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: May 31, 2009o

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. (Check one):

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 June 22, 2009 is approximately: 92,116,369.



---





PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

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

Three Months EndedMay 31,
2009

June 1,
2008Net sales

$
298,455

$
375,375Cost of goods sold


176,304


227,002Gross profit


122,151


148,373Selling, general and administrative expenses


95,581


116,359Amortization expense


778


954Restructuring expenses and asset impairment


1,335


Royalty income, net of royalty expense


(4,600
)

(4,276
)Income from operations


29,057


35,336Interest expense


16,876


15,369Loss on rights for convertible notes


2,729


Refinancing and extinguishment of debt and interest rate derivatives


17,422


Other income, net


(13
)

(81
)(Loss) income before income taxes


(7,957
)

20,048Income tax (benefit) provision


(2,719
)

8,091Net (loss) income

$
(5,238
)
$
11,957(Loss) earnings per common shareBasic

$
(0.06
)
$
0.13(Loss) earnings per common shareDiluted

$
(0.06
)
$
0.13Weighted average number of common shares outstanding:Basic


91,819


90,999Diluted


91,819


93,965


See
accompanying notes to condensed consolidated financial statements.

1

---





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

Six Months EndedMay 31,
2009

June 1,
2008Net sales

$
608,431

$
767,304Cost of goods sold


368,030


465,736Gross profit


240,401


301,568Selling, general and administrative expenses


192,277


232,562Amortization expense


1,593


1,869Restructuring expenses and asset impairment


1,448


541Royalty income, net of royalty expense


(7,970
)

(9,136
)Income from operations


53,053


75,732Interest expense


34,424


30,745Loss on rights for convertible notes


2,729


Refinancing and extinguishment of debt and interest rate derivatives


17,422


Gain on sale of subsidiary stock


(1,292
)

Other income, net


(46
)

(180
)(Loss) income before income taxes


(184
)

45,167Income tax provision


308


16,996Net (loss) income

$
(492
)
$
28,171(Loss) earnings per common shareBasic

$
(0.01
)
$
0.31(Loss) earnings per common shareDiluted

$
(0.01
)
$
0.30Weighted average number of common shares outstanding:Basic


91,813


90,932Diluted


91,813


94,758


See
accompanying notes to condensed consolidated financial statements.

2

---





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

May 31,
2009

November 30,
2008ASSETSCurrent assets:Cash and equivalents

$
92,498

$
26,596Accounts receivable, net of allowances for bad debts, cash discounts and returns


171,219


156,583Inventories


57,857


64,634Prepaid expenses and other current assets


21,658


30,969Deferred income tax assets


16,928


16,775Total current assets


360,160


295,557Property, plant and equipmentat cost


455,345


449,308Less accumulated depreciation


(234,201
)

(218,560
)221,144


230,748Goodwill


360,864


357,149Intangible assets, net of accumulated amortization


3,603


4,945Deferred income tax assets


5,146


3,392Debt issuance costs, net, and other assets


50,084


29,083419,697


394,569Total assets

$
1,001,001

$
920,874LIABILITIES AND STOCKHOLDERS' DEFICITCurrent liabilities:Current portionlong-term obligations

$
16,737

$
21,243Accounts payable


101,405


97,084Accrued incentives and advertising


24,969


34,542Accrued compensation


27,703


24,797Accrued interest


11,192


16,432Other accrued liabilities


40,877


44,363Total current liabilities


222,883


238,461Long-term obligations, net of current portion


836,646


762,162Rights liability for convertible notes


95,985


Other liabilities


69,182


71,257Deferred income tax liabilities


6,729


4,962Common stock and options subject to redemption





8,856Stockholders' deficit:Common stock, $0.01 par value; Authorized shares: 2009600,000; 2008200,000 Issued and outstanding: 200992,116;
200891,800 (including shares classified above as subject to redemption: 20090; 2008282)


920


917Additional paid-in capital


774,917


668,547Accumulated deficit


(1,003,628
)

(814,298
)Accumulated other comprehensive income, net


(2,633
)

(19,990
)Total shareholders' deficit


(230,424
)

(164,824
)Total liabilities and shareholders' deficit

$
1,001,001

$
920,874


See accompanying notes to condensed consolidated financial statements.

3

---





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

Common Stock





Accumulated
Other
Comprehensive
IncomeComprehensive
Income

Additional
Paid-in
Capital

Accumulated DeficitShares

Amount

TotalBalance at November 30, 2008





91,800

$
917

$
668,547

$
(814,298
)
$
(19,990
)
$
(164,824
)Net loss


(492
)










(492
)




(492
)Foreign currency translation adjustment


8,436














8,436


8,436Adjustment to defined benefit plan liability, net of tax of $77


76














76


76Change in fair value of cash flow hedge, net of tax of $339


(599
)













(599
)

(599
)Loss on termination of interest rate swaps, net of tax of $5,834


9,444














9,444


9,444Share-based compensation:Compensation associated with stock option grants











1,658








1,658Directors' deferred stock compensation











195








195Current period expense from restricted stock awards











333








333Current period expense from restricted stock units











43








43Exercise of stock options





24





20








20Excess tax benefit on options exercised











(315
)







(315
)Distribution of rights to purchase convertible notes














(188,838
)




(188,838
)Settlement of rights under forward purchase contract











95,583








95,583Adjustment of common stock and options subject to redemption








3


8,853








8,856Balance at May 31, 2009

$
16,865


91,824

$
920

$
774,917

$
(1,003,628
)
$
(2,633
)
$
(230,424
)


See accompanying notes to condensed consolidated financial statements.

4

---





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

Six Months EndedMay 31,
2009

June 1,
2008Operating activities:Net (loss) income

$
(492
)
$
28,171Adjustments for non-cash and non-operating items:Depreciation and amortization


15,738


17,120Deferred income taxes


(5,524
)

2,741Impairment charges


1,326


Amortization of deferred gain on sale-leaseback


(324
)

Amortization of debt issuance costs and other


579


1,174Loss on rights for convertible notes


2,729


Share-based compensation


2,229


1,998Excess tax benefits from share-based payment arrangements





(781
)Loss on sale of assets


451


311Write-off of debt issuance costs related to debt extinguishments


2,113


Loss on termination of interest rate swaps


15,232


Payment to terminate interest rate swaps


(15,232
)

Gain on sale of subsidiary stock


(1,292
)

Other, net


(661
)

662Changes in operating assets and liabilities:Accounts receivable


(9,747
)

21,471Inventories


6,125


268Prepaid expenses and other current assets


14,136


1,594Other assets


1,262


2,852Accounts payable


1,303


18,325Accrued expenses


(15,757
)

(34,513
)Other liabilities


1,126


1,387Net cash provided by operating activities


15,320


62,780Investing activities:Purchase of property, plant and equipment


(4,592
)

(13,866
)Proceeds from sale of property, plant and equipment


10,149


12Net proceeds from sale of subsidiary stock


1,237


Investments in and loans to unconsolidated affiliate


(2,322
)

Net cash provided by (used in) investing activities


4,472


(13,854
)Financing activities:Cash dividends





(6,811
)Proceeds from issuance of long-term obligations


2,830


1,748Repayments of long-term obligations


(8,995
)

(16,882
)Repayment of senior term loans


(377,181
)

Proceeds from issuance of new senior secured notes


335,916


Proceeds from issuance of related party debt


177,132


Borrowings under revolving credit facilities


140,616


206,258Repayments under revolving credit facilities


(205,016
)

(203,085
)Exercise of employee stock options, including related excess tax benefits


(295
)

803Debt issuance costs


(20,553
)

Net cash provided by (used in) financing activities


44,454


(17,969
)Effect of exchange rate changes on cash


1,656


(1,317
)Increase in cash and equivalents


65,902


29,640Cash and equivalents:Beginning of period


26,596


14,607End of period

$
92,498

$
44,247


See
accompanying notes to condensed consolidated financial statements.

5

---





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 30, 2008 included within the Company's Annual
Report on Form 10-K (File No. 001-08738).

At
May 31, 2009, affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") controlled approximately 50.6% 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.

A
reclassification has been made to the Condensed Consolidated Financial Statements for the three and six months ended June 1, 2008 to conform with the 2009 presentation. The
reclassification made relates to the $0.5 million of restructuring charges incurred in the first half of fiscal 2008 for Brazil which was originally reported as a component of selling, general
and administrative expenses in the
Condensed Consolidated Statement of Operations. This amount was reclassified to restructuring expenses in the Condensed Consolidated Statement of Operations in the fiscal 2008 presentation.

Note 2: Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Acconting Standards ("FAS") No. 157, "Fair Value Measurements"
("FAS 157"), which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosure about fair value measurements. In February 2008, the FASB issued FASB
Staff Position No. FAS 157-2, "Effective Date of FASB Statement No. 157", which provides a one year deferral of the effective date of FAS 157 for
non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. In accordance
with this interpretation, the Company has adopted the provisions of FAS 157 with respect to its non-financial assets and liabilities that are measured at fair value within the
financial statements as of December 1, 2008. See Note 11.

In
March 2008, the FASB issued FAS 161, "Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133", which amends
and expands the disclosure requirements of FAS 133 to require qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of
and gains and losses on derivative

6

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 2: Recently Issued Accounting Pronouncements (Continued)

instruments,
and disclosures about credit-risk-related contingent features in derivative agreements. We adopted the provisions of this statement effective March 1, 2009.
As a result of the adoption of this statement, we have expanded our disclosures regarding derivative instruments and hedging activities within Note 10.

In
June 2007, the Emerging Issues Task Force ("EITF") issued Issue No. 07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities," which provides guidance on the accounting for certain nonrefundable advance payments for goods or services that will be used or rendered for future research and
development activities. The provisions of this issue were adopted effective December 1, 2008. The adoption of this issue did not have an impact on the financial statements as the Company had
previously accounted for these types of advance payments in a manner consistent with that required by the interpretation.

In
December 2007, the FASB issued FAS 160, "Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51". This statement
establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective prospectively, except for
certain retrospective disclosure requirements, for fiscal years beginning after December 15, 2008. This statement will be effective for the Company beginning in fiscal 2010. The Company is
still assessing the potential impact of adoption.

In
December 2007, the FASB issued FAS 141(R), "Business Combinationsa replacement of FASB Statement No. 141", which significantly changes the principles and
requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The statement also provides guidance for recognizing and measuring goodwill acquired in a business combination and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. This statement is effective prospectively, except for certain retrospective adjustments to deferred tax balances,
for fiscal years beginning after December 15, 2008. This statement will be effective for the Company beginning in fiscal 2010. The Company is still assessing the potential impact of adoption.

In
April 2008, the FASB issued FASB Staff Position ("FSP") No. 142-3, "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. This interpretation is effective for financial statements issued for fiscal years
beginning after December 15, 2008 and interim periods within those years. The Company will adopt this interpretation as of the beginning of fiscal 2010 and is still assessing the potential
impact of adoption.

In
June 2008, the FASB issued FSP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities",
which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share. This interpretation is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. The
Company will adopt this interpretation as of the beginning of fiscal 2010 and is still assessing the potential impact of adoption.

7

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 2: Recently Issued Accounting Pronouncements (Continued)

In
November 2008, the EITF issued Issue No. 08-06, "Equity Method Investment Considerations", which clarifies the accounting for certain transactions involving equity
method investments. This interpretation is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 and interim periods within those years. The Company
will adopt this issue as of the beginning of fiscal 2010 and is still assessing the potential impact of adoption.

In
December 2008, the FASB issued FSP 132(R)-1, "Employers Disclosures about Postretirement Benefit Plan Assets", which provides additional 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 fiscal 2010. The adoption of this interpretation will increase the disclosures in the financial statements related to the assets
of its defined benefit pension plans.

In
April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, "Interim Financial Disclosures about Fair Value of Financial Instruments", which amends
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments", to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. The FSP also amends APB Opinion No. 28, "Interim Financial Reporting", to require those disclosures in summarized financial information at
interim reporting periods. This interpretation is effective for interim reporting periods ending after June 15, 2009. The Company will adopt this interpretation beginning in the third fiscal
quarter of fiscal 2009.

In
June 2009, the FASB confirmed that theFASB Accounting Standards Codification(the "Codification") will become the single official
source of authoritative US GAAP (other than guidance issued by the SEC), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force ("EITF"), and
related literature. After that date, only one level of authoritative US GAAP will exist. All other literature will be considered non-authoritative. The Codification does not change
US GAAP; instead, it introduces a new structure that is organized in an easily accessible, user-friendly online research system. The Codification becomes effective for interim and
annual periods ending on or after September 15, 2009. The Company will apply the Codification beginning in the fourth quarter of fiscal 2009.

In
May 2009, the FASB issued FAS 165, "Subsequent Events", which established principles and requirements for subsequent events. The statement details the period after the balance
sheet date during which the Company should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which the Company
should recognize events or transactions occurring after the balance sheet date in its financial statements
and the required disclosures for such events. This statement is effective for interim or annual reporting periods ending after June 15, 2009. The Company will adopt this interpretation
beginning in the third fiscal quarter of fiscal 2009.

