UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended: August 29, 2010o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition Period
from                        to


Commission file number 001-08738



SEALY CORPORATION(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of incorporation)

36-3284147(I.R.S. Employer Identification No.)Sealy Drive One Office Parkway
Trinity, North Carolina(Address of principal executive offices)

27370(Zip Code)(336) 861-3500Registrant's telephone number, including area code




Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes ý    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a
smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o    No ý

The number of shares of the registrant's common stock outstanding as of September 21, 2010 was approximately: 97,494,390.



---





PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

SEALY CORPORATION        Condensed Consolidated Statements of Operations        (in thousands, except per share data)        (unaudited)

Three Months EndedAugust 29,
2010

August 30,
2009Net sales

$
346,181

$
349,573Cost of goods sold


208,616


203,508Gross profit


137,565


146,065Selling, general and administrative expenses


107,498


110,256Asset impairment loss


22,963


Amortization expense


68


842Royalty income, net of royalty expense


(4,535
)

(4,216
)Income from operations


11,571


39,183Interest expense


21,784


22,127Loss on rights for convertible notes





1,820Refinancing and extinguishment of debt and interest rate derivatives





39Other income, net


(57
)

(14
)(Loss) income before income taxes


(10,156
)

15,211Income tax provision


6,379


3,155Equity in earnings of unconsolidated affiliates


712


Net (loss) income

$
(15,823
)
$
12,056(Loss) earnings per common shareBasic

$
(0.16
)
$
0.13(Loss) earnings per common shareDiluted

$
(0.16
)
$
0.05Weighted average number of common shares outstanding:Basic


97,043


91,884Diluted


97,043


279,156


See
accompanying notes to Condensed Consolidated Financial Statements.

1

---





SEALY CORPORATION        Condensed Consolidated Statements of Operations        (in thousands, except per share data)        (unaudited)

Nine Months EndedAugust 29,
2010

August 30,
2009Net sales

$
1,002,336

$
958,004Cost of goods sold


596,413


572,353Gross profit


405,923


385,651Selling, general and administrative expenses


323,636


302,533Asset impairment loss


22,963


Amortization expense


522


2,435Restructuring expenses including related asset impairment





1,448Royalty income, net of royalty expense


(12,343
)

(12,186
)Income from operations


71,145


91,421Interest expense


65,890


56,551Loss on rights for convertible notes





4,549Refinancing and extinguishment of debt and interest rate derivatives


3,759


17,461Gain on sale of subsidiary stock





(1,292
)Other income, net


(161
)

(60
)Income before income taxes


1,657


14,212Income tax provision


13,619


3,201Equity in earnings of unconsolidated affiliates


2,702


Net (loss) income

$
(9,260
)
$
11,011(Loss) earnings per common shareBasic

$
(0.10
)
$
0.12(Loss) earnings per common shareDiluted

$
(0.10
)
$
0.07Weighted average number of common shares outstanding:Basic


95,384


91,836Diluted


95,384


153,602


See
accompanying notes to Condensed Consolidated Financial Statements.

2

---





SEALY CORPORATION        Condensed Consolidated Balance Sheets        (in thousands, except per share amounts)        (unaudited)

August 29,
2010

November 29,
2009ASSETSCurrent assets:Cash and equivalents

$
82,510

$
131,427Accounts receivable, less allowances for bad debts, cash discounts and returns


181,758


156,850Inventories


68,634


56,810Other current assets


19,910


21,080Deferred income tax assets


15,375


20,222Total current assets


368,187


386,389Property, plant and equipmentat cost


416,354


446,989Less accumulated depreciation


(246,468
)

(239,508
)169,886


207,481Goodwill


360,878


360,583Intangible assets, net


1,517


1,937Deferred income tax assets


9,601


6,874Other assets, including debt issuance costs, net


54,814


52,206426,810


421,600Total assets

$
964,883

$
1,015,470LIABILITIES AND STOCKHOLDERS' DEFICITCurrent liabilities:Current portionlong-term obligations

$
7,634

$
13,693Accounts payable


89,229


88,971Accrued incentives and advertising


33,215


31,804Accrued compensation


26,466


43,105Accrued interest


17,616


15,230Other accrued liabilities


32,617


36,436Total current liabilities


206,777


229,239Long-term obligations, net of current portion


794,658


833,766Other liabilities


58,004


59,625Deferred income tax liabilities


875


832Stockholders' deficit:Common stock, $0.01 par value; Authorized shares: 2010 and 2009600,000 Issued and outstanding: 201097,477; 200994,417


977


947Additional paid-in capital


908,446


885,064Accumulated deficit


(1,002,210
)

(992,950
)Accumulated other comprehensive income, net


(2,644
)

(1,053
)Total shareholders' deficit


(95,431
)

(107,992
)Total liabilities and shareholders' deficit

$
964,883

$
1,015,470


See
accompanying notes to Condensed Consolidated Financial Statements.

3

---





SEALY CORPORATION        Condensed Consolidated Statement of Stockholders' Deficit        (in thousands)        (unaudited)

Common Stock





Accumulated
Other
Comprehensive
Income (Loss)Comprehensive
Income (Loss)

Additional
Paid-in
Capital

Accumulated
DeficitShares

Amount

TotalBalance at November 29, 2009

$
32,143


94,417

$
947

$
885,064

$
(992,950
)
$
(1,053
)
$
(107,992
)Net loss


(9,260
)










(9,260
)




(9,260
)Foreign currency translation adjustment


(1,982
)













(1,982
)

(1,982
)Adjustment to defined benefit plan liability, net of tax of $191


461














461


461Change in fair value of cash flow hedges, net of tax of $43


(70
)













(70
)

(70
)Share-based compensation











12,759








12,759Exercise of stock options





261


3


156








159Vesting of restricted share units





2,593


26


(4,531
)







(4,505
)Vesting of restricted shares





112


1


(207
)







(206
)Excess tax benefit on share based awards











942








942Beneficial conversion feature on Convertible paid-in-kind Notes











14,263








14,263Balance at August 29, 2010

$
(10,851
)

97,383

$
977

$
908,446

$
(1,002,210
)
$
(2,644
)
$
(95,431
)


See
accompanying notes to Condensed Consolidated Financial Statements.

4

---





SEALY CORPORATION        Condensed Consolidated Statements of Cash Flows        (in thousands)        (unaudited)

Nine Months EndedAugust 29,
2010

August 30,
2009Operating activities:Net (loss) income

$
(9,260
)
$
11,011Adjustments to reconcile net income to cash provided by operating activities:Depreciation and amortization


21,813


24,655Deferred income taxes


4,259


(7,565
)Impairment charges


22,963


1,326Amortization of deferred gain on sale-leaseback


(490
)

(485
)Paid in kind interest on convertible notes


10,830


1,820Amortization of discount on new senior secured notes


1,702


351Amortization of debt issuance costs and other


4,191


2,925Loss on rights for convertible notes





4,549Share-based compensation


12,759


7,381Excess tax benefits from share-based payment arrangements


(942
)

Loss on sale of assets


246


383Write-off of debt issuance costs related to debt extinguishments


2,709


2,113Loss on repurchase of senior notes


1,050


15,232Payment to terminate interest rate swaps





(15,232
)Gain on sale of subsidiary stock





(1,292
)Other, net


(1,635
)

(2,458
)Changes in operating assets and liabilities:Accounts receivable


(28,724
)

(27,628
)Inventories


(13,984
)

5,684Other current assets


(1,279
)

14,080Other assets


(5,314
)

(1,434
)Accounts payable


3,822


5,195Accrued expenses


(14,239
)

6,752Other liabilities


386


(7,150
)Net cash provided by operating activities


10,863


40,213Investing activities:Purchase of property, plant and equipment


(11,369
)

(8,669
)Proceeds from sale of property, plant and equipment


67


10,385Net proceeds from sale of subsidiary stock





1,237Investments in and loans to unconsolidated affiliate





(2,322
)Net cash (used in) provided by investing activities


(11,302
)

631Financing activities:Proceeds from issuance of long-term obligations


2,784


3,343Repayments of long-term obligations


(10,204
)

(15,668
)Repayment of senior term loans





(377,181
)Proceeds from issuance of new senior secured notes





335,916Proceeds from issuance of related party notes





177,132Repayment of related party notes





(83,284
)Repayment of senior secured notes, including premium of $1,050


(36,050
)

Proceeds from issuance of convertible notes, net





83,284Borrowings under revolving credit facilities





140,904Repayments under revolving credit facilities





(205,304
)Repurchase of common stock


(4,711
)

Exercise of employee stock options, including related excess tax benefits


1,101


(330
)Debt issuance costs





(27,421
)Other


(8
)

Net cash (used in) provided by financing activities


(47,088
)

31,391Effect of exchange rate changes on cash


(1,390
)

1,009Change in cash and equivalents


(48,917
)

73,244Cash and equivalents:Beginning of period


131,427


26,596End of period

$
82,510

$
99,840


See accompanying notes to Condensed Consolidated Financial Statements.

5

---





SEALY CORPORATION        Notes to Condensed Consolidated Financial Statements        (unaudited)

Note 1: Basis of Presentation

The accompanying interim Condensed Consolidated Financial Statements are unaudited, and certain related information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with Rule 10-01 of
Regulation S-X. The accompanying interim Condensed Consolidated Financial Statements were prepared following the same policies and procedures used in the preparation of the annual
financial statements and reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of Sealy Corporation and its subsidiaries
(collectively, the "Company"). The results of operations for the interim periods are not necessarily indicative of the results for the fiscal year. Our third fiscal quarter sales are typically 5% to
15% higher than other fiscal quarters. These Condensed Consolidated Financial Statements should be read in conjunction with the annual consolidated financial statements for the year ended
November 29, 2009 included within the Company's Annual Report on Form 10-K (File No. 001-08738).

At
August 29, 2010, affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") controlled approximately 48.2% of the issued and outstanding common stock of the
Company.

The
preparation of financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP") requires management to make estimates and
assumptions that affect the amount of assets and liabilities and disclosures on contingent assets and liabilities at period end and the reported amounts of revenue and expenses during the reporting
period. Actual results may differ from these estimates.

Note 2: Recently Issued Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board ("FASB") issued authoritative guidance on noncontrolling interests in consolidated financial statements. This guidance
establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The Company adopted this guidance in the first quarter of
fiscal 2010, and it did not have a material impact on its financial statements.

In
December 2007, the FASB issued authoritative guidance on business combinations, which significantly changes the principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The FASB also issued guidance for
recognizing and measuring goodwill acquired in a business combination and what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the
business combination. The Company adopted this guidance in the first quarter of fiscal 2010, and it did not have a material impact on its financial statements.

In
April 2008, the FASB issued authoritative guidance on the determination of the useful lives of intangible assets, which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of an intangible asset. The Company adopted this guidance in the first quarter of fiscal 2010, and it did not have a material impact
on its financial statements.

In
June 2008, the FASB issued authoritative guidance which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and,
therefore, need to

6

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 2: Recently Issued Accounting Pronouncements (Continued)

be
included in the earnings allocation in computing earnings per share. The Company adopted this guidance in the first quarter of fiscal 2010 and retrospectively restated its earnings per share for
previous periods in accordance with this guidance. The adoption did not have a material impact on the current or prior period financial statements presented herein.

In
November 2008, the Emerging Issues Task Force ("EITF") of the FASB issued authoritative guidance which clarifies the accounting for certain transactions involving equity method
investments. The Company adopted this guidance in the first quarter of fiscal 2010, and it did not have a material impact on its financial statements.

In
December 2008, the FASB issued authoritative guidance on employers' disclosures about plan assets of a defined benefit pension or other postretirement plan. This interpretation is
effective for financial statements issued for fiscal years ending after December 15, 2009. The Company will adopt this interpretation in the fourth quarter of fiscal 2010. The adoption of this
interpretation will increase the disclosures in the financial statements related to the assets of the Company's defined benefit pension plans.

In
June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities ("VIE"). This new guidance significantly affects the overall consolidation
analysis. The Company adopted this guidance in the first quarter of fiscal 2010. The Company has evaluated the guidance and does not have a VIE for which it is currently required to evaluate whether
it is the primary beneficiary. As such, the adoption of this guidance did not have a material impact on the Company's financial statements.

In
January 2010, the FASB issued authoritative guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new
disclosures on the transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy, including the reasons and timing of the transfers, which the
Company adopted in the second quarter of fiscal 2010. Additionally, the guidance requires a rollforward of activities related to the purchases, sales, issuance and settlements of assets and
liabilities measured using Level 3 fair value measurements. The Company will adopt this guidance in the first quarter of fiscal 2012. The adoption of this guidance will increase the level of
disclosures in the financial statements related to fair value measurements.

In
January 2010, the FASB issued authoritative guidance to amend the accounting and reporting requirements for decreases in ownership of a subsidiary. This guidance requires that a
decrease in the ownership interest of a subsidiary that does not result in a change of control be treated as an equity transaction. The guidance also expands the disclosure requirements about the
deconsolidation of a subsidiary. The Company adopted this guidance in the first quarter of fiscal 2010 and it did not have a material impact on its financial statements.

In
July 2010, the FASB issued authoritative guidance which requires expanded disclosures about the credit quality of an entity's financing receivables and its allowance for credit losses
on a disaggregated basis. The Company will adopt the portion of this guidance which pertains to disclosures as of the end of a reporting period in the first quarter of fiscal 2011. The Company will
adopt the portion of this guidance which pertains to the activity that occurs during a reporting period in the second quarter of fiscal 2011. The adoption of this guidance will increase the level of
disclosures in the

7

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 2: Recently Issued Accounting Pronouncements (Continued)

financial
statements related to the credit quality of its financing receivables and allowance for credit losses.

Note 3: Restatement of Previous Periods

During the year-end financial close process of fiscal 2009, the Company discovered an error related to the depreciation of the assets acquired through the purchase of certain
of its European subsidiaries in fiscal 2001. The Company also discovered an error related to the deferred income tax liabilities recorded on these assets. The errors, which were immaterial to the
prior periods, resulted in an understatement of depreciation expense, recorded as a component of cost of goods sold and an overstatement of the income tax provision in the Condensed Consolidated
Statements of Operations for prior periods. The recorded balances of accumulated depreciation and deferred tax liabilities were, likewise, understated and overstated, respectively in the Condensed
Consolidated Balance Sheets for prior periods. The Company evaluated the effects of these errors on prior periods' consolidated financial statements, individually and in the aggregate, in accordance
with the guidance provided by SEC Staff Accounting Bulletin ("SAB") No. 108, codified as Topic 1.N, "Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements," and concluded that no prior period is materially misstated. However, in accordance with the provisions of this SAB Topic, the Company is restating its Condensed
Consolidated Financial Statements for the nine months ended August 30, 2009 as follows (in thousands):

Condensed Consolidated Statements of
Operation InformationNine Months Ended
August 30, 2009As Previously
Reported

Adjustments

RestatedCost of goods sold

$
571,538

$
815

$
572,353Gross profit


386,466


(815
)

385,651Income from operations


92,236


(815
)

91,421Income before income taxes


15,027


(815
)

14,212Income tax provision


3,463


(262
)

3,201Net income


11,564


(553
)

11,011Eanrings per common shareBasic


0.13





0.12Earnings per common shareDiluted


0.09





0.07Basic shares


91,836





91,836Diluted shares


153,602





153,602


8

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 3: Restatement of Previous Periods (Continued)



Condensed Consolidated Statements of
Cash Flow Information for the
Nine Months Ended
August 30, 2009As Previously
Reported

Adjustments

RestatedNet income

$
11,564

$
(553
)
$
11,011Adjustments to reconcile net income to cash provided by operating activities:Depreciation and amortization


23,840


815


24,655Deferred income taxes


(7,303
)

(262
)

(7,565
)Net cash provided by operating activities


40,213





40,213


Note 4: Share-Based Compensation

The Company maintains the 1998 Stock Option Plan ("1998 Plan") and the 2004 Stock Option Plan for Key Employees of Sealy Corporation and its Subsidiaries ("2004 Plan") which are
collectively referred to as the "Option Plans". The Company accounts for all new stock options granted and outstanding options using the fair value based method under FASB authoritative guidance
surrounding share-based payments. Total share-based compensation recognized during the three and nine months ended August 29, 2010 was $3.5 million and $12.8 million,
respectively, and $5.2 million and $7.4 million, respectively, for the three and nine months ended August 30, 2009.

Modification of Awards

During the third quarter of fiscal 2009, the Company undertook a modification to the terms of its outstanding share-based compensation
awards to give effect to the dilution caused by the issuance of rights to purchase notes convertible into shares of common stock. For outstanding stock option awards granted under the 1998 Plan, the
number of awards was increased by 32.7696%, and the strike price of the awards was reduced by 24.6815%. For awards granted under the 2004 Plan, the number of awards outstanding was not adjusted, but
the strike price of the outstanding awards was reduced by 24.6815%. The increase to the number of outstanding awards has been treated as an additional grant of stock options under the 1998 Plan as
disclosed below.

The
Company also modified the terms of its outstanding restricted share unit ("RSU") awards by increasing the number of awards by 32.7696%. This modification resulted in an additional
112,856 awards being granted. However, since the Company's restricted shares outstanding as of the modification date participated in the rights offering, there was no modification of the restricted
share awards.

