<PAGE>
Exhibit 10.4
Confidential treatment has been requested for certain portions of this
document which have been omitted and filed separately with the Secretary of
the Securities and Exchange Commission. Omitted portions are indicated by
[REDACTED].
LETTERHEAD OF:
SEALY MATTRESS COMPANY Northeast Regional Office
18 Main Street Extension - Plymouth, Massachusetts 02360
Phone 508/747-6062 - Fax 508/747-6379
March 17,1997
Mr. Jon Studner
Chief Executive Officer
Mattress Discounters
9822 Fallard Court
Upper Marlboro, MD 20772
Dear Jon:
I want to express my appreciation to Mattress Discounters for our senior
management meeting between our companies on Tuesday, February 18, in Los
Angeles. We feel it was a win-win situation for Mattress Discounters and Sealy
to be chosen as your single bedding source.
The following were the topics and agreements of our meeting:
1. Sealy-only stores - Sealy, Inc. will become the only bedding supplier,
-----------------
other than bedding produced by Mattress Discounters in its own factories or
as substitute for such manufacturing, and subcontracted under their own
label, to Mattress Discounters for three periods as follows:
July 1, 1997 through December 31, 1997
January 1, 1998 through December 31, 1998
January 1, 1999 through June 30, 2000
2. Price increases - Sealy, Inc. will agree to maintain current Sealy prices
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as charged to Mattress Discounters through the balance of 1997. Sealy,
Inc. will agree not to make any product changes on its new Comfort Cell
products design until 1998 without Mattress Discounters' concurrence.
Stearns and Foster will continue to be managed under our national product
and pricing policies.
3. Returns - Your current return percentage to Sealy, Inc. is 1.78% to total
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sales. Mattress Discounters has agreed to maintain its current comfort
exchange policy on $899 retail and above. Our common goal is to have Sealy
returns from Mattress Discounters be less than
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Mr. Jon Studner
March 14, 1997
Page 2
2% and Comfort Cell products less than 4%. We agreed to maintain the
current returns procedure and review this program every six months, in
order to identify and address problems for either Mattress Discounters or
Sealy.
4. [REDACTED]
5. Indemnification - Sealy, Inc. will agree to indemnify, hold harmless, and
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defend Mattress Discounters against any patent and trademark litigation
resulting from the Sealy Comfort Cell products sold to Mattress Discounters
during our three-year agreement.
6. Rebate Program - To the extent permitted by applicable laws, the subsidy
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and rebate program will be as set forth on Attachment A.
7. Wholesale sales - Sealy, Inc. will pay all subsidies and rebate dollars
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based upon Mattress Discounters wholesale sales less the following:
- Floor samples
- Current promotional products or similar future promotional
specifications
- Product returns
8. Payment of subsidies - From July 1, 1997 through December 31, 1997, Sealy,
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Inc. will pay a [REDACTED] subsidy on wholesale sales. Subject to Mattress
Discounters' remaining in compliance with this agreement and as more fully
set forth on the attached schedule, beginning January 1, 1998, Sealy, Inc.
will pay a [REDACTED] subsidy on wholesale sales until purchases beginning
January 1, 1998 total [REDACTED] and thereafter a [REDACTED] subsidy on
wholesale sales in excess of [REDACTED], for the balance of the agreement.
Sealy, Inc. will pay the subsidy monthly by the 30th of each following
month during the term of the agreement. Sealy, Inc. will reconcile and pay
rebate dollars due Mattress Discounters on July 31 in 1998, 1999, and 2000.
[REDACTED]
9. Quarterly rebate payment - Sealy, Inc., will pay a [REDACTED] percent
------------------------
rebate on wholesale sales each quarter during the term of the agreement.