In
June 2009, the FASB issued FAS 166, "Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140", which amends the derecognition guidance in
FASB Statement No. 140 and eliminates the exemption from consolidation for qualifying special-purpose entities. This statement is effective for financial asset transfers occurring after the
beginning of an

8

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 2: Recently Issued Accounting Pronouncements (Continued)

entity's
first fiscal year that begins after November 15, 2009. This statement will be effective for the Company beginning in fiscal 2010. The Company is still assessing the potential impact of
adoption.

In
June 2009, the FASB issued FAS 167, "Amendments to FASB Interpretation No. 46(R)", which amends the consolidation guidance applicable to variable interest entities. The
amendments will significantly affect the overall consolidation analysis under FASB Interpretation No. 46(R). This statement is effective as of the beginning of the first fiscal year that begins
after November 15, 2009. This statement will be effective for the Company beginning in fiscal 2010. The Company is still assessing the potential impact of adoption.

Note 3: Change in Estimate

During the second quarter of fiscal 2008, the Company completed an analysis of its returns claims experience based on historical return trends for the Company's U.S. business, which is a
component of the Americas segment, using newly available information as a result of a new and improved product return process that allows it to better track and match claims received to the sales for
which those claims were initially recorded. This analysis was applied to both its warrantable and other product returns. The effect of this change in estimate for warranty claims was to reduce other
accrued liabilities and cost of sales by approximately $4.5 million. The change in estimate for other product returns
reduced other accounts receivable balances by approximately $3.7 million, with a corresponding increase in net sales. For both the three and six month periods ended June 1, 2008, the
change in estimate increased operating income by $8.2 million and net income by $5.1 million. This change in estimate also increased net income per basic and diluted share by $0.06 and
$0.05, respectively, for the three and six months ended June 1, 2008.

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 or outstanding options modified after August 29, 2005 (the beginning of the fourth quarter
of fiscal 2005) under the provisions of FAS No. 123 (revised 2004) "Share-Based Payment" ("FAS 123(R)"). Effective May 26, 2009, the Company adopted the Second Amended and
Restated Equity Plan for Key Employees of Sealy Corporation and its Subsidiaries which, among other things, increases the number of shares available for issuance under the 2004 Plan from 15,190,000 to
40,190,000.

During
the three and six months ended May 31, 2009, the Company granted new options to purchase 7,320 and 58,487 shares, respectively, of common stock and recognized compensation
expense related to these options of an insignificant amount during the three and six months ended May 31, 2009. During the three and six months ended June 1, 2008, the Company granted
new options to purchase 1,352,455 shares of common stock and recognized compensation expense associated with these grants of approximately $0.1 million. The options granted during the second
quarter of fiscal 2009 and fiscal 2008 had a weighted average grant-date fair value of $1.82 and $2.92, respectively, per option.

9

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 4: Share-Based Compensation (Continued)

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

Three Months
Ended
May 31, 2009

Three Months
Ended
June 1, 2008Expected volatility


60%


40%Expected dividend yield


0.00%


0.00%-3.35%Expected term (in years)


5.63


5.87-6.53Risk-free rate


1.92%


2.48%-3.03%


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 and also considers 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 six months ended May 31, 2009, is presented below:

Shares Subject
to Options

Weighted Average
Exercise Price
Per ShareOutstanding November 30, 2008


1,935,478

$
1.50Exercised


(23,938
)

0.88Forfeited


(18,104
)

3.56Outstanding May 31, 2009 (all fully vested and exercisable)


1,893,436

$
1.49Weighted average remaining contractual term


4.9 yearsAggregate intrinsic value of in-the-money options at May 31, 2009 (in thousands)

$
1,198


10

---



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 six months ended May 31, 2009, is presented below:

Shares Subject
to Options

Weighted Average
Exercise Price
Per ShareOutstanding November 30, 2008


9,948,520

$
6.96Granted


58,487

$
1.34Forfeited


(382,877
)
$
7.15Outstanding May 31, 2009


9,624,130

$
6.91Weighted average remaining contractual term


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


$53Exercisable at May 31, 2009


5,543,956Weighted average remaining contractual term


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


$5


As
of May 31, 2009, the Company had approximately $5.1 million of unrecognized compensation expense which is expected to be recognized over a weighted average period of
4.6 years.

During
the three months and six months ended May 31, 2009 and June 1, 2008, the Company recognized total non-cash compensation expense associated with stock
options of $0.8 million and $1.7 million, respectively, for fiscal 2009 and $1.2 million and $1.7 million, respectively, for fiscal 2008. The non-cash
compensation expense recognized for the three and six months ended June 1, 2008 includes a charge of approximately $0.7 million related to a modification of awards given to our former
President and Chief Executive Officer. This charge has been recorded as a component of selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

During
the three and six months ended June 1, 2008, the Company recognized expense of $0.2 million and $0.3 million, respectively, resulting from the accretion of an
obligation to certain executives of the Company for their right to sell to the Company, upon their retirement, vested shares of the Company's
common stock. These rights to sell the vested shares have expired and the related liability was reclassified to common stock and options subject to redemption and additional paid in capital in fiscal
2008. In the second quarter of fiscal 2009, due to the expiration of the ability of share and option holders to redeem the outstanding shares or options following the death or disability of the share
or option holder, the amounts recorded as common stock and options subject to redemption were reclassified to additional paid in capital. See Note 22.

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 May 31, 2009, it is the Company's expectation that the
performance targets for these stock options will not be met. As such, the recognition of 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. The Company has not recognized compensation

11

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 4: Share-Based Compensation (Continued)

cost
in the current period for options to purchase 674,532 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.

The
Company has outstanding 291,971 restricted shares that are considered to be non-vested shares under the provisions of FAS 123(R), and have the same rights as the
Company's outstanding common shares except that they cannot be sold by the holder until the end of the vesting period. Compensation expense recognized during the three and six months ended
May 31, 2009 related to these restricted shares was $0.2 million and $0.3 million, respectively. As of May 31, 2009, the remaining unrecognized compensation cost related to
restricted stock awards was $1.4 million which is expected to be recognized over the remaining vesting period of 2.1 years. As of May 31, 2009, none of the outstanding restricted
stock awards have vested. There were no such awards outstanding as of June 1, 2008.

On
February 26, 2009, the Company approved grants of 344,400 restricted share units (RSUs). The RSUs 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. These RSUs vest based on the attainment of certain performance targets that are tied to the Company's earnings performance. If these performance targets
are not met, then the RSUs will not vest. Compensation expense recognized during the three and six months ended May 31, 2009 related to these awards was an insignificant amount. As of
May 31, 2009, the remaining unrecognized compensation cost related to these RSUs was $0.2 million which will be recognized based on the Company's forecasted attainment of the performance
targets. As of May 31, 2009, it is the Company's expectation that the performance targets for the RSUs will be met.

Note 5: Inventories

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

May 31,
2009

November 30,
2008Raw materials

$
28,466

$
27,335Work in process


20,480


29,140Finished goods


8,911


8,159$
57,857

$
64,634


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 as well as a 20-year
warranty on the major components of itsTrueFormandMirrorFormvisco-elastic products and its SpringFreelatex 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. The RightTouchline was discontinued in the third quarter of fiscal 2008. The Company's policy is to accrue the estimated cost of warranty coverage at the
time the sale is recorded. The estimate involves

12

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 6: Warranty Costs (Continued)

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.

During
fiscal 2008, the Company completed an analysis of its warranty claims experience. The analysis was based on historical return trends using newly available information as a result
of a new and improved product return process that allows the Company to better track and match claims received to the sales for which those claims were initially recorded. As a result of the analysis
performed, the Company changed its estimate of accrued warranty obligations. This resulted in a reduction of accrued warranty obligations and cost of sales of approximately $4.5 million. The
change in the Company's accrued warranty obligations for each of the six months ended May 31, 2009 and June 1, 2008 was as follows (in thousands):

May 31,
2009

June 1,
2008Accrued warranty obligations at beginning of period

$
16,487

$
15,964Warranty claims


(9,348
)

(9,981
)Warranty provisions


9,400


13,623Change in estimate





(4,484
)Accrued warranty obligations at end of period

$
16,539

$
15,122


As
of May 31, 2009 and November 30, 2008, $10.7 million and $9.9 million is included as a component of other accrued liabilities and $5.8 million and
$6.6 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 $3.0 million and $3.1 million for the six months ended May 31, 2009 and the six months ended June 1, 2008,
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. During the fourth quarter of fiscal 2008, the Company recognized an
impairment charge on the goodwill of its Europe reporting unit that was based upon an estimate of the fair value of the property and equipment and certain intangible assets, including customer
relationships. During the first quarter of fiscal 2009, the Company completed its measurement of the impairment loss for the Europe reporting unit and concluded that the entire balance of the goodwill
of this reporting unit was determined to be impaired. Thus, the $24.7 million impairment charge recognized in the fourth quarter of fiscal 2008 as an estimate required no adjustment in the
first quarter of fiscal 2009.

13

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 7: Goodwill and Other Intangible Assets (Continued)

The
changes in the carrying amount of goodwill for the six months ended May 31, 2009 are as follows:

Americas

Europe

Total(in thousands)Balance as of November 30, 2008


357,149





357,149Increase due to foreign currency translation


3,715





3,715Balance as of May 31, 2009

$
360,864

$


$
360,864


Total
other intangibles of $3.6 million (net of accumulated amortization of $16.3 million) as of May 31, 2009 consist primarily of licenses, which are amortized
using a straight-line method over periods ranging from 5 to 15 years. During the three and six months ended May 31, 2009 and June 2, 2008, the Company recognized
amortization expense associated with intangibles of $0.8 million and $1.6 million, respectively for fiscal 2009 and $1.0 million and $1.9 million, respectively for fiscal
2008. The Company expects to recognize amortization expense relating to these intangibles of $1.7 million for the remainder of 2009, $0.5 million in 2010, $0.3 million in 2011,
$0.3 million in 2012, $0.3 million in 2013 and $0.7 million thereafter.

Note 8: Debt Issuance Costs

The Company capitalizes costs associated with the issuance of debt and amortizes them as additional
interest expense over the lives of the debt on a straight-line basis which approximates the effective interest method. In connection with the refinancing of the Company's senior secured
credit facilities in May 2009, the Company recorded fees in the amount of $24.1 million which were deferred and will be amortized over the life of the new agreements. As of May 31, 2009,
$3.5 million of these fees had not yet been paid and were recorded as a component of other accrued liabilities in the accompanying Condensed Consolidated Balance Sheets. Since the old senior
secured term loans are considered terminated, under the provisions of FAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities", the remaining
unamortized debt issuance costs of $2.1 million were expensed and recognized as a component of debt extinguishment and refinancing expenses in the Condensed Consolidated Statements of
Operations. The remaining unamortized debt issuance costs associated with the old senior revolving credit facility will continue to be amortized over the life of the Company's new asset-based
revolving credit facility in accordance with the provisions of EITF 98-14, "Debtor's Accounting for Changes in Line-of-Credit or Revolving-Debt
Arrangements".

14

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 9: Long-Term Obligations

Long-term obligations as of May 31, 2009 and November 30, 2008 consisted of the following:

May 31,
2009

November 30,
2008(in thousands)Asset-based revolving credit facility

$


$
Old senior revolving credit facility





64,400New senior secured notes


335,916


Related party obligation


177,132


Old senior secured term loans





377,181Senior subordinated notes


273,945


273,945Financing obligations


41,847


42,348Other


24,543


25,531853,383


783,405Less current portion


(16,737
)

(21,243
)$
836,646

$
762,162


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) will issue $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"), pursuant to a rights offering issued to all existing shareholders of the Company's common stock.

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

The
proceeds from the issuance of this debt 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.

15

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 9: 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. 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. Borrowings under the ABL
Revolver bear interest at the Company's choice of either a base rate (determined by reference to the higher of 1) the prime rate; 2) the federal funds effective rate plus
one-half of one percent; or 3) the three month LIBOR rate for U.S. dollar deposits) or a three month LIBOR rate for U.S. dollar deposits plus an applicable margin of 4.00%. The ABL
Revolver also requires the Company to pay a commitment fee for the unused portion. As of May 31, 2009, there were no amounts outstanding under the ABL Revolver. At May 31, 2009, the
Company had approximately $59.4 million available under the ABL Revolver which represents the calculated borrowing base reduced by outstanding letters of credit of $16.0 million.

The
obligations under the Company's ABL Revolver are guaranteed by the Company and all of its current and future domestic subsidiaries, and are also secured by substantially all of the
assets of the Company and the assets of its current and future domestic subsidiaries through a first-priority security interest in the accounts receivable, inventory, cash, related general intangibles
and instruments and proceeds of the foregoing, and a second-priority security interest in substantially all of the Company's material real property and equipment and all other assets of its current
and future domestic subsidiaries that secure the Senior Notes on a first-priority basis.

The
ABL Revolver imposes 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. The agreement also 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 May 31, 2009, the Company is not
in a minimum availability period under the ABL Revolver.

