank or in the
name of the Executive) and the Executive will deliver to Schweitzer a check or
wire transfer of immediately available funds in the aggregate amount equal to
the Purchase Price.
(b) Upon execution of this Agreement, the Executive shall
execute and deliver a joinder to the Securityholders Agreement (the "Joinder
Agreement").
(c) With respect to the Executive Securities, within 30 days
from the date hereof, the Executive will make an effective election with the
Internal Revenue Service under Section 83(b) of the Internal Revenue Code and
the regulations promulgated thereunder in the form of Exhibit A attached hereto.
(d) In connection with the acquisition of the Executive
Securities, the Executive represents and warrants to Schweitzer and Holdings
that:
(i) The Executive Securities to be acquired by the
Executive pursuant to this Agreement will be acquired for the Executive's own
account and not with a view to, or intention of, distribution thereof in
violation of the Securities Act, or any applicable state securities laws, and
the Executive Securities will not be disposed of in contravention of the
Securities Act or any applicable state securities laws.
(ii) No commission, fee or other remuneration is to be
paid or given, directly or indirectly, to any Person for soliciting the
Executive to purchase the Executive Securities.
(iii) The Executive is an executive officer of the
Company, is sophisticated in financial matters and is able to evaluate the risks
and benefits of the investment in the Executive Securities and has determined
that such investment in the Executive Securities is suitable for the Executive,
based upon the Executive's financial situation and needs, as well as the
Executive's other securities holdings.
(iv) The Executive qualifies an "accredited investor"
within the meaning of Rule 501(a) of Regulation D under the Securities Act.
(v) The Executive is able to bear the economic risk of the
Executive's investment in the Executive Securities for an indefinite period of
time and the Executive understands that the Executive Securities have not been
registered under the Securities Act and cannot be sold unless subsequently
registered under the Securities Act or an exemption from such registration is
available.
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(vi) The Executive has had an opportunity to ask questions
and receive answers concerning the terms and conditions of the offering of
Executive Securities and has had access to such other information concerning
Holdings as the Executive has requested. The Executive has reviewed, or has had
an opportunity to review, the following documents: (A) the organization
documents of Holdings; (B) the loan agreements, notes and related documents with
the lenders of the Company Group; and (C) financial statements related to the
Company Group.
(vii) This Agreement constitutes the legal, valid and
binding obligation of the Executive, enforceable in accordance with its terms,
and the execution, delivery and performance of this Agreement by the Executive
does not and will not conflict with, violate or cause a breach of any agreement,
contract or instrument to which the Executive is a party or any judgment, order
or decree to which the Executive is subject.
(e) In connection with the sale of the Executives Securities,
Schweitzer represents and warrants to the Executive that:
(i) the Executive Securities are held beneficially and of
record by Schweitzer free and clear of any mortgage, pledge, security interest,
encumbrance, claim, right of possession, or other defect in title or lien.
(ii) this Agreement constitutes a valid and binding
obligation of Schweitzer, enforceable in accordance with its terms.
(iii) the fulfillment of and compliance with the
respective terms of this Section 6 will not conflict with or result in a breach
of the terms, conditions or provisions of any agreement to which Schweitzer or
the Executive Securities are subject which would prevent the transfer of the
Executive Securities pursuant to this Agreement.
(f) The Executive acknowledges and agrees that neither the
purchase of the Executive Securities by the Executive nor any provision
contained herein shall entitle the Executive to remain in the employment of the
Company Group and its Subsidiaries or affect the right of the Company Group and
its Subsidiaries to terminate the Executive's employment at any time for any
reason.
7. Representations and Warranties of Holdings. Holdings hereby
represents and warrants to the Executive that:
(a) Immediately following the consummation of the transactions
contemplated hereby, the authorized units of Holdings shall consist of (i) Class
A Common, of which 8,465 units shall be issued and outstanding, (ii) Class B
Common Interests, of which no units shall be issued and outstanding, and (iii)
Preferred Interests, of which 10,357.1 units shall be issued and outstanding. As
of immediately following the consummation of the transactions contemplated
hereby, all of the outstanding units of Holdings' shall be validly issued, fully
paid and nonassessable.