The
number of units outstanding under the Sealy Corporation Directors' Deferred Compensation Plan was also increased by 32.7696% as part of this modification, resulting in an additional
62,953 awards being granted at a grant date fair value of $2.00 per unit.

In
connection with the modification of its outstanding share-based compensation awards, the Company will recognize additional compensation expense of $2.1 million, which will be
recorded as a component of selling, general and administrative expenses in the Condensed Consolidated Statements

9

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 4: Share-Based Compensation (Continued)

of
Operations. Of this amount, $1.6 million was recognized in the three and nine months ended August 30, 2009 which primarily represents the additional compensation cost related to
awards that were vested at the date of the modification.

Assumptions
used in valuing stock options modified in the third quarter of fiscal 2009 were as follows:

Expected volatility


60
%Expected dividend yield


0.00
%Expected term (in years)


0.00 - 7.47Risk-free rate


0.52% - 3.46
%


Stock Option Awards

During the three and nine months ended August 29, 2010, the Company granted no new options to purchase shares of common stock.
During the nine months ended August 30, 2009, the Company granted options to purchase 58,487 shares of common stock, in addition to those granted through the modification, to newly hired and
promoted employees and recognized an insignificant amount of compensation expense associated with these grants during the nine months ended August 30, 2009. The options granted during the third
quarter of fiscal 2009 had a weighted average grant-date fair value of $3.09 per option.

The
Company valued these stock option grants using the trinomial lattice valuation model with the following assumptions:

Three Months
Ended
August 29, 2009Expected volatility


40
%Expected dividend yield


0.00
%Expected term (in years)


5.71 - 6.31Risk-free rate


3.48
%


Due
to the lack of sufficient historical trading information with respect to its own shares, the Company estimated expected volatility based on its own shares weighted with a portfolio
of selected stocks of companies believed to have market and economic characteristics similar to its own. The expected dividend yield is assumed to be zero based on restrictions to pay a dividend under
the provisions of the Company's debt agreements. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term is based on an analysis of
the early exercise behavior of employees.

10

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 4: Share-Based Compensation (Continued)

A
summary of option activity under the 1998 Plan for the nine months ended August 29, 2010, is presented below:

Shares Subject to Options

Weighted Average
Exercise Price Per ShareOutstanding November 29, 2009


2,102,162

$
1.09Exercised


(228,888
)

0.49Outstanding August 29, 2010 (all fully vested and exercisable)


1,873,274

$
1.16Weighted average remaining contractual term


3.6 yearsAggregate intrinsic value of in-the-money options at August 29, 2010 (in thousands)

$
2,383


A
summary of option activity under the 2004 Plan for the nine months ended August 29, 2010, is presented below:

Shares Subject to Options

Weighted Average
Exercise Price Per ShareOutstanding November 29, 2009


9,568,777

$
5.20Exercised


(28,068
)
$
1.64Forfeited


(2,639,385
)
$
4.62Outstanding August 29, 2010


6,901,324

$
5.44Weighted average remaining contractual term


4.7 yearsAggregate intrinsic value of in-the-money options (in thousands)

$
1,283Exercisable at August 29, 2010


4,660,413Weighted average remaining contractual term


4.7 yearsAggregate intrinsic value of in-the-money options (in thousands)

$
756


As
of August 29, 2010, the Company had approximately $2.0 million of unrecognized compensation expense related to stock option awards, which is expected to be recognized
over a weighted average period of 3.4 years.

The
Company has granted to employees stock options that have accelerated vesting provisions which take effect if certain performance levels are achieved by the Company. If the Company
does not meet these performance targets, then the vesting of the options occurs over the remainder of the requisite service period. As of August 29, 2010, it is the Company's expectation that
the performance targets for these stock options will not be met. As such, the related unrecognized compensation cost is being recognized over the remainder of the requisite service period for those
options that vest over the remaining service period. Further, the Company has not recognized compensation cost in the current period for certain options to purchase 667,532 shares of common stock that
do not vest unless the performance targets are achieved. Total unrecognized compensation cost related to these options is $1.3 million.

11

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 4: Share-Based Compensation (Continued)

Restricted Shares

At August 29, 2010, the Company had outstanding 97,324 restricted shares that are considered to be non-vested
shares, and have the same rights as the Company's outstanding common shares, including dividend participation rights, except that they cannot be sold by the holder until the end of the vesting period.
During the three and nine months ended August 29, 2010, 194,647 of the outstanding restricted shares vested. The restricted shares that vested were settled on a net basis which provided for the
repurchase and cancellation of 82,628 shares as a means to cover the required minimum withholding tax payments. A total of 112,019 common shares were delivered to the holder of these awards. As of
August 29, 2010, the remaining unrecognized compensation cost related to restricted stock awards was $0.6 million which is expected to be recognized over the remaining vesting period of
0.9 years. As the restricted shares outstanding participated in the rights offering, there was no modification of these awards as part of the 2009 modification.

Restricted Share Unit ("RSU") Awards

As of August 29, 2010, the Company had outstanding 440,660 RSUs which vest based on the attainment of certain performance
targets that are tied to the Company's earnings performance and a three-year service requirement. None of these RSUs were granted in the three or nine months ended August 29, 2010.
If the performance targets are not met, then the RSUs will not vest. As of August 29, 2010, the first of the related performance targets has been met indicating that one-third of
the awards will vest upon the completion of the service requirement.

As
of August 29, 2010, the Company also had outstanding 12,802,144 time-based RSUs that vest based on the passage of time and which do not contain performance
requirements. The awards granted prior to the three and nine months ended August 30, 2009 accrete in the number of RSUs at an annual rate of 8% payable semi-annually until the RSUs
are vested or forfeited. The number of awards outstanding above gives effect to this accretion.

During
the three and nine months ended August 29, 2010, the Company approved grants of 525,000 and 775,000 RSUs, respectively, that vest ratably over three years and do not
contain an accretion factor. The RSUs granted during the three months ended August 29, 2010 have a grant date fair value of $2.68 per unit based on the closing price of the Company's common
stock as of the grant date.

During
the three and nine months ended August 30, 2009, the Company approved grants of 16,251,433 and 16,595,833 RSUs, respectively. The RSUs granted in the third quarter of
fiscal 2009 have a weighted average grant date fair value of $2.00 based on the closing price of the Company's common stock as of the grant date. The RSUs granted during the third quarter of fiscal
2009 vest based on the passage of time and do not contain performance requirements. The RSU award amount accretes in the number of RSUs at an annual rate of 8% payable semi-annually until
the RSUs are vested or forfeited. The grants discussed above give effect to this accretion.

12

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 4: Share-Based Compensation (Continued)

In connection with the modification of share-based compensation awards discussed above, the RSUs outstanding as of June 12, 2009, which were all performance-based awards, were
modified to increase the number of awards by 32.7696%. This modification resulted in an additional 112,856 awards being granted and additional compensation cost of $0.2 million which will be
recognized based on the
forecasted attainment of the performance targets over time. The additional awards granted as part of this modification are included as RSUs granted as disclosed below.

None
of the Company's outstanding RSUs contain dividend participation rights.

A
summary of restricted share unit award activity for the nine months ended August 29, 2010, is presented below:

Unvested Restricted
Share Units

Weighted Average Grant
Date Fair ValueOutstanding November 29, 2009


16,954,906

$
2.02Granted


775,000


3.00Vested


(4,075,166
)

1.98Forfeited


(411,936
)

1.97Outstanding August 29, 2010


13,242,804

$
2.08Weighted average remaining vesting period


1.9 years


As
of August 29, 2010, the remaining unrecognized compensation cost related to the total outstanding RSUs was $13.1 million which will be recognized based on the Company's
forecasted attainment of the performance targets or over time depending upon the vesting criteria of the award. As of August 29, 2010, it is the Company's expectation that the performance
targets for RSUs with performance targets will be met.

Note 5: Inventories

The major components of inventories were as follows (in thousands):

August 29, 2010

November 29, 2009Raw materials

$
31,333

$
29,700Work in process


24,574


19,158Finished goods


12,727


7,952$
68,634

$
56,810


Note 6: Warranty Costs

The Company's warranty policy provides a 10-year non-prorated warranty service period on all currently manufacturedSealy Posturepedic,
Stearns & FosterandBassettbedding products and certain other Sealy-branded products. In addition, the Company has a
20-year warranty on the major components of itsTrueFormandMirrorFormvisco-elastic
products and itsSpringFreelatex product, the last ten years of which are prorated on a straight-line basis. The Company also offers a
20-year limited

13

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 6: Warranty Costs (Continued)

warranty
on itsRightTouchproduct line which covers only certain parts of the product and is prorated for part of the twenty years. The RightTouchline was
discontinued in the third quarter of fiscal 2008. The Company's policy is to accrue the estimated cost of warranty coverage at the
time the sale is recorded. The estimate involves an average lag time in days between the sale of a bed and the date of its return, applied to the current rate of the warranty returns.

The
change in the Company's accrued warranty obligations for each of the nine months ended August 29, 2010 and August 30, 2009 was as follows (in thousands):

August 29, 2010

August 30, 2009Accrued warranty obligations at beginning of period

$
16,464

$
16,487Warranty claims


(14,443
)

(13,379
)Warranty provisions


15,871


13,354Accrued warranty obligations at end of period

$
17,892

$
16,462


As
of August 29, 2010 and November 29, 2009, respectively, $11.0 million and $10.6 million was included as a component of other accrued liabilities and
$6.9 million and $5.9 million was included as a component of other noncurrent liabilities within the accompanying Condensed Consolidated Balance Sheet, respectively. In estimating its
warranty obligations, the Company considers the impact of recoverable salvage value on warranty cost in determining its estimate of future warranty obligations. Warranty claims and provisions shown
above do not include estimated salvage recoveries that reduced cost of sales by $4.5 million and $4.4 million for the nine months ended August 29, 2010 and the nine months ended
August 30, 2009, respectively.

Note 7: Goodwill and Other Intangible Assets

The Company performs an annual assessment of its goodwill for impairment as of the beginning of the fiscal fourth quarter. The Company also assesses its goodwill and other intangible
assets for impairment when events or circumstances indicate that their carrying value may not be recoverable from future cash flows.

The
changes in the carrying amount of goodwill, which relates entirely to the Americas segment, for the nine months ended August 29, 2010 were as follows (in thousands):

Balance as of November 29, 2009

$
360,583Increase due to foreign currency translation


295Balance as of August 29, 2010

$
360,878


Total
other intangibles of $1.5 million (net of accumulated amortization of $3.1 million) as of August 29, 2010 consisted primarily of licenses, which are amortized
using a straight-line method over periods ranging from 5 to 15 years. Costs to renew or extend the term of a recognized intangible asset are expensed as incurred. The Company
recognized amortization expense associated with intangibles of $0.1 million and $0.5 million, respectively, for the three and nine months ended August 29, 2010 and $0.8 and
$2.4 million, respectively for the three and nine months ended August 30, 2009. The Company expects to recognize amortization expense relating to these intangibles of $0.1 million
for the remainder

14

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 7: Goodwill and Other Intangible Assets (Continued)

of
2010, $0.3 million in 2011, $0.3 million in 2012, $0.3 million in 2013, $0.3 million in 2014 and $0.3 million thereafter.

Note 8: Debt Issuance Costs

On March 16, 2010, the Company redeemed 10%, or $35.0 million, of the principal amount of its outstanding Senior Notes at a redemption price of 103% of the principal amount
of the notes, plus accrued and unpaid interest to the redemption date. In connection with the repurchase, the Company recognized charges of $1.1 million related to the premium paid to
repurchase the notes and $2.7 million related to write-off of related debt issuance costs and original issue discount. These charges were recorded as a component of refinancing and
extinguishment of debt and interest rate derivatives in the Condensed Consolidated Statements of Operations.

The
Company capitalizes costs associated with the issuance of debt and amortizes them as additional interest expense over the lives of the debt on a straight-line basis which
approximates the effective interest method. In connection with the refinancing of the Company's senior secured credit facilities in May 2009, the Company recorded fees in the amount of
$27.6 million which were deferred and will be amortized over the life of the new agreements. Since the previously existing senior secured term loans were considered terminated under the
provisions of the applicable authoritative accounting guidance, the remaining unamortized debt issuance costs of $2.1 million were expensed and recognized as a component of debt extinguishment
and refinancing expenses in the Condensed Consolidated Statements of Operations. The remaining unamortized debt issuance costs of $0.4 million associated with the previously existing senior
revolving credit facility will continue to be amortized over the life of the Company's new asset-based revolving credit facility in accordance with the provisions of the applicable authoritative
accounting guidance.

Note 9: Long-Term Obligations

Long-term obligations as of August 29, 2010 and November 29, 2009 consisted of the following (in thousands):

August 29, 2010

November 29, 2009Asset-based revolving credit facility

$


$
Senior secured notes


303,978


336,625Convertible notes(1)


177,320


180,109Senior subordinated notes


268,945


268,945Financing obligations


40,237


41,296Other


11,812


20,484802,292


847,459Less current portion


(7,634
)

(13,693
)$
794,658

$
833,766


(1)Includes
PIK interest of $2.0 million and $5.3 million for which the principal balance of the Convertible Notes has not yet been increased at
August 29, 2010 and November 29, 2009, respectively.


15

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 9: Long-Term Obligations (Continued)




Debt Refinancing

On May 13, 2009, the Company announced a comprehensive plan to refinance its existing senior secured credit facilities and
replace them with indebtedness that has longer-dated maturities and eliminates quarterly financial ratio based maintenance covenants (the "Refinancing"). Through the Refinancing, the Company has:
1) entered into a new asset-based revolving credit facility (the "ABL Revolver") which provides commitments of up to $100.0 million maturing in May 2013; 2) issued
$350.0 million in aggregate principal amount of senior secured notes due April 2016 (the "Senior Notes"); and 3) issued $177.1 million in aggregate principal amount of senior
secured convertible paid in kind ("PIK") notes due July 2016 which are convertible into shares of the Company's common stock (the "Convertible Notes").

At
May 31, 2009, the rights offering (discussed below) related to the Convertible Notes had not yet expired, and therefore, none of the Convertible Notes were issued as of this
date. However, the Company had entered into a forward purchase agreement with a related party, Sealy Holding LLC (the "Purchaser"), an affiliate of KKR, in connection with the distribution of
the subscription rights through which the Purchaser provided $177.1 million in cash to support its obligation to exercise its rights as well as an oversubscription for those rights that are not
exercised by other common shareholders.

The
proceeds from the Refinancing were used to repay all of the outstanding amounts due under the Company's previously existing senior secured credit facilities, which consisted of a
$125 million senior revolving credit facility and senior secured term loans, and to increase cash for general operating purposes.

ABL Revolver

The ABL Revolver provides for revolving credit financing of up to $100.0 million, subject to borrowing base availability, and
matures in May 2013. As of August 29, 2010, there were no amounts outstanding under the ABL Revolver. At August 29, 2010, the Company had approximately $67.7 million available
under the ABL Revolver which represents the calculated borrowing base reduced by outstanding letters of credit of $16.1 million.

The
ABL Revolver agreement requires the Company to maintain a fixed charge coverage ratio in excess of 1.1 to 1.0 in periods of minimum availability where the availability for two
consecutive calendar days is less than the greater of 1) 15% of the total commitment under the ABL Revolver and 2) $15.0 million. As of August 29, 2010, the Company was not
in a minimum availability period under the ABL Revolver.

Senior Secured Notes

On May 29, 2009, the Company issued $350.0 million aggregate principal amount of Senior Notes maturing April 2016 bearing
interest at 10.875% per annum payable semi-annually in arrears on April 15 and October 15. The total proceeds received by the Company from the issuance of these notes was
$335.9 million, resulting in an original issue discount ("OID") of $14.1 million which will be accreted over the life of the agreement with the related expense recognized as a component
of interest expense in the Condensed Consolidated Statement of Operations. For the three and nine months ended August 29, 2010, the Company recognized additional interest expense of
$0.3 million and

16

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 9: Long-Term Obligations (Continued)

$1.1 million,
respectively, related to the accretion of the OID. For both the three and nine months ended August 30, 2009, the additional interest expense recognized related to the
accretion of the OID was $0.4 million.

As
discussed further in Note 8, on March 16, 2010, the Company redeemed 10%, or $35.0 million, of the principal amount of its outstanding Senior Notes at a
redemption price of 103% of the principal amount of the notes, plus accrued and unpaid interest to the redemption date.

Convertible PIK Notes

On May 13, 2009, the Company announced a rights offering pursuant to which rights to subscribe for Convertible Notes were issued
at no charge to all holders of the Company's common stock at the close of business on May 26, 2009 at a rate of one right per share of common stock. Every 13 rights entitled its holder to
purchase a Convertible Note at a subscription price of $25.00, and each Convertible Note was initially convertible into 25 shares of common stock. The rights offering expired on July 2, 2009,
and the related Convertible Notes were issued on July 10, 2009.