In
accordance with EITF 95-22, "Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include both a Subjective Acceleration
Clause and a Lock-Box Arrangement", the Company will classify our ABL Revolver, which has a maturity date of more than one year from the balance sheet date, as a current liability since it
includes both a lockbox arrangement and a subjective acceleration clause.

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. The Senior Notes rank equally in

16

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 9: Long-Term Obligations (Continued)

right
of payment with all of the Company's existing and future senior indebtedness, including amounts outstanding under the ABL Revolver and the Convertible Notes and senior in right of payment to any
existing and future subordinated indebtedness, including the existing 8.25% Senior Subordinated Notes due 2014 ("2014 Notes"). The obligations under the Senior Notes are guaranteed by the Company and
all of its current and future domestic subsidiaries, and are also secured by substantially all of the assets of the Company and the assets of its current and future domestic subsidiaries through a
first-priority security interest in substantially all of the Company's material real property and equipment and all other assets of its current and future domestic subsidiaries that secure the Senior
Notes on a first-priority basis, and a second-priority security interest in the accounts receivable, inventory, cash, related general intangibles and instruments and proceeds of the foregoing.

The
Senior Notes are governed by an indenture which calls for the Company to offer prepayment of the notes at a price equal to 101% of the outstanding principal amount in the event of a
change in control as defined in the indenture. After April 15, 2012, the Senior Notes are subject to redemption by the Company at 30 to 60 days' notice at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest thereon, to the applicable redemption date, if redeemed during the twelve month period beginning on
April 15 of each of the years indicated below:

Year

Percentage of
Principal Amount2012


108.156
%2013


105.438
%2014


102.719
%2015 and thereafter


100.000
%


Further,
during any twelve month period commencing on the date of issuance, the Company will be entitled to redeem up to 10% of the aggregate principal amount of the Senior Notes at a
redemption price equal to 103.000% plus accrued and unpaid interest. Prior to April 15, 2011, the Company may redeem up to 40% of the aggregate principal amount of the Senior Notes at a
redemption price equal to 110.875% of the aggregate principal amount plus accrued and unpaid interest thereon with the net proceeds of an equity offering.

Convertible PIK Notes and Related Rights

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

The
issuance of the rights to purchase the Convertible Notes was considered a non-monetary distribution of $188.8 million in the second quarter of fiscal 2009.
Further, the rights are considered to be representative of the substantial premium at which the related Convertible Notes were issued which is presumed to represent additional paid-in
capital. The distribution was recorded at its fair value based

17

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 9: Long-Term Obligations (Continued)

on
the initial trading value of the rights on the active market on which they trade. See Note 11. The rights are considered to constitute written options which are accounted for as derivative
instruments under the provisions of FAS 133 and must be adjusted, prior to exercise or expiration, to fair value through earnings. See Note 10.

On
May 15, 2009, the Company entered into a forward purchase agreement (the "Forward Contract") with the Purchaser in connection with the distribution of the subscription rights
discussed above. The Forward Contract requires the Purchaser to purchase up to $177.1 million aggregate principal amount of Convertible Notes which represents the maximum number of Convertible
Notes that the Purchaser may be obligated to purchase. The Forward Contract will be settled upon the expiration of the rights offering. Upon settlement, the Company will deliver to the Purchaser the
Convertible Notes that have not been subscribed for by the Company's shareholders (other than the Purchaser) and cash in an amount equal to the purchase price of the Convertible Notes that were
subscribed to by the Company's shareholders (other than the Purchaser) along with accrued interest. In consideration of the Forward Contract, the Purchaser posted cash of $177.1 million on
May 29, 2009 which will bear interest during the rights offering period at the rate of one-month LIBOR plus 3.00%. The Company recognized a liability related to the posted cash
which was recorded as a component of long-term debt in the Condensed Consolidated Balance Sheet as of May 31, 2009 due to
the expectation that this related party debt will be refinanced on a long-term basis through the issuance of the Convertible Notes in July 2009. Under the terms of the Forward Contract,
the Company paid the Purchaser a forward contract payment of $1.0 million which was recorded as a component of debt issuance costs, net, and other assets in the Condensed Consolidated Balance
Sheet as of May 31, 2009 and will be amortized as a component of interest expense within the Condensed Consolidated Statements of Operations.

Due
to the agreement by the Purchaser to exercise all of the rights distributed to them under the terms of the Forward Contract, the associated rights have been considered to be
exercised at issuance and the fair value of these rights have been recorded as a component of additional paid-in capital as of May 31, 2009. The rights issued to the Company's other
shareholders are considered to remain outstanding at May 31, 2009 and have been recorded as a non-current liability within the Condensed Consolidated Balance Sheets at their fair
value (Note 11) as the liability is expected to be refinanced on a long-term basis through the issuance of the Convertible Notes in July 2009.

The
Convertible Notes will mature in July 2016 and will bear interest at 8.00% per annum payable semi-annually in arrears on January 15 and July 15. The Company
will not pay interest in cash related to the Convertible Notes, but instead will increase 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 will be calculated on the basis of the accreted principal amount as of the first day of such interest period. The Convertible
Notes will be convertible into shares of the Company's common stock at an initial conversion price of $1.00 per share.

The
Convertible Notes will rank equally in right of payment with all of the Company existing and future senior indebtedness, including amounts outstanding under the ABL Revolver and the
Senior Notes, and senior in right of payment to any existing and future subordinated indebtedness, including the existing 2014 Notes. The Convertible Notes are also secured by a third-priority lien on
all of the

18

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 9: Long-Term Obligations (Continued)

collateral
securing the ABL Revolver and the Senior Notes which liens will be effectively junior to the senior priority leins securing the Senior Notes and the ABL Revolver.

As
of May 31, 2009, there were no Convertible Notes issued or outstanding. Pursuant to the terms of the rights offering discussed above, the Convertible Notes will be issued at
the expiration of the rights period on July 2, 2009, unless extended.

The
Company will account for the PIK interest on the Convertible Notes in accordance with the provisions of EITF No. 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios", EITF 00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments", and
EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock". This may require an allocation of a portion of the
proceeds 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. The
resulting discount will be shown as a reduction of the balance of the Convertible Notes which will be accreted to the par value through interest expense over the term of the Convertible Notes.

The
indentures and agreements governing our 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. At May 31, 2009, the Company was in compliance with the
covenants contained within the related note indentures and agreements.

Note 10: Derivative Instruments and Hedging Strategies

The Company uses hedging contracts to manage the risk of its overall exposure to interest rate and foreign currency changes. 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, and 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 11, taking into consideration current interest rates and the current creditworthiness of the
counterparties or the Company, as applicable. Details of the specific instruments used by the Company to hedge its exposure to interest rate fluctuations follow:

On
June 15, 2007, the Company entered into an interest rate swap agreement effective December 3, 2007 fixing the floating portion of the interest rate at 5.495% on
$242 million of the

19

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 10: Derivative Instruments and Hedging Strategies (Continued)

outstanding
balance under the old senior secured term loan 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. The Company formally designated this swap agreement as a cash flow hedge as it was expected to be highly effective in offsetting
fluctuations in the designated interest payments resulting from changes in the benchmark interest rate. The Company selected the Eurodollar rate on the hedged portion of the old senior secured term
loan during the term of the swap.

On
December 1, 2008, the Company entered into two interest rate swap agreements effective December 4, 2008. The first of these swaps fixed the floating portion of the
interest rate at 1.952% on $20.0 million of the outstanding balance under the old senior credit facility through November 4, 2009. The second of these swaps fixed the floating portion of
the interest rate at 1.991% on $107.0 million of the outstanding balance under the old senior credit facility through February 4, 2010. The Company formally designated these swap
agreements as cash flow hedges as they were expected to be highly effective in offsetting fluctuations in the designated interest payments resulting from changes in the benchmark interest rate. The
Company selected the Eurodollar rate on the hedged portion of the old senior credit facility during the term of these swaps.

In
connection with the Refinancing (Note 9), the Company paid $15.2 million to terminate the above interest rate swaps. As the future variable interest rate payments are no
longer probable of being made, the amounts which had previously been recorded in accumulated other comprehensive income were charged to refinancing expense for the three and six months ended
May 31, 2009 in accordance with the provisions of FAS 133.

Additionally,
the Company has entered into three interest rate swaps 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 May 31, 2009, the total notional amount of the Company's interest rate swap agreements was $12.3 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 contracts. As with its interest rate swap instruments, the Company designates
certain of these forward contract hedges as hedging instruments and enters into some forward contracts that are considered to be economic hedges which are not designated as hedging instruments.
Whether designated or undesignated, these forward 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

20

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 10: Derivative Instruments and Hedging Strategies (Continued)

Note 11,
taking into consideration current interest rates and the current creditworthiness of the counterparties or the Company, as applicable. Details of the specific instruments used by the
Company to hedge its exposure to foreign currency fluctuations follow:

At
May 31, 2009, the Company had three forward foreign currency contracts outstanding to purchase a total of 1.4 million Euros with expiration dates ranging from
June 30, 2009 through December 31, 2009. These hedges were entered into to protect against the fluctuation in the Euro denominated royalty payments related to a third party license held
by the Company. The Company has formally designated these contracts as cash flow hedges, and they are expected to be highly effective in offsetting fluctuations in these royalty payments related to
changes in the foreign currency exchange rates.

The
Company also enters into forward 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 May 31, 2009 and November 30, 2008, the Company did not have
any outstanding foreign currency contracts that were not designated as hedges for accounting purposes.

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 December 31, 2009. Over the next 12 months, the Company expects to reclassify an insignificant amount
of deferred losses from accumulated other comprehensive income to selling, general and administrative expense as related forecasted foreign currency payments are made.

For
the three months and six months ended May 31, 2009, recognized foreign currency transaction losses were $(0.4 million) and $(0.8 million), respectively, compared
with (losses) gains of $(0.1 million) and $0.6 million for the three months and six months ended June 1, 2008.

Embedded Derivatives

The Company evaluates its outstanding debt arrangements in accordance with FAS 133, which requires bifurcation of embedded
derivative instruments and measurement of fair value for accounting purposes. The Company concluded that the contingent redemption option upon a change of control or a qualifying asset sale within its
Senior Notes qualifies as an embedded derivative instrument which should be bundled as a compound embedded derivative and bifurcated from the Senior Notes. Due to the low probability of the occurrence
of the contingent events requiring redemption, the fair value of this derivative was determined to be immaterial.

Rights to Purchase Convertible Notes

During the second quarter of fiscal 2009, the Company issued rights to holders of its common stock at close of business on
May 26, 2009. As described in Note 9, these rights entitle holders to purchase the Company's Convertible Notes issued in connection with the Refinancing. These rights are considered to
be written options and therefore are treated as derivatives under the provisions of FAS 133 which require that they be adjusted, after issuance, to fair value through earnings. Based on the
terms of the forward purchase agreement with the Purchaser, the rights related to the Purchaser's approximate 50.6% ownership are considered to be exercised as of the date of the issuance of the
right.

21

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 10: Derivative Instruments and Hedging Strategies (Continued)

Therefore,
the fair value of the rights attributable to the Purchaser, which was $95.6 million at May 27, 2009, was recorded as additional paid-in capital upon issuance. The
rights issued to other shareholders remain outstanding at May 31, 2009, and were adjusted to their market value at that date resulting in a $2.7 million loss. At May 31, 2009, the
liability for the rights issued to other shareholders was $96.0 million.

At
May 31, 2009 and November 30, 2008, the fair value carrying amount of the Company's derivative instruments was recorded as follows (in thousands):

Asset Derivatives

Liability DerivativesMay 31, 2009

May 31, 2009Balance Sheet
Location

Fair
Value

Balance Sheet
Location

Fair
ValueDerivatives designated as hedging instruments under FAS 133Foreign exchange contracts

Other current assets

$
178

Other current liabilities

$
Total derivatives designated as hedging instruments under FAS 133




178




Derivatives not designated as hedging instruments under FAS 133Interest rate contracts

Other noncurrent assets


707

Other noncurrent liabilities


Rights to purchase convertible notes

Other noncurrent assets




Other noncurrent liabilities


95,985Total derivatives not designated as hedging instruments under FAS 133




707




95,985Total derivatives



$
885



$
95,985




Asset Derivatives

Liability DerivativesNovember 30, 2008

November 30, 2008Balance Sheet
Location

Fair
Value

Balance Sheet
Location

Fair
ValueDerivatives designated as hedging instruments under FAS 133Interest rate contracts

Accrued interest receivable

$


Accrued interest payable

$
1,624Interest rate contracts

Other current assets




Other current liabilities


6,285Interest rate contracts

Other noncurrent assets




Other noncurrent liabilities


8,055Total derivatives designated as hedging instruments under FAS 133









15,964Derivatives not designated as hedging instruments under FAS 133Interest rate contracts

Other noncurrent assets


388

Other noncurrent liabilities


Total derivatives not designated as hedging instruments under FAS 133




388




Total derivatives



$
388



$
15,964


22

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 10: Derivative Instruments and Hedging Strategies (Continued)

The effect of derivative instruments on the Condensed Consolidated Statement of Operations for the three and six months ended May 31, 2009,
was as follows (in thousands):

Three Months Ended May 31, 2009Derivatives in FAS 133 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


(2,484
)
Interest income (expense)


(2,967
)
Interest income (expense)


Interest rate contracts




Refinancing expense




Refinancing expense


(15,232
)Foreign exchange contracts


192

Selling, general and administrative expenses


19

Selling, general and administrative expenses


Total

$
(2,292
)


$
(2,948
)


$
(15,232
)




Six Months Ended May 31, 2009Derivatives in FAS 133 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


(3,864
)
Interest income (expense)


(5,266
)
Interest income (expense)


Interest rate contracts




Refinancing expense




Refinancing expense


(15,232
)Foreign exchange contracts


189

Selling, general and administrative expenses


108

Selling, general and administrative expenses


Total

$
(3,675
)


$
(5,158
)


$
(15,232
)




Three Months Ended May 31, 2009Derivatives Not Designated as Hedging
Instruments under Statement 133

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

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

Interest income (expense)

$
108Rights to purchase convertible notes

Loss on rights for convertible notes


(2,729
)Total



$
(2,621
)


23

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 10: Derivative Instruments and Hedging Strategies (Continued)

Six Months Ended May 31, 2009Derivatives Not Designated as Hedging
Instruments under Statement 133

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

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

Interest income (expense)

$
319Rights to purchase convertible notes

Loss on rights for convertible notes


(2,729
)Total



$
(2,410
)


At
May 31, 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 9). At November 30, 2008, accumulated other comprehensive income associated with interest rate swaps qualifying
for hedge accounting treatment was $(8.9 million), net of income tax effects. At May 31, 2009 and November 30, 2008, accumulated other comprehensive income associated with foreign
currency forwards qualifying for hedge accounting treatment was an insignificant amount, net of income tax effects.

