UNITED STATESSECURITIES 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: February 28, 2010o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition Period
from                        toCommission file number 001-08738




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

Delaware

36-3284147(State or other jurisdiction of incorporation)

(I.R.S. Employer Identification No.)Sealy Drive One Office Parkway
Trinity, North Carolina

27370(Address of principal executive offices)

(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 March 18, 2010 is approximately: 94,710,510.



---





PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

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

Three Months EndedFebruary 28,
2010

March 1,
2009Net sales

$
339,627

$
309,976Cost of goods sold


199,507


192,336Gross profit


140,120


117,640Selling, general and administrative expenses


108,956


96,696Amortization expense


339


815Restructuring expenses and asset impairment





113Royalty income, net of royalty expense


(4,023
)

(3,370
)Income from operations


34,848


23,386Interest expense


22,341


17,548Gain on sale of subsidiary stock





(1,292
)Other income, net


(54
)

(33
)Income before income taxes


12,561


7,163Income tax provision


7,790


2,819Equity in earnings of unconsolidated affiliates


943


Net income

$
5,714

$
4,344Earnings per common shareBasic

$
0.06

$
0.05Earnings per common shareDiluted

$
0.03

$
0.05Weighted average number of common shares outstanding:Basic


94,524


91,807Diluted


283,576


93,555


See
accompanying notes to Condensed Consolidated Financial Statements.

1

---





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

February 28,
2010

November 29,
2009ASSETSCurrent assets:Cash and equivalents

$
117,055

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


177,700


156,850Inventories


59,536


56,810Other current assets


16,091


21,080Deferred income tax assets


15,688


20,222Total current assets


386,070


386,389Property, plant and equipmentat cost


436,097


446,989Less accumulated depreciation


(236,297
)

(239,508
)199,800


207,481Goodwill


360,875


360,583Intangible assets, net


1,594


1,937Deferred income tax assets


10,670


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


52,920


52,206426,059


421,600Total assets

$
1,011,929

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

$
10,972

$
13,693Accounts payable


95,461


88,971Accrued incentives and advertising


25,689


31,804Accrued compensation


28,229


43,105Accrued interest


19,161


15,230Other accrued liabilities


33,468


36,436Total current liabilities


212,980


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


829,005


833,766Other liabilities


60,225


59,625Deferred income tax liabilities


1,997


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


947


947Additional paid-in capital


896,130


885,064Accumulated deficit


(987,236
)

(992,950
)Accumulated other comprehensive income, net


(2,119
)

(1,053
)Total shareholders' deficit


(92,278
)

(107,992
)Total liabilities and shareholders' deficit

$
1,011,929

$
1,015,470


See accompanying notes to Condensed Consolidated Financial Statements.

2

---





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





94,417

$
947

$
885,064

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


5,714











5,714





5,714Foreign currency translation adjustment


(974
)













(974
)

(974
)Adjustment to defined benefit plan liability, net of tax of $64


192














192


192Change in fair value of cash flow hedges, net of tax of $203


(284
)













(284
)

(284
)Share-based compensation











4,117








4,117Excess tax benefit on options exercised











(42
)







(42
)Beneficial conversion feature on Convertible paid in kind Notes











6,991








6,991Balance at February 28, 2010

$
4,648


94,417

$
947

$
896,130

$
(987,236
)
$
(2,119
)
$
(92,278
)


See accompanying notes to Condensed Consolidated Financial Statements.

3

---





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

Three Months EndedFebruary 28,
2010

March 1,
2009Operating activities:Net income

$
5,714

$
4,344Adjustments to reconcile net income to cash provided by operating activities:Depreciation and amortization


7,549


8,229Deferred income taxes


2,656


(3,571
)Amortization of deferred gain on sale-leaseback


(163
)

(162
)Paid in kind interest on convertible notes


3,365


Amortization of discount on new senior secured notes


389


Amortization of debt issuance costs and other


2,067


583Share-based compensation


4,117


1,016Loss on sale of assets


171


395Gain on sale of subsidiary stock





(1,292
)Other, net


(523
)

(172
)Changes in operating assets and liabilities:Accounts receivable


(22,905
)

(8,369
)Inventories


(3,991
)

6,947Other current assets


2,011


10,723Other assets


71


Accounts payable


8,577


14,056Accrued expenses


(19,419
)

(12,619
)Other liabilities


1,565


(186
)Net cash (used in) provided by operating activities


(8,749
)

19,922Investing activities:Purchase of property, plant and equipment


(2,449
)

(2,346
)Proceeds from sale of property, plant and equipment


57


8,449Net proceeds from sale of subsidiary stock





1,237Investments in and loans to unconsolidated affiliate





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


(2,392
)

5,018Financing activities:Proceeds from issuance of long-term obligations


516


1,990Repayments of long-term obligations


(3,361
)

(4,043
)Borrowings under revolving credit facilities





59,565Repayments under revolving credit facilities





(93,965
)Exercise of employee stock options, including related excess tax benefits





3Debt issuance costs





(8
)Other


(16
)

Net cash used in financing activities


(2,861
)

(36,458
)Effect of exchange rate changes on cash


(370
)

(4
)Decrease in cash and equivalents


(14,372
)

(11,522
)Cash and equivalents:Beginning of period


131,427


26,596End of period

$
117,055

$
15,074


See accompanying notes to Condensed Consolidated Financial Statements.

4

---





SEALY CORPORATION        Notes to Condensed Consolidated Financial Statements        (unaudited)

Note 1: Basis of Presentation

The 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 (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
February 28, 2010, affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") controlled approximately 49.2% 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 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. Guidance was also issued 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

5

---



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") 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 an 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 will
become effective for the Company 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.

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

6

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 3: Restatement of Previous Periods (Continued)

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
three months ended March 1, 2009 as follows (in thousands):

Condensed Consolidated Statements of Operations
Information for the Three Months EndedMarch 1, 2009As Previously
Reported

Adjustments

RestatedCost of goods sold

$
191,726

$
610

$
192,336Gross profit


118,250


(610
)

117,640Income from operations


23,996


(610
)

23,386Income before income taxes


7,773


(610
)

7,163Income tax provision


3,027


(208
)

2,819Net income


4,746


(402
)

4,344Earnings per common shareBasic


0.05





0.05Earnings per common shareDiluted


0.05





0.05Condensed Consolidated Statements of Cash Flows
for the Three Months EndedMarch 1, 2009Net income

$
4,746

$
(402
)
$
4,344Adjustments to reconcile net income to cash provided by operating activities:Depreciation and amortization


7,619


610


8,229Deferred income taxes


(3,363
)

(208
)

(3,571
)


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 months ended
February 28, 2010 and March 1, 2009 was $4.1 million and $1.0 million, respectively.