The
issuance of the 92,116,369 rights to purchase the Convertible Notes was considered a non-reciprocal transfer with owners and was therefore treated as a dividend of
$188.8 million in the second quarter of fiscal 2009. The amount recorded as a dividend was calculated based on the initial fair value of the rights issued of $2.05 per right based on the
initial trading value of the rights on the active market on which they traded. See Note 11. The rights were considered to constitute written options which are accounted for as derivative
instruments and were adjusted, prior to exercise or expiration, to fair value through earnings. See Note 10.

On
May 15, 2009, the Company entered into a forward purchase agreement (the "Forward Contract") with the Purchaser in connection with the distribution of the subscription rights
discussed above. The Forward Contract required the Purchaser to purchase up to $177.1 million aggregate principal amount of Convertible Notes which represented the maximum number of Convertible
Notes that the Purchaser could have been obligated to purchase. The Forward Contract was settled upon the expiration of the rights offering. Upon settlement, the Company delivered to the Purchaser the
Convertible Notes that were not subscribed for by the Company's shareholders (other than the Purchaser) and cash in an amount equal to the purchase price of the Convertible Notes that were subscribed
to by the Company's shareholders (other than the Purchaser) along with accrued interest. In consideration of the Forward Contract, the Purchaser posted cash of $177.1 million on May 29,
2009 which bore interest during the rights offering period at the rate of LIBOR plus 3.00%. On July 10, 2009, the forward contract was settled resulting in a repayment to the Purchaser of
$84.0 million which represented $83.3 million related to rights exercised by shareholders other than the Purchaser and an interest payment of $0.7 million. Under the terms of the
Forward Contract, the Company paid the Purchaser a forward contract payment of $1.0 million which was recorded as a component of debt issuance costs, net, and other assets in the Condensed
Consolidated Balance Sheet as of November 29, 2009 and is being amortized as a component of interest expense within the Condensed Consolidated Statements of Operations.

Due
to the agreement by the Purchaser to exercise all of the rights distributed to it under the terms of the Forward Contract, the 46,625,921 rights allocable to the Purchaser have been
considered

17

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 9: Long-Term Obligations (Continued)

to
be exercised at issuance of the rights. The fair value of these rights was considered to represent a substantial premium related to the issuance of the Convertible Notes. As such,
$95.6 million of this premium was recorded as a component of additional paid-in capital upon issuance of the rights. The amount of the premium recognized was based upon the $2.05
initial fair value of the rights. The 45,490,448 rights issued to the Company's other shareholders remained outstanding through the rights period and were adjusted to their fair value (See
Note 13) until the issuance of the Convertible Notes on July 10, 2009 as the rights were considered to be written options and were accounted for as derivative liabilities while they were
outstanding. Upon issuance of the Convertible Notes, the current fair value of these rights was also considered to represent a substantial premium related to the issuance of the Convertible Notes and
$97.8 million of premium was recorded as a component of additional paid-in capital within the Condensed Consolidated Balance Sheets.

The
Company accounts for the PIK interest on the Convertible Notes in accordance with the applicable FASB authoritative guidance pertaining to convertible instruments and derivative
financial instruments indexed to, and potentially settled in, a company's own stock. This guidance requires an allocation of a portion of the issuance amount to an embedded beneficial conversion
feature based on the difference between the effective conversion price of the convertible debt and the fair value of the underlying common stock. Upon each of the January 15, 2010 and
July 15, 2010 interest payment dates, the fair value of the underlying common stock was more than double the conversion price of the Convertible Notes. Therefore, a beneficial conversion
feature was recognized for the entire amount of the PIK interest payment of $7.0 million and $7.3 million, respectively. The recognition of these beneficial conversion features resulted
in the recognition of a discount of $14.3 million, which was reflected as a reduction of the balance of the Convertible Notes with an offsetting increase to additional paid-in
capital. The recognized discount will be accreted through interest expense over the remaining term of the Convertible Notes.

The
Convertible Notes mature in July 2016 and bear interest at 8.00% per annum payable semi-annually in arrears on January 15 and July 15. The Company does not
pay interest in cash related to the Convertible Notes but instead increases the amount of the Convertible Notes by an amount equal to the interest payable for the interest period ending immediately
prior. The amount of interest payable for each interest period is calculated on the basis of the accreted principal amount as of the first day of such interest period. The Convertible Notes are
convertible into shares of the Company's common stock at an initial conversion price of $1.00 per share.

During
the three and nine months ended August 29, 2010, there were an insignificant number of conversions of Convertible Notes into common shares.

The
indentures and agreements governing the ABL Revolver, Senior Notes, Convertible Notes and the 2014 Notes also impose certain restrictions including, but not limited to, the payment
of dividends or other equity distributions and the incurrence of debt or liens upon the assets of the Company or its subsidiaries. For instance, the agreement governing Sealy Mattress Company's ABL
Revolver contains restrictions on the ability of Sealy Corporation's subsidiaries to pay dividends or make other distributions to Sealy Corporation subject to specified exceptions including the
satisfaction of a minimum fixed charge coverage ratio and average daily availability levels. Likewise, under the indentures governing our Senior Notes and the 2014 Notes, we are restricted from paying
dividends or making other distributions to Sealy Corporation unless we are able to satisfy certain requirements or

18

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 9: Long-Term Obligations (Continued)

use
an available exception from the limitation. As of August 29, 2010, the net assets of Sealy Mattress Company and its subsidiaries of $234.0 million were restricted from being
distributed to its parent due to the provisions in its long-term debt agreements. However, these agreements would allow $32.6 million of these assets to be distributed without
restriction as restricted payments. At August 29, 2010, the Company was in compliance with the covenants contained within the related note indentures and agreements.

Note 10: Derivative Instruments and Hedging Strategies

The Company uses hedging contracts to manage the risk of its overall exposure to changes in interest rates, commodity prices and foreign currency exchange rates. All of the Company's
designated hedging instruments are considered to be cash flow hedges.

Interest Rate Risk

The Company is exposed to interest rate risk associated with fluctuations in the interest rates on its variable interest rate debt. In
order to manage this risk, the Company has entered into several interest rate swap agreements that convert the debt's variable interest rate to a fixed interest rate. These swap agreements are either
designated as hedging instruments or are considered to be economic hedges which are not designated as hedging instruments. The gains and losses on both designated and undesignated swap agreements will
offset losses and gains on the transactions being hedged. The Company formally documents qualifying hedged transactions and hedging instruments. The Company assesses, both at inception of the contract
and on an ongoing basis, whether the hedging instruments are effective in offsetting changes in cash flows of the hedged transaction. The fair values of the interest rate agreements are estimated as
described in Note 10, taking into consideration current interest rates and the current creditworthiness of the counterparties or the Company, as applicable. Details of the specific instruments
used by the Company to hedge its exposure to interest rate fluctuations are as follows:

Prior
to the Refinancing, the Company had three interest rate swap agreements related to term debt under our preexisting senior credit facility which were formally designated as cash
flow hedges. These interest rate swaps consisted of: 1) an agreement fixing the floating portion of the interest rate at 5.495% on $242 million of the outstanding balance through
November 2008, declining to $240 million from December 2008 through November 2009, and further declining to $180 million from December 2009 through November 2010; 2) an agreement
fixing the floating portion of the interest rate at 1.952% on $20.0 million of the outstanding balance through November 4, 2009; and 3) an agreement fixing the floating portion of
the interest rate at 1.991% on $107.0 million of the outstanding balance through February 4, 2010. In connection with the Refinancing, the Company paid $15.2 million to terminate
these interest rate swap agreements which was recorded as refinancing expense in the second quarter of fiscal 2009.

Additionally,
the Company has three interest rate swaps outstanding for notional amounts of 2.3 million Euros, 2.9 million Euros and 3.5 million Euros which fix the
floating interest rates on the Company's debt of its Europe segment at 4.92%, 4.85% and 4.50%, respectively. The notional amounts of these contracts amortize over the life of the agreement and the
agreements expire in May 2019,

19

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 10: Derivative Instruments and Hedging Strategies (Continued)

January
2013 and October 2013. The Company has not formally documented these interest rate swaps as hedges.

As
of August 29, 2010, the total notional amount of the Company's interest rate swap agreements was $11.0 million, which relates to agreements that have not been designated
as hedging instruments. The maximum length of time over which the Company is hedging its exposure to the variability of future
cash flows related to forecasted interest payments through interest rate swap agreements is through May 2019.

Foreign Currency Exposure

The Company is exposed to foreign currency risk related to purchases of materials and royalty payments made in a foreign currency. To
manage the risk associated with fluctuations in foreign currencies, the Company enters into foreign currency forward and option contracts. As with its interest rate swap instruments, the Company
designates certain of these contracts as hedging instruments and enters into some contracts that are considered to be economic hedges which are not designated as hedging instruments. Whether
designated or undesignated, these contracts protect against the reduction in value of forecasted foreign currency cash flows resulting from payments in a foreign currency. The fair values of foreign
currency agreements are estimated as described in Note 11, taking into consideration current interest rates and the current creditworthiness of the counterparties or the Company, as applicable.
Details of the specific instruments used by the Company to hedge its exposure to certain foreign currency fluctuations are as follows:

At
August 29, 2010, the Company had 35 forward foreign currency contracts and 7 foreign currency option contracts to sell Canadian dollars and receive a total of
32.9 million U.S. dollars at specified exchange rates with expiration dates ranging from September 15, 2010 through June 15, 2011. At August 30, 2009, the Company had three
forward foreign currency contracts and three foreign currency option contracts to sell Canadian dollars and receive a total of 10.2 million U.S. dollars at specified exchanges rates with
expiration dates ranging from September 15, 2009 through November 15, 2009. These hedges were entered into to protect against the fluctuation in the Canadian subsidiary's U.S. dollar
denominated purchases of raw materials. The Company has formally designated these contracts as cash flow hedges, and they are expected to be highly effective in offsetting fluctuations in the
forecasted purchases of these raw materials related to changes in the foreign currency exchange rates.

The
Company also enters into foreign currency contracts that are not designated as hedges for accounting purposes. The changes in fair value of these foreign currency hedges are included
as a part of cost of goods sold or selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. At August 29, 2010, the Company had one outstanding
foreign currency contract that was not designated as a hedge for accounting purposes. This contract had a fair value of an insignificant amount. At November 29, 2009, the Company did not have
any outstanding foreign currency contracts that were not designated as hedges for accounting purposes.

20

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 10: Derivative Instruments and Hedging Strategies (Continued)

At August 30, 2009, the Company had two forward foreign currency contracts outstanding to purchase a total of 0.9 million Euros with expiration dates ranging from
September 30, 2009 through December 31, 2009. These hedges were entered into to protect against the fluctuation in the Euro denominated royalty payments related to a third party license
held by the Company. The Company formally
designated these contracts as cash flow hedges, and they were expected to be highly effective in offsetting fluctuations in these royalty payments related to changes in the foreign currency exchange
rates. These hedges were no longer outstanding at August 29, 2010.

At
August 29, 2010, the maximum length of time over which the Company is hedging its exposure to the reduction in value of certain forecasted foreign currency cash flows through
foreign currency forward agreements is through June 15, 2011. Over the next 12 months, the Company expects to reclassify $0.8 million of deferred gains from accumulated other
comprehensive income to selling, general and administrative expense as related forecasted foreign currency payments are made.

For
the three and nine months ended August 29, 2010, the Company recognized foreign currency transaction (losses) of $(0.6 million) and $(2.4 million), respectively,
compared with (losses) of $(2.4 million) and $(3.2 million), respectively, for the three and nine months ended August 30, 2009. These amounts are recognized in cost of goods sold
or selling, general and administrative expenses at the time they occur.

Commodity Price Exposure

The Company is exposed to risk associated with fluctuations in the prices of diesel fuel used in the transportation of its finished
product to its customers. To manage this risk, the Company enters into fixed price swap agreements. The Company designates these fixed price swap contracts as hedging instruments. These contracts
protect against the reduction in value of forecasted cash flows resulting from the purchases of diesel fuel. The fair values of the fixed price swap agreements are estimated as described in
Note 11, taking into consideration current interest rates and the current creditworthiness of the counterparties or the Company, as applicable. Details of the specific instruments used by the
Company to hedge its exposure to diesel price fluctuations are as follows:

At
August 29, 2010, the Company had five fixed price swap contracts outstanding to purchase 0.6 million gallons of diesel fuel at specified prices with expiration dates
ranging from September 30, 2010 through January 31, 2011. These hedges were entered into to protect against the fluctuations in the prices of diesel fuel purchased by certain of the
Company's U.S. manufacturing facilities. The Company has formally designated these contracts as cash flow hedges, and they are expected to be highly effective in offsetting fluctuations in the
forecasted purchases of diesel fuel related to changes in the underlying diesel fuel prices.

21

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 10: Derivative Instruments and Hedging Strategies (Continued)

Embedded Derivatives

The Company evaluates its outstanding debt arrangements in accordance with the FASB's authoritative guidance on derivative instruments
and hedging, which requires bifurcation of embedded derivative instruments and measurement of fair value for accounting purposes. The Company concluded that the contingent redemption option upon a
change of control or a qualifying asset sale within its Senior Notes qualifies as an embedded derivative instrument which should be bundled as a compound embedded derivative and bifurcated from the
Senior Notes. Due to the low probability of the occurrence of the contingent events requiring redemption, the fair value of this embedded derivative instrument was determined to be immaterial.

Rights to Purchase Convertible Notes

During the second quarter of fiscal 2009, the Company issued rights to holders of its common stock at the close of business on
May 26, 2009. As described in Note 11, these rights entitled holders to purchase the Company's Convertible Notes issued in connection with the Refinancing. These rights were considered
to be written options and therefore were treated as derivatives and were adjusted, after issuance, to fair value through earnings. Based on the terms of the forward purchase agreement with the
Purchaser, the rights related to the Purchaser's then approximate 50.6% ownership were considered to be exercised as of the date of the issuance of the right.

The
fair value of the rights attributable to the Purchaser, which was $95.6 million at May 27, 2009, was recorded as additional paid-in capital upon issuance.
The rights issued to other shareholders remained outstanding through the issuance of the Convertible Notes on July 10, 2009, and were adjusted to their market value through that date. The
Company recognized losses on these rights of $1.8 million and $4.5 million for the three and nine months ended August 30, 2009, respectively. At the expiration of the rights, the
fair value of the rights issued to other shareholders of $97.8 million was recorded as additional paid-in capital.

22

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 10: Derivative Instruments and Hedging Strategies (Continued)

At
August 29, 2010 and November 29, 2009, the fair value carrying amount of the Company's derivative instruments was recorded as follows (in thousands):

Asset Derivatives

Liability DerivativesAugust 29, 2010

August 29, 2010Balance Sheet
Location

Fair Value

Balance Sheet
Location

Fair ValueDerivatives designated as hedging instrumentsForeign exchange contracts

Other current assets

$
799

Other current liabilities

$
Commodity fixed price swap contracts

Other current assets


10

Other current liabilities


(12
)Total derivatives designated as hedging instruments




809




(12
)Derivatives not designated as hedging instrumentsInterest rate contracts

Other noncurrent assets


532

Other noncurrent liabilities


Foreign exchange contracts

Other current assets


5

Other current liabilities


Total derivatives not designated as hedging instruments




537




Total derivatives



$
1,346



$
(12
)




Asset Derivatives

Liability DerivativesNovember 29, 2009

November 29, 2009Balance Sheet
Location

Fair Value

Balance Sheet
Location

Fair ValueDerivatives designated as hedging instruments Foreign exchange contracts

Other current assets

$
1,133

Other current liabilities

$
Total derivatives designated as hedging instruments




1,133




Derivatives not designated as hedging instruments Interest rate contracts

Other noncurrent assets


475

Other noncurrent liabilities


Total derivatives not designated as hedging instruments




475




Total derivatives



$
1,608



$



23

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 10: Derivative Instruments and Hedging Strategies (Continued)

The effect of derivative instruments on the Condensed Consolidated Statement of Operations for the three and nine months ended August 29,
2010 and August 30, 2009, was as follows (in thousands):

Three Months Ended August 29, 2010Derivatives in Designated
Cash Flow Hedging
Relationships

Amount of
Gain/(Loss)
Recognized
in OCI on
Derivatives
(Effective Portion)

Location of Gain/(Loss)
Reclassified from
Accumulated
OCI into Income
(Effective Portion)

Amount of Gain/(Loss)
Reclassified from
Accumulated
OCI into Income
(Effective Portion)

Location of Gain/(Loss)
Recognized in Income on
Derivatives (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)

Amount of Gain/(Loss)
Recognized in Income on
Derivatives (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)Diesel fixed price swap contracts


(7
)
Selling, general and administrative expenses


33

Selling, general and administrative expenses


Foreign exchange contracts


141

Cost of goods sold


2

Cost of goods sold


Total

$
134



$
35



$





Nine Months Ended August 29, 2010Derivatives in Designated
Cash Flow Hedging
Relationships

Amount of
Gain/(Loss)
Recognized
in OCI on
Derivatives
(Effective Portion)

Location of Gain/(Loss)
Reclassified from
Accumulated
OCI into Income
(Effective Portion)

Amount of Gain/(Loss)
Reclassified from
Accumulated
OCI into Income
(Effective Portion)

Location of Gain/(Loss)
Recognized in Income on
Derivatives (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)

Amount of Gain/(Loss)
Recognized in Income on
Derivatives (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)Diesel fixed price swap contracts