Note 11: Fair Value of Financial Instruments

For assets and liabilities measured at fair value on a recurring basis during the period under the provisions of FAS 157, the Company uses an income approach to value the assets
and liabilities for outstanding interest rate swap and foreign currency forward derivative contracts discussed in Note 10 above. 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 using current market information 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. We have evaluated the credit and
non-performance risks associated with our derivative counterparties or the Company, as applicable, and have recorded a credit valuation adjustment of an insignificant amount at
May 31, 2009. The fair value of the Company's rights for convertible notes is determined based on the closing price reported on the active market on which the related rights trade. As noted in
Note 2 above, the Company adopted the provisions of FAS 157 with respect to its non-financial assets and liabilities during the first quarter of fiscal 2009. However, there
were no non-financial assets or liabilities requiring initial measurement
or subsequent remeasurement during the first half of fiscal 2009. The following table provides a summary of the fair values of assets and liabilities as determined under FAS 157 (in thousands):

Fair Value Measurements at May 31, 2009 UsingMay 31, 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

$
885

$


$
885

$
Rights to purchase convertible notes


(95,985
)

(95,985
)




Total

$
(95,100
)
$
(95,985
)
$
885

$



24

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 11: Fair Value of Financial Instruments (Continued)



Fair Value Measurements at November 30, 2008 UsingNovember 30, 2008

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

$
(15,597
)
$


$
(15,597
)
$



Note 12: Debt Extinguishment and Refinancing Expense

Debt extinguishment and refinancing expenses for the three and six months ended May 31, 2009 includes non-cash charges of $2.1 million relating to the
write-off of debt issuance costs associated with the old senior term loans as well as $15.2 million of cash charges associated with the termination of the interest rate swap
agreements that were associated with the old senior credit facility. See Note 9.

Note 13: Other Income, Net

Other income, net, includes interest income for the three and six months ended May 31, 2009 and June 1, 2008 of an insignificant amount, for fiscal 2009 and
$0.1 million and $0.2 million, respectively, for fiscal 2008.

Note 14: Conditional Asset Retirement Obligations

Under the provisions of FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47"), the Company recorded an additional
$0.1 million in property, plant and equipment and other noncurrent liabilities in the first half of fiscal 2009. No new amounts were recorded in the first half of fiscal 2008. The amounts
recorded in fiscal 2009 resulted from obligations of a new facility lease that requires the Company to return the property to the same or similar condition at the end of the lease as existed when the
Company began using the facility.

Note 15: Acquisitions and Dispositions

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

25

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 15: Acquisitions and Dispositions (Continued)

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 and is therefore not consolidated for
financial statement purposes. The Company accounts for its interest in this joint venture under the equity method.

Note 16: Defined Benefit Pension Expense

The components of net periodic pension cost recognized for the Company's defined benefit pension plans in the U.S., Canada and France for the three and six months ended May 31,
2009 and June 1, 2008 are as follows:

Three Months Ended

Six Months EndedMay 31, 2009

June 1, 2008

May 31, 2009

June 1, 2008(in thousands)

(in thousands)Service cost

$
184

$
272

$
551

$
544Interest cost


352


339


1,057


679Expected return on plan assets


(235
)

(335
)

(705
)

(669
)Amortization of unrecognized gains and losses


91


39


274


79Amortization of unrecognized transition asset





(22
)




(44
)Amortization of unrecognized prior service cost


63


69


188


138Net periodic pension cost*

$
455

$
362

$
1,364

$
727Cash contributions

$
0

$
501

$
1,447

$
945


---

The
Company expects to make additional cash contributions to the plans of approximately $0.6 million during the remainder of fiscal 2009.

Note 17: Income Taxes

The Company's effective income tax rates differ from the Federal statutory rate principally because of the effect of certain foreign tax rate differentials and state and local income
taxes. The effective tax rate for the three and six months ended May 31, 2009 was approximately 34.2% and (167.4)%, respectively, compared to approximately 40.4% and 37.6%, respectively, for
the three and six months ended June 1, 2008. The effective rate for the three and six months ended May 31, 2009 was lower than the rate for the three and six months ended June 1,
2008 primarily due to lower pre-tax income in fiscal 2009.

The
Company adopted Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes", effective December 3, 2007. As a
result of the implementation, the Company recognized a $10.5 million net increase to the liability for uncertain tax positions including interest and penalties of $0.7 million and
$2.5 million, respectively. These increases

26

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 17: Income Taxes (Continued)

were
accounted for as a cumulative effect adjustment and recognized as an increase in the beginning accumulated deficit in the consolidated balance sheet. Including the cumulative effect adjustment,
the Company had approximately $25.9 million of total unrecognized tax benefits as of December 3, 2007. The Condensed Consolidated Balance Sheet as of May 31, 2009 includes accrued
interest of $6.3 million and penalties of $3.4 million due to unrecognized tax benefits. As of November 30, 2008, the Company had recorded accrued interest of $5.3 million
and penalties of $3.4 million due to unrecognized tax benefits. During the three and six months ended May 31, 2009 and June 1, 2008, additional interest was recognized of
$0.7 million and $1.0 million, respectively, for fiscal 2009 and $0.6 and $1.1 million for fiscal 2008. Additional penalties were recorded in income tax expense in the three and
six months ended May 31, 2009 and June 1, 2008 of an insignificant amount for fiscal 2009 and $0.2 million and $0.3 million, respectively, for fiscal 2008. The Company
expects the liability for uncertain tax positions to decrease by $12.0 million within the succeeding twelve months due to expiration of income tax statutes of limitations. Federal years open to
examination are fiscal year 2004 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 May 31, 2009. The Company also cannot predict when or if any other future tax payments related to these tax positions may occur.

Note 18: Comprehensive Income

Comprehensive income for the three and six months ended May 31, 2009 and June 1, 2008 was $15.7 million and $16.9 million, respectively, for fiscal 2009 and
$16.4 million and $31.7 million, respectively, for fiscal 2008. The decrease in comprehensive income for the three and six months May 31, 2009 as compared to the three and six
months ended June 1, 2008 has been primarily driven by the decrease in net income as compared to the prior period which has been partially offset by the change in the fair value and termination
of the previously existing interest rate swaps and the increase in the foreign currency translation adjustment.

Note 19: Commitments and Contingencies

Contingencies

The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of
these matters is currently not determinable, management does not

27

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 19: Commitments and Contingencies (Continued)

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 New Jersey Department
of Environmental Protection approval and operates 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 May 31, 2009 for $2.4 million ($3.6 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 $0.2 million associated with the additional work and ongoing monitoring. The Company believes the contamination is attributable to the manufacturing
operations of previous unaffiliated occupants of the facility.

While
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.



On December 1, 2008, the Company completed a sale-leaseback transaction of its South Gate, California facility,
including the land, building and improvements affixed to the properties. The facility is being leased back over a seven year term and is classified as an operating lease. The net proceeds from the
sale were $8.4 million and were reinvested in the business. The sale of this facility resulted in a gain of approximately $4.9 million. This gain has been deferred and is being amortized
over the lease term. During the three and six months ended May 31, 2009, the Company has recognized $0.2 million and $0.3 million of this gain, respectively. The remaining
deferred gain was $4.6 million at May 31, 2009. Amounts recorded as a component of other accrued liabilities and other noncurrent liabilities

28

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 19: Commitments and Contingencies (Continued)

within
the accompanying Condensed Consolidated Balance Sheets as of May 31, 2009 are $0.4 million and $4.2 million, respectively. The future minimum payments associated with this
lease for the next five years, from the date of the sale, are as follows (in thousands):

Fiscal Year2009

$
6302010


8612011


8832012


9052013


927Thereafter


1,925$
6,131


The
Company has employment agreements with certain of its executive officers and key employees which, among other things, provide severance benefits to those employees. For the three and
six months ended May 31, 2009, severance costs of an insignificant amount and $1.2 million, respectively, were recorded as a component of operating income within the accompanying
Condensed Consolidated Statements of Operations. For the three and six months ended June 1, 2008, severance costs of $3.4 million and $4.3 million, respectively, were recorded as
a component of operating income within the accompanying Condensed Consolidated Statements of Operations. These charges are inclusive of the $0.7 million of compensation cost that was recognized
in connection with a modification of the terms of certain stock options in connection with the employee's resignation. Severance benefits of $2.4 million and $3.2 million have been
accrued as of May 31, 2009 and November 30, 2008, respectively. Of this amount, $2.4 million and $2.2 million is included as a component of accrued liabilities and
$0.0 million and $1.0 million is included as a component of other noncurrent liabilities within the accompanying Condensed Consolidated Balance Sheet as of May 31, 2009 and
November 30, 2008, respectively.

Note 20: Related Party Transactions

During the three and six months ended May 31, 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 $0.9 million and $1.6 million, respectively. As of May 31, 2009, $1.1 million of this amount was accrued as a
component of other accrued liabilities in the accompanying Condensed Consolidated Balance Sheets. The Company was also billed $0.1 million and $0.2 million for executive search costs
incurred by KKR on the Company's behalf for the three and six months ended May 31, 2009, respectively. During the three and six months ended June 1, 2008, the Company was billed for
premiums of $0.1 million and $0.2 million, respectively for excess directors and officers liability insurance and excess liability insurance to KKR.

In
connection with the Refinancing (Note 9), the Company entered into an agreement with Sealy Holding, LLC, a company which is owned by KKR, whereby the Purchaser provided
$177.1 million in cash to support its obligation to exercise its rights as well as an oversubscription for those rights that are not exercised by other common shareholders. Until the conclusion
of the rights offering period, the

29

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 20: Related Party Transactions (Continued)

$177.1 million
bears interest at a rate of LIBOR plus 3.0%. At the expiration of the rights offering period, the Company will repay the Purchaser an amount equal to the proceeds obtained from
the subscription to the Convertible Notes by other shareholders and Convertible Notes will be issued for the remaining amount. At May 31, 2009, the $177.1 million is reflected as related
party debt within the Condensed Consolidated Balance Sheet. At May 31, 2009 $0.1 million of interest has been recognized on this related party debt and is accrued as a component of
accrued interest within the Condensed Consolidated Balance Sheet. As consideration for the forward purchase, the Company paid the Purchaser $1.0 million which has been deferred as debt issuance
costs which will be amortized as a component of interest expense.

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. An insignificant amount of interest has been recorded related to KKR Financial LLC's portion of the outstanding Senior Notes and
remains accrued at May 31, 2009.

Note 21: Segment Information

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

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

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

Three Months Ended

Six Months EndedMay 31, 2009

June 1, 2008

May 31, 2009

June 1, 2008Americas:United States

$
222,478

$
258,678

$
457,233

$
539,968Canada


32,743


44,892


63,782


89,259Other International


19,098


26,701


38,989


54,142Total Americas


274,319


330,271


560,004


683,369Europe


24,136


45,104


48,427


83,935Total

$
298,455

$
375,375

$
608,431

$
767,304Total International

$
75,977

$
116,697

$
151,198

$
227,336


There
were no sales from Europe to the Americas for the three and six months ended May 31, 2009. Sales from Europe to the Americas for the three and six months ended
June 1, 2008 were

30

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 21: Segment Information (Continued)

$1.8 million
and $3.7 million, respectively. Long lived assets (principally property, plant and equipment) outside the United States were $67.8 million and $60.8 million as
of May 31, 2009 and November 30, 2008, respectively.