(b) There are no statutory or contractual securityholders
preemptive rights or rights of refusal with respect to the issuance of the
Executive Securities hereunder. Neither
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Schweitzer nor Holdings has violated any applicable federal or state securities
laws in connection with the offer and sale of the Executive Securities hereunder
and such sale does not require registration under the Securities Act or any
applicable state securities laws.
8. Repurchase Option on Executive Interests. In the event the Executive
ceases to be employed by the Company Group for any reason (the "Termination"),
the Executive Securities (whether held by the Executive or one or more of the
Executive's transferees) will be subject to repurchase by Schweitzer and
Holdings pursuant to the terms and conditions set forth in this Section 8 (the
"Repurchase Option").
(a) The purchase price for each unit of Executive Securities
will be the Fair Value for such unit; provided, that if, on or prior to the
fifth anniversary of the date hereof, the termination of the Employment Period
is by resolution of the Board for Cause or by the voluntary resignation of the
Executive other than within 60 days following a Good Reason Event, then the
purchase price for each unit of Executive Securities will be the Executive's
Original Cost.
(b) Schweitzer may elect to purchase all, but not less than
all, of the Executive Securities held by the Executive by delivering written
notice (the "Repurchase Notice") to the holder or holders of the Executive
Securities within 90 days after the Termination. The Repurchase Notice will set
forth the number of units to be acquired from each holder, the aggregate
consideration to be paid for such securities and the time and place for the
closing of the transaction. The number of units of Executive Securities to be
repurchased by Schweitzer shall first be satisfied to the extent possible from
the Executive Securities held by the Executive at the time of delivery of the
Repurchase Notice. If the number of units then held by the Executive is less
than the total number of units of Executive Securities Schweitzer has elected to
purchase, Schweitzer shall purchase the remaining Executive Securities elected
to be purchased from the other holder(s) of Executive Securities, pro rata
according to the amount of such Executive Securities held by such other
holder(s) at the time of delivery of such Repurchase Notice (determined as
nearly as practicable to the nearest share). The number of units to be
repurchased hereunder will be allocated among the Executive and the other
holders of Executive Securities (if any) pro rata according to the number of
units of Executive Securities to be purchased from such Persons.
(c) If for any reason Schweitzer does not elect to purchase
all of the units of Executive Securities that are subject to the Repurchase
Option, pursuant to such Repurchase Option, Holdings shall be entitled to
exercise the Repurchase Option for the Executive Securities Schweitzer has not
elected to purchase (the "Available Interests"). As soon as practicable after
Schweitzer has determined that there will be Available Interests, but in any
event within 150 days after the Termination, Schweitzer shall give written
notice (the "Option Notice") to Holdings setting forth the number of Available
Interests, and the purchase price for each of such Available Interests. The
Board may elect to cause Holdings to purchase all, but not less than all, of
Available Interests by giving written notice to Schweitzer within 45 days after
the Option Notice has been given by Schweitzer. As soon as practicable, and in
any event within ten days after the expiration of the 45-day period set forth
above, Holdings shall notify each holder of Executive Securities as to the
number of units being purchased from such holder by Holdings (the "Supplemental
Repurchase Notice").
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(d) The closing of the purchase of the Executive Securities
pursuant to the Repurchase Option shall take place on the date designated by
Schweitzer in the Repurchase Notice or by Holdings in the Supplemental
Repurchase Notice, which date shall not be later than the 30th day after the
delivery of the later of such notices to be delivered (or, if later, the 15th
day after the Fair Value is finally determined) nor earlier than the fifth day
after such delivery. Schweitzer and/or Holdings will pay for the Executive
Securities to be purchased pursuant to the Repurchase Option by delivery of a
certified or cashier's check or wire transfer of funds, except that Holdings may
pay up to 50% of the aggregate consideration in the form of a three year
subordinated promissory note bearing 6% interest and payable, as to principal
and interest, in three equal annual installments on the first three
anniversaries of the closing of such repurchase. The purchasers of Executive
Securities hereunder will be entitled to receive customary representations and
warranties from the sellers as to title, authority and capacity to sell.