(1
)
Selling, general and administrative expenses


65

Selling, general and administrative expenses


Foreign exchange contracts


(34
)
Cost of goods sold


54

Cost of goods sold


Total

$
(35
)


$
119



$





Three Months Ended August 30, 2009Derivatives in Designated Cash
Flow Hedging Relationships

Amount of
Gain/(Loss)
Recognized
in OCI on
Derivative
(Effective Portion)

Location of Gain/(Loss)
Reclassified from
Accumulated
OCI into Income
(Effective Portion)

Amount of Gain/(Loss)
Reclassified from
Accumulated
OCI into Income
(Effective Portion)

Location of Gain/(Loss)
Recognized in Income on
Derivative (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)

Amount of Gain/(Loss)
Recognized in Income on
Derivative (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)Foreign exchange contracts


70

Selling, general and administrative expenses


56

Selling, general and administrative expenses


Total

$
70



$
56



$





Nine Months Ended August 30, 2009Derivatives in Designated Cash
Flow Hedging Relationships

Amount of
Gain/(Loss)
Recognized
in OCI on
Derivative
(Effective Portion)

Location of Gain/(Loss)
Reclassified from
Accumulated
OCI into Income
(Effective Portion)

Amount of Gain/(Loss)
Reclassified from
Accumulated
OCI into Income

Location of Gain/(Loss)
Recognized in Income on
Derivative (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)

Amount of Gain/(Loss)
Recognized in Income on
Derivative (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)Interest rate contracts


(3,864
)
Interest income (expense)


(5,266
)
Interest income (expense)


Interest rate contracts




Refinancing expense




Refinancing expense


(15,232
)Foreign exchange contracts


259

Selling, general and administrative expenses


164

Selling, general and administrative expenses


Total

$
(3,605
)


$
(5,102
)


$
(15,232
)


24

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 10: Derivative Instruments and Hedging Strategies (Continued)



Three Months EndedAugust 29, 2010

August 30, 2009Derivatives Not Designated as
Hedging Instruments

Location of Gain/(Loss)
Recognized in Income
on Derivatives

Amount of Gain/(Loss)
Recognized in Income
on Derivatives

Amount of Gain/(Loss)
Recognized in Income
on DerivativesInterest rate contracts

Interest income (expense)

$
36

$
227Rights to purchase convertible notes

Loss on rights for convertible notes





(1,820
)Total



$
36

$
(1,593
)




Nine Months EndedAugust 29, 2010

August 30, 2009Derivatives Not Designated as
Hedging Instruments

Location of Gain/(Loss)
Recognized in Income
on Derivatives

Amount of Gain/(Loss)
Recognized in Income
on Derivatives

Amount of Gain/(Loss)
Recognized in Income
on DerivativesInterest rate contracts

Interest income (expense)

$
57

$
335Rights to purchase convertible notes

Loss on rights for convertible notes





(4,549
)Total



$
57

$
(4,214
)


Note 11: Fair Value of Financial Instruments

For assets and liabilities measured at fair value on a recurring basis during the period, the Company uses an income approach to value the assets and liabilities for outstanding interest
rate swaps, foreign currency derivative contracts and diesel fixed price swap contracts discussed above. See Note 10. These contracts are valued using an income approach which consists of a
discounted cash flow model that takes into account the present value of future cash flows under the terms of the contracts by using current market information available as of the reporting date such
as prevailing interest rates and foreign currency and diesel spot and forward rates. We mitigate derivative credit risk by transacting
with highly rated counterparties. The fair value of the Company's rights for convertible notes is determined based on the closing price reported on the active market on which the related rights trade.
There were no non-financial assets or liabilities requiring initial measurement or subsequent remeasurement during the first nine months of fiscal 2010 or 2009. Further, there were no
transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy during the nine months ended August 29, 2010 and August 29, 2009.
The following table provides a summary of the fair values of assets and liabilities (in thousands):

Fair Value Measurements at August 29, 2010 UsingAugust 29, 2010

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable Inputs
(Level 3)Interest rate, foreign exchange and commodity derivatives

$
1,334

$


$
1,334

$



25

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 11: Fair Value of Financial Instruments (Continued)

Fair Value Measurements at November 29, 2009 UsingNovember 29, 2009

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable Inputs
(Level 3)Interest rate and foreign exchange derivatives

$
1,608

$


$
1,608

$



Due
to the short maturity of cash and equivalents, accounts receivable, accounts payable and accrued expenses, their carrying values approximate fair value. The fair value amounts of
long term debt, based on quoted market prices, at August 29, 2010 were as follows (in thousands):

Senior Secured Notes

$
352,800Convertible Notes


503,318Senior Subordinated Notes


269,617


Note 12: Impairment of Long-Lived Assets

The Company reviews property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets is measured by a comparison of the carrying amount of an asset group to future net undiscounted cash flows expected to be generated by the asset group. If such assets are
considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Based
upon an impairment analysis performed in the third quarter of fiscal 2010, the Company determined that the cash flows expected to be generated by the long-lived assets
of its Europe segment are less than the carrying amount of these assets. As such, the Company recognized an impairment charge of $23.0 million in the third quarter of fiscal 2010 to reduce the
carrying value of these assets to their estimated fair value. The fair value of these assets was estimated based on the expected cash flows to be received from these assets based on current comparable
data from market participants (Level 3 inputs).

Note 13: Debt Extinguishment and Refinancing Expense

Debt extinguishment and refinancing expenses for the nine months ended August 29, 2010 included non-cash charges of $2.7 million related to the
write-off of debt issuance costs and original issue discount associated with the $35.0 million of principal amount of the Senior Notes that were repurchased during the nine months
ended August 29, 2010. Also included was a cash charge of $1.1 million which represents the premium that was paid to repurchase these notes. See Note 8.

Debt
extinguishment and refinancing expenses for the three and nine months ended August 30, 2009 included non-cash charges of $2.1 million relating to the
write-off of debt issuance costs associated with the previously existing senior term loans as well as $15.2 million of cash charges associated with the termination of the interest
rate swap agreements that were associated with the old senior credit facility. See Note 9.

26

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 14: Other Income, Net

Other income, net, included interest income of $0.1 million and $0.2 million for the three and nine months ended August 29, 2010, respectively, and an insignificant
amount and $0.1 million for the three and nine months ended August 30, 2009, respectively.

Note 15: Acquisitions and Dispositions

On December 1, 2008, the Company sold fifty percent of its ownership interest in its 100% owned subsidiary Sealy Korea Company to the Company's Australian licensee, and these
operations became part of the group of joint ventures that we participate in with the Australian licensee. In consideration of the sale of the fifty percent interest, the Company received net cash of
$1.2 million and recognized a gain on the sale of the subsidiary of $1.3 million which has been recorded as a gain on sale of subsidiary stock in the accompanying Condensed Consolidated
Statements of Operations. Upon the close of this transaction, the subsidiary was deconsolidated. The joint venture to which these operations were added is not considered to be a variable interest
entity for which the Company is a primary beneficiary and is, therefore, not consolidated for financial statement purposes. The Company accounts for its interest in this joint venture under the equity
method.

On
December 4, 2008, the Company and its Australian licensee each acquired a 50% interest in a joint venture that owns the assets of the Company's former New Zealand licensee. The
purchase price for the 50% ownership was $1.9 million. Additional contributions of $0.4 million were made by each party to the joint venture to fund the initial working capital of this
entity. The New Zealand joint venture is not considered to be a variable interest entity for which the Company is a primary beneficiary and is, therefore, not consolidated for financial statement
purposes. The Company accounts for its interest in this joint venture under the equity method.

Note 16: Defined Benefit Pension Expense

The components of net periodic pension cost recognized for the Company's defined benefit pension plans in the United States, Canada and France for the three and nine months ended
August 29, 2010 and August 30, 2009 are as follows (in thousands):

Three Months Ended

Nine Months EndedAugust 29, 2010

August 30, 2009

August 29, 2010

August 30, 2009Service cost

$
244

$
191

$
732

$
574Interest cost


383


359


1,149


1,076Expected return on plan assets


(305
)

(237
)

(916
)

(712
)Amortization of unrecognized losses


37


91


111


274Amortization of unrecognized prior service cost


143


64


430


192Net periodic pension cost*

$
502

$
468

$
1,506

$
1,404Cash contributions

$
220

$
285

$
855

$
570


*Net
periodic pension cost recognized for the three and nine months ended August 29, 2010 is based upon preliminary estimates pending the final
actuarial determination of such costs for fiscal


27

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 16: Defined Benefit Pension Expense (Continued)

2010.
Similarly, net periodic pension cost for the three and nine months ended August 30, 2009 is based upon preliminary estimates.


The
Company expects to make additional cash contributions to the plans of approximately $0.2 million during the remainder of fiscal 2010.

Note 17: Income Taxes

The Company's effective income tax rates regularly differ from the Federal statutory rate principally because of the effect of non-deductible paid in kind interest, certain
foreign tax rate differentials and state and local income taxes. The effective tax rate for the three and nine months ended August 29, 2010 was approximately (62.8)% and 821.9%, respectively,
compared to approximately 20.7% and 22.5%, for the three and nine months ended August 30, 2009, respectively. The effective rate for the three and nine months ended August 29, 2010 was
higher than the rate for the three and nine months ended August 30, 2009, primarily due to the effect of non-deductible paid in kind interest which resulted from the Refinancing in
the second quarter of fiscal 2009 and the impairment of European assets.

The
Condensed Consolidated Balance Sheet as of August 29, 2010 includes accrued interest of $3.9 million and penalties of $2.9 million due to unrecognized tax
benefits. As of November 29, 2009, the Company had recorded accrued interest of $3.6 million and penalties of $3.1 million due to unrecognized tax benefits.

The
Company expects the liability for uncertain tax positions to decrease by approximately $1.9 million within the succeeding twelve months due to expiration of income tax
statutes of limitations. Federal years open to examination are fiscal year 2006 and forward. State and international jurisdictions remain open to examination for fiscal year 2000 and forward.

Significant
judgment is required in evaluating the Company's federal, state and foreign tax positions and in the determination of its tax provision. Despite the Company's belief that its
liability for unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax matter. The Company may adjust these
liabilities as relevant circumstances evolve, such as guidance from the relevant tax authority, or resolution of issues in the courts. These adjustments are recognized as a component of income tax
expense entirely in the period in which they are identified. The Company is currently undergoing examinations of certain of its corporate income tax returns by tax authorities. Issues related to
certain of these reserves have been presented to the Company, and the Company believes that such audits will not result in a material
assessment or payment of taxes related to these positions during the one year period following August 29, 2010. The Company also cannot predict when or if any other future tax payments related
to these tax positions may occur.

Note 18: Comprehensive Income

Comprehensive (loss) income for the three and nine months ended August 29, 2010 was $(14.8) million and $(10.9) million, respectively, and $12.2 million and
$29.1 million, respectively for the three and nine months ended August 30, 2009. The decrease in comprehensive income for the three months ended August 29, 2010 compared to the
three and nine months ended August 30, 2009, was driven primarily by the decrease in net income.

28

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 18: Comprehensive Income (Continued)

The
following table provides the components of accumulated other comprehensive income in the Condensed Consolidated Balance Sheets (in thousands):

August 29, 2010

November 29, 2009Unrealized gain on cash flow hedges, net of tax

$
393

$
463Unrealized actuarial loss and prior service credit for pension liability, net of tax


(7,474
)

(7,936
)Accumulated foreign currency translation adjustment


4,437


6,420$
(2,644
)
$
(1,053
)


Note 19: Commitments and Contingencies

Contingencies

The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of
these matters is currently not determinable,
management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

The
Company is currently conducting an environmental cleanup at a formerly owned facility in South Brunswick, New Jersey pursuant to the New Jersey Industrial Site Recovery Act. The
Company and one of its subsidiaries are parties to an Administrative Consent Order issued by the New Jersey Department of Environmental Protection. Pursuant to that order, the Company and its
subsidiary agreed to conduct soil and groundwater remediation at the property. The Company does not believe that its manufacturing processes were the source of contamination. The Company sold the
property in 1997. The Company and its subsidiary retained primary responsibility for the required remediation. The Company has completed essentially all soil remediation with the approval of the New
Jersey Department of Environmental Protection and continues to operate a groundwater remediation system on the site. During 2005, with the approval of the New Jersey Department of Environmental
Protection, the Company removed and disposed of sediment in Oakeys Brook adjoining the site. The Company continues to monitor ground water at the site. The Company has recorded a reserve as a
component of other accrued liabilities and other noncurrent liabilities in the accompanying Condensed Consolidated Balance Sheets as of August 29, 2010 for $2.0 million
($2.5 million prior to discounting at 4.75%) associated with this remediation project.

The
Company is also remediating soil and groundwater contamination at an inactive facility located in Oakville, Connecticut. Although the Company is conducting the remediation
voluntarily, it obtained Connecticut Department of Environmental Protection approval of the remediation plan. The Company has completed essentially all soil remediation under the remediation plan and
is currently monitoring groundwater at the site. The Company identified cadmium in the ground water at the site and removed the contaminated soil and rock from the site during fiscal 2007. The Company
has recorded a liability of approximately $0.1 million associated with the additional work and ongoing monitoring. The Company believes the contamination is attributable to the manufacturing
operations of previous, unrelated, unaffiliated occupants of the facility.

29

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 19: Commitments and Contingencies (Continued)

The
Company cannot predict the ultimate timing or costs of the South Brunswick and Oakville environmental matters. Based on facts currently known, the Company believes that the accruals
recorded are adequate and does not believe the resolution of these matters will have a material adverse effect on the financial position or future operations of the Company. However, in the event of
an adverse decision by the agencies involved, or an unfavorable result in the New Jersey natural resources damages matter, these matters could have a material adverse effect.



The Company has employment agreements with certain of its executive officers and key employees which, among other things, provide
severance benefits to those employees. For the three and nine months ended August 29, 2010, severance costs of $0.8 million and $2.2 million, respectively, were recorded as a
component of operating income within the accompanying Condensed Consolidated Statements of Operations. For the three and nine months ended August 29, 2009, severance costs of
$0.1 million and $1.3 million, respectively, were recorded as a component of operating income within the accompanying Condensed Consolidated Statements of Operations. Severance benefits
of $1.0 million and $1.2 million have been accrued as of August 29, 2010 and November 29, 2009, respectively. The entire liability has been recorded as a component of
accrued compensation within the accompanying Condensed Consolidated Balance Sheet as of August 29, 2010 and November 29, 2009, respectively.

Note 20: Related Party Transactions

During the three and nine months ended August 29, 2010, the Company incurred costs for consulting services rendered by KKR and Capstone Consulting LLC (a consulting company
that works exclusively with KKR's portfolio companies) of $0.4 million and $1.4 million, respectively. As of August 29, 2010, $0.2 million of this amount was accrued as a
component of other accrued liabilities and accounts payable in the accompanying Condensed Consolidated Balance Sheets. We also participate in a lease arrangement with a KKR affiliate for our Clarion
facility for a six month initial term with two six month renewal options available. We received lease income on this property of an insignificant amount during the first nine months of fiscal 2010.

During
the three and nine months ended August 30, 2009, the Company incurred costs for consulting services rendered by KKR and Capstone Consulting LLC (a consulting company
that works exclusively with KKR's portfolio companies) of $0.7 million and $2.3 million, respectively. The Company was also billed $0.3 million for executive search costs incurred
by KKR on the Company's behalf for the three and nine months ended August 30, 2009.

In
connection with the Refinancing (Note 9), the Company entered into an agreement with Sealy Holding, LLC, a company which is owned by KKR, whereby the Purchaser provided
$177.1 million in cash to support its obligation to exercise its rights as well as an oversubscription for those rights that are not exercised by other common shareholders. Until the conclusion
of the rights offering period, the $177.1 million bore interest at a rate of LIBOR plus 3.0%. At the expiration of the rights offering period, the Company repaid the Purchaser an amount equal
to the proceeds obtained from the subscription to the Convertible Notes by other shareholders and Convertible Notes were issued for the remaining amount. For the three and nine months ended
August 30, 2009, $0.7 million of interest was

30

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 20: Related Party Transactions (Continued)

recognized
on this related party debt. As consideration for the forward purchase, the Company paid the Purchaser $1.0 million which was deferred as debt issuance costs and is being amortized as
a component of interest expense.

Certain
funds and accounts managed by KKR Asset Management LLC, an affiliate of KKR, also participated in the Senior Notes that were issued in connection with the Refinancing. At
August 29, 2010, KKR Financial LLC held $45.7 million principal amount of the outstanding Senior Notes. Interest expense of $1.2 million and $3.9 million was
recorded during the three and nine months ended August 29, 2010, respectively, related to KKR Financial LLC's portion of the outstanding Senior Notes and remains accrued at
August 29, 2010.

During
the nine months ended August 29, 2010, the Company's joint ventures declared a distribution of $1.0 million which has been reflected as a reduction of our investment
in these joint ventures in the accompanying Condensed Consolidated Balance Sheet as of August 29, 2010.

Note 21: Segment Information

The Company has determined that it has two reportable segments: the Americas and Europe. These segments have been identified and aggregated based on the Company's organizational
structure which is organized around geographic areas.