7

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 4: Share-Based Compensation (Continued)

Stock Option Awards

During the three months ended February 28, 2010, the Company granted no new options to purchase shares of common stock. During
the three months ended March 1, 2009, the Company granted options to purchase 51,167 shares of common stock and recognized an insignificant amount of compensation expense associated with these
grants during the three months ended March 1, 2009. The options granted during the first quarter of fiscal 2009 had a weighted average grant-date fair value of $0.47 per option.

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

Three Months
Ended
March 1, 2009Expected volatility


60
%Expected dividend yield


0.00
%Expected term (in years)


5.63-5.90Risk-free rate


2.07
%


Due
to the lack of sufficient historical trading information with respect to its own shares, the Company estimates 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.

A
summary of option activity under the 1998 Plan for the three months ended February 28, 2010, is presented below:

Shares Subject to Options

Weighted Average
Exercise Price Per ShareOutstanding November 29, 2009


2,102,162

$
1.09Forfeited





Outstanding February 28, 2010 (all fully vested and exercisable)


2,102,162

$
1.09Weighted average remaining contractual term


4.1 yearsAggregate intrinsic value of in-the-money options at February 28, 2010 (in thousands)

$
3,073


8

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 4: Share-Based Compensation (Continued)

A
summary of option activity under the 2004 Plan for the three months ended February 28, 2010, is presented below:

Shares Subject to Options

Weighted Average
Exercise Price Per ShareOutstanding November 29, 2009


9,568,777

$
5.20Exercised


(1,067
)
$
1.64Forfeited


(90,048
)
$
5.52Outstanding February 28, 2010


9,477,662

$
5.20Weighted average remaining contractual term


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

$
1,550Exercisable at February 28, 2010


6,196,764Weighted average remaining contractual term


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

$
656


As
of February 28, 2010, the Company had approximately $3.0 million of unrecognized compensation expense related to stock option awards, which is expected to be recognized
over a weighted average period of 3.9 years.

The
Company has granted stock options to employees 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 February 28, 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.

Restricted Shares and Share Unit Awards

The Company has outstanding 291,971 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. As of February 28, 2010,
the remaining unrecognized compensation cost related to restricted stock awards was $0.9 million which is expected to be recognized over the remaining vesting period of 1.4 years. As of
February 28, 2010, none of the outstanding restricted stock awards have vested.

9

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 4: Share-Based Compensation (Continued)

The
Company has outstanding 457,256 restricted share units (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 months ended February 28, 2010. During the three months ended March 1, 2009, the Company
approved grants of 344,400 performance-based RSUs. If the performance targets are not met, then the RSUs will not vest. As of February 28, 2010, the first of the related performance targets
have been met indicating that one-third of the awards will vest upon the completion of the service requirement. The RSUs granted during the three months ended March 1, 2009 have a
grant date fair value of $0.87 based on the closing price of the Company's common stock as of the grant date.

The
Company also has outstanding 16,485,436 restricted share units (RSUs) that 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 number of awards outstanding above gives effect to this accretion.
The RSUs do not contain dividend participation rights.

As
of February 28, 2010, the remaining unrecognized compensation cost related to these outstanding RSUs was $18.2 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 February 28, 2010, it is the Company's expectation that the performance
targets for RSUs with performance targets will be met. The unrecognized compensation cost for the outstanding RSUs is expected to be recognized over the remaining vesting period of 2.9 years

A
summary of restricted share unit award activity for the three months ended February 28, 2010, is presented below:

Unvested Restricted
Share Units

Weighted Average Grant
Date Fair ValueOutstanding November 29, 2009


16,954,906

$
2.02Vested


(4,179
)

2.00Forfeited


(8,035
)

2.00Outstanding February 28, 2010


16,942,692

$
2.02Weighted average remaining vesting period


2.9 years


Note 5: Inventories

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

February 28, 2010

November 29, 2009Raw materials

$
28,126

$
29,700Work in process


21,824


19,158Finished goods


9,586


7,952$
59,536

$
56,810


10

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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 warranty on itsRightTouchproduct line which covers only certain parts of the product and is prorated for part of the
twenty years. TheRightTouchline 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 three months ended February 28, 2010 and March 1, 2009 was as follows (in thousands):

February 28, 2010

March 1, 2009Accrued warranty obligations at beginning of period

$
16,464

$
16,487Warranty claims


(4,546
)

(4,580
)Warranty provisions


4,404


4,164Accrued warranty obligations at end of period

$
16,322

$
16,071


As
of February 28, 2010 and November 29, 2009, $10.5 million and $10.6 million is included as a component of other accrued liabilities and $5.8 million
and $5.9 million is 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 $1.5 million and $1.3 million for the three months ended February 28, 2010 and the three months ended March 1,
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 three months ended February 28, 2010 are as follows (in thousands):

Balance as of November 29, 2009

$
360,583Increase due to foreign currency translation


292Balance as of February 28, 2010

$
360,875


Total
other intangibles of $1.6 million (net of accumulated amortization of $3.0 million) as of February 28, 2010 consist primarily of licenses, which are amortized
using a straight-line method over

11

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 7: Goodwill and Other Intangible Assets (Continued)

periods
ranging from 5 to 15 years. Costs to renew or extend the term of a recognized intangible asset are expensed as incurred. During the three months ended February 28, 2010 and
March 1, 2009, the Company recognized amortization expense associated with intangibles of $0.3 million and $0.8 million, respectively. The Company expects to recognize
amortization expense relating to these intangibles of $0.2 million for the remainder of 2010, $0.3 million in 2011, $0.3 million in 2012, $0.3 million in 2013,
$0.3 million in 2014 and $0.2 million thereafter.

Note 8: Long-Term Obligations

Long-term obligations as of February 28, 2010 and November 29, 2009 consisted of the following (in thousands):

February 28, 2010

November 29, 2009Asset-based revolving credit facility

$


$
Senior secured notes


337,003


336,625Convertible notes(1)


176,493


180,109Senior subordinated notes


268,945


268,945Financing obligations


40,940


41,296Other


16,596


20,484839,977


847,459Less current portion


(10,972
)

(13,693
)$
829,005

$
833,766


(1)Includes
PIK interest of $1.7 million from January 16, 2010 through February 28, 2010 for which the principal balance of the
Convertible Notes has not yet been increased.