Sealy, Inc. will reconcile the rebate, per the attached schedule, and pay
the balance of the rebate earned to Mattress Discounters on July 31 in
1998, 1999, and 2000. If Mattress Discounters' wholesale sales fall short
of the [REDACTED] rebate sales volume, [REDACTED]
10. Initial subsidy and rebate - Upon execution of this initial letter of
--------------------------
understanding, and upon notification to Simmons, which notification will
occur no later than March 1, 1997 that Sealy will be your single-bedding
source effective July 1, 1997, Sealy, Inc. will pay Mattress Discounters
[REDACTED]. This payment will be paid to Mattress Discounters
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Mr. Jon Studner
March 14, 1997
Page 3
[REDACTED]
per month, commencing March 1, 1997 and continuing on the fifteenth day of
April, May, and June, 1997.
11. Pre-agreement subsidy level - Sealy will begin to pay the [REDACTED]
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subsidies beginning March 1, 1997 through June 30, 1997.
12. Term and assignment - The term of this agreement shall be for three (3)
-------------------
years subject to its terms. Mattress Discounters may assign this agreement
as a result of the transfer of the majority of ownership in or control of
Mattress Discounters to a third party, other than a bedding manufacturer or
any of its affiliates, pursuant to which the third party also acquires
essentially all of Mattress Discounters' then existing stores and other
retail distribution, it being understood this agreement shall only be
applicable to (a) the then existing Mattress Discounters locations, (b)
future retail locations that are owned by Mattress Discounters or
identified to consumers as "Mattress Discounters" stores, and (c) any
company that Mattress Discounters directly or indirectly controls which
sells bedding to the public, including licensees and franchisees,
regardless of the trade name under which it operates.
13. Advertising information - Sealy will be provided with the necessary
-----------------------
advertising expenditure information required by our co-operative
advertising policy in a timely manner.
14. Terms - Sealy, Inc. has agreed to improve your terms to [REDACTED].
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Mattress Discounters will continue to pay by wire transfer.
15. Pricing issue - Chuck Dawson and Ray Bojanowski will resolve very minor
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pricing issues for Sealy's charge to Mattress Discounters on Roseland
Pillowtop and Crown Jewel Level I Pillowtop.
16. Ticks - Chuck Dawson and Ray Bojanowski will resolve some minor tick issues
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on a couple of Sealy models.
17. Point of purchase - Chuck Dawson and Ray Bojanowski will work out point-of-
-----------------
purchase materials including pillowshams, neon signs, Comfort Cell product
information, and other Sealy and Stearns & Foster materials for all
Mattress Discounters stores.
18. Mattress Discounters commitments - Mattress Discounters has agreed to the
--------------------------------
following:
- Equal commissions will be paid to sales associates on Sleepcare and
Sealy, Inc. products at similar retail price points.
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Mr. Jon Studner
March 14, 1997
Page 4
- Sealy, Inc. will be Mattress Discounters only bedding supplier, other
than bedding produced by Mattress Discounters, in all stores and in all
markets, including all stores Mattress Discounters controls or opens
using other trade names.
- Sealy, Inc. products will maintain a minimum balance of sale of
[REDACTED] of bedding. Mattress Discounters will be responsible for all
contests or spiffs paid to retail associates and all contests or spiffs
will be equal for all brands and products.
19. Mattress Discounters defined - Whenever the term Mattress Discounters is
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used in this letter, it is intended to apply to Mattress Discounters, its
parent, subsidiaries, affiliates, or assigns, and to any company that
Mattress Discounters directly or indirectly controls which sells bedding to
the public, including licensees and franchisees, regardless of the trade
name under which it operates.
Jon, I appreciate the confidence you have in the Sealy, Inc., management team,
and we look forward to the start of a long-term partnership between the largest
and best specialty store retailer and the largest and best manufacturer of
bedding in the industry. If you concur that this letter confirms our discussion
and agreement, (a) please sign below and return one copy to me, and (b) accept
the enclosed check for [REDACTED] representing the first pre-payment discussed
in paragraph 10 above.
Sincerely yours,
/s/ Charles L. Dawson
Charles L. Dawson
Regional Vice President of Sales
CLD:lsr
Enc.
X /s/ Jon M. Studner
____________________________________________________________
Name: Jon M. Studner
Title: Executive Vice President & Chief Operating
Officer
Entity: Mattress Discounters
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[REDACTED]