Both
reportable segments manufacture and market conventional and specialty bedding. The Americas segment's operations are concentrated in the United States, Canada, Mexico, Argentina,
Uruguay, Brazil, Puerto Rico and Chile. Europe's operations are concentrated in Western Europe. The accounting policies of the segments are the same as those described in Note 1. The Company
evaluates performance based on profit or loss from operations before interest expense, income taxes, depreciation and amortization ("EBITDA"). The Company accounts for inter-segment sales and
transfers as if the sales or transfers were to third parties, that is, at current market prices.

Sales
by geographic area are as follows (in thousands):

Three Months Ended

Nine Months EndedAugust 29, 2010

August 30, 2009

August 29, 2010

August 30, 2009Americas:United States

$
251,041

$
256,755

$
726,546

$
713,988Canada


49,047


45,201


135,865


108,982Other International


21,069


19,763


63,095


58,752Total Americas


321,157


321,719


925,506


881,722Europe


25,024


27,854


76,830


76,282Total

$
346,181

$
349,573

$
1,002,336

$
958,004Total International

$
95,140

$
92,818

$
275,790

$
244,016


31

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 21: Segment Information (Continued)

Intersegment sales from the Americas to Europe for the three and nine months ended August 29, 2010 were $0.2 million and $0.6 million, respectively. There were no
inter-segment sales for the three and six months ended August 30, 2009. Long lived assets (principally property, plant and equipment) outside
the United States were $36.7 million and $60.6 million as of August 29, 2010 and November 29, 2009, respectively.

Three Months Ended

Nine Months EndedAugust 29, 2010

August 30, 2009

August 29, 2010

August 30, 2009(in thousands)

(in thousands)Net sales to external customers:Americas

$
321,157

$
321,719

$
925,506

$
881,722Europe


25,024


27,854


76,830


76,282346,181


349,573


1,002,336


958,004Capital expenditures:Americas


4,586


4,055


10,746


8,392Europe


105


87


623


2774,691


4,142


11,369


8,669EBITDA:Americas


42,844


45,210


117,273


99,771Europe(1)


(23,427
)

230


(25,211
)

(4,285
)Inter-segment eliminations











(68
)19,417


45,440


92,062


95,418Reconciliation of EBITDA to net income:EBITDA from segments(1)


19,417


45,440


92,062


95,418Interest


21,784


22,127


65,890


56,551Income taxes


6,379


3,155


13,619


3,201Depreciation and amortization


7,077


8,102


21,813


24,655Net Income

$
(15,823
)
$
12,056

$
(9,260
)
$
11,011




August 29, 2010

November 29, 2009(in thousands)Total assets:Americas

$
935,177

$
949,051Europe


31,259


67,972Intersegment eliminations


(1,553
)

(1,553
)$
964,883

$
1,015,470


(1)Amounts
for the three and nine months ended August 29, 2010 include an impairment charge of $23.0 million to adjust the carrying value of the
segment's assets to their fair value. (Note 12)


32

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 22: Earnings per Share

In June 2008, the FASB issued new authoritative guidance that indicates that unvested share-based awards that contain rights to receive non-forfeitable dividends (whether
paid or unpaid) are participating securities and should be included in the two-class method of computing earnings per share. As of February 28, 2010, the Company implemented this
guidance which requires the unvested shares of its restricted shares outstanding to be treated as participating securities in accordance with the two-class method in the calculation of
both basic and diluted earnings per share. Prior period comparative data has been retrospectively restated below, in accordance with the new guidance.

The
following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended:

Three Months Ended

Nine Months EndedAugust 29, 2010

August 30, 2009

August 29, 2010

August 30, 2009(in thousands)

(in thousands)Numerator:Net income (loss), as reported

$
(15,823
)
$
12,056

$
(9,260
)
$
11,564Net income (loss) attributable to participating securities


34


(38
)

26


(37
)Interest on convertible notes





1,820





1,820Net income available to common shareholders

$
(15,789
)
$
13,838

$
(9,234
)
$
13,347Denominator:Denominator for basic earnings per shareweighted average shares


97,043


91,884


95,384


91,836Effect of dilutive securities:Convertible debt





177,088





60,549Stock options





1,745





1,016Restricted share units





8,172





Other





267





201Denominator for diluted earnings per shareadjusted weighted average shares and assumed conversions


97,043


279,156


95,384


153,602


Since
the Company reported a net loss for the three and nine months ended August 29, 2010, the outstanding options to purchase common stock, restricted shares, share units and
Convertible Notes were considered antidilutive and are not included in the computation of diluted earnings per share. For the three and nine month periods, the antidilutive awards were 194,604 and
192,511, respectively (in thousands). Options and share units (in thousands) not included in the computation of diluted earnings per share because their impact is antidilutive for the three and nine
months ended August 30, 2009 were 8,617 and 25,188, respectively.

33

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 23: Restructuring Activities

For the three and nine months ended August 30, 2009, the Company recognized restructuring charges related to initiatives including facility closures and organizational changes.
There were no such charges incurred during the three and nine months ended August 29, 2010. The pretax restructuring charges recognized by the Company during the three and nine months ended
August 29, 2010 and August 30, 2009 were as follows:

Three Months Ended

Nine Months EndedAugust 29, 2010

August 30, 2009

August 29, 2010

August 30, 2009(in thousands)

(in thousands)Americas Segment

$


$


$


$
1,448Europe Segment











$


$


$


$
1,448


The
following table summarizes the restructuring activity for the nine months ended August 30, 2009 and the related restructuring liabilities balance:

2009 Restructuring ActivitiesLiabilities
November 30, 2008

Charges to
Expense

Cash
Payments

Non-cash
Utilized

Liabilities
August 30, 2009(in thousands)Severance and employee benefits

$
393

$
114

$
(315
)
$


$
192Asset impairment charges





1,334





(1,334
)

Total

$
393

$
1,448

$
(315
)
$
(1,334
)
$
192


For
the nine months ended August 30, 2009, the Company incurred restructuring charges of $0.1 million representing costs incurred to relocate machinery and equipment
associated with the closure of its
Clarion, Pennsylvania manufacturing facility which occurred in October 2008. Additionally, in the second quarter of fiscal 2009, management made the decision to cease manufacturing of certain
foundation components and begin purchasing all of these components from third party suppliers. As a result, the Company incurred certain costs which were insignificant related to one-time
terminations of employees. Additionally, the Company recognized an impairment charge of approximately $1.3 million for the related equipment used in this manufacturing process that was not
sold. This plan was completed in the second quarter of fiscal 2009 and we do not expect to incur additional costs related to this restructuring activity.

Note 24: Guarantor/Non-Guarantor Financial Information

Sealy Corporation, Sealy Mattress Corporation (a 100% owned subsidiary of Sealy Corporation) and each of the subsidiaries of Sealy Mattress Company (the "Issuer") that guarantee the
Senior Notes, the Convertible Notes and the 2014 Notes (the "Guarantor Subsidiaries"), and are 100% owned subsidiaries of the Issuer, have fully and unconditionally guaranteed, on a joint and several
basis, the obligation to pay principal and interest with respect to the Senior Notes, the Convertible Notes and the 2014 Notes (collectively, the "Guaranteed Notes") of the Issuer. Substantially all
of the Issuer's operating income and cash flow is generated by its subsidiaries. As a result, funds necessary to meet

34

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 24: Guarantor/Non-Guarantor Financial Information (Continued)

the
Issuer's debt service obligations are provided, in part, by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the
financial condition and operating requirements of the Issuer's subsidiaries, could limit the Issuer's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service
obligations, including the payment of principal and interest on the Guaranteed Notes. Although holders of the Guaranteed Notes will be direct creditors of the Issuer's principal direct subsidiaries by
virtue of the guarantees, the Issuer has subsidiaries ("Non-Guarantor Subsidiaries") that are not included among the Guarantor Subsidiaries, and such subsidiaries will not be obligated
with respect to the Guaranteed Notes. As a result, the claims of creditors of the Non-Guarantor Subsidiaries will effectively have priority with respect to the assets and earnings of such
companies over the claims of creditors of the Issuer, including the holders of the Guaranteed Notes.

The
following supplemental Condensed Consolidating Financial Statements present:



Separate
financial statements of each of the Guarantor Subsidiaries are not presented because management believes that these financial statements would not be material to investors.

35

---





SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 24: Guarantor/Non-Guarantor Financial Information (Continued)

SEALY CORPORATION        Supplemental Condensed Consolidating Balance Sheets        August 29, 2010        (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedAssetsCurrent assets:Cash and equivalents

$
799

$


$
9,234

$
35,273

$
37,204

$


$
82,510Accounts receivable, net








20


109,403


72,335





181,758Inventories








1,929


45,936


21,181


(412
)

68,634Other current assets and deferred income taxes


391





879


27,922


6,093





35,285Total current assets


1,190





12,062


218,534


136,813


(412
)

368,187Property, plant and equipment, at cost








9,423


336,551


70,380





416,354Less accumulated depreciation








(5,189
)

(188,979
)

(52,300
)




(246,468
)





4,234


147,572


18,080





169,886Other assets:Goodwill








24,741


301,942


34,195





360,878Intangible assets, net











1,449


68





1,517Net investment in subsidiaries


(182,002
)

233,964


387,642


180,408


(3
)

(620,009
)

Due from (to) affiliates


262,844


(415,966
)

534,609


(106,307
)

(98,070
)

(177,110
)

Debt issuance costs, net and other assets








23,477


23,170


17,768





64,41580,842


(182,002
)

970,469


400,662


(46,042
)

(797,119
)

426,810Total assets

$
82,032

$
(182,002
)
$
986,765

$
766,768

$
108,851

$
(797,531
)
$
964,883Liabilities and Stockholders' (Deficit) EquityCurrent liabilities:Current portionlong-term obligations

$


$


$


$
1,750

$
5,884

$


$
7,634Accounts payable








407


49,030


39,792





89,229Accrued customer incentives and advertising











23,535


9,680





33,215Accrued compensation








318


18,701


7,447





26,466Accrued interest








1,458


15,968


190





17,616Other accrued liabilities


(1
)




313


24,895


7,410





32,617Total current liabilities


(1
)




2,496


133,879


70,403





206,777Long-term obligations


177,320





750,243


38,898


5,517


(177,320
)

794,658Other liabilities











47,239


10,765





58,004Deferred income tax liabilities


144





62


21


648





875Stockholders' equity (deficit)


(95,431
)

(182,002
)

233,964


546,731


21,518


(620,211
)

(95,431
)Total liabilities and stockholders' equity (deficit)

$
82,032

$
(182,002
)
$
986,765

$
766,768

$
108,851

$
(797,531
)
$
964,883


36

---





SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 24: Guarantor/Non-Guarantor Financial Information (Continued)

SEALY CORPORATION        Supplemental Condensed Consolidating Balance Sheets        November 29, 2009        (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedAssetsCurrent assets:Cash and equivalents

$
357

$


$
29,234

$
67,950

$
33,886

$


$
131,427Accounts receivable, net








6


82,339


74,505





156,850Inventories








1,663


37,023


18,478


(354
)

56,810Other current assets and deferred income taxes


394





1,169


31,405


8,334





41,302Total current assets


751





32,072


218,717


135,203


(354
)

386,389Property, plant and equipment, at cost








9,337


335,302


102,350





446,989Less accumulated depreciation








(4,802
)

(180,116
)

(54,590
)




(239,508
)





4,535


155,186


47,760





207,481Other assets:Goodwill








24,741


301,942


33,900





360,583Intangible assets, net


271








1,666








1,937Net investment in subsidiaries


(170,794
)

245,511


389,844


75,527





(540,088
)

Due from (to) affiliates


243,154


(416,305
)

553,243


(102,010
)

(98,073
)

(180,009
)

Debt issuance costs, net and other assets








29,226


17,902


11,952





59,08072,631


(170,794
)

997,054


295,027


(52,221
)

(720,097
)

421,600Total assets

$
73,382

$
(170,794
)
$
1,033,661

$
668,930

$
130,742

$
(720,451
)
$
1,015,470Liabilities and Stockholders' (Deficit) EquityCurrent liabilities:Current portionlong-term obligations

$


$


$


$
2,159

$
11,534

$


$
13,693Accounts payable








275


45,413


43,283





88,971Accrued customer incentives and advertising











24,175


7,629





31,804Accrued compensation








391


32,706


10,008





43,105Accrued interest


6





1,343


13,658


223





15,230Other accrued liabilities


1,116





401


28,046


6,873





36,436Total current liabilities


1,122





2,410


146,157


79,550





229,239Long-term obligations


180,108





785,678


40,220


7,868


(180,108
)

833,766Other liabilities











48,456


11,169





59,625Deferred income tax liabilities


144





62


21


605





832Common stock and options subject to redemption




















Stockholders' equity (deficit)


(107,992
)

(170,794
)

245,511


434,076


31,550


(540,343
)

(107,992
)Total liabilities and stockholders' equity (deficit)

$
73,382

$
(170,794
)
$
1,033,661

$
668,930

$
130,742

$
(720,451
)
$
1,015,470


37

---





SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 24: Guarantor/Non-Guarantor Financial Information (Continued)

SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Operations        Three Months Ended August 29, 2010        (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
20,541

$
238,680

$
93,644

$
(6,684
)
$
346,181Cost and expenses:Cost of goods sold








12,224


145,109


57,915


(6,632
)

208,616Selling, general and administrative


(28
)




1,899


80,139


25,488





107,498Asset impairment loss














22,963





22,963Amortization expense











72


(4
)




68Restructuring expenses and asset impairment




















Royalty (income) expense, net











(4,542
)

7





(4,535
)Income from operations


28





6,418


17,902


(12,725
)

(52
)

11,571Interest expense





80


20,378


557


769





21,784Loss on rights for convertible notes




















Gain on sale of subsidiary stock




















Refinancing and extinguishment of debt and interest rate derivatives




















Other (income) expense, net














(57
)




(57
)Loss (income) from equity investees


17,648


18,783


(18,796
)







(17,635
)

Loss (income) from non- guarantor equity investees











16,432





(16,432
)

Capital charge and intercompany interest allocation








(18,668
)

17,931


737





Income (loss) before income taxes


(17,620
)

(18,863
)

23,504


(17,018
)

(14,174
)

34,015


(10,156
)Income tax provision (benefit)


(1,797
)

(1,215
)

42,287


(35,724
)

2,970


(142
)

6,379Equity in earnings of unconsolidated affiliates














712





712Net income (loss)

$
(15,823
)
$
(17,648
)
$
(18,783
)
$
18,706

$
(16,432
)
$
34,157

$
(15,823
)


38

---





SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 24: Guarantor/Non-Guarantor Financial Information (Continued)

SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Operations        Three Months Ended August 30, 2009        (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
22,373

$
242,758

$
91,307

$
(6,865
)
$
349,573Cost and expenses:Cost of goods sold








12,651


139,179


58,561


(6,883
)

203,508Selling, general and administrative


(9
)




2,038


86,554


21,673





110,256Amortization expense


770








73


(1
)




842Restructuring expenses and asset impairment




















Royalty (income) expense, net


(1,063
)







(4,216
)

1,063





(4,216
)Income from operations


302





7,684


21,168


10,011


18


39,183Interest expense


19


72


20,300


627


1,109





22,127Loss on rights for convertible notes


1,820

















1,820Gain on sale of subsidiary stock




















Refinancing and extinguishment of debt and interest rate derivatives








39











39Other (income) expense, net














(14
)




(14
)Loss (income) from equity investees


(5,927
)

(5,544
)

(495
)







11,966


Loss (income) from non- guarantor equity investees











(5,568
)




5,568


Capital charge and intercompany interest allocation








(18,508
)

17,858


650





Income (loss) before income taxes


4,390


5,472


6,348


8,251


8,266


(17,516
)

15,211Income tax provision (benefit)


(7,666
)

(455
)

804


7,866


2,698


(92
)

3,155Net income (loss)

$
12,056

$
5,927

$
5,544

$
385

$
5,568

$
(17,424
)
$
12,056


39

---





SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 24: Guarantor/Non-Guarantor Financial Information (Continued)

SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Operations        Nine Months Ended August 29, 2010        (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
60,800

$
690,959

$
271,175

$
(20,598
)
$
1,002,336Cost and expenses:Cost of goods sold








36,461


412,935


167,557


(20,540
)

596,413Selling, general and administrative


351





5,628


241,348


76,309





323,636Asset impairment loss














22,963





22,963Amortization expense


266








216


40





522Restructuring expenses and asset impairment




















Royalty (income) expense, net


(368
)







(12,470
)

495





(12,343
)Income from operations


(249
)




18,711


48,930


3,811


(58
)

71,145Interest expense


1


239


61,426


1,792


2,432





65,890Refinancing and extinguishment of debt and interest rate derivatives








3,759











3,759Other (income) expense, net














(161
)




(161
)Loss (income) from equity investees


9,500


9,729


454








(19,683
)

Loss (income) from non- guarantor equity investees











8,130





(8,130
)

Capital charge and intercompany interest allocation








(56,151
)

52,510


3,641





Income (loss) before income taxes


(9,750
)

(9,968
)

9,223


(13,502
)

(2,101
)

27,755


1,657Income tax provision (benefit)


(490
)