Three Months Ended

Six Months EndedMay 31, 2009

June 1, 2008

May 31, 2009

June 1, 2008(in thousands)

(in thousands)Net sales to external customers:Americas

$
274,319

$
330,271

$
560,003

$
683,369Europe


24,136


45,104


48,427


83,935298,455


375,375


608,430


767,304Capital expenditures:Americas


2,129


4,032


4,337


12,578Europe


52


772


190


1,2882,181


4,804


4,527


13,866EBITDA:Americas*


20,607


42,566


54,560


89,492Europe


(3,502
)

1,403


(4,515
)

3,423Inter-segment eliminations


(67
)

191


(68
)

11717,038


44,160


49,977


93,032Reconciliation of EBITDA to net income:EBITDA from segments


17,038


44,160


49,977


93,032Interest


16,876


15,369


34,424


30,745Income taxes


(2,719
)

8,091


308


16,996Depreciation and amortization


8,119


8,743


15,738


17,120Net Income

$
(5,238
)
$
11,957

$
(493
)
$
28,171


---

May 31, 2009

November 30, 2008(in thousands)Total assets:Americas

$
930,198

$
852,644Europe


72,356


69,784Intersegment eliminations


(1,553
)

(1,554
)$
1,001,001

$
920,874


31

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 22: Common Stock and Options Subject to Redemption

In connection with its adoption of FAS 123(R), the Company reclassified as temporary equity amounts previously included in additional paid in capital that were associated with
outstanding shares and options which, under the terms of management shareholder agreements, were potentially redeemable for a 180 day period following the death or disability of the share or
option holder. During the second quarter of fiscal 2009, the right of the share or option holder to redeem the shares or options expired. As a result, the remaining balance of temporary equity of
$8.6 million was reclassified to additional paid in capital.

Note 23: Earnings per Share

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

Three Months Ended

Six Months EndedMay 31, 2009

June 1, 2008

May 31, 2009

June 1, 2008(in thousands)

(in thousands)Numerator:Net (loss) income available to common shareholders

$
(5,238
)
$
11,957

$
(492
)
$
28,171Denominator:Denominator for basic earnings per shareweighted average shares


91,819


90,999


91,813


90,932Effect of dilutive securities:Stock options





2,871





3,737Other





95





89Denominator for diluted earnings per shareadjusted weighted average shares and assumed conversions


91,819


93,965


91,813


94,758


On
May 26, 2009, in order to have sufficient authorized but unissued shares of common stock for issuance with any conversion of the Convertible Notes, the Company amended its
Certificate of Incorporation to increase the number of voting Class A shares of common stock authorized for issuance by 400,000,000 to a total of 600,000,000 shares. The number of authorized
shares of preferred stock, par value $0.01 per share, remained unchanged at 50,000,000.

Since
the Company reported a net loss for the three and six month periods ending May 31, 2009 the 189,478 outstanding options to purchase common stock, restricted shares, share
units and rights for
Convertible Notes (in thousands) are considered antidilutive and are not included in the calculation of diluted earnings per share. Options and share units not included in the calculation of diluted
earnings per share because their impact is antidilutive are 2,995 and 2,555 for the three and six month periods ended June 1, 2008, respectively.

32

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 24: Restructuring Activities

For the three and six months ended May 31, 2009 and June 1, 2008, the Company recognized restructuring charges related to initiatives including facility closures and
organizational changes. The pretax restructuring charges recognized by the Company during the three and six months ended May 31, 2009 and June 1, 2008 were as follows:

Three Months Ended

Six Months EndedMay 31, 2009

June 1, 2008

May 31, 2009

June 1, 2008(in thousands)

(in thousands)Americas Segment

$
1,335

$


$
1,448

$
541Europe Segment











$
1,335

$


$
1,448

$
541


The
following table summarizes the restructuring activity for the six months ended May 31, 2009 and the related restructuring liabilities balance:

2009 Restructuring ActivitiesLiabilities
November 30, 2008

Charges to
Expense

Cash
Payments

Non-cash
Utilized

Liabilities
May 31, 2009(in thousands)Severance and employee benefits

$
393

$
114

$
(315
)
$


$
192Asset impairment charges





1,334





(1,334
)

Other restructuring costs














Total

$
393

$
1,448

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


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

33

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 24: Restructuring Activities (Continued)

The
following table summarizes the restructuring activity for the six months ended June 1, 2008 and the related restructuring liabilities balance:

2008 Restructuring ActivitiesLiabilities
December 2, 2007

Charges to
Expense

Cash
Payments

Non-cash
Utilized

Liabilities
June 1, 2008(in thousands)Severance and employee benefits

$


$
541

$
(322
)
$


$
219Other restructuring costs














Total

$


$
541

$
(322
)
$


$
219


Restructuring
charges in the first half of fiscal 2008 represent employee severance and related benefit charges related to the decision to cut back the manufacturing operations in Brazil
and move to a business model under which more product would be supplied by production from other Sealy manufacturing facilities.

Note 25: Subsequent Event

On June 12, 2009, the Company approved grants of 13,266,500 RSUs to certain members of management and independent board members. The RSUs 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% until the RSUs are vested or forfeited. Additionally, as a result of the Refinancing,
the Company adjusted the strike prices and/or number of units of its outstanding employee stock options, RSUs and phantom stock units. This modification gives effect to the dilution caused by the
issuance of the rights for Convertible Notes.

On
June 15, 2009, Sealy was served with a lawsuit filed by Tempur-Pedic, LLC North America in the Western District of Virginia. In the lawsuit, Tempur-Pedic alleges that
Sealy and sixteen other defendants are infringing a patent issued to Tempur-Pedic in March of 2009, requesting injunctive relief and unspecified damages against all of the defendants. Sealy is
currently reviewing the lawsuit and intends to pursue a vigorous defense in the matter. As the suit was filed in June 2009, no trial date has been set and the parties are now pursuing
discovery. Accordingly, at this time, Sealy cannot predict the potential outcome of this litigation.

Note 26: 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

34

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 26: Guarantor/Non-Guarantor Financial Information (Continued)

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

The
following supplemental Condensed Consolidating Financial Statements present:



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

35

---





SEALY CORPORATION        Supplemental Condensed Consolidating Balance Sheets        May 31, 2009        (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedAssetsCurrent assets:Cash and equivalents

$
29

$


$
36,097

$
35,996

$
20,376

$


$
92,498Accounts receivable, net








5


98,165


73,049





171,219Inventories








2,000


36,711


19,617


(471
)

57,857Prepaid expenses, deferred income taxes and other current assets


1,358





254


29,822


7,152





38,586Total current assets


1,387





38,356


200,694


120,194


(471
)

360,160Property, plant and equipment, at cost








9,372


349,954


96,019





455,345Less accumulated depreciation








(4,626
)

(189,658
)

(39,917
)




(234,201
)





4,746


160,296


56,102





221,144Other assets:Goodwill








24,741


301,942


34,181





360,864Intangible assets, net


1,792








1,811








3,603Net investment in subsidiaries


(181,852
)

234,190


377,901


44,349





(474,588
)

Due from (to) affiliates


225,301


(416,042
)

550,259


(85,553
)

(96,990
)

(176,975
)

Debt issuance costs, net and other assets








29,406


15,093


10,731





55,23045,241


(181,852
)

982,307


277,642


(52,078
)

(651,563
)

419,697Total assets

$
46,628

$
(181,852
)
$
1,025,409

$
638,632

$
124,218

$
(652,034
)
$
1,001,001Liabilities and Stockholders' (Deficit) EquityCurrent liabilities:Current portionlong-term obligations

$


$


$


$
3,124

$
13,613

$


$
16,737Accounts payable








261


59,248


41,896





101,405Accrued customer incentives and advertising











19,933


5,036





24,969Accrued compensation








326


19,982


7,395





27,703Accrued interest


18





955


9,906


313





11,192Other accrued liabilities


3,134





3,606


27,993


6,144





40,877Total current liabilities


3,152





5,148


140,186


74,397





222,883Long-term obligations


177,132





786,993


41,215


8,438


(177,132
)

836,646Written option liability for convertible notes


95,985

















95,985Other liabilities











57,326


11,856





69,182Deferred income tax liabilities


783





(922
)

377


6,491





6,729Common stock and options subject to redemption




















Stockholders' equity (deficit)


(230,424
)

(181,852
)

234,190


399,528


23,036


(474,902
)

(230,424
)Total liabilities and stockholders' equity (deficit)

$
46,628

$
(181,852
)
$
1,025,409

$
638,632

$
124,218

$
(652,034
)
$
1,001,001


36

---





SEALY CORPORATION        Supplemental Condensed Consolidating Balance Sheets        November 30, 2008        (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedAssetsCurrent assets:Cash and equivalents

$
589

$


$
1

$
2,423

$
23,583

$


$
26,596Accounts receivable, net








7


80,528


76,048





156,583Inventories








1,695


44,454


18,945


(460
)

64,634Prepaid expenses, deferred income taxes and other current assets


1,368





2,645


38,406


5,325





47,7441,957





4,348


165,811


123,901


(460
)

295,557Property, plant and equipment, at cost








9,676


352,888


86,744





449,308Less accumulated depreciation








(4,613
)

(180,256
)

(33,691
)




(218,560
)





5,063


172,632


53,053





230,748Other assets:Goodwill








24,741


301,942


30,466





357,149Intangible assets, net


2,989








1,956








4,945Net investment in subsidiaries


(199,388
)

216,613


367,163


29,866





(414,254
)

Due from (to) affiliates


43,933


(416,001
)

534,520


(72,344
)

(90,206
)

98


Debt issuance costs, net and other assets








8,640


17,088


6,747





32,475(152,466
)

(199,388
)

935,064


278,508


(52,993
)

(414,156
)

394,569Total assets

$
(150,509
)
$
(199,388
)
$
944,475

$
616,951

$
123,961

$
(414,616
)
$
920,874Liabilities and Stockholders' (Deficit) EquityCurrent liabilities:Current portionlong-term obligations

$


$


$
3,750

$
2,737

$
14,756

$


$
21,243Accounts payable








341


52,337


44,406





97,084Accrued customer incentives and advertising











24,013


10,529





34,542Accrued compensation








392


16,082


8,323





24,797Accrued interest


27





1,127


14,919


359





16,432Other accrued liabilities


3,702





6,408


27,560


6,693





44,3633,729





12,018


137,648


85,066





238,461Long-term obligations








711,776


42,034


8,352





762,162Other noncurrent liabilities


947





8,055


51,280


10,975





71,257Deferred income tax liabilities


783





(3,987
)

3,443


4,723





4,962Common stock and options subject to redemption


8,856

















8,856Stockholders' equity (deficit)


(164,824
)

(199,388
)

216,613


382,546


14,845


(414,616
)

(164,824
)Total liabilities and stockholders' equity (deficit)

$
(150,509
)
$
(199,388
)
$
944,475

$
616,951

$
123,961

$
(414,616
)
$
920,874


37

---





SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Operations        Three Months Ended May 31, 2009        (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
19,327

$
210,797

$
74,789

$
(6,458
)
$
298,455Cost and expenses:Cost of goods sold








11,751


121,595


49,468


(6,510
)

176,304Selling, general and administrative


(197
)




1,819


71,506


22,453





95,581Amortization expense


723








72


(17
)




778Restructuring expenses and asset impairment











1,335








1,335Royalty (income) expense, net


(999
)







(4,600
)

999





(4,600
)Income from operations


473





5,757


20,889


1,886


52


29,057Interest expense


27


72


15,951


623


203





16,876Loss on rights for convertible notes


2,729

















2,729Gain on sale of subsidiary stock




















Refinancing and extinguishment of debt and interest rate derivatives








17,422











17,422Other (income) expense, net














(13
)




(13
)Loss (income) from equity investees


4,635


4,661


(1,260
)







(8,036
)

Loss (income) from non- guarantor equity investees











158





(158
)

Capital charge and intercompany interest allocation








(14,544
)

14,039


505





Income (loss) before income taxes


(6,918
)

(4,733
)

(11,812
)

6,069


1,191


8,246


(7,957
)Income tax provision (benefit)


(1,680
)

(98
)

(7,151
)

4,838


1,416


(44
)

(2,719
)Net income (loss)

$
(5,238
)
$
(4,635
)
$
(4,661
)
$
1,231

$
(225
)
$
8,290

$
(5,238
)


38

---





SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Operations        Three Months Ended June 1, 2008        (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
18,334

$
248,087

$
116,919

$
(7,965
)
$
375,375Cost and expenses:Cost of goods sold








10,654


148,850


75,442


(7,944
)

227,002Selling, general and administrative


21





1,850


84,946


29,542





116,359Amortization expense


847








73


34





954Royalty (income) expense, net


(1,170
)







(4,276
)

1,170





(4,276
)Income from operations


302





5,830


18,494


10,731


(21
)

35,336Interest expense


72


127


13,251


604


1,315





15,369Other (income) expense, net














(81
)




(81
)Loss (income) from equity investees


(11,835
)

(11,906
)

(9,351
)







33,092


Loss (income) from non-guarantor equity investees











(5,483
)




5,483


Capital charge and intercompany interest allocation








(12,273
)