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 June 2016 which are convertible into shares of the Company's common stock (the "Convertible Notes").

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.

12

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 8: Long-Term Obligations (Continued)

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 February 28, 2010, there were no amounts outstanding under the ABL Revolver. At February 28, 2010, the Company had approximately $53.8 million available
under the ABL Revolver which represents the calculated borrowing base reduced by outstanding letters of credit of $24.2 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 February 28, 2010, the Company is
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 months ended February 28, 2010, the Company recognized additional interest expense of
$0.4 million related to the accretion of the OID.

On
February 1, 2010, the Company announced its intention to redeem 10%, or $35.0 million, of the principal amount of its outstanding Senior Notes. Pursuant to the terms of
the Senior Notes, the redemption price will equal 103% of the principal amount of the notes, plus accrued and unpaid interest to the redemption date. The redemption occurred on March 16, 2010.
See Note 20.

Convertible PIK 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 months ended February 28, 2010, there were no conversions of Convertible Notes into common shares.

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 the January 15, 2010 interest payment
date, the fair value of the

13

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 8: Long-Term Obligations (Continued)

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. The recognition of the beneficial conversion feature resulted in the recognition of a discount of $7.0 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
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 use an available exception from the limitation. As of February 28, 2010, Sealy
Mattress Company is restricted in distributing the net assets of its subsidiaries in the amount of $249.9 million to its parent due to the provisions in its long-term debt
agreements. However, $40.2 million would be available for distribution without restriction. At February 28, 2010, the Company was in compliance with the covenants contained within the
related note indentures and agreements.

Note 9: 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:

14

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 9: Derivative Instruments and Hedging Strategies (Continued)

Prior to the Refinancing, the Company had three interest rate swap agreements related to term debt under our Old 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, January 2013 and October 2013. The Company has not formally documented these interest rate swaps as hedges.

As
of February 28, 2010, the total notional amount of the Company's interest rate swap agreements was $11.8 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 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 foreign currency fluctuations are as follows:

At
February 28, 2010, the Company had 14 forward foreign currency contracts and 14 foreign currency option contracts to sell a total of 27.3 million Canadian dollars and
receive US dollars at specified exchange rates with expiration dates ranging from March 15, 2010 through November 15, 2010. These hedges were entered into to protect against the
fluctuation in the Canadian subsidiary's US 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.

15

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 9: Derivative Instruments and Hedging Strategies (Continued)

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 selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. At February 28, 2010 and November 29, 2009, the Company did not have any
outstanding foreign currency contracts that were not designated as hedges for accounting purposes.

At
March 1, 2009, the Company had four forward foreign currency contracts outstanding to purchase a total of 1.8 million Euros with expiration dates ranging from
March 31, 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 February 28, 2010.

At
February 28, 2010, the maximum length of time over which the Company is hedging its exposure to the reduction in value of forecasted foreign currency cash flows through foreign
currency forward agreements is through November 15, 2010. Over the next 12 months, the Company expects to reclassify $0.1 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 months ended February 28, 2010 and March 1, 2009, recognized foreign currency transaction gains were $1.2 million, and of $0.5 million,
respectively. These gains 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 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 foreign currency fluctuations are as
follows:

At
February 28, 2010, the Company had nine fixed price swap contracts outstanding to purchase 1.1 million gallons of diesel fuel at specified prices with expiration dates
ranging from March 31, 2010 through November 30, 2010. 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.

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

16

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 9: Derivative Instruments and Hedging Strategies (Continued)

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.

At
February 28, 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 DerivativesFebruary 28, 2010

February 28, 2010Balance Sheet
Location

Fair
Value

Balance Sheet
Location

Fair
ValueDerivatives designated as hedging instrumentsForeign exchange contracts

Other current assets

$
552

Other current liabilities

$
Commodity fixed price swap contracts

Other current assets


44

Other current liabilities


Total derivatives designated as hedging instruments




596




Derivatives not designated as hedging instrumentsInterest rate contracts

Other noncurrent assets


506

Other noncurrent liabilities


Total derivatives not designated as hedging instruments




506




Total derivatives



$
1,102



$





Asset Derivatives

Liability DerivativesNovember 29, 2009

November 29, 2009Balance Sheet
Location

Fair
Value

Balance Sheet
Location

Fair
ValueDerivatives designated as hedging instrumentsForeign exchange contracts

Other current assets

$
1,133

Other current liabilities

$
Total derivatives designated as hedging instruments




1,133




Derivatives not designated as hedging instrumentsInterest rate contracts

Other noncurrent assets


475

Other noncurrent liabilities


Total derivatives not designated as hedging instruments




475




Total derivatives



$
1,608



$



17

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 9: Derivative Instruments and Hedging Strategies (Continued)

The effect of derivative instruments on the Condensed Consolidated Statement of Operations for the three months ended February 28, 2010 and
March 1, 2009, was as follows (in thousands):

Three Months Ended February 28, 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


17

Selling, general and administrative expenses




Selling, general and administrative expenses


16Foreign exchange contracts


(136
)
Selling, general and administrative expenses


57

Selling, general and administrative expenses


Total

$
(119
)


$
57



$
16




Three Months Ended March 1, 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)Interest rate contracts


2,344

Interest income (expense)


(2,299
)
Interest income (expense)


Foreign exchange contracts


(3
)
Selling, general and administrative expenses


89

Selling, general and administrative expenses


Total

$
2,341



$
(2,210
)


$





Three Months Ended February 28, 2010Derivatives Not Designated
as Hedging Instruments

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

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

Interest income (expense)

$
30Total



$
30




Three Months Ended March 1, 2009Derivatives Not Designated
as Hedging Instruments

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

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

Interest income (expense)


211Foreign exchange contracts

Selling, general and administrative expenses


19Total



$
230


At February 28, 2010 and November 29, 2009 there were no outstanding interest rate swaps qualifying for hedge accounting treatment
due to the termination of these swaps and the repayment of the related variable-rate debt in connection with the Refinancing (Note 8). At February 28, 2010 and
November 29, 2009, accumulated other comprehensive income associated with foreign currency

18

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 9: Derivative Instruments and Hedging Strategies (Continued)

forwards
qualifying for hedge accounting treatment was $0.2 million and $0.5 million, respectively net of income tax effects. At February 28, 2010, accumulated other comprehensive
income, net of income tax effect, associated with diesel fixed swap contract was an insignificant amount.