(468
)

18,952


(12,992
)

8,731


(114
)

13,619Equity in earnings of unconsolidated affiliates














2,702





2,702Net income (loss)

$
(9,260
)
$
(9,500
)
$
(9,729
)
$
(510
)
$
(8,130
)
$
27,869

$
(9,260
)


40

---





SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 24: Guarantor/Non-Guarantor Financial Information (Continued)

SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Operations        Nine Months Ended August 30, 2009        (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
62,593

$
676,224

$
239,641

$
(20,454
)
$
958,004Cost and expenses:Cost of goods sold








36,775


396,854


159,185


(20,461
)

572,353Selling, general and administrative


(12
)




5,790


233,238


63,517





302,533Amortization expense


2,220








217


(2
)




2,435Restructuring expenses and asset impairment











1,448








1,448Royalty (income) expense, net


(3,066
)







(12,217
)

3,097





(12,186
)Income from operations


858





20,028


56,684


13,844


7


91,421Interest expense


82


232


52,153


1,869


2,215





56,551Loss on rights for convertible notes


4,549

















4,549Gain on sale of subsidiary stock














(1,292
)




(1,292
)Refinancing and extinguishment of debt and interest rate derivatives








17,461











17,461Other (income) expense, net














(60
)




(60
)Loss (income) from equity investees


(6,002
)

(5,660
)

(2,617
)







14,279


Loss (income) from non- guarantor equity investees











(6,424
)




6,424


Capital charge and intercompany interest allocation








(47,522
)

45,777


1,745





Income (loss) before income taxes


2,229


5,428


553


15,462


11,236


(20,696
)

14,212Income tax provision (benefit)


(9,335
)

(574
)

(5,107
)

12,935


5,433


(151
)

3,201Net income (loss)

$
11,564

$
6,002

$
5,660

$
2,527

$
5,803

$
(20,545
)
$
11,011


41

---





SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 24: Guarantor/Non-Guarantor Financial Information (Continued)

SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Cash Flows        Nine Months Ended August 29, 2010        (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedNet cash provided by operating activities

$


$


$
11,798

$
(18,089
)
$
12,443

$


$
6,152Investing activities:Purchase of property, plant and equipment








(139
)

(9,267
)

(1,963
)




(11,369
)Proceeds from the sale of property, plant, and equipment








27





40





67Net activity in investment in and advances from (to) subsidiaries and affiliates


(659
)




4,372


(3,421
)

(292
)




Net cash provided by (used in) investing activities


(659
)




4,260


(12,688
)

(2,215
)




(11,302
)Financing activities:Equity received upon exercise of stock including related excess tax benefits


1,101

















1,101Proceeds from issuance of long term obligations














2,784





2,784Repayments of long-term obligations











(1,900
)

(8,304
)




(10,204
)Repayment of senior secured notes








(36,050
)










(36,050
)Debt issuance costs




















Other








(8
)










(8
)Net cash used in financing activities


1,101





(36,058
)

(1,900
)

(5,520
)




(42,377
)Effect of exchange rate changes on cash














(1,390
)




(1,390
)Change in cash and equivalents


442





(20,000
)

(32,677
)

3,318





(48,917
)Cash and equivalents:Beginning of period


357





29,234


67,950


33,886





131,427End of period

$
799

$


$
9,234

$
35,273

$
37,204

$


$
82,510


42

---





SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 24: Guarantor/Non-Guarantor Financial Information (Continued)

SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Cash Flows        Nine Months Ended August 30, 2009        (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedNet cash provided by operating activities

$


$


$
11,069

$
28,929

$
215

$


$
40,213Investing activities:Purchase of property, plant and equipment








(57
)

(7,677
)

(935
)




(8,669
)Proceeds from the sale of property, plant, and equipment








47


10,272


66





10,385Net proceeds from sale of subsidiary














1,237





1,237Investments in and loans to unconsolidated affiliate














(2,322
)




(2,322
)Net activity in investment in and advances from (to) subsidiaries and affiliates


(202
)




(25,985
)

22,349


3,838





Net cash provided by (used in) investing activities


(202
)




(25,995
)

24,944


1,884





631Financing activities:Equity received upon exercise of stock including related excess tax benefits


(330
)
















(330
)Proceeds from issuance of long term obligations














3,343





3,343Repayments of long-term obligations











(4,156
)

(11,512
)




(15,668
)Repayment of old senior term loans








(377,181
)










(377,181
)Proceeds from issuance of new senior secured notes








335,916











335,916Proceeds from issuance of related party debt








177,132











177,132Repayment of related party notes








(83,284
)










(83,284
)Proceeds from issuance of convertible notes, net








83,284











83,284Borrowings under new asset-based revolver




















Borrowings under old revolving credit facilities








130,300





10,604





140,904Repayments on old revolving credit facilities








(194,700
)




(10,604
)




(205,304
)Debt issuance costs




















Other








(27,421
)










(27,421
)Net cash used in financing activities


(330
)




44,046


(4,156
)

(8,169
)




31,391Effect of exchange rate changes on cash














1,009





1,009Change in cash and equivalents


(532
)




29,120


49,717


(5,061
)




73,244Cash and equivalents:Beginning of period


589





1


2,423


23,583





26,596End of period

$
57

$


$
29,121

$
52,140

$
18,522

$


$
99,840


43

---





SEALY CORPORATION

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

The following management's discussion and analysis is provided as a supplement to, and should be read in
conjunction with, our Condensed Consolidated Financial Statements and accompanying notes included in this Quarterly Report on Form 10-Q as well as our management's discussion and
analysis included in our Annual Report on Form 10-K (File No. 001-08738). Except where the context suggests otherwise, the terms "we," "us" and "our" refer to
Sealy Corporation and its subsidiaries.

BUSINESS OVERVIEW

Our mattress and foundation products include theSealy, Sealy Posturepedic, Stearns &
FosterandBassettbrands. We produce a variety of innerspring, visco-elastic (memory foam) and latex foam products.

The
current economic and weak retail environments have affected the level of spending by end consumers and have continued to put pressure on U.S. mattress sales, though we have begun to
see some stabilization in the retail environment recently. Some of the international markets where we operate are experiencing similar challenges as well. We expect this challenging business
environment to potentially continue through 2010. Furthermore, changes in foreign exchange rates contributed favorably to international results but these trends may not continue.

We
have continued our focus on new product development to bring new and innovative products to the market. In February 2010, we introducedEmbody by
Sealy, a single premium specialty brand that encompasses both memory foam and latex technologies. TheEmbodyline features
products at retail price levels ranging from $1,999 to $3,299 per queen set. We also introduced new 60th AnniversaryPosturepedicmattresses which feature new innerspring product at retail price points ranging from $750 to $1,000 per queen set. We have recently begun shipping all of these products to retailers.

Our
industry has experienced volatility in the price of petroleum-based and steel products, which affects the cost of our polyurethane foam, polyester, polyethylene foam and steel
innerspring component parts. Domestic supplies of these raw materials are limited by supplier consolidation, specific exports of these raw materials outside of the United States and other forces
beyond our control. During fiscal 2009, the cost of these components decreased and ultimately became more stable in the latter part of fiscal 2009. While these costs remained relatively stable in the
first half of fiscal 2010, the costs have shifted upwards during the latter half of fiscal 2010 as feed stocks adjust to market conditions. The manufacturers of products such as petro-chemicals and
wire rod, which are the feed stocks purchased by our suppliers of foam and drawn wire appear to be managing excess capacity an effort to maintain higher prices.

We
have two reportable segments: the Americas and Europe. These segments have been identified and aggregated based on our organizational structure which is organized around geographic
areas. Both reportable segments manufacture and market conventional and specialty bedding. The Americas segment's operations take place in the United States, Canada, Mexico, Argentina, Uruguay,
Brazil, Puerto Rico and Chile. Europe's operations are concentrated in Western Europe.

RESULTS OF OPERATIONS

During the year-end financial close process of fiscal 2009, we discovered an error related to the depreciation of the
assets acquired through our purchase of certain of our European subsidiaries in fiscal 2001. We also discovered an error related to the deferred income tax liabilities recorded on these assets. The
errors, which were immaterial to the prior periods, resulted in an understatement of depreciation expense and an overstatement of the income tax provision in the Consolidated Statement of Operations
for prior periods.

44

---



As
further discussed in Note 3 of our Condensed Consolidated Financial Statements in Item 1 above, we evaluated the effects of these errors in accordance with applicable
SEC guidance and concluded that no prior period was materially misstated. Nonetheless, we decided to restate our Consolidated Financial Statements for the nine months ended August 30, 2009,
which restated periods are discussed below. Such restatement had no impact on our compliance with the indentures governing our Senior Notes, our 2014 Notes, our Convertible Notes or our ABL Revolver
agreement.



The following table sets forth our summarized results of operations for the three months ended August 29, 2010 and
August 30, 2009, expressed in thousands of dollars, as well as a percentage of each period's net sales:

For the three months ended:August 29, 2010

August 30, 2009(in thousands)

(percentage of
net sales)

(in thousands)

(percentage of
net sales)Net sales

$
346,181


100.0
%
$
349,573


100.0
%Cost of goods sold


208,616


60.3


203,508


58.2Gross profit


137,565


39.7


146,065


41.8Selling, general and administrative expenses


107,498


31.1


110,256


31.5Asset impairment loss


22,963


6.6





Amortization expense


68





842


0.2Royalty income, net of royalty expense


(4,535
)

(1.3
)

(4,216
)

(1.2
)Income from operations


11,571


3.3


39,183


11.3Interest expense


21,784


6.3


22,127


6.3Loss on rights for convertible notes








1,820


0.5Refinancing and extinguishment of debt and interest rate derivatives








39


Other income, net


(57
)




(14
)

(Loss) income before income taxes


(10,156
)

(3.0
)

15,211


4.5Income tax provision


6,379


1.8


3,155


0.9Equity in earnings of unconsolidated affiliates


712


0.2





Net (loss) income

$
(15,823
)

(4.6
)%
$
12,056


3.6
%Effective tax rate


(62.8
)%




20.7
%


The
following table indicates the percentage distribution of our net sales in U.S. dollars throughout our global operations:

Three Months
Ended:August 29,
2010

August 30,
2009Americas:United States


72.5
%

73.4
%Canada


14.2


12.9Other


6.1


5.7Total Americas


92.8


92.0Europe


7.2


8.0Total


100.0
%

100.0
%


45

---



The
following table shows our net sales and margin profitability for our Americas and Europe segments as well as the major geographic regions within our Americas segment:

For the Three Months EndedAugust 29, 2010

August 30, 2009(in thousands)

(percentage of
net sales)

(in thousands)

(percentage of
net sales)Total Americas (U.S. Dollars):Net sales

$
321,157


100.0
%
$
321,719


100.0
%Cost of goods sold


188,885


58.8


183,105


56.9Gross profit


132,272


41.2


138,614


43.1United States (U.S. Dollars):Net sales


251,041


100.0


256,755


100.0Cost of goods sold


149,603


59.6


143,943


56.1Gross profit


101,438


40.4


112,812


43.9Total International (U.S. Dollars):Net sales


95,140


100.0


92,818


100.0Cost of goods sold


59,013


62.0


59,565


64.2Gross profit


36,127


38.0


33,253


35.8Canada:US Dollars:Net sales


49,047


100.0


45,201


100.0Cost of goods sold


26,701


54.4


27,263


60.3Gross profit


22,346


45.6


17,938


39.7Canadian Dollars:Net sales


51,088


100.0


49,996


100.0Cost of goods sold


27,812


54.4


30,164


60.3Gross profit


23,276


45.6


19,832


39.7Other Americas (U.S. Dollars):Net sales


21,069


100.0


19,763


100.0Cost of goods sold


12,581


59.7


11,899


60.2Gross profit


8,488


40.3


7,864


39.8Europe:US Dollars:Net sales


25,024


100.0


27,854


100.0Cost of goods sold


19,731


78.8


20,403


73.2Gross profit


5,293


21.2


7,451


26.8Euros:Net sales


19,886


100.0


19,672


100.0Cost of goods sold


15,671


78.8


14,405


73.2Gross profit


4,215


21.2
%

5,267


26.8
%


46

---





Net Sales.Our consolidated net sales for the quarter ended August 29, 2010, were $346.2 million, a decrease of
$3.4 million, or
1.0%, from the quarter ended August 30, 2009. Total Americas net sales were $321.2 million for the third quarter of fiscal 2010, a decrease of 0.2% from the third quarter of fiscal 2009.
This decrease was primarily due to decreases in the U.S. business offset by increases in the Canada and Other Americas businesses. Total U.S. net sales were $251.0 million for the third quarter
of fiscal 2010, a decrease of 2.2% from the third quarter of fiscal 2009. The U.S. net sales decrease of $5.7 million was attributable to a 0.3% decrease in wholesale unit volume, which
excludes third party sales from our component plants, coupled with a 2.3% decrease in wholesale average unit selling price. The decrease in unit volume was primarily attributable to softness at themed
price points in the market. The decrease in wholesale average unit selling price was due to our response to competitive pressures including a growing mix of our promotional priced bedding as we
capture more sales with our newSealybranded products. International net sales increased $2.3 million, or 2.5%, from the third quarter of fiscal
2009 to $95.1 million, primarily driven by unit volume growth in Canada. Excluding the effects of currency fluctuation, international net sales increased 2.6% from the third quarter of fiscal
2009. In Canada, local currency sales increases of 2.2% translated into increases of 8.5% in U.S. dollars due to an increase in the average value of the Canadian dollar versus the U.S. dollar. Local
currency sales performance in Canada was driven by a 7.4% increase in unit volume, which was partially offset by a 4.9% decrease in average unit selling price. The increase in unit volume was driven
by the strength of our newStearns & Fosterline and the success of our promotional products. The lower average unit selling price was driven
primarily by strategic merchandising and promotional activity. In our Europe segment, local currency sales increases of 1.1% translated into decreases of 10.2% in U.S. dollars due to the decrease in
the average value of the Euro versus the U.S. dollar. The increase in local currency sales resulted from a 3.4% increase in sales of latex cores. Finished goods sales in local currency decreased 2.0%
from the prior year.

Gross Profit.Our consolidated gross profit for the quarter ended August 29, 2010 was $137.6 million, a decrease of
$8.5 million
from the comparable prior year period. As a percentage of net sales, gross profit decreased 2.1 percentage points to 39.7% due to a decrease in gross profit margins in both of our segments.
Total Americas gross profit for the quarter ended August 29, 2010 was $132.3 million, a
decrease of $6.3 million from the comparable prior year period. As a percentage of net sales, gross profit for the Americas decreased 1.9 percentage points to 41.2%. The decrease in
percentage of net sales was primarily driven by decreases in the U.S. business. U.S. gross profit decreased $11.4 million to $101.4 million, which, as a percentage of net sales,
represents a decrease of 3.5 percentage points to 40.4% of net sales. The decrease in percentage of net sales was driven primarily by higher discounting on products that are near the end of
their life cycle as well as the impact of inflation on material costs. Partially offsetting these decreases were improvements in operations efficiencies and value engineering efforts. The gross profit
margin in Canada was 45.6%, which is consistent with historical levels and was achieved through a reduction in material costs per unit, improved operating efficiencies and higher absorption of fixed
costs on a 7.4% increase in unit volume. These increases have been partially offset by the lower average unit selling price discussed above. In our Europe segment, the local currency gross profit
margin decreased 5.6 percentage points due to material cost increases and providing greater values onSealybranded product.

47

---



Selling, General, Administrative.Our consolidated selling, general and administrative expense for the quarter ended
 August 29, 2010 decreased
$2.8 million to $107.5 million compared to the same prior year period. As a percentage of net sales, this expense was 31.1% and 31.5% for the quarters ended August 29, 2010 and
August 30, 2009, respectively, a decrease of 0.4 percentage points. The decrease as a percentage of net sales was primarily driven by a decrease in compensation costs. The decrease in
absolute dollars is primarily due to a decrease in costs related to incentive compensation and expected defined contribution plan payments partially offset by an increase in cooperative advertising
and promotional costs and less benefit related to foreign currency translation.

Asset Impairment Loss.Based upon an impairment analysis performed in the third quarter of fiscal 2010, we determined that the cash
flows expected to
be generated by the long-lived assets of our Europe segment are less than the carrying amount of these assets. As such, we recognized an impairment charge of $23.0 million in the
third quarter of fiscal 2010 to reduce the carrying value of these assets to their estimated fair value. The fair value of these assets was estimated based on the expected cash flows to be received
from these assets based on current comparable data from market participants. No such charges were recognized in the three months ended August 30, 2009.

Royalty income, net of royalty expense.Our consolidated royalty income, net of royalty expenses, of $4.5 million for the three
months ended
August 29, 2010 increased $0.3 million from the prior year period due to royalties earned from international licensees.