11,363


910





Income (loss) before income taxes


12,065


11,779


14,203


12,010


8,587


(38,596
)

20,048Income tax provision (benefit)


108


(56
)

2,297


2,640


3,147


(45
)

8,091Net income (loss)

$
11,957

$
11,835

$
11,906

$
9,370

$
5,440

$
(38,551
)
$
11,957


39

---





SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Operations        Six Months Ended May 31, 2009        (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
40,220

$
433,466

$
148,334

$
(13,589
)
$
608,431Cost and expenses:Cost of goods sold








24,124


257,675


99,809


(13,578
)

368,030Selling, general and administrative


(3
)




3,752


146,684


41,844





192,277Amortization expense


1,450








144


(1
)




1,593Restructuring expenses and asset impairment











1,448








1,448Royalty (income) expense, net


(2,003
)







(8,001
)

2,034





(7,970
)Income from operations


556





12,344


35,516


4,648


(11
)

53,053Interest expense


63


160


31,853


1,242


1,106





34,424Loss on rights for convertible notes


2,729

















2,729Gain on sale of subsidiary stock














(1,292
)




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








17,422











17,422Other (income) expense, net














(46
)




(46
)Loss (income) from equity investees


(75
)

(116
)

(2,122
)







2,313


Loss (income) from non-guarantor equity investees











(856
)




856


Capital charge and intercompany interest allocation








(29,014
)

27,919


1,095





Income (loss) before income taxes


(2,161
)

(44
)

(5,795
)

7,211


3,785


(3,180
)

(184
)Income tax provision (benefit)


(1,669
)

(119
)

(5,911
)

5,069


2,997


(59
)

308Net income (loss)

$
(492
)
$
75

$
116

$
2,142

$
788

$
(3,121
)
$
(492
)


40

---





SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Operations        Six Months Ended June 1, 2008        (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
36,464

$
518,600

$
227,609

$
(15,369
)
$
767,304Cost and expenses:Cost of goods sold








21,636


313,229


146,357


(15,486
)

465,736Selling, general and administrative


(33
)




3,591


171,685


57,860





233,103Amortization expense


1,647








145


77





1,869Royalty (income) expense, net


(2,214
)







(9,136
)

2,214





(9,136
)Income from operations


600





11,237


42,677


21,101


117


75,732Interest expense


149


270


27,314


1,055


1,957





30,745Other (income) expense, net














(180
)




(180
)Loss (income) from equity investees


(27,985
)

(28,097
)

(24,245
)







80,327


Loss (income) from non-guarantor equity investees











(16,229
)




16,229


Capital charge and intercompany interest allocation








(25,401
)

22,738


2,663





Income (loss) before income taxes


28,436


27,827


33,569


35,113


16,661


(96,439
)

45,167Income tax provision (benefit)


265


(158
)

5,472


10,868


549





16,996Net income (loss)

$
28,171

$
27,985

$
28,097

$
24,245

$
16,112

$
(96,439
)
$
28,171


41

---





SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Cash Flows        Six Months Ended May 31, 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

$


$


$
887

$
19,742

$
(5,309
)
$


$
15,320Investing activities:Purchase of property, plant and equipment








(12
)

(3,946
)

(634
)




(4,592
)Proceeds from the sale of property, plant, and equipment








46


10,153


(50
)




10,149Net 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


(265
)




(15,739
)

10,665


5,339





Net cash provided by (used in) investing activities


(265
)




(15,705
)

16,872


3,570





4,472Financing activities:Equity received upon exercise of stock including related excess tax benefits


(295
)
















(295
)Proceeds from issuance of long term obligations














2,830





2,830Repayments of long-term obligations











(3,041
)

(5,954
)




(8,995
)Repayment of old senior term loans








(377,181
)










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








335,916











335,916Proceeds from issuance of related party debt








177,132











177,132Borrowings under new asset- based revolver




















Borrowings under old revolving credit facilities








130,300





10,316





140,616Repayments on old revolving credit facilities








(194,700
)




(10,316
)




(205,016
)Debt issuance costs








(20,553
)










(20,553
)Other




















Net cash used in financing activities


(295
)




50,914


(3,041
)

(3,124
)




44,454Effect of exchange rate changes on cash














1,656





1,656Change in cash and equivalents


(560
)




36,096


33,573


(3,207
)




65,902Cash and equivalents:Beginning of period


589





1


2,423


23,583





26,596End of period

$
29

$


$
36,097

$
35,996

$
20,376

$


$
92,498


42

---





SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Cash Flows        Three Months Ended June 1, 2008        (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedNet cash provided by operating activities

$
(2
)
$


$
5,667

$
10,625

$
46,490

$


$
62,780Investing activities:Purchase of property, plant and equipment








(125
)

(11,399
)

(2,342
)




(13,866
)Proceeds from the sale of property, plant, and equipment











5


7





12Net activity in investment in and advances from (to) subsidiaries and affiliates


6,097





(1,280
)

3,807


(8,624
)




Net cash provided by (used in) investing activities


6,097





(1,405
)

(7,587
)

(10,959
)




(13,854
)Financing activities:Dividend


(6,811
)
















(6,811
)Equity received upon exercise of stock including related excess tax benefits


803

















803Repurchase of common stock




















Proceeds from issuance of long term obligations














1,748





1,748Repayments of long-term obligations








(7,462
)

(2,861
)

(6,559
)




(16,882
)Borrowings under revolving credit facilities








189,300





16,958





206,258Repayments on revolving credit facilities








(186,100
)




(16,985
)




(203,085
)Other




















Net cash used in financing activities


(6,008
)




(4,262
)

(2,861
)

(4,838
)




(17,969
)Effect of exchange rate changes on cash














(1,317
)




(1,317
)Change in cash and equivalents


87








177


29,376





29,640Cash and equivalents:Beginning of period


4





1


4,012


10,590





14,607End of period

$
91

$


$
1

$
4,189

$
39,966

$


$
44,247


43

---





SEALY CORPORATION

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

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

BUSINESS OVERVIEW

Our conventional bedding products include theSealy, Sealy Posturepedic, Stearns &
Foster,andBassettbrands and accounted for approximately 87% of our total net sales for the year ended November 30,
2008. In addition to our innerspring bedding, we also produce a variety of visco-elastic (memory foam) and latex foam bedding products.

The
current economic and weak retail environments have affected the level of spending by end consumers and have caused a decrease in U.S. mattress sales across the industry. We expect
this challenging business environment to continue through 2009. Also, the economic slowdown we have been experiencing in the U.S. has begun to spread and we are experiencing a slowdown in
international markets as well. Furthermore, changes in foreign exchange rates contributed favorably to international results in fiscal 2008 and these trends have begun to reverse.

We
have continued our focus on new product development to bring new and innovative products to the market. In February 2009, we introduced our redesigned Stearns & Fosterproduct line which
features our Variable Response Technology foam to provide a softer, more indulgent sleep surface. Earlier, in
January 2008, we introduced our newSealy Posturepedicinnerspring line which is designed to eliminate tossing and turning caused by pressure points. We
have also invested capital in the business to increase our capability to design products including the opening of our Center of Excellence pressure mapping laboratory in 2008.

Our
industry continues to recover from 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 2008, the cost of these components saw significant increases above their recent historical averages. We have begun to see these costs, particularly those related to
steel and polyurethane and latex foams, decrease during the second quarter of fiscal 2009 and expect these decreases to level off during the third quarter of fiscal 2009 due to declines in related
commodity prices. 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 and Puerto Rico. Europe's operations are concentrated in western Europe.

44

---



RESULTS OF OPERATIONS



The following table sets forth our summarized results of operations for the three months ended May 31, 2009 and June 1,
2008, expressed in thousands of dollars, as well as a percentage of each period's net sales:

For the three months ended:May 31, 2009

June 1, 2008(in thousands)

(percentage
of net sales)

(in thousands)

(percentage
of net sales)Net sales

$
298,455


100.0
%
$
375,375


100.0
%Cost of goods sold


176,304


59.1


227,002


60.5Gross profit


122,151


40.9


148,373


39.5Selling, general and administrative expenses


95,581


32.0


116,359


31.0Amortization expense


778


0.3


954


0.3Restructuring expenses and asset impairment


1,335


0.4





Royalty income, net of royalty expense


(4,600
)

(1.5
)

(4,276
)

(1.1
)Income from operations


29,057


9.7


35,336


9.3Interest expense


16,876


5.7


15,369


4.1Loss on rights for convertible notes


2,729


0.9





Refinancing and extinguishment of debt and interest rate derivatives


17,422


5.8





Other income, net


(13
)




(81
)

(Loss) income before income taxes


(7,957
)

(1.8
)

20,048


5.2Income tax (benefit) provision


(2,719
)

(0.9
)

8,091


2.2Net (loss) income

$
(5,238
)

(0.9
)%
$
11,957


3.0
%Effective tax rate


34.2
%




40.4
%


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

Three Months Ended:May 31,
2009

June 1,
2008Americas:United States


74.5
%

68.9
%Canada


11.0


12.0Other


6.4


7.1Total Americas


91.9


88.0Europe


8.1


12.0Total


100.0
%

100.0
%


45

---



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

For the three months endedMay 31, 2009

June 1, 2008(in thousands)

(percentage
of net sales)

(in thousands)

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

$
274,319


100.0
%
$
330,271


100.0
%Cost of goods sold


158,609


57.8


193,054


58.5Gross profit


115,710


42.2


137,217


41.5United States (US Dollars):Net sales


222,478


100.0


258,678


100.0Cost of goods sold


126,038


56.7


152,319


58.9Gross profit


96,440


43.3


106,359


41.1Total International (US Dollars):Net sales


75,977


100.0


116,697


100.0Cost of goods sold


50,266


66.2


74,683


64.0Gross profit


25,711


33.8


42,014


36.0Canada:US Dollars:Net sales


32,743


100.0


44,892


100.0Cost of goods sold


21,184


64.7


25,119


56.0Gross profit


11,559


35.3


19,773


44.0Canadian Dollars:Net sales


39,217


100.0


45,242


100.0Cost of goods sold


25,367


64.7


25,308


55.9Gross profit


13,850


35.3


19,934


44.1Other Americas (US Dollars):Net sales


19,098


100.0


26,701


100.0Cost of goods sold


11,387


59.6


15,616


58.5Gross profit


7,711


40.4


11,085


41.5Europe:US Dollars:Net sales


24,136


100.0


45,104


100.0Cost of goods sold


17,695


73.3


33,948


75.3Gross profit


6,441


26.7


11,156


24.7Euros:Net sales


18,122


100.0


28,924


100.0Cost of goods sold


13,277


73.3


21,770


75.3Gross profit


4,845


26.7
%

7,154


24.7
%


46

---







Net Sales.Our consolidated net sales for the quarter ended May 31, 2009, were $298.5 million, a decrease of
$76.9 million, or
20.5%, from the quarter ended June 1, 2008. Total Americas net sales were $274.3 million for the second quarter of fiscal 2009, a decrease of 16.9% from the second quarter of fiscal
2008. This decrease was primarily related to decreased sales in the U.S. and Canada. Total U.S. net sales were $222.5 million for the second quarter of fiscal 2009, a decrease of 14% from the
second quarter of fiscal 2008. The U.S. net sales decrease of $36.2 million was attributable to a 13.2% decrease in wholesale unit volume and a 0.7% decrease in wholesale average unit selling
price. The decrease in unit volume is primarily attributable to continued weak retail demand as described above under "Business Overview". The slight decrease in average unit selling price was driven
by reduced industry demand for higher priced products and increased demand for value priced goods likeSealybranded product as a result of their appeal
to consumers in this economic environment. Of the 0.7% decline in wholesale average unit selling price, 1.4% was attributable to the $3.7 million favorable impact received from the change in
the estimated reserve for non-warranty product returns in fiscal 2008. These factors were partially offset by the favorable impact of our July 2008 price increase as well as fewer
discounts on floor samples in the second quarter of fiscal 2009 as theStearns & Fosterproduct launched in fiscal 2009 is not distributed as
widely as thePosturepedicproduct launched in fiscal 2008. International net sales decreased $40.7, million or 34.9%, from the second quarter of
fiscal 2008 to $76.0 million. Excluding the effects of currency fluctuation, net sales declined 22.2% from the second quarter of fiscal 2008. This decline was primarily due to declines in OEM
sales in Europe and, to a lesser extent, the weak retail environment in Canada and Europe. In Canada, local currency sales decreases of 13.3% translated into decreases of 27.1% in U.S. dollars due to
the decline in value of the Canadian dollar versus the U.S. dollar. Local currency sales performance in Canada was driven by a 13.5% decrease in unit volume, which was partially offset by a 0.2%
increase in average unit selling price. The decline in unit volume is primarily attributable to weak Canadian retail demand. Elsewhere in the Americas, we have experienced sales decreases in our
Mexico and South American markets. In
our Europe segment, local currency sales decreases of 37.3% translated into decreases of 46.5% in U.S. dollars due to the decline in value of the Euro versus the U.S. dollar. Decreased sales of OEM
latex bed cores, which have lower prices, drove most of the decline. Local currency finished goods sales in Europe decreased 8.5% and we believe is reflective of the overall economic slowdown in
Europe.