Note 10: 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 9. 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 spot and forward rates. We mitigate derivative credit risk by transacting with
highly rated counterparties. There were no non-financial assets or liabilities requiring initial measurement or subsequent remeasurement during the first quarter of fiscal 2010 or 2009.
The following table provides a summary of the fair values of assets and liabilities (in thousands):

Fair Value Measurements at February 28, 2010 UsingFebruary 28, 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

$
1,102

$


$
1,102

$





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 carrying amounts of long
term debt, based on quoted market prices, at February 28, 2010 were as follows (in thousands):

Senior Secured Notes

$
386,750Convertible Notes


664,395Senior Subordinated Notes


267,600


Note 11: Other Income, Net

Other income, net, includes interest income for the three months ended February 28, 2010 and March 1, 2009 of $0.1 million and an insignificant amount, respectively.

19

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 12: 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 13: Defined Benefit Pension Expense

The components of net periodic pension cost recognized for the Company's defined benefit pension plans in the U.S., Canada and France for the three months ended February 28, 2010
and March 1, 2009 are as follows (in thousands):

Three Months EndedFebruary 28, 2010

March 1, 2009Service cost

$
244

$
199Interest cost


383


365Expected return on plan assets


(305
)

(240
)Amortization of unrecognized gains and losses


37


91Amortization of unrecognized prior service cost


143


66Net periodic pension cost*

$
502

$
481Cash contributions

$
0

$
0


*Net
periodic pension cost recognized for the three months ended February 28, 2010 is based upon preliminary estimates pending the final actuarial
determination of such costs for fiscal 2010. Similarly, net periodic pension cost for the three months ended March 1, 2009 is based upon preliminary estimates.


The
Company expects to make additional cash contributions to the plans of approximately $1.1 million during the remainder of fiscal 2010.

20

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 14: 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 months ended February 28, 2010 was approximately 62.0%, compared to approximately 39.4%,
for the three months ended March 1, 2009. The effective rate for the three months ended February 28 2010 was higher than the rate for the three months ended March 1, 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.

The
Condensed Consolidated Balance Sheet as of February 28, 2010 includes accrued interest of $3.6 million and penalties of $3.2 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 $2.9 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 February 28, 2010. The Company also cannot predict when or if any other future tax payments related to these tax positions may occur.

Note 15: Comprehensive Income

Comprehensive income for the three months ended February 28, 2010 and March 1, 2009 was $4.6 million and $1.2 million, respectively. The increase in
comprehensive income for the three months ended February 28, 2010 compared to the three months ended March 1, 2009, has been driven primarily by a decrease in losses from foreign
currency translation coupled with increased net income.

21

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 15: Comprehensive Income (Continued)

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

February 28, 2010

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

$
179

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


(7,744
)

(7,936
)Accumulated foreign currency translation adjustment


5,446


6,420$
(2,119
)
$
(1,053
)


Note 16: 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 February 28, 2010 for $2.2 million
($2.4 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

22

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 16: Commitments and Contingencies (Continued)

monitoring.
The Company believes the contamination is attributable to the manufacturing operations of previous, unrelated, unaffiliated occupants of the facility.

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 months ended February 28, 2010, severance costs of $1.3 million were recorded as a component of operating income within the
accompanying Condensed Consolidated Statements of Operations. For the three months ended March 1, 2009, severance costs of $1.2 million, were recorded as a component of operating income
within the accompanying Condensed Consolidated Statements of Operations. Severance benefits of $1.9 million and $1.2 million have been accrued as of February 28, 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
February 28, 2010 and November 29, 2009, respectively.

Note 17: Related Party Transactions

During the three months ended February 28, 2010, the Company incurred costs for consulting services rendered by KKR and Capstone Consulting LLC (a consulting company that
works exclusively with KKR's portifolio companies) of $0.5 million. As of February 28, 2010, $0.3 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 have received lease income on this property of an insignificant amount during the first quarter of fiscal 2010.

During
the three months ended March 1, 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 $0.6 million. As of March 1, 2009, this entire amount was accrued as a component of other accrued expenses in the accompanying Condensed
Consolidated Balance Sheets.

In
connection with the Refinancing (Note 8), Convertible Notes were issued to Sealy Holding LLC, an affiliate of KKR, in an aggregate amount of $93.8 million. In
connection with the PIK interest payment on the Convertible Notes, the par value of the notes held by KKR was increased by $3.8 million.

KKR
Financial LLC, an affiliate of KKR, also participated in the Senior Notes that were issued in connection with the Refinancing. As part of the offering, KKR
Financial LLC purchased $53.0 million principal amount of the outstanding Senior Notes. Interest expense of $2.2 million has been recorded

23

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 17: Related Party Transactions (Continued)

during
the three months ended February 28, 2010 related to KKR Financial LLC's portion of the outstanding Senior Notes and remains accrued at February 28, 2010.

During
the first quarter of fiscal 2010, the Company's joint ventures declared a distribution of $1.0 million, which has been recognized as a component of Accounts Receivable as
of February 28, 2010 in the Condensed Consolidated Balance Sheets.

Note 18: 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 EndedFebruary 28, 2010

March 1, 2009Americas:United States

$
246,374

$
234,755Canada


44,727


31,039Other International


21,894


19,891Total Americas


312,995


285,685Europe


26,632


24,291Total

$
339,627

$
309,976Total International

$
93,253

$
75,221


24

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 18: Segment Information (Continued)

There were no inter-segment sales for the three months ended February 28, 2010 and March 1, 2009. Long lived assets (principally property, plant and equipment) outside the
United States were $60.3 million and $60.6 million as of February 28, 2010 and November 29, 2009, respectively.

Three Months EndedFebruary 28, 2010

March 1, 2009(in thousands)Net sales to external customers:Americas

$
312,995

$
285,685Europe


26,632


24,291339,627


309,976Capital expenditures:Americas


2,092


2,208Europe


357


1382,449


2,346EBITDA:Americas


44,257


33,954Europe


(863
)

(1,013
)Inter-segment eliminations





(1
)43,394


32,940Reconciliation of EBITDA to net income:EBITDA from segments


43,394


32,940Interest


22,341


17,548Income taxes


7,790


2,819Depreciation and amortization


7,549


8,229Net Income

$
5,714

$
4,344




February 28, 2010

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

$
954,547

$
949,051Europe


58,935


67,972Intersegment eliminations


(1,553
)

(1,553
)$
1,011,929

$
1,015,470


25

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 19: 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 months ended:

Three Months EndedFebruary 28, 2010

March 1, 2009(in thousands)Numerator:Net income, as reported

$
5,714

$
4,344Net income attributable to participating securities


(18
)

(13
)Interest on convertible notes


3,365


Net income available to common shareholders

$
9,061

$
4,331Denominator:Denominator for basic earnings per shareweighted average shares


94,524


91,807Effect of dilutive securities:Convertible debt


178,204


Stock options


1,316


1,595Restricted share units


9,206


Other


326


153Denominator for diluted earnings per shareadjusted weighted average shares and assumed conversions


283,576


93,555


Options
and share units (in thousands) not included in the calculation of diluted earnings per share because their impact is antidilutive for the three months ended February 28,
2010 and March 1, 2009 are 7,808 and 10,593, respectively.