Interest Expense.Our consolidated interest expense for the third quarter of fiscal 2010 decreased
$0.3 million to $21.8 million as compared with the prior year period. This decrease results from a decrease in cash interest expense of approximately $2.0 million due to the
repurchase of $35 million of Senior Notes in the second quarter of fiscal 2010, offset by increases in non-cash interest expense as the Convertible Notes were not outstanding for
the entire third quarter of fiscal 2009. Non-cash interest for the third quarter of fiscal 2010 was $5.9 million compared with $4.2 million for the third quarter of fiscal
2009. Non cash interest expense on our Convertible Notes was $4.3 million and $2.5 million for the third quarter of fiscal 2010 and 2009, respectively. The remaining portion of
non-cash interest relates to the accretion or amortization of original issue discount and deferred debt issuance costs. Our net weighted average borrowing cost was 10.8% and 10.4% for the
three months ended August 29, 2010 and August 30, 2009, respectively. Our borrowing cost was unfavorably impacted by the refinancing of our senior secured credit facilities in May 2009
(the "Refinancing") which resulted in increased interest rates and outstanding debt balances.

Income Tax.Our effective income tax rates regularly differ from the Federal statutory rate principally because of the effect of
non-deductible paid in kind interest, non-deductible mark to market adjustments for derivatives associated with the Convertible Notes subscription rights, certain foreign tax rate
differentials and state and local income taxes. Our effective tax rate for the three months ended August 29, 2010 was (62.8)% compared to 20.7% for the three months ended August 30,
2009. The effective rate for the fiscal 2010 period was lower than the fiscal 2009 period primarily due to the impairment of European assets.

Equity in Earnings of Unconsolidated Affiliates.Earnings related to our joint ventures for the third quarter of fiscal 2010 increased
from the prior
year period due to increased demand seen in the Asian markets.

48

---





The following table sets forth our summarized results of operations for the nine months ended August 29, 2010 and
August 30, 2009, expressed in thousands of dollars, as well as a percentage of each period's net sales:

For the nine months ended:August 29, 2010

August 30, 2009(in thousands)

(percentage of
net sales)

(in thousands)

(percentage of
net sales)Net sales

$
1,002,336


100.0
%
$
958,004


100.0
%Cost of goods sold


596,413


59.5


572,353


59.7Gross profit


405,923


40.5


385,651


40.3Selling, general and administrative expenses


323,636


32.3


302,533


31.6Asset impairment loss


22,963


2.3





Amortization expense


522


0.1


2,435


0.3Restructuring expenses including related asset impairment








1,448


0.2Royalty income, net of royalty expense


(12,343
)

(1.2
)

(12,186
)

(1.3
)Income from operations


71,145


7.0


91,421


9.5Interest expense


65,890


6.6


56,551


5.9Loss on rights for convertible notes








4,549


0.5Refinancing and extinguishment of debt and interest rate derivatives


3,759


0.4


17,461


1.8Gain on sale of subsidiary stock








(1,292
)

(0.1
)Other income, net


(161
)




(60
)

Income before income taxes


1,657


0.0


14,212


1.4Income tax provision


13,619


1.4


3,201


0.3Equity in earnings of unconsolidated affiliates


2,702


0.3





Net (loss) income

$
(9,260
)

(1.1
)%
$
11,011


1.1
%Effective tax rate


821.9
%




22.5
%


The
following table indicates the percentage distribution of our net sales in U.S. dollars throughout our global operations:

Nine Months
Ended:2010

2009Americas:United States


72.5
%

74.5
%Canada


13.6


11.4Other


6.2


6.1Total Americas


92.3


92.0Europe


7.7


8.0Total


100.0
%

100.0
%


49

---



The
following table shows our net sales and margin profitability for our Americas and Europe segments as well as the major geographic regions within our Americas segment:

For the nine months ended:August 29, 2010

August 30, 2009(in thousands)

(percentage of
net sales)

(in thousands)

(percentage of
net sales)Total Americas (U.S. Dollars):Net sales

$
925,506


100.0
%
$
881,722


100.0
%Cost of goods sold


538,134


58.1


514,927


58.4Gross profit


387,372


41.9


366,795


41.6United States (U.S. Dollars):Net sales


726,546


100.0


713,988


100.0Cost of goods sold


425,706


58.6


410,283


57.5Gross profit


300,840


41.4


303,705


42.5Total International (U.S. Dollars):Net sales


275,790


100.0


244,016


100.0Cost of goods sold


170,707


61.9


162,070


66.4Gross profit


105,083


38.1


81,946


33.6Canada:US Dollars:Net sales


135,865


100.0


108,982


100.0Cost of goods sold


75,165


55.3


68,996


63.3Gross profit


60,700


44.7


39,986


36.7Canadian Dollars:Net sales


141,407


100.0


127,604


100.0Cost of goods sold


78,227


55.3


80,959


63.4Gross profit


63,180


44.7


46,645


36.6Other Americas (U.S. Dollars):Net sales


63,095


100.0


58,752


100.0Cost of goods sold


37,263


59.1


35,648


60.7Gross profit


25,832


40.9


23,104


39.3Europe:US Dollars:Net sales


76,830


100.0


76,282


100.0Cost of goods sold


58,279


75.9


57,426


75.3Gross profit


18,551


24.1


18,856


24.7Euros:Net sales


57,532


100.0


56,127


100.0Cost of goods sold


43,682


75.9


42,191


75.2Gross profit


13,850


24.1
%

13,936


24.8
%


50

---





Net Sales.Our consolidated net sales for the nine months ended August 29, 2010, were $1,002.3 million, an increase of
$44.3 million, or 4.6%, from the nine months ended August 30, 2009. Total Americas net sales were $925.5 million for the nine months ended August 29, 2010, an increase of
5.0% from the first nine months of fiscal 2009. This increase was due to increases in the Canada, U.S. and Other Americas businesses. Total U.S. net sales were $726.5 million for the first nine
months of fiscal 2010, an increase of 1.8% from the first nine months of fiscal 2009. The U.S. net sales increase of $12.6 million was attributable to a 1.3% increase in wholesale unit volume,
which excludes third party sales from our component plants, coupled with a 0.1% increase in wholesale average unit selling price. The increase in unit volume is primarily attributable to the
successful launch of our newStearns & Fosterline. The increase in average unit selling price was driven primarily by sales of product priced
greater than $1,000, but was offset by increased spending for customer incentive programs. International net sales increased $31.8 million or 13.0%, from the first nine months of fiscal 2009 to
$275.8 million. This increase was driven primarily by the favorable changes in foreign currency exchange rates and growth in our Canadian business. Excluding the effects of currency
fluctuation, international net sales increased 6.7% from the first nine months of fiscal 2009. In Canada, local currency sales increases of 10.8% translated into increases of 24.7% in U.S. dollars due
to an increase in the average value of the Canadian dollar versus the U.S. dollar. Local currency sales performance in Canada was driven by a 17.9% increase in unit volume, which was partially offset
by a 6.0% decrease in average unit selling price. The increase in unit volume was driven by strategic promotional activity and the success of our newStearns &
Fosterline. The lower average unit selling price was driven primarily by strategic merchandising and promotional activity. Elsewhere in the Americas, we experienced sales
increases in our Mexico markets and relatively flat sales in our South American markets. In our Europe segment, local currency sales increases of 2.5% translated into decreases of 0.7% in U.S. dollars
due to the increase in the average value of the Euro versus the U.S. dollar. The increase in local currency sales resulted from a 5.8% increase in sales of latex cores. Finished goods sales in local
currency remained flat as compared to the prior year.

Gross Profit.Our consolidated gross profit for the nine months ended August 29, 2010 was $405.9 million, an increase of
$20.3 million from the comparable prior year period. As a percentage of net sales, gross profit increased 0.2 percentage points to 40.5% due to an increase in gross profit margins in the
Americas segment. Total Americas gross profit for the nine months ended August 29, 2010 was $387.4 million, an increase of $20.6 million from the comparable prior year period. As
a percentage of net sales, gross profit for the Americas increased 0.3 percentage points to 41.9%. The increase in percentage of net sales was primarily due to an increase in gross profit
margins in our Canadian operations. U.S. gross profit, as a percentage of net sales, decreased 1.1 percentage points to 41.4% of net sales. The decrease in percentage of net sales was driven
primarily by product mix changes and higher discounting on products that are at the end of their life cycle. These decreases were partially
offset by slightly lower material costs and improved operational efficiencies. The gross profit margin in Canada was 44.7%. This performance was driven by a reduction in material costs per unit,
operational efficiencies and higher absorption of fixed costs on a 17.9% increase in unit volume. These increases were partially offset by the lower average unit selling price discussed above. In our
Europe segment, the local currency gross profit margin decreased 0.7 percentage points due to conversion costs reductions.

Selling, General, Administrative.Our consolidated selling, general and administrative expense for the nine months ended August 29,
 2010
increased $21.1 million to $323.6 million compared to the same prior year period. As a percentage of net sales, this expense was 32.3% and 31.6% for the nine months ended
August 29, 2010 and August 30, 2009, respectively, an increase of 0.7 percentage points. The increase as a percentage of net sales was due to volume driven variable expenses and
by an increase in non-cash compensation costs. The increase in absolute dollars is primarily due to a $14.4 million

51

---



increase
in volume driven variable expenses including a $17.2 million increase in cooperative advertising and promotional costs, and a $2.4 million increase in delivery costs due
primarily to an increase in fuel costs. The increase in these costs was partially offset by a $5.2 million decrease in bad debt expense. Fixed operating costs, exclusive of non-cash
compensation expense, decreased $3.3 million from the prior year period primarily due to a $5.3 million decrease in expected defined contribution plan payments and cash incentive-based
compensation costs. These decreases were offset by increased product launch and advertising costs of $3.2 million. Non-cash compensation expense increased by $5.4 million
compared to the nine months ended August 30, 2009 due primarily to the recognition of expense related to the restricted share unit grants that occurred in the third quarter of fiscal 2009.

Asset Impairment Loss.Based upon an impairment analysis performed in the third quarter of fiscal 2010, we determined that the cash
flows expected to
be generated by the long-lived assets of our Europe segment are less than the carrying amount of these assets. As such, we recognized an impairment charge of $23.0 million in the
third quarter of fiscal 2010 to reduce the carrying value of these assets to their estimated fair value. The fair value of these assets was estimated based on the expected cash flows to be received
from these assets based on current comparable data from market participants. No such charges were recognized in the nine months ended August 30, 2009 except for those discussed below related to
restructuring activities.

Restructuring expenses including related asset impairment.We recognized pretax restructuring costs of $1.4 million during the
nine months
ended August 30, 2009. No such costs were incurred during the nine months ended August 29, 2010.

In
the second quarter of fiscal 2009, management made the decision to cease manufacturing of certain foundation components and to begin purchasing all of these components from
third-party suppliers. As a result, we incurred certain insignificant costs related to one-time terminations of employees. Additionally, we recognized an impairment charge of approximately
$1.3 million for the related equipment used in this manufacturing process that was not sold. This plan was completed in the second quarter of fiscal 2009, and we do not expect to incur
additional costs related to this restructuring activity.

Royalty income, net of royalty expense.Our consolidated royalty income, net of royalty expenses, of $12.3 million for the nine
months ended
August 29, 2010 remained flat compared to the nine months ended August 30, 2009.

Interest Expense.Our consolidated interest expense for the first three quarters of fiscal 2010 as compared with the prior year period
increased
$9.3 million to $65.9 million. Interest expense for the first three quarters of fiscal 2010 included $16.8 million of non-cash interest expense, of which
$11.9 million related to non-cash interest on our Convertible Notes and the remainder of which related to the accretion or amortization of original issue discount and deferred debt
issuance costs. Our net weighted average borrowing cost was 10.8% and 9.3% for the nine months ended August 29, 2010 and August 30, 2009, respectively. Our borrowing cost was unfavorably
impacted by the Refinancing which resulted in increased interest rates and outstanding debt balances.

Refinancing and extinguishment of debt and interest rate derivatives.Debt extinguishment and refinancing expenses for the nine months
ended
August 29, 2010 included non-cash charges of $2.7 million related to the write-off of debt issuance costs and original issue discount associated with the
$35.0 million of Senior Notes that were repurchased this period. Also included was a cash charge of $1.1 million which represents the premium that was paid to repurchase these notes.

52

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Debt extinguishment and refinancing expenses for the nine months ended August 30, 2009 included non-cash charges of $2.1 million relating to the
write-off of debt issuance costs related to our old senior term loans. Additionally, we incurred $15.2 million of charges associated with termination payments on our interest rate
swap agreements that were associated with the old senior credit facility.

Income Tax.Our effective income tax rates regularly differ from the Federal statutory rate principally because of the effect of
non-deductible paid in kind interest, non-deductible mark to market adjustments for derivatives associated with the Convertible Notes subscription rights, certain foreign tax
rate differentials and state and local income taxes. Our effective tax rate for the nine months ended August 29, 2010 was 821.9% compared to 22.5% for the nine months ended August 30,
2009. The effective rate for the fiscal 2010 period was higher than the fiscal 2009 period primarily due to the effect of non-deductible paid in kind interest which resulted from the
Refinancing in the second quarter of fiscal 2009 and the impairment of European assets.

Equity in Earnings of Unconsolidated Affiliates.Earnings related to our joint ventures for the first nine months of fiscal 2010 have
increased over
the prior year period due to increased demand seen in the Asian markets.

LIQUIDITY AND CAPITAL RESOURCES



Our principal sources of funds are cash flows from operations and borrowings under our asset-based revolving credit facility (the "ABL
Revolver"). Our principal use of funds consists of operating expenditures, payments of interest on our senior debt, capital expenditures and interest payments on our outstanding senior subordinated
notes. Capital expenditures totaled $11.4 million for the nine months ended August 29, 2010. We expect total 2010 capital expenditures to be approximately $21.0 million. We
believe that annual capital expenditure limitations in our current debt agreements will not prevent us from meeting our ongoing capital needs. Our introductions of new products typically require us to
make initial cash investments in inventory, promotional supplies and employee training which may not be immediately recovered through new product sales. However, we believe that we have sufficient
liquidity to absorb such expenditures related to new products and that these expenses will not have a significant adverse impact on our operating cash flow. At August 29, 2010, the Company had
approximately $67.7 million available under the ABL Revolver, which represents the calculated borrowing base reduced by outstanding letters of credit of $16.1 million, and certain
reserves related to our outstanding derivative contracts. The calculated borrowing base under the ABL Revolver is determined based on our domestic accounts receivable and inventory balances. Our net
weighted average borrowing cost was 10.8% and 9.3% for the nine months ended August 29, 2010 and August 30, 2009, respectively. As of September 21, 2010, we had no borrowings
outstanding under the ABL Revolver.

On
May 13, 2009, the Company announced its Refinancing, a comprehensive plan to refinance its existing senior secured credit facilities (the "Old Senior Credit Facility") and
replace them with indebtedness that has longer-dated maturities and eliminates quarterly financial ratio based maintenance covenants. The Refinancing converted much of the existing senior debt from
debt bearing interest at variable rates to debt bearing interest at fixed rates. Due to increases in the interest rates associated with our senior debt, the amount of debt outstanding and increases in
the amortization of debt issuance costs, our interest expense in future periods is expected to increase significantly. However, cash interest payments have not changed significantly due to the payment
in kind interest associated with the Convertible Notes (as discussed below).

53

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In connection with the Refinancing, we: 1) entered into a new ABL Revolver which provides commitments of up to
$100.0 million maturing in May 2013, and which bears interest at our choice of either a base rate (determined by reference to the higher of several rates as defined by the ABL Revolver
agreement) or a LIBOR rate for U.S. dollar deposits plus an applicable margin of 4.00%; 2) issued $350.0 million in aggregate principal amount of senior secured notes due April 2016 (the
"Senior Notes"), which bear interest at 10.875% per annum payable semi-annually; and 3) issued $177.1 million in aggregate principal amount of senior secured convertible paid
in kind ("PIK") notes due July 2016 which are convertible into shares of the Company's common stock (the "Convertible Notes") and bear interest at 8.00% per annum payable semi-annually in
the form of additional Convertible Notes.

At
August 29, 2010, there were no amounts outstanding under the ABL Revolver. The Senior Notes had an outstanding balance of $304.0 million at August 29, 2010 which
gave effect to an unamortized original issue discount of $11.0 million. As of August 29, 2010, the Convertible Notes had an outstanding balance of $177.3 million. We also have an
outstanding principal balance of $268.9 million at August 29, 2010 on the 8.25% Senior Subordinated Notes due 2014 (the "2014 Notes").

On
March 16, 2010, the Company redeemed 10%, or $35.0 million, of the principal amount of its outstanding Senior Notes at a redemption price of 103% of the principal amount
of the notes, plus accrued and unpaid interest to the redemption date. In connection with the repurchase, the Company recognized charges of $1.1 million related to the premium paid to
repurchase the notes and $2.7 million related to write-off of related debt issuance costs and original issue discount.

Future
interest payments are expected to be paid out of cash flows from operations and borrowings on our ABL Revolver. The ABL Revolver provides for revolving credit financing, subject
to borrowing base availability. The borrowing base consists of the following: 1) 85% of the net amount of eligible accounts receivable and 2) the lesser of (a) 85% of the net
orderly liquidation value of eligible inventory or (b) 65% of the net amount of eligible inventory. These amounts are reduced by reserves deemed necessary by the lenders. At August 29,
2010, there were no amounts outstanding under the ABL Revolver.