Gross Profit.Our consolidated gross profit for the quarter was $122.2 million, a decrease of $26.2 million from the
comparable prior
year period. As a percentage of net sales, gross profit increased 1.4 percentage points to 40.9% due to an increase in gross profit margins in both of our segments. Total Americas gross profit
for the quarter was $115.7 million, a decrease of $21.5 million from the comparable prior year period. As a percentage of net sales, gross profit for the Americas increased
0.7 percentage points to 42.2%. This increase as a percentage of sales was primarily due to an increase in gross profit margins in our U.S. operations partially offset by decreased gross profit
margins in Canada. U.S. gross profit decreased $9.9 million to $96.4 million, which, as a percent of sales, represents an increase of 2.2 percentage points to 43.3% of net sales.
The increase in percentage of net sales was driven by a combination of the favorable impact of fewer floor sample discounts offered in the second quarter of fiscal 2009, operations efficiencies such
as labor productivity and value engineering and the price increases taken in July 2008. Partially offsetting these improvements was a benefit of $8.2 million from the change in
accounting estimate related to our returns allowances in the prior year period which resulted in a reduction of cost of sales of approximately $4.5 million and an increase to sales of
approximately $3.7 million. In addition, margins were negatively impacted by less absorption of fixed costs as a result of lower volume and slightly higher material costs. The gross profit
margin in Canada was 35.3% as a percentage of net sales which represents a decrease of 8.8 percentage points. This decrease was driven by the impact of currency fluctuations and inflation on
raw materials. In addition, our margins were negatively impacted by less absorption of fixed costs as a result of lower volume. In our Europe segment, the gross profit margin increase of
2.0 percentage

47

---



points
was due to the shift in product sales mix toward more finished goods sales, partially offset by the unfavorable impact of less absorption for fixed costs as a result of lower volume.

Selling, General, Administrative.Our consolidated selling, general and administrative expense decreased $20.8 million to
$95.6 million. As a percent of net sales this expense was 32.0% and 31.0% for the quarters ended May 31, 2009 and June 1, 2008, respectively, an increase of 1.0 percentage
point. The increase as a percent of sales is primarily due to lower sales volumes. The decrease in absolute dollars is primarily due to a $9.5 million reduction in volume driven variable
expenses including a $5.9 million decrease in delivery costs due primarily to a decrease in unit volume shipped, a $2.2 million decrease in cooperative advertising and promotional costs
and a decrease in bad debt expense of $1.0 million. Fixed operating costs decreased $4.5 million from the prior year period due to reductions in national advertising expenses, salary and
fringe expenses and discretionary expenditures. Promotional expenses related to launching new products in the U.S. were $3.1 million lower than in fiscal 2008 which included costs associated
with the 2008 roll out of our newSealy Posturepedicinnerspring line. In addition, severance related costs decreased $2.7 million from the
second quarter of fiscal 2008.

Restructuring expenses and asset impairment.We recognized pretax restructuring costs of $1.3 million during the quarter ended
May 31,
2009 as compared with no such costs recognized during the comparable prior year period.

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

Royalty income, net of royalty expense.Our consolidated royalty income, net of royalty expenses, for the three months ended May 31,
 2009
increased by $0.3 million as compared with the prior year period to $4.6 million primarily due to a increase in domestic license sales.

Interest Expense.Our consolidated interest expense for the second quarter of fiscal 2009 increased $1.5 million as compared with
the prior
year period to $16.9 million. Our net weighted average borrowing cost was 8.5% and 7.6% for the three months ended May 31, 2009 and June 1, 2008, respectively. Our borrowing cost
was unfavorably impacted by the amendment of our old senior credit facility in the fourth quarter of fiscal 2008 which increased the applicable margins on our interest rates between 275 and 325 basis
points. Also contributing to the increase in interest expense were higher outstanding balances on our old senior revolving credit facility during the second quarter of fiscal 2009.

Refinancing and extinguishment of debt and interest rate derivativesDebt extinguishment and refinancing expenses for the quarter ended
May 31, 2009 includes non-cash charges of $2.1 million relating to the write-off of debt issuance costs related to our old senior term loans. Additionally, we
incurred $15.2 million of charges associated with termination payments on our interest rate swap agreements that were associated with the old senior credit facility.

Income Tax.Our effective income tax rates differ from the Federal statutory rate principally because of the effect of certain foreign
tax rate
differentials and state and local income taxes. Our effective tax rate for the three months ended May 31, 2009 was 34.2% compared to 40.4% for the three months
ended June 1, 2008. The effective rate for the fiscal 2009 period was lower than the fiscal 2008 period primarily due to lower pre-tax income in fiscal 2009.

48

---





The following table sets forth our summarized results of operations for the six months ended May 31, 2009 and June 1,
2008, expressed in thousands of dollars, as well as a percentage of each period's net sales:

For the six months ended:May 31, 2009

June 1, 2008(in thousands)

(percentage
of net sales)

(in thousands)

(percentage
of net sales)Net sales

$
608,431


100.0
%
$
767,304


100.0
%Cost of goods sold


368,030


60.5


465,736


60.7Gross profit


240,401


39.5


301,568


39.3Selling, general and administrative expenses


192,277


31.6


232,562


30.3Amortization expense


1,593


0.3


1,869


0.2Restructuring expenses and asset impairment


1,448


0.2


541


0.1Royalty income, net of royalty expense


(7,970
)

(1.3
)

(9,136
)

(1.2
)Income from operations


53,053


8.7


75,732


9.9Interest expense


34,424


5.7


30,745


4.0Loss on rights for convertible notes


2,729


0.4





Refinancing and extinguishment of debt and interest rate derivatives


17,422


2.9





Gain on sale of subsidiary stock


(1,292
)

(0.2
)




Other income, net


(46
)




(180
)

(Loss) income before income taxes


(184
)

(0.1
)

45,167


5.9Income tax provision


308


0.1


16,996


2.2Net (loss) income

$
(492
)

(0.2
)%
$
28,171


3.7
%Effective tax rate


(167.4
)%




37.6
%


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

Six Months Ended:2009

2008Americas:United States


75.1
%

70.4
%Canada


10.5


11.6Other


6.4


7.1Total Americas


92.0


89.1Europe


8.0


10.9Total


100.0
%

100.0
%


49

---



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

For the six months ended:May 31, 2009

June 1, 2008(in thousands)

(percentage
of net sales)

(in thousands)

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

$
560,004


100.0
%
$
683,369


100.0
%Cost of goods sold


331,822


59.3


403,157


59.0Gross profit


228,182


40.7


280,212


41.0United States (US Dollars):Net sales


457,233


100.0


539,968


100.0Cost of goods sold


266,340


58.3


320,903


59.4Gross profit


190,893


41.7


219,065


40.6Total International (US Dollars):Net sales


151,198


100.0


227,336


100.0Cost of goods sold


101,690


67.3


144,833


63.7Gross profit


49,508


32.7


82,503


36.3Canada:US Dollars:Net sales


63,782


100.0


89,259


100.0Cost of goods sold


41,733


65.4


50,456


56.5Gross profit


22,049


34.6


38,803


43.5Canadian Dollars:Net sales


77,607


100.0


89,424


100.0Cost of goods sold


50,795


65.5


50,539


56.5Gross profit


26,812


34.5


38,885


43.5Other Americas (US Dollars):Net sales


38,989


100.0


54,142


100.0Cost of goods sold


23,749


60.9


31,798


58.7Gross profit


15,240


39.1


22,344


41.3Europe:US Dollars:Net sales


48,427


100.0


83,935


100.0Cost of goods sold


36,208


74.8


62,579


74.6Gross profit


12,219


25.2


21,356


25.4Euros:Net sales


36,455


100.0


55,244


100.0Cost of goods sold


27,239


74.7


41,163


74.5Gross profit


9,216


25.3
%

14,081


25.5
%


50

---







Net Sales.Our consolidated net sales for the six months ended May 31, 2009, were $608.4 million, a decrease of
$158.9 million,
or 20.7%, from the six months ended June 1, 2008. Total Americas net sales were $560.0 million for the first half of fiscal 2009, a decrease of 18.1% from the first half of fiscal 2008.
This decrease was primarily related to our U.S. and Canadian operations within the Americas segment. Total U.S. net sales were $457.2 million for the first half of fiscal 2009, a decrease of
15.3% from the first half of fiscal 2008. The U.S. net sales decrease of $82.7 million was attributable to a 14.9% decrease in wholesale unit volume and a 0.4% decrease in wholesale average
unit selling price. The decrease in unit volume is primarily attributable to continued weak retail demand as described above under "Business Overview". The slight decrease in average unit selling
price was driven by reduced industry demand for higher priced products and increased demand for value priced goods likeSealybranded product as a
result of their appeal to consumers in this economic environment. Of the 0.4% decrease in wholesale average unit selling price, 0.7% was attributable to the $3.7 million favorable impact
received from the change in the estimated reserve for non-warranty product returns in fiscal 2008. These factors were partially offset by the favorable impact of the July 2008 price
increase as well as fewer discounts on floor samples in the second quarter of fiscal 2009 as theStearns & Fosterproduct launch was not
distributed as widely as thePosturepedicproduct launched in the second quarter of fiscal 2008. International net sales decreased $76.1 million,
or 33.5%, from the second quarter of fiscal 2008 to $151.2 million. Excluding the effects of currency fluctuation, net sales declined 20.7% from the second quarter of fiscal 2008. This decline
was primarily due to declines in OEM sales in Europe and, to a lesser extent, the weak retail environment in Canada and Europe. In Canada, local currency sales decreases of 13.2% translated into
decreases of 28.5% in U.S. dollars due to the decline in value of the Canadian dollar versus the U.S. dollar. Local currency sales performance in Canada was driven by a 14.7% decrease in unit
volume, which was partially offset by a 1.8% increase in average unit selling price. The decline in unit volume is primarily attributable to weak Canadian retail demand.
Elsewhere in the Americas, we have experienced sales decreases in our Mexico and South American markets. In our Europe segment, local currency sales decreases of 34.0% translated into decreases of
42.3% in U.S. dollars due to the decline in value of the Euro versus the U.S. dollar. Decreased sales of OEM latex bed cores, which have lower prices, drove most of the decline. Local currency
finished goods sales in Europe decreased 9.8% and we believe is reflective of the overall economic slowdown in Europe.

Gross Profit.Our consolidated gross profit for the six months ended May 31, 2009 was $240.4 million, a decrease of
$61.2 million from the comparable prior year period. As a percentage of net sales, gross profit increased 0.2 percentage points to 39.5% due to an increase in gross profit margins in the
U.S. offset by decreases in our international operations. Total Americas gross profit for the six months was $228.2 million, a decrease of $52.0 million from the comparable prior year
period. As a percentage of net sales, gross profit for the Americas decreased 0.3 percentage points to 40.7%. This decrease as a percentage of sales was primarily due to a decrease in gross
profit margins in our Canadian operations. U.S. gross profit decreased $28.2 million to $190.9 million, which, as a percent of sales, represents an increase of 1.1 percentage
points to 41.7% of net sales. The increase in percentage of net sales was driven by the continued favorable impact of operations efficiencies such as labor productivity and value engineering, the
favorable impact of less floor sample expense in 2009 as compared to 2008, and the price increases taken in July 2008. Partially offsetting these improvements was a benefit of
$8.2 million from the change in accounting estimate related to our returns allowances in the prior year period which resulted in a reduction of cost of sales of approximately
$4.5 million and an increase to sales of approximately $3.7 million. Also, the unfavorable impact of inflation including significant increases on steel and foam and the negative impact
of less absorption of fixed costs as a result of lower volume negatively impacted gross profit margin. The gross profit margin in Canada was 34.6% as a percentage of net sales which represents a
decrease of 8.9 percentage points. This decrease was driven by the impact of currency fluctuations and inflation on raw materials. In our Europe

51

---



segment,
the gross profit margin decrease of 0.2 percentage points was due to the negative impact of less absorption for fixed costs as a result of lower volumes partially offset by a favorable
impact from a shift in sales mix toward more finished goods sales.

Selling, General, Administrative.Our consolidated selling, general and administrative expense decreased $40.3 million to
$192.3 million. As a percent of net sales this expense was 31.6% and 30.3% for the six months ended May 31, 2009 and June 1, 2008, respectively, an increase of
1.3 percentage points. The increase as a percent of sales is primarily due to lower sales volumes. The decrease in absolute dollars is primarily due to a $20.5 million reduction in
volume driven variable expenses including a $10.6 million decrease in cooperative advertising and promotional costs and a $10.7 million decrease in delivery costs due primarily to a
decrease in unit volume shipped. These decreases were partially offset by an increase in bad debt expense of $0.8 million. In addition, fixed operating costs decreased $12.4 million from
the prior year period due to reductions in national advertising expenses, salary and fringe expenses and discretionary expenditures such as travel and entertainment. Promotional expenses related to
launching new products in the U.S. were $4.2 million lower than in fiscal 2008 which included costs associated
with the 2008 roll out of our newSealy Posturepedicinnerspring line. In addition, severance related costs decreased $3.0 million from the first
half of fiscal 2008.