(e) Notwithstanding anything to the contrary contained in this
Agreement, all repurchases of Executive Securities by Holdings shall be subject
to applicable legal restrictions. If any such restrictions prohibit the
repurchase of Executive Securities hereunder which Holdings is otherwise
entitled to make, Holdings may make such repurchases as soon as it is permitted
to do so under such restrictions.
9. Restrictions on Transfer.
(a) If certificated, the Executive Securities will bear the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT 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 EMPLOYMENT AGREEMENT
BETWEEN THE ISSUER AND THE SIGNATORY THERETO DATED AS OF
FEBRUARY 26, 1999. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY
THE HOLDER HEREOF AT THE ISSUER'S PRINCIPAL PLACE OF BUSINESS
WITHOUT CHARGE."
(b) No holder of Executive Securities may sell, transfer or
dispose of any units of Executive Securities (except pursuant to an effective
registration statement under the Securities Act) without first delivering to
Holdings an opinion of counsel (reasonably acceptable in form and substance to
Holdings) that neither registration nor qualification under the Securities Act
and applicable state securities laws is required in connection with such
transfer.
(c) Each holder of Executive Securities agrees not to effect
any sale or distribution of any Executive Securities or other equity securities
of Holdings, or any securities convertible into or exchangeable or exercisable
for any of Holdings's equity securities, during the
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seven days prior to and the 120 days (or, subject to the requirements of the
underwriters, up to 180 days) after the effectiveness of any underwritten public
offering, except as part of such underwritten public offering or if otherwise
permitted by Holdings.
(d) Each holder of Executive Securities acknowledges that the
Executive Securities are subject to additional restrictions contained in the
Securityholders Agreement.
10. Notices. All notices, demands or other communications to be given
or delivered under or by reason of the provisions of this Agreement will be in
writing and will be deemed to have been given when delivered personally, mailed
by certified or registered mail, return receipt requested and postage prepaid,
or sent via a nationally recognized overnight courier, or sent via facsimile to
the recipient with telephonic confirmation by the sending party. Such notices,
demands and other communications will be sent to the address indicated below:
To the Company:
Herr Manufacturing Company
18 Prestige Lane
Lancaster, PA 17603
Attention: President
Telecopy No.: (717) 392-6154
With copies to:
Sleepmaster L.L.C.
2001 Lower Road
Linden, NJ 07036
Attention: President
Telecopy No.: (908) 381-4455
Citicorp Venture Capital, Ltd.
399 Park Avenue
14th Floor
New York, NY 10043
Attention: Mr. John Weber
Telecopy No.: (212) 888-2940
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, NY 10022
Attention: Kimberly P. Taylor, Esq.
Telecopy No.: (212) 446-4900
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15
To any other Member of the Company Group or the Investor:
c/o Sleepmaster L.L.C.
2001 Lower Road
Linden, NJ 07036
Attention: President
Telecopy No.: (908) 381-4455
With copies to:
Citicorp Venture Capital, Ltd.
399 Park Avenue
14th Floor
New York, NY 10043
Attention: Mr. John Weber
Telecopy No.: (212) 888-2940
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, NY 10022
Attention: Kimberly P. Taylor, Esq.
Telecopy No.: (212) 446-4900
To the Executive:
c/o Herr Manufacturing Company
18 Prestige Lane
Lancaster, PA 17603
Attention: Mr. John K. Herr III
With a copy to:
Barley, Snyder, Senft & Cohen, LLC
126 East King Street
Lancaster, PA 17602-2893
Attention: John Shirk, Esq.
Telecopy No.: (717) 291-4660
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party.
11. Miscellaneous.
(a) Transfers in Violation of Agreement. Any transfer or
attempted transfer of any Executive Securities in violation of any provision of
this Agreement shall be null and void, and
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Holdings shall not record such transfer on its books or treat any purported
transferee of such Executive Securities as the owner of such securities for any
purpose.
(b) Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(c) Complete Agreement. This Agreement, the Joinder Agreement,
the Securityholders Agreement and the Stock Purchase Agreement embody the
complete agreement and understanding among the parties and supersede and preempt
any prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way,
including, without limitation, the Previous Agreement.