Note 20: Subsequent Events

On March 16, 2010, the Company redeemed $35.0 million principal amount of its outstanding Senior Notes. Pursuant to the terms of the related indenture, the redemption price
was 103% of the principal amount of the notes or $36.1 million, plus accrued and unpaid interest to the redemption date of $1.6 million. In connection with the repurchase, the Company
also recognized charges of $1.1 million related to the premium paid to repurchase the notes and $2.7 million related to the write-off of related debt issuance costs and
original issue discount.

26

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 21: 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 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.

27

---





SEALY CORPORATION        Supplemental Condensed Consolidating Balance Sheets        February 28, 2010        (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

$
55,753

$
31,711

$


$
117,055Accounts receivable, net








7


103,025


74,668





177,700Inventories








1,737


38,997


19,246


(444
)

59,536Other current assets and deferred income taxes


394





810


25,513


5,062





31,779Total current assets


751





31,788


223,288


130,687


(444
)

386,070Property, plant and equipment, at cost








9,339


330,587


96,171





436,097Less accumulated depreciation








(4,928
)

(179,140
)

(52,229
)




(236,297
)





4,411


151,447


43,942





199,800Other assets:Goodwill








24,741


301,942


34,192





360,875Intangible assets, net











1,594








1,594Net investment in subsidiaries


(166,287
)

249,925


393,499


190,698


(1
)

(667,834
)

Due from (to) affiliates


249,895


(416,212
)

553,009


(110,807
)

(99,561
)

(176,324
)

Debt issuance costs, net and other assets








27,699


20,361


15,530





63,59083,608


(166,287
)

998,948


403,788


(49,840
)

(844,158
)

426,059Total assets

$
84,359

$
(166,287
)
$
1,035,147

$
778,523

$
124,789

$
(844,602
)
$
1,011,929Liabilities and Stockholders' (Deficit) EquityCurrent liabilities:Current portionlong-term obligations

$


$


$


$
1,871

$
9,101

$


$
10,972Accounts payable








385


53,032


42,044





95,461Accrued customer incentives and advertising











19,908


5,781





25,689Accrued compensation








355


20,758


7,116





28,229Accrued interest








1,660


17,293


208





19,161Other accrued liabilities








319


26,700


6,449





33,468Total current liabilities








2,719


139,562


70,699





212,980Long-term obligations


176,493





782,441


39,768


6,796


(176,493
)

829,005Other liabilities











48,694


11,531





60,225Deferred income tax liabilities


144





62


1,145


646





1,997Stockholders' equity (deficit)


(92,278
)

(166,287
)

249,925


549,354


35,117


(668,109
)

(92,278
)Total liabilities and stockholders' equity (deficit)

$
84,359

$
(166,287
)
$
1,035,147

$
778,523

$
124,789

$
(844,602
)
$
1,011,929


28

---





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


29

---





SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Operations        Three Months Ended February 28, 2010        (in
thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
21,583

$
233,420

$
91,624

$
(7,000
)
$
339,627Cost and expenses:Cost of goods sold








12,927


137,342


56,148


(6,910
)

199,507Selling, general and administrative


10





1,959


81,101


25,886





108,956Amortization expense


266








72


1





339Restructuring expenses and asset impairment




















Royalty (income) expense, net


(368
)







(4,121
)

466





(4,023
)Income from operations


92





6,697


19,026


9,123


(90
)

34,848Interest expense


1


80


20,716


664


880





22,341Other (income) expense, net














(54
)




(54
)Loss (income) from equity investees


(5,694
)

(5,711
)

(4,668
)







16,073


Loss (income) from non- guarantor equity investees











(4,423
)




4,423


Capital charge and intercompany interest allocation








(18,856
)

16,620


2,236





Income (loss) before income taxes


5,785


5,631


9,505


6,165


6,061


(20,586
)

12,561Income tax provision (benefit)


71


(63
)

3,794


1,478


2,581


(71
)

7,790Equity in earnings of unconsolidated affiliates














943





943Net income (loss)

$
5,714

$
5,694

$
5,711

$
4,687

$
4,423

$
(20,515
)
$
5,714


30

---





SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Operations        Three Months Ended March 1, 2009        (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
20,893

$
222,669

$
73,545

$
(7,131
)
$
309,976Cost and expenses:Cost of goods sold








12,373


136,080


50,951


(7,068
)

192,336Selling, general and administrative


194





1,933


75,178


19,391





96,696Amortization of intangibles


727








72


16





815Restructuring and related costs











113








113Royalty (income) expense, net


(1,004
)







(3,401
)

1,035





(3,370
)Income from operations


83





6,587


14,627


2,152


(63
)

23,386Interest expense


36


88


15,902


619


903





17,548Gain on sale of subsidiary stock














(1,292
)




(1,292
)Other (income) expense, net














(33
)




(33
)Loss (income) from equity investees


(4,308
)

(4,375
)

(460
)







9,143


Loss (income) from non- guarantor equity investees











(612
)




612


Capital charge and intercompany interest allocation








(14,470
)

13,880


590





Income (loss) before income taxes


4,355


4,287


5,615


740


1,984


(9,818
)

7,163Income tax expense (benefit)


11


(21
)

1,240


231


1,373


(15
)

2,819Net income (loss)

$
4,344

$
4,308

$
4,375

$
509

$
611

$
(9,803
)
$
4,344


31

---





SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Cash Flows        Three Months Ended February 28, 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

$


$


$
6,813

$
(15,086
)
$
(476
)
$


$
(8,749
)Investing activities:Purchase of property, plant and equipment








(40
)

(1,765
)

(644
)




(2,449
)Proceeds from the sale of property, plant, and equipment














57





57Net activity in investment in and advances from (to) subsidiaries and affiliates








(6,757
)

5,558


1,199





Net cash provided by (used in) investing activities








(6,797
)