Restructuring expenses and asset impairment.We recognized pretax restructuring costs of $1.4 million during the six months ended
May 31, 2009 as compared with costs of $0.5 million recognized during the comparable prior year period.

In
the first half of fiscal 2008, management made the decision to cut back the manufacturing operations in Brazil and move to a business model under which more product would be supplied
by production from other Sealy manufacturing facilities. As a result, we incurred charges of $0.5 million during that period related to employee severance and related benefits. The plan was
completed in the fourth quarter of fiscal 2008.

In
the third quarter of fiscal 2008, management also made the decision to close its manufacturing facility in Clarion, Pennsylvania. During the six months ended May 31, 2009, we
incurred additional charges related to this action of $0.1 million primarily related to relocation costs. This plan was completed in the first quarter of fiscal 2009 and we do not expect to
incur additional costs related to this restructuring activity.

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

Royalty income, net of royalty expense.Our consolidated royalty income, net of royalty expenses, for the six months ended May 31,
2009
decreased by $1.2 million as compared with the prior year period to $8.0 million primarily due to a decrease in domestic license sales along with unfavorable fluctuations in
international currency rates.

Gain on sale of subsidiary stock.On December 1, 2008, the Company sold 50% 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 joint venture that we participate in with the Australian licensee. As a
result of the sale of the 50% interest, the Company recognized a gain of $1.3 million in the six months ended May 31, 2009.

52

---



Interest Expense.Our consolidated interest expense for the first half of fiscal 2009 increased $3.7 million as compared with the
prior year
period to $34.4 million. Our net weighted average borrowing cost was 8.7% and 7.6% for the six months ended May 31, 2009 and June 1, 2008, respectively. Our borrowing cost was
unfavorably impacted by the amendment of our old senior credit facility in the fourth quarter of fiscal 2008 which increased the applicable margins on our interest rates between 275 and 325 basis
points. Also contributing to the increase in interest expense were higher outstanding balances on our old senior revolving credit facility during the second quarter of fiscal 2009.

Refinancing and extinguishment of debt and interest rate derivativesDebt extinguishment and refinancing expenses for the six months
ended
May 31, 2009 includes non-cash charges of $2.1 million relating to the write-off of debt issuance costs related to our old senior term loans. Additionally, we
incurred $15.2 million of charges associated with termination payments on our interest rate swap agreements that were associated with the old senior credit facility.

Income Tax.Our effective income tax rates differ from the Federal statutory rate principally because of the effect of certain foreign
tax rate
differentials and state and local income taxes. Our effective tax rate for the six months ended May 31, 2009 was (167.4)% compared to 37.6% for the six months ended June 1, 2008. The
effective rate for the fiscal 2009 period was lower than the fiscal 2008 period primarily due to lower pre-tax income in 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 $4.6 million for the six months ended May 31, 2009. We expect total 2009 capital expenditures to be approximately $15.0 to $18.0 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 May 31, 2009, the Company had
approximately $59.4 million available under the ABL Revolver which represents the calculated borrowing base reduced by outstanding letters of credit of $16.0 million. 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 8.7% and 7.6% for the six months ended
May 31, 2009 and June 1, 2008, respectively. As of June 19, 2009, we had no borrowings outstanding under the ABL Revolver.

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, and the amount of debt outstanding, 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).

53

---





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) upon the completion of a rights offering to all existing shareholders of our common stock will issue $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
May 31, 2009, there were no amounts outstanding under the ABL Revolver. The Senior Notes have an outstanding balance of $335.9 million at May 31, 2009 which gives
effect to an original issue discount of $14.1 million. As of May 31, 2009, there were no Convertible Notes issued or outstanding. However, we have entered into a forward purchase
agreement with a related party, Sealy Holding LLC (the "Purchaser"), in connection with the distribution of the subscription rights through which the Purchaser provided $177.1 million in
cash to support its obligation to exercise its rights as well as an oversubscription for those rights that are not exercised by other common shareholders. The liability related to the forward purchase
agreement was recorded as a component of long-term debt at May 31, 2009 within the Condensed Consolidated Balance Sheet. Pursuant to the terms of the rights offering discussed
above, the Convertible Notes will be issued at the expiration of the rights period on July 2, 2009 unless extended. We also have an outstanding principal balance of $273.9 million at
May 31, 2009 on the 8.25% Senior Subordinated Notes due 2014 (the "2014 Notes").

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 and (ii) 65% of the net amount of eligible inventory. These amounts are reduced by reserves deemed necessary by the lenders. At May 31,
2009, there were no amounts outstanding under the ABL Revolver.

Prior
to the Refinancing, we had outstanding 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. As the future variable interest rate payments are no longer probable of being made, the amounts which had previously been recorded in accumulated other comprehensive income were charged to
refinancing expense for the three and six months ended May 31, 2009, in accordance with the provisions of FAS 133.

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

54

---



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.

The
outstanding 8.25% Senior Subordinated Notes due 2014 (the "2014 Notes") consist of an original $314 million aggregate principal amount maturing June 15, 2014, bearing
interest at 8.25% per annum payable semiannually in arrears on June 15 and December 15, commencing on December 15, 2004. At May 31, 2009, the outstanding balance of the
2014 Notes was $273.9 million.

At
May 31, 2009, 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.

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 voluntary
prepayments of our senior debt, or redemption or repurchase of a portion of our senior subordinated 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 May 31, 2009, we had repurchased shares for $16.3 million under this program,
none of which was repurchased during the first half of fiscal 2009. From June 1 through June 19, 2009, 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 $16.7 million during the next twelve months, with $1.7 million for our financing obligations and capital leases and the remainder
for debt owed by our international subsidiaries. However, as we continually evaluate our ability to make additional prepayments as permitted under our ABL Revolver agreement and the indentures
governing the Senior Notes, the Convertible Notes and the 2014 Notes, it is possible that we will make additional voluntary prepayments on 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 such as meeting a minimum leverage ratio. We currently do not meet this requirement. Therefore, we do not currently expect a dividend will be declared during the third
fiscal quarter of 2009.

55

---





The following table summarizes our changes in cash:

Six Months Ended:May 31,
2009

June 1,
2008(in thousands)Statement of Cash Flow Data:Cash flows provided by (used in):Operating activities

$
15,320

$
62,780Investing activities


4,472


(13,854
)Financing activities


44,454


(17,969
)Effect of exchange rate changes on cash


1,656


(1,317
)Change in cash and cash equivalents


65,902


29,640Cash and cash equivalents:Beginning of period


26,596


14,607End of period

$
92,498

$
44,247




Cash Flows from Operating Activities.Our cash flow from operations decreased $47.5 million to $15.3 million in net cash
provided for
the six months ended May 31, 2009, compared to $62.8 million in net cash provided for the six months ended June 1, 2008. This decrease is primarily the result of a decrease in net
income and cash provided by changes in working capital. Net income and cash flows from operations for the six months ended May 31, 2009 includes $15.2 million of payment to terminate our
interest rate swaps. The decrease in cash provided by working capital of $7.9 million includes an offsetting benefit for the receipt of $8.0 million of income tax refunds during the six
months ended May 31, 2009.

Cash Flows from Investing Activities.Our cash flows provided by investing activities for the six months ended May 31, 2009 was
$4.5 million as compared to net cash used in investing activities of $13.9 million for the six months ended June 1, 2008. This change is due to $8.4 million of proceeds
from the sale-leaseback of the Company's South Gate, California facility coupled with $9.3 million of lower capital expenditures for the first six months of fiscal 2009 as compared
to the same fiscal period in the prior year.

Cash Flows from Financing Activities.Our cash flow provided by financing activities for the six months ended May 31, 2009 was
$44.5 million compared with cash used in financing activities of $18.0 million for the six months ended June 1, 2008. This change has been primarily driven by the Refinancing
which provided $50.9 million of cash after considering the effects of the payments of costs to issue our new debt.



Significant judgment is required in evaluating our federal, state and foreign tax positions and in the determination of our tax
provision. Despite our belief that our liability for unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax
matters. We may adjust these liabilities as relevant circumstances evolve, such as guidance from the relevant tax authority, our tax advisors, or resolution of issues in the courts. These adjustments
are recognized as a component of income tax expense entirely in the period in which they are identified. The Company is currently undergoing examinations of its corporate income tax returns

56

---



by
tax authorities. Issues related to certain of these reserved positions have been presented to the Company. The Company believes that such audits will not result in a material assessment and payment
of taxes related to these positions during the one year period following May 31, 2009. 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. Our ABL Revolver requires us to meet a minimum
fixed charge coverage ratio in order to incur additional indebtedness and make dividend distributions to holders of our common stock, subject to certain exceptions. Additionally, the ABL Revolver
requires us 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. The indentures governing our Senior Notes, Convertible Notes and Senior Subordinated Notes also require
us to meet a fixed charge coverage ratio in order to incur additional indebtedness, subject to certain exceptions. As of May 31, 2009 we are in compliance with all debt covenants and are not in
a minimum availability period under the ABL Revolver.

The
covenants contained in our senior 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 as
discussed above. Adjusted EBITDA is presented herein as it is a material component of these covenants. Non-compliance with such covenants could result in the requirement to immediately
repay all amounts outstanding under such facilities. 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 generally accepted accounting principles ("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 calculations, these presentations may not be
comparable to other similarly titled measures of other companies.

57

---



The
following table sets forth a reconciliation of net income to EBITDA and EBITDA to Adjusted EBITDA for the three and six months ended May 31, 2009:

Three Months Ended:
May 31, 2009

Six Months Ended:
May 31, 2009(in thousands)

(in thousands)Net loss

$
(5,238
)
$
(492
)Interest expense


16,876


34,424Income taxes


(2,719
)

308Depreciation and amortization


8,119


15,738EBITDA


17,038


49,978Adjustments for debt covenants:Refinancing charges


17,422


17,442Non-cash compensation


1,212


2,223Impairment charges


1,334


1,334KKR consulting fees


890


1,610Severance charges


669


1,942Loss on rights for Convertible Notes


2,729


2,729Gain on sale of subsidiary


0


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


319


1,148Adjusted EBITDA

$
41,613

$
77,114






The
following table reconciles EBITDA to cash flow from operations:

Six Months Ended:
May 31, 2009(in thousands)EBITDA

$
49,978Adjustments to EBITDA to arrive at cash flow from operations:Interest expense


(34,424
)Income taxes


(308
)Non-cash and non-operating charges against (credits to) net income


1,626Changes in operating assets & liabilities


(1,552
)Cash flow from operations

$
15,320




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 30,
2008.



"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

58

---



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:



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.



On December 1, 2008, we completed a sale-leaseback transaction of its South Gate, California facility, including the
land, building and improvements affixed to the properties. On May 29, 2009, we completed a refinancing of our existing senior secured credit facilities and replaced them with indebtedness that
has longer-dated maturities and eliminates quarterly maintenance-based covenants. Additionally, through the Refinancing, we terminated our outstanding interest rate swaps related to the existing
senior secured credit facilities. Therefore, we no longer have future obligations related to these contracts. The revised contractual payments associated with the Senior Notes and Convertible Notes as

59

---



well
as the South Gate, California facility lease from the point of inception forward are projected as follows:

Contractual Obligations

2009

2010

2011

2012

2013

After 2013

Total
ObligationsPrincipal maturities of long-term debt

$


$


$


$


$


$
527,132

$
527,132Projected interest on long-term debt(1)


39,834


52,661


53,852


55,141


56,534


160,117


418,139Operating leases(2)


630


861


883


905


927


1,925


6,131Total

$
40,464

$
53,522

$
54,735

$
56,046

$
57,461

$
689,174

$
951,402


---

There
have been no other material changes in our contractual obligations and commercial commitments other than in the ordinary course of business since the end of fiscal 2008. Refer to
our Annual Report on Form 10-K for additional information regarding our contractual obligations and commercial commitments.

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. Foreign currency forward contracts are used to hedge against the earnings effects of such fluctuations. 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 six months ended May 31, 2009. 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 contracts. At May 31, 2009, we had three forward foreign
currency contracts outstanding to purchase a total of 1.4 million Euros with expiration dates ranging from June 30, 2009 through December 31, 2009. At May 31, 2009, the
fair value of these contracts was an asset of $0.2 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.

60

---





On June 15, 2007, we entered into an interest rate swap agreement effective December 3, 2007 which fixed the floating
portion of the interest rate at 5.495% on $242 million of the outstanding balance under the term loans under our Old Senior Credit Facility 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.

On
December 1, 2008, we entered into two interest rate swap agreements related to the term loans under our Old Senior Credit Facility effective December 4, 2008. The first
of these swaps fixed the floating portion of the interest rate at 1.952% on $20.0 million of the outstanding balance through November 4, 2009. The second of these swaps fixed 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 Old Senior Credit Facility which bore interest at variable rates was predominately replaced with fixed-rate debt in the form of the
Senior Notes and the Convertible Notes thereby reducing our exposure to the variability in interest rates. As a result, we paid $15.2 million to terminate the above