(d) Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
(e) Successors and Assigns. Except as otherwise provided
herein, this Agreement shall bind and inure to the benefit of and be enforceable
by the Executive, the Company Group, and the Investor and their respective
successors and assigns (including subsequent holders of Executive Securities);
provided that the rights and obligations of the Executive under this Agreement
shall not be assignable except in connection with a permitted transfer of
Executive Securities hereunder.
(f) Third Party Beneficiary. This Agreement is intended for
the benefit of, and will be enforceable by, the Investor.
(g) 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
COMMONWEALTH OF PENNSYLVANIA, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR
CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE COMMONWEALTH OF PENNSYLVANIA
OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE COMMONWEALTH OF PENNSYLVANIA; PROVIDED, THAT ANY
QUESTIONS REQUIRING INTERPRETATION OF THE LAWS GOVERNING LIMITED LIABILITY
COMPANIES SHALL BE GOVERNED BY THE NEW JERSEY LIMITED LIABILITY COMPANY ACT.
(h) JURISDICTION AND VENUE. ALL JUDICIAL PROCEEDINGS BROUGHT
BY OR AGAINST THE COMPANY OR THE EXECUTIVE WITH RESPECT TO THIS AGREEMENT SHALL
BE BROUGHT IN ANY STATE COURT OF COMPETENT JURISDICTION IN THE CITY OF
PHILADELPHIA IN THE COMMONWEALTH OF PENNSYLVANIA OR FEDERAL COURT IN THE EASTERN
DISTRICT OF THE COMMONWEALTH OF PENNSYLVANIA. BY EXECUTION AND DELIVERY OF THIS
AGREEMENT THE COMPANY AND THE EXECUTIVE ACCEPT
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FOR ITSELF AND HIMSELF AND IN CONNECTION WITH ITS OR HIS RESPECTIVE PROPERTIES,
GENERALLY AND UNCONDITIONALLY, THE EXCLUSIVE JURISDICTION OF THE AFORESAID
COURTS, AND IRREVOCABLY AGREE TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN
CONNECTION WITH THIS AGREEMENT. THE COMPANY AND THE EXECUTIVE WAIVE ANY CLAIMS
THAT SUCH JURISDICTION IS AN INCONVENIENT FORUM OR AN IMPROPER FORUM BASED ON
LACK OF VENUE.
(i) Dispute Resolution.
(i) Arbitration. In the event of disputes between the
Parties with respect to the terms and conditions of this Agreement (other than
disputes with respect to Sections 3, 4, and 5 of this Agreement), such disputes
shall be resolved by and through an arbitration proceeding to be conducted under
the auspices of the Philadelphia Court of Common Pleas or the American
Arbitration Association (or any like organization successor thereto) in the
Eastern District of Pennsylvania. Such arbitration proceeding shall be conducted
in as expedited a manner as is practical, and the arbitrator or arbitrators in
any such arbitration (an "Arbitration") shall be persons who are expert in the
subject of mergers and acquisitions. Both the foregoing agreement of the Parties
to arbitrate any and all such claims, and the results, determination, finding,
judgment and/or award rendered through such Arbitration, shall be final and
binding on the Parties hereto and may be specifically enforced by legal
proceedings. The parties agree and acknowledge that money damages may not be an
adequate remedy for any breach of the provisions of this Agreement and that any
party may, in its sole discretion, ask for specific performance and/or
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
(ii) Procedure. The Arbitration shall be conducted before
a panel of arbitrators selected in accordance with the rules of the American
Arbitration Association. Each Party shall bear separately the cost of their
respective attorneys, witnesses and experts in connection with such arbitration.
Time is of the essence of this arbitration procedure, and the arbitrators shall
be instructed and required to render their decision within ten (10) days
following completion of the Arbitration.