3,793


612





(2,392
)Financing activities:Equity received upon exercise of stock including related excess tax benefits




















Proceeds from issuance of long term obligations














516





516Repayments of long-term obligations











(904
)

(2,457
)




(3,361
)Borrowings under new asset- based revolver




















Other








(16
)










(16
)Net cash used in financing activities








(16
)

(904
)

(1,941
)




(2,861
)Effect of exchange rate changes on cash














(370
)




(370
)Change in cash and equivalents











(12,197
)

(2,175
)




(14,372
)Cash and equivalents:Beginning of period


357





29,234


67,950


33,886





131,427End of period

$
357

$


$
29,234

$
55,753

$
31,711

$


$
117,055


32

---





SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Cash Flows        Three Months Ended March 1, 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

$


$


$
4,139

$
15,595

$
188

$


$
19,922Cash flows from investing activities:Purchase of property, plant and equipment











(2,092
)

(254
)




(2,346
)Proceeds from the sale of property, plant, and equipment











8,498


(49
)




8,449Net 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


(586
)




30,269


(16,442
)

(13,241
)




Net cash provided by (used in) investing activities


(586
)




30,269


(10,036
)

(14,629
)




5,018Cash flows from financing activities:Equity received upon exercise of stock including related excess tax benefits


3

















3Proceeds from issuance of long term obligations














1,990





1,990Repayments of long-term obligations











(1,254
)

(2,789
)




(4,043
)Borrowings under revolving credit facilities








51,500





8,065





59,565Repayments on revolving credit facilities








(85,900
)




(8,065
)




(93,965
)Other








(8
)










(8
)Net cash used in financing activities


3





(34,408
)

(1,254
)

(799
)




(36,458
)Effect of exchange rate changes on cash














(4
)




(4
)Change in cash and cash equivalents


(583
)







4,305


(15,244
)




(11,522
)Cash and cash equivalents:Beginning of period


589





1


2,423


23,583





26,596End of period

$
6

$


$
1

$
6,728

$
8,339

$


$
15,074


33

---





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 &
Foster,andBassettbrands. 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 and these trends are expected to 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 (visco) and latex technologies. TheEmbodyline
features products at price levels ranging from $1,999 to $3,299 per queen set. We also introduced a new 60th Anniversary Posturepedicline which features new innerspring product at
higher price points ranging from $750 to $1,000 per queen set. We will begin shipping these
products to retailers in the coming months.

Our
industry has experienced significant 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 being limited by supplier consolidation, the exporting of these raw materials outside of the U.S. 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. We expect these costs to remain stable through
fiscal 2010. 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, may reduce supplies in an effort to
maintain higher prices. These actions would delay or eliminate price reductions from our suppliers.

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 are concentrated 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.

34

---



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 is materially misstated. Nonetheless, we decided to restate our Consolidated Financial Statements for the three months ended March 1, 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 February 28, 2010 and
March 1, 2009, expressed in thousands of dollars, as well as a percentage of each period's net sales:

For the three months ended:February 28, 2010

March 1, 2009(in thousands)

(percentage
of net sales)

(in thousands)

(percentage
of net sales)Net sales

$
339,627


100.0
%
$
309,976


100.0
%Cost of goods sold


199,507


58.7


192,336


62.0Gross profit


140,120


41.3


117,640


38.0Selling, general and administrative expenses


108,956


32.1


96,696


31.2Amortization expense


339


0.1


815


0.3Restructuring expenses and asset impairment








113


Royalty income, net of royalty expense


(4,023
)

(1.2
)

(3,370
)

(1.1
)Income from operations


34,848


10.3


23,386


7.6Interest expense


22,341


6.6


17,548


5.7Gain on sale of subsidiary stock








(1,292
)

(0.4
)Other income, net


(54
)




(33
)

Income before income taxes


12,561


3.7


7,163


2.3Income tax provision


7,790


2.3


2,819


0.9Equity in earnings of unconsolidated affiliates


943


0.3





Net income

$
5,714


1.4
%
$
4,344


1.4
%


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

Three Months Ended:February 28,
2010

March 1,
2009Americas:United States


72.5
%

75.7
%Canada


13.2


10.0Other


6.5


6.5Total Americas


92.2


92.2Europe


7.8


7.8Total


100.0
%

100.0
%


35

---



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 EndedFebruary 28, 2010

March 1, 2009(in thousands)

(percentage
of net sales)

(in thousands)