Prior
to the Refinancing, we had three interest rate swap agreements related to term debt under our Old Senior Credit Facility. These interest rate swaps consisted of: 1) an
agreement fixing the floating portion of the interest rate at 5.495% on $242 million of the outstanding balance through November 2008, declining to $240 million from December 2008
through November 2009, and further declining to $180 million from December 2009 through November 2010; 2) an agreement fixing the floating portion of the interest rate at 1.952% on
$20.0 million of the outstanding balance through November 4, 2009; and 3) an agreement fixing the floating portion of the interest rate at 1.991% on $107.0 million of the
outstanding balance through February 4, 2010. In connection with the Refinancing, we paid $15.2 million to terminate these interest rate swap agreements.

We
are also party to three interest rate swaps for 2.3 million Euros, 2.9 million Euros and 3.5 million Euros which fix the floating interest rates on the debt of
our Europe segment at 4.92%, 4.85% and 4.50%, respectively. The notional amounts of these contracts amortize over the life of the agreement and the agreements expire in May 2019, January 2013 and
October 2013, respectively. We have not formally documented these interest rate swaps as hedges. Therefore, changes in the fair value of these interest rate swaps are recorded as a component of
interest expense.

At
August 29, 2010, the Company was in compliance with the covenants contained within its ABL Revolver agreement and the indentures governing the Senior Notes, the Convertible
Notes and the 2014 Notes. These agreements also restrict our ability to pay dividends and repurchase common stock.

54

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As
part of our ongoing evaluation of our capital structure, we continually assess opportunities to reduce our debt, which opportunities may from time to time include the redemption or
repurchase of a portion of our Senior Notes, the 2014 Notes or the Convertible Notes to the extent permitted by our debt covenants. In addition, our Board authorized a common stock repurchase program
under which we may repurchase up to $100 million of our common stock. As of August 29, 2010, we have repurchased shares for $16.3 million under this program, none of which was
repurchased during fiscal 2010. From August 29, 2010 through September 21, 2010, we did not repurchase any additional shares under this program.

Our
ability to make scheduled payments of principal, or to pay the interest or liquidated damages, if any, on, or to refinance our indebtedness, or to fund planned capital expenditures
will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We
will be required to make scheduled principal payments of $7.6 million during the next twelve months, with $1.7 million for our financing obligations and capital leases and the remainder
for debt owed by our international subsidiaries. However, as we continually evaluate our ability to make additional prepayments as permitted under our ABL Revolver agreement and the indentures
governing the Senior Notes, the Convertible Notes and the 2014 Notes, it is possible that we will redeem or repurchase additional portions of our senior or subordinated debt during that time.



Our ABL Revolver agreement and the indentures governing the Senior Notes, the 2014 Notes and the Convertible Notes contain restrictions
on our ability to pay dividends, including a requirement in the ABL Revolver agreement that we meet a minimum fixed charge coverage ratio and restrictions as to the amount available for payment.
Although we met the minimum fixed charge coverage ratio requirement as of August 29, 2010, we do not currently expect a dividend will be declared in the fourth quarter of fiscal 2010.



The following table summarizes our changes in cash:

Nine Months Ended:August 29,
2010

August 30,
2009(in thousands)Statement of Cash Flow Data:Cash flows provided by (used in):Operating activities

$
10,863

$
40,213Investing activities


(11,302
)

631Financing activities


(47,088
)

31,391Effect of exchange rate changes on cash


(1,390
)

1,009Change in cash and cash equivalents


(48,917
)

73,244Cash and cash equivalents:Beginning of period


131,427


26,596End of period

$
82,510

$
99,840


55

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Cash Flows from Operating Activities.Our cash flow from operations decreased $29.4 million to a source of cash of
$10.9 million for
the nine months ended August 29, 2010 from a source of cash of $40.2 million for the nine months ended August 30, 2009. Net income and cash flows from operations for the nine
months ended August 30, 2010 compared to the same prior year period reflect a greater use of working capital. The uses include increases in inventories due to the planning for certain
promotional events by our customers and the payment of incentive compensation that was accrued at the end of fiscal 2009. Cash flows from operations for the nine months ended August 30, 2009
included a benefit of $8.0 million for the receipt of income tax refunds.

Cash Flows from Investing Activities.Our cash flows used in investing activities for the nine months ended August 29, 2010 were
$11.3 million as compared to net cash provided by investing activities of $0.6 million for the nine months ended August 30, 2009. This difference of $11.9 million was
primarily due to the receipt of $8.4 million of proceeds in the nine months ended August 30, 2009 from the sale-leaseback of the Company's South Gate, California facility as
well as higher capital spending in fiscal 2010.

Cash Flows from Financing Activities.Our cash flow used in financing activities for the nine months ended August 29, 2010 was
$47.1 million compared with cash provided by financing activities of $31.4 million for the nine months ended August 30, 2009. The use of cash during the nine months ended
August 29, 2010 was primarily driven by the repayment of $35.0 million of our Senior Notes. Cash provided by financing activities for the nine months ended August 30, 2009 was
impacted significantly by the Refinancing which provided $44.0 million of cash after considering the effects of the payments of costs to issue our new debt.



Significant judgment is required in evaluating our federal, state and foreign tax positions and in the determination of our tax
provision. Despite our belief that our liability for unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax
matters. We may adjust these liabilities as relevant circumstances evolve, such as guidance from the relevant tax authority, our tax advisors, or resolution of issues in the courts. These adjustments
are recognized as a component of income tax expense entirely in the period in which they are identified. The Company is currently undergoing examinations of its corporate income tax returns by tax
authorities. Issues related to certain of these reserved positions have been presented to the Company. The Company believes that such audits will not result in a material assessment and payment of
taxes related to these positions during the one year period following August 29, 2010. We also cannot predict when or if any other future tax payments related to these tax positions may occur.



Our long-term obligations contain various financial tests and covenants but do not require that we meet quarterly financial
ratio targets in order to maintain compliance with the terms of the obligations unless we are in a minimum availability period under the terms of our ABL Revolver.

Our
ABL Revolver requires us to maintain a minimum fixed charge coverage ratio in excess of 1.1 to 1.0 in periods of minimum availability where the availability for two consecutive
calendar days is less than the greater of 1) 15% of the total commitment under the ABL Revolver and 2) $15.0 million. As of August 29, 2010, we were not in a period of
minimum availability and did not have any outstanding borrowings under the ABL Revolver. Non-compliance with the minimum fixed charge coverage ratio in a period of minimum availability
could result in the requirement to immediately repay all amounts outstanding under the ABL Revolver. The fixed charge coverage ratio is defined by the ABL Revolver agreement as the ratio of Adjusted
EBITDA less unfinanced capital expenditures and net cash taxes

56

---



paid
to fixed charges which include cash payments for interest, capital lease obligations, scheduled principal payments on debt and other restricted payments.



The covenants contained in our senior debt agreements also restrict our ability to enter into certain transactions (the most
significant of which are summarized below). Our ABL Revolver requires us to meet a minimum fixed charge coverage ratio of 1.25 to 1.00 in order to make certain restricted payments including dividend
distributions to holders of our common stock, dividends or distributions to the parent company (Sealy Corporation), and debt repayments, subject to certain exceptions. The fixed charge coverage ratio
is defined by the ABL Revolver agreement as the ratio of Adjusted EBITDA less unfinanced capital expenditures and net cash paid to fixed charges which include cash payments for interest, capital lease
obligations, scheduled principal payments on debt and restricted payments. At August 29, 2010, adjustments to Adjusted EBITDA for cash taxes paid and unfinanced capital expenditures were
$38.0 million. Fixed charges as calculated under the terms of the ABL Revolver agreement were $72.1 million. This results in a fixed charge coverage ratio of 1.86 to 1.00 at
August 29, 2010 under the terms of the ABL Revolver agreement.

The
indentures governing our Senior Notes, Convertible Notes and Senior Subordinated Notes also require us to meet a fixed charge coverage ratio of 2.0 to 1.0 in order to incur
additional indebtedness and make certain restricted payments, including dividends or equity distributions, subject to certain exceptions. The fixed charge coverage ratio is defined by the indentures
related to these notes as the ratio of Adjusted EBITDA to fixed charges which include interest expense, and cash dividend payments on certain preferred stock. At August 29, 2010, fixed charges
as calculated under the terms of the indentures governing our Senior Notes, Convertible Notes and Senior Subordinated Notes were $84.0 million, resulting in a fixed charge coverage ratio of
2.05 to 1.00.

Non-compliance
with the minimum fixed charge ratio contained in the ABL Revolver agreement and the indentures governing the Senior Notes, Convertible Notes and 2014 Notes
would prohibit Sealy Mattress Company and its subsidiaries from being able to incur additional indebtedness other than pursuant to specified exceptions.

The
covenants contained within our debt agreements are based on what we refer to herein as "Adjusted EBITDA". In the senior debt agreements, Adjusted EBITDA is defined as net income plus
interest, taxes, depreciation and amortization adjusted to exclude unusual items and other adjustments permitted in calculating covenant compliance. Adjusted EBITDA is presented herein as it is a
material component of these covenants. Additionally, management uses Adjusted EBITDA to evaluate the Company's operating performance and we believe that this measure provides useful incremental
information to investors regarding our operating performance. While the determination of "unusual items" is subject to interpretation and requires judgment, we believe the adjustments listed below are
in accordance with the covenants.

Adjusted
EBITDA is not a recognized term under GAAP and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating
activities as a measure of liquidity. Additionally, it is not intended to be a measure of free cash flow for
management's discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Because not all companies use identical
calculations, these presentations may not be comparable to other similarly titled measures of other companies.

57

---



The
following table sets forth a reconciliation of net income to Adjusted EBITDA for the three and nine months ended August 29, 2010 and August 30, 2009:

Three Months Ended:

Nine Months Ended:August 29, 2010

August 30, 2009

August 29, 2010

August 30, 2009(in thousands)

(in thousands)Net loss

$
(15,823
)
$
12,056

$
(9,260
)
$
11,011Interest expense


21,784


22,127


65,890


56,551Income taxes


6,379


3,155


13,619


3,201Depreciation and amortization


7,077


8,102


21,813


24,655EBITDA


19,417


45,440


92,062


95,418Adjustments for debt covenants:Refinancing charges





40


3,759


17,461Non-cash compensation


3,545


5,164


12,760


7,387Impairment charges


22,963





22,963


0KKR consulting fees


405


655


1,425


2,196Severance charges


640


229


1,892


2,171Loss on rights for Convertible Notes





1,820





4,549Other (various)(a)


(91
)

319


163


1,599Adjusted EBITDA

$
46,879

$
53,667

$
135,024

$
130,781


(a)Consists
of various immaterial adjustments




There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our Annual Report on Form 10-K for the fiscal year ended November 29,
2009.



"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995.When used in this Quarterly Report on
Form 10-Q, the words "believes," "anticipates," "expects," "intends," "projects" and similar expressions are used to identify forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to future financial and operational results. Any forward-looking statements contained in this report represent
our management's current expectations, based on present information and current assumptions, and are thus prospective and subject to risks and uncertainties which could cause actual results to differ
materially from those expressed in such forward-looking statements. Actual results
could differ materially from those anticipated or projected due to a number of factors. These factors include, but are not limited to:



58

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All
forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Quarterly Report on Form 10-Q and are expressly
qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q. Except as may be required by law, we undertake no obligation to publicly
update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events. For a more detailed
discussion of these factors, see the information under the caption "Risk Factors" herein and in the Company's most recent Annual Report on Form 10-K filed with the Securities and
Exchange Commission and "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein and in the Company's most recent Annual Report on Form 10-K.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

The information appearing below relating to our market risk sensitive instruments by major category should be
read in conjunction with the related disclosure contained in the management's discussion and analysis section of our Annual Report on Form 10-K (File
No. 001-08738).



Our earnings are affected by fluctuations in the value of our subsidiaries' functional currency as compared to the currencies of our
foreign denominated purchases. The result of a uniform 10% change in the value of the U.S. dollar relative to currencies of countries in which we manufacture or sell our products would have an
approximate $1.4 million and $0.8 million dollar impact on our financial position for the three and nine months ended August 29, 2010, respectively. This calculation assumes that
each exchange rate would change in the same direction relative to the U.S. dollar.

To
protect against the reduction in value of forecasted foreign currency cash flows resulting from purchases in a foreign currency, we have instituted a forecasted cash flow hedging
program. We hedge portions of our purchases denominated in foreign currencies and royalty payments to third parties with forward and option contracts. At August 29, 2010, we had outstanding
forward and option foreign currency contracts to sell Canadian dollars for a total of 32.9 million U.S. dollars. The expiration dates for the Canadian dollar contracts range from
September 15, 2010 to June 15, 2011. At August 29, 2010, the fair value of these contracts was an asset of $0.8 million. The changes in fair value of the foreign currency
hedges are included in net income, except for those contracts that have been designated as hedges for accounting purposes. For contracts designated as hedges for accounting purposes, the

59

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changes
in fair value related to the effective portion of the hedge are recognized as a component of accumulated other comprehensive income.



At August 29, 2010, the Company has outstanding three interest rate swaps for 2.3 million Euro, 2.9 million Euro
and 3.5 million Euro which fix the floating interest rates on the Company's debt of its Europe segment at 4.92%, 4.85% and 4.50%, respectively. The notional amounts of these contracts amortize
over the life of the agreement, and the agreements expire in May 2019, January 2013 and October 2013. The fair value of these swaps was an asset totaling $0.5 million as of August 29,
2010 and November 29, 2009, respectively.

A
10% increase or decrease in market interest rates that affect our interest rate derivative instruments would not have a material impact on our earnings during the next fiscal year.
Based on the amount of variable-rate debt outstanding at August 29, 2010, a 12.5 basis point increase or decrease in variable interest rates would have an insignificant dollar
impact on our annual interest expense.



Polyurethane foam, polypropylene, polyethylene foam and High Carbon Steel Wire prices are moving upwards at pace with the market
conditions of fiscal 2010. We have entered into commodity-based physical contracts to buy natural gas at agreed-upon fixed prices. These contracts were entered into in the normal course of
business. During the first quarter of fiscal 2010, we entered into a program through which we hedge a portion of our expected diesel fuel consumption through the use of fixed price swap contracts.
These contracts reduce the Company's exposure to the volatility in diesel fuel prices. At August 29, 2010 we had contracts outstanding for
0.6 million gallons of diesel fuel to be consumed from August 30, 2010 through January 31, 2011. The fair value of these fixed price swap diesel contracts was an asset of an
insignificant amount as of August 29, 2010. There were no such contracts outstanding at November 29, 2009.

Item 4.    Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal accounting
officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report (the "Evaluation Date"). Based on this evaluation, our principal
executive officer and principal accounting officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company,
including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission ("SEC") reports (i) is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company's management, including our principal executive and principal accounting officers, as
appropriate to allow timely decisions regarding required disclosure.

There
were no changes in our internal control over financial reporting identified in connection with the foregoing evaluation that occurred during the third quarter of fiscal 2010 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

60

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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

See Note 19 to the Condensed Consolidated Financial Statements, Part I, Item 1 included herein.

Item 1A.    Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed below and in
Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended November 29, 2009, which could materially affect our business, financial
condition or future results. The risks described herein and in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

The recently enacted legislation on healthcare reform and proposed amendments thereto could impact the healthcare benefits required to be provided by the Company and cause
our compensation costs to increase, potentially reducing our net income and adversely affecting our cash flows.

The recently enacted healthcare legislation and proposed amendments thereto contain provisions which could materially impact the future
healthcare costs of the Company. While the legislation's ultimate impact is not yet known, it is possible that these changes could significantly increase our compensation costs which would reduce our
net income and adversely affect our cash flows.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

The table below shows our repurchases of the Company's common stock during the third quarter of fiscal 2010.

Period

Total number of
shares
purchased(1)

Average price paid
per share

Total number of shares
purchased during
quarter as part of
publicly announced
program(2)

Approximate dollar
value of shares that
may yet be purchased
under programMay  31 - June 27, 2010


2,578,573

$
3.05




$
83,746,985June 28 - July 25, 2010


89,372


2.49





83,746,985July  26 - August 29, 2010











83,746,985Total


2,667,945








(1)The
entire amounts presented above are comprised of common stock surrendered or withheld to cover the minimum tax withholding obligations related to the
vesting of restricted shares and restricted stock units as permitted under the 2004 Stock Option Plan.(2)Our
common stock repurchase program, which authorizes us to repurchase up to $100 million of our Company's common stock, was initially approved by
our Board of Directors on February 19, 2007.


Our
ability to pay dividends is restricted by our debt agreements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Item 3.    Defaults Upon Senior Securities

None

61

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Item 4.    (Removed and Reserved)

Item 5.    Other Information

None

Item 6.    Exhibits

31.1

Chief Executive Officer Certification of the Quarterly Financial Statements.31.2

Chief Financial Officer Certification of the Quarterly Financial Statements.32

Certification pursuant to 18 U.S.C. Section 1350.


Filed
herewith.


62

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.



Signature

Title/s/ LAWRENCE J. ROGERS Lawrence J. Rogers

President and Chief Executive Officer
(Principal Executive Officer)/s/ JEFFREY C. ACKERMAN Jeffrey C. Ackerman

Executive Vice President and Chief Financial Officer (Principal Financial Officer)


Date:
September 30, 2010

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