(iii) Equitable Remedies. With respect to Sections 3, 4
and 5 of this Agreement, each of the Parties will be entitled to enforce its
rights under this Agreement specifically, to recover damages and costs
(including reasonable attorneys' fees) caused by any breach of Sections 3, 4, or
5 and to exercise all other rights existing in its favor. The parties hereto
agree and acknowledge that money damages may not be an adequate remedy for any
breach of Sections 3, 4, or 5 and that any Party may, in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or deposit), ask for specific performance and/or other injunctive
relief in order to enforce or prevent any violations of such provisions.
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(j) Amendment and Waiver. The provisions of this Agreement may
be amended and waived only with the prior written consent of the Company, the
Executive and the Investor.
(k) Guaranty. The Company's obligations contained in this
Agreement are hereby guaranteed by Sleepmaster and Holdings for so long as any
of such entities own, either directly or indirectly, Stock of the Company.
* * * * *
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IN WITNESS WHEREOF, the parties hereto have executed this
Employment Agreement as of the date first written above.
SLEEPMASTER HOLDINGS L.L.C.
By: __________________________
Name:
Title:
SLEEPMASTER L.L.C.
By: __________________________
Name:
Title:
HERR MANUFACTURING COMPANY
By: _________________________
Name:
Title:
__________________________________
JOHN K. HERR, III
Agreed and Accepted:
SLEEP INVESTOR L.L.C.
By: __________________________
Name:
Title:
20
SCHEDULE A
EMPLOYEE BENEFITS
Medical, dental and life insurance benefits and short-term and long-term
disability benefits at least equal to the benefits provided by the Company's
group medical, dental and life insurance plans and the Company's Disability
Income Plan described on Schedules 6P and 6V to the Stock Purchase Agreement
(the "Existing Plans") on terms at least as favorable as those available to the
Executive under the Existing Plans.
Permitted Vacation: Four weeks per year.
Schedule A, Page 1
21
EXHIBIT A
[ ]1999
ELECTION TO INCLUDE SECURITIES IN GROSS
INCOME PURSUANT TO SECTION 83(b) OF THE
INTERNAL REVENUE CODE
The undersigned purchased units of Common Interests (the
"Interests"), of Sleepmaster Holdings L.L.C. ("Holdings") on [ ]. Under certain
circumstances, Holdings has the right to repurchase the Interests at cost from
the undersigned (or from the holder of the Interests, if different from the
undersigned) should the undersigned cease to be employed by the Company Group
and its subsidiaries. Hence, the Interests are subject to a substantial risk of
forfeiture and are non-transferable. The undersigned desires to make an election
to have the Interests taxed under the provision of Code Section 83(b) at the
time he purchased the Interests.
Therefore, pursuant to Code Section 83(b) and Treasury
Regulation Section 1.83-2 promulgatED thereunder, the undersigned hereby makes
an election, with respect to the Interests (described below), to report as
taxable income for calendar year [ ] the excess (if any) of the Interests' fair
market value on [ ] over the purchase price thereof.
The following information is supplied in accordance with
Treasury Regulation Section 1.83-2(e):
1. The name, address and social security number of the
undersigned:
Name: John K. Herr III
Address:
SSN:
2. A description of the property with respect to which the
election is being made: [ ] Class A Common Interests of Sleepmaster Holdings
L.L.C.
3. The date on which the property was transferred: [ ]. The
taxable year for which such election is made: calendar 1999.
4. The restrictions to which the property is subject: If
during the first five years after the purchase of the Interests the undersigned
ceases to be employed by the Company Group or any of its subsidiaries by reason
of the undersigned's voluntary resignation or by termination of the undersigned
by the Company Group or any of its subsidiaries for Cause (as defined), the
Interests will be subject to repurchase by the Company Group at cost, and at any
time prior to a public offering by Holdings or a sale of Holdings the
undersigned ceases to be employed by the Company Group or any of its
subsidiaries, the Interests will be subject to repurchase by Holdings at fair
value.
5. The fair market value on [ ] of the property with respect
to which the election is being made, determined without regard to any lapse
restrictions: [$ ] per Interest.
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6. The amount paid for such property: [$ ] per Interest.
A copy of this election has been furnished to the Secretary of
Holdings pursuant to Treasury Regulations Section 1.83-2(e)(7).
Dated: _____________, [ ] __________________________
Name:
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