(percentage
of net sales)Total Americas (US Dollars):Net sales

$
312,995


100.0
%
$
285,685


100.0
%Cost of goods sold


179,717


57.4


173,213


60.6Gross profit


133,278


42.6


112,472


39.4United States (US Dollars):Net sales


246,374


100.0


234,755


100.0Cost of goods sold


142,261


57.7


140,302


59.8Gross profit


104,113


42.3


94,453


40.2Total International (US Dollars):Net sales


93,253


100.0


75,221


100.0Cost of goods sold


57,246


61.4


52,034


69.2Gross profit


36,007


38.6


23,187


30.8Canada:US Dollars:Net sales


44,727


100.0


31,039


100.0Cost of goods sold


24,780


55.4


20,549


66.2Gross profit


19,947


44.6


10,490


33.8Canadian Dollars:Net sales


47,187


100.0


38,390


100.0Cost of goods sold


26,143


55.4


25,428


66.2Gross profit


21,044


44.6


12,962


33.8Other Americas (US Dollars):Net sales


21,894


100.0


19,891


100.0Cost of goods sold


12,676


57.9


12,362


62.1Gross profit


9,218


42.1


7,529


37.9Europe:US Dollars:Net sales


26,632


100.0


24,291


100.0Cost of goods sold


19,790


74.3


19,123


78.7Gross profit


6,842


25.7


5,168


21.3Euros:Net sales


18,687


100.0


18,332


100.0Cost of goods sold


13,884


74.3


14,372


78.4Gross profit


4,803


25.7
%

3,960


21.6
%


36

---







Net Sales.Our consolidated net sales for the quarter ended February 28, 2010, were $339.6 million, a increase of
$29.7 million,
or 9.6%, from the quarter ended March 1, 2009. Total Americas net sales were $313.0 million for the first quarter of fiscal 2010, an increase of 9.6% from the first quarter of fiscal
2009. This increase was due to increases in the Canada, U.S. and Other Americas businesses. Total U.S. net sales were $246.4 million for the first quarter of fiscal 2010, an increase of 4.9%
from the first quarter of fiscal 2009. The U.S. net sales increase of $11.6 million was attributable to a 2.4% increase in wholesale unit volume, which excludes third party sales from our
component plants, coupled with a 2.2% increase in wholesale average unit selling price. The increase in unit volume is primarily attributable to the successful launch of our new Stearns & Fosterline and a more stable retail environment. International net sales increased $18.0 million or 24.0%, from the first
quarter of fiscal 2009 to $93.3 million. Excluding the effects of currency fluctuation, net sales increased 11.9% from the first quarter of fiscal 2009. This increase was primarily due to
increased sales stemming from the success of our newStearns & Fosterline, better execution of promotions and an improvement in retail demand in
the Canadian market. We also experienced increases in sales in Europe and the Other Americas markets. In Canada, local currency sales increases of 22.9% translated into increases of 44.1% 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 32.5% increase in unit volume, which was
partially offset by a 7.2% decrease in average unit selling price. Both the increase in unit volume and lower average unit selling price were driven by the success of our new Stearns & Fosterline and strategic 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 1.9% translated into increases of 9.6% 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 4.4% increase in sales of latex cores. Finished goods sales in local currency remained flat to the prior year.

Gross Profit.Our consolidated gross profit for the quarter was $140.1 million, an increase of $22.5 million from the
comparable prior
year period. As a percentage of net sales, gross profit increased 3.3 percentage points to 41.3% due to an increase in gross profit margins in both of our segments. Total Americas gross profit
for the quarter was $133.3 million, a increase of $20.8 million from the comparable prior year period. As a percentage of net sales, gross profit for the Americas increased
3.2 percentage points to 42.6%. The increase in percentage of net sales was primarily due to an increase in gross profit margins in our U.S. and Canadian operations. U.S. gross profit increased
$9.7 million to $104.1 million, which, as a percentage of net sales, represents an increase of 2.1 percentage points to 42.3% of net sales. The increase in percentage of net sales
was driven primarily by lower material costs due to commodity price decreases from the prior year and improved operational efficiencies. In local currency, the gross profit margin in Canada was 44.6%
as a percentage of net sales which represents an increase of 10.8 percentage points. This increase was driven by the impact of lower material costs per unit, partially offset by the lower
average unit selling price discussed above. In our Europe segment, the local currency gross profit margin increased 4.1 percentage points due to conversion costs reductions.

Selling, General, Administrative.Our consolidated selling, general and administrative expense increased $12.3 million to
$109.0 million. As a percentage of net sales this expense was 32.1% and 31.2% for the quarters ended February 28, 2010 and March 1, 2009, respectively, an increase of
0.9 percentage points. The increase as a percentage of net sales was primarily driven by an increase in non-cash compensation costs. The increase in absolute dollars is primarily
due to a $6.3 million increase in volume driven variable expenses including an $8.8 million increase in cooperative advertising and promotional costs, and a $0.8 million increase
in delivery costs due primarily to an increase in unit volume shipped. The increase in these costs have been partially offset by a $3.2 million

37

---



decrease
in bad debt expense. Fixed operating costs, exclusive of non-cash compensation expense, increased $2.9 million from the prior year period primarily due to increases in
expected defined contribution plan payments, cash compensation costs and professional services. Non-cash compensation expense increased by $3.1 million compared to the first quarter
of fiscal 2009 due primarily to the recognition of expense related to the restricted share unit grants that occurred in the third quarter of fiscal 2009.

Royalty income, net of royalty expense.Our consolidated royalty income, net of royalty expenses, of $4.0 million for the three
months ended
February 28, 2010 increased 0.7 million from the prior year period due to increased royalties received from international licensees.

Interest Expense.Our consolidated interest expense for the first quarter of fiscal 2010 increased $4.8 million as compared with
the prior
year period to $22.3 million which included $5.3 million of non-cash interest expense, of which $3.4 million relates to paid-in-kind interest
on our Convertible Notes. Our net weighted average borrowing cost was 10.6% and 8.9% for the three months ended February 28, 2010 and March 1, 2009, respectively. Our borrowing cost was
unfavorably impacted by the Refinancing which resulted in increased interest rates and outstanding debt balances.

Equity in Earnings of Unconsolidated Affiliates.Earnings related to our joint ventures have increased over the first quarter of fiscal
2009 due to
increased demand seen in the Asian markets.

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 February 28, 2010 was 62.0% compared to 39.4% for the three months ended March 1,
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.

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 $2.4 million for the three months ended February 28, 2010. We expect total 2010 capital expenditures to
be approximately $18.0 to $20.0 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 February 28, 2010, the Company had approximately $53.8 million available under the ABL Revolver which represents the calculated borrowing base reduced by outstanding
letters of credit of $24.2 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 10.6% and 8.9% for the three months ended February 28, 2010 and March 1, 2009,
respectively. As of March 18, 2010, we had no borrowings outstanding under the ABL Revolver.

38

---



On
May 13, 2009, the Company announced 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"). 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, we do not expect cash interest payments to change significantly due to
the payment in kind interest associated with the Convertible Notes (as discussed below).



In connection with the Refinancing, we have: 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, 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
February 28, 2010, there were no amounts outstanding under the ABL Revolver. The Senior Notes have an outstanding balance of $337.0 million at February 28, 2010
which gives effect to an unamortized original issue discount of $13.0 million. As of February 28, 2010, the Convertible Notes have an outstanding balance of $176.5 million. We
also have an outstanding principal balance of $268.9 million at February 28, 2010 on the 8.25% Senior Subordinated Notes due 2014 (the "2014 Notes").

On
February 1, 2010, the Company announced its intention to redeem 10%, or $35.0 million, of the principal amount of its outstanding Senior Notes. Pursuant to the terms of
the Senior Notes, the redemption price will equal 103% of the principal amount of the notes, plus accrued and unpaid interest to the redemption date. The redemption occurred on March 16, 2010.
See Note 23.

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 (i) 85% of the net
orderly liquidation value of eligible inventory or (ii) 65% of the net amount of eligible inventory. These amounts are reduced by reserves deemed necessary by the lenders. At
February 28, 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.

39

---



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. 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
February 28, 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.

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 February 28, 2010, we have repurchased shares for $16.3 million under this program, none of which was
repurchased during fiscal 2010. From February 28, 2010 through March 18, 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 $11.0 million during the next twelve months, with $1.9 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 meet the minimum fixed charge coverage ratio requirement as of February 28, 2010, we do not currently expect a dividend will be declared in the second quarter of fiscal 2010.

40

---





The following table summarizes our changes in cash:

Three Months Ended:February 28,
2010

March 1,
2009(in thousands)Statement of Cash Flow Data:Cash flows provided by (used in):Operating activities

$
(8,749
)
$
19,922Investing activities


(2,392
)

5,018Financing activities


(2,861
)

(36,458
)Effect of exchange rate changes on cash


(370
)

(4
)Change in cash and cash equivalents


(14,372
)

(11,522
)Cash and cash equivalents:Beginning of period


131,427


26,596End of period

$
117,055

$
15,074




Cash Flows from Operating Activities.Our cash flow from operations decreased $28.6 million to a use of cash of $8.7 million
for the
three months ended February 28, 2010 from a source of cash of $19.9 million for the three months ended March 1, 2009. Net income and cash flows from operations for the three
months ended February 28, 2010 compared to the same prior year period reflect a greater use of working capital. The uses include increases in accounts receivable and inventories to support
higher sales in the quarter and the payment of incentive compensation that was accrued during fiscal 2009. Cash flows from operations for the three months ended March 1, 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 three months ended February 28, 2010
were
$2.4 million as compared to net cash provided by investing activities of $5.0 million for the three months ended March 1, 2009. This difference of $7.4 million is primarily
due to the receipt of $8.4 million of proceeds in the prior year from the sale-leaseback of the Company's South Gate, California facility.

Cash Flows from Financing Activities.Our cash flow used in financing activities for the three months ended February 28, 2010 was
$2.9 million compared with cash used in financing activities of $36.5 million for the three months ended March 1, 2009. This change has been primarily driven by the 2009
Refinancing which increased our cash position such that we are no longer in a position of borrowing against our revolving credit facility as we did in the first quarter of fiscal 2009.



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

41

---



of
taxes related to these positions during the one year period following February 28, 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 February 28, 2010, we are not in a period of
minimum availability and do 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 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 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
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.

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, EBITDA is defined as net income plus
interest, taxes, depreciation and amortization and Adjusted EBITDA is defined as EBITDA further 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. 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.

EBITDA
and Adjusted EBITDA are not recognized terms under GAAP and do not purport to be alternatives to net income as a measure of operating performance or to cash flows from operating
activities as a measure of liquidity. Additionally, they are not intended to be measures of free cash flow for management's discretionary use, as they do not consider certain cash requirements such as
interest payments, tax payments and debt service requirements. Because not all companies use identical

42

---



calculations,
these presentations may not be comparable to other similarly titled measures of other companies.

The
following table sets forth a reconciliation of net income to EBITDA and EBITDA to Adjusted EBITDA for the three months ended February 28, 2010 and March 1, 2009:

Three Months Ended:February 28,
2010

March 1,
2009(in thousands)Net income

$
5,714

$
4,344Interest expense


22,341


17,548Income taxes


7,790


2,819Depreciation and amortization


7,549


8,229EBITDA


43,394


32,940Adjustments for debt covenants:Non-cash compensation


4,107


1,011KKR consulting fees


496


720Severance charges


1,115


1,278Gain on sale of subsidiary





(1,292
)Other (various)(a)


176


844Adjusted EBITDA

$
49,288

$
35,501


(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:



43

---









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.

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 $0.1 million dollar impact on our financial position for the three months ended February 28, 2010. 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 February 28, 2010, we had outstanding
forward and option foreign currency contracts to sell a total of 27.3 million Canadian dollars for US dollars. The expiration dates for the Canadian dollar contracts range from March to
November 2010. At February 28, 2010, the fair value of these contracts was an asset of $0.6 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 changes in fair value related to the effective
portion of the hedge are recognized as a component of accumulated other comprehensive income.



At February 28, 2010, the Company has entered into 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

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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 and $0.4 million as of February 28, 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 February 28, 2010, a 12.5 basis point increase or decrease in variable interest rates would have an insignificant dollar
impact on our annual interest expense.



We achieved decreases in the cost of polyurethane foam, polyester, polyethylene foam and steel innerspring component parts in fiscal
2009 and expect stability in the prices of these commodities through 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, 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 February 28, 2010 we had contracts outstanding for 1.1 million gallons of diesel fuel to be consumed from March 31, 2010 through November 30, 2010. The fair value of
these fixed price swap diesel contracts was an asset totaling an insignificant amount as of February 28, 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 first quarter of fiscal 2010 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

See Note 16 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

There were no repurchases of the Company's common stock during the first quarter of fiscal 2010 as part of a publicly announced program
or otherwise. 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. As of February 28, 2010, the approximate dollar value of shares that may yet be purchased under the program was $83.7 million.

Subsequent
to February 28, 2010, through March 18, 2010, no shares of Sealy Corporation common stock were surrendered by participants in the Company's 1998 and 2004 Stock
Option Plans to cover the exercise price and/or tax withholding obligations in stock option exercises.

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

Item 4.    (Removed and Reserved)

Item 5.    Other Information

None

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Item 6.    Exhibits

*10.19

Third Amended and Restated Credit Agreement, dated as of August 25, 2006, among Sealy Mattress Company, as Borrower, Sealy Canada Ltd./Ltee as Canadian Borrower, the Guarantors named therein, Sealy Mattress
Corporation, as Holdings and a Guarantor, Sealy Corporation, as Parent, the Several Lenders from time to time parties thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, J.P. Morgan Securities Inc., as Joint Lead Arranger and Joint
Bookrunner, Citigroup Global Markets, Inc. as Joint Lead Arranger and Joint Bookrunner, Citibank N.A., as Syndication Agent, General Electric Capital Corporation, as Co-Documentation Agent, Wachovia Bank, National Assocation, as Co-Documentation
Agent and LaSalle Bank National Association as Co-Documentation Agent.*10.37

Credit Agreement, dated as of May 13, 2009, among Sealy Mattress Company, as Borrower, Sealy Mattress Corporation, as Holdings and a Guarantor, Sealy Corporation, as Parent, the Several Lenders from time to time
parties thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, J.P. Morgan Securities Inc., as Joint Lead Arranger and Joint Bookrunner, GE Capital Markets, Inc., as Joint Lead Arranger and Joint Bookrunner,
General Electric Capital Corporation, as Co-Collateral Agent, Citigroup Global Markets, Inc. as Joint Lead Arranger and Joint Bookrunner, and Mizuho Corporate Bank, Ltd., as Syndication Agent.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.


*Agreement
previously filed by the registrant at the time of execution. Refiling is being made herewith in order to include related schedules and/or exhibits
relating thereto.Filed
herewith.


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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.

SEALY CORPORATION




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:
March 30, 2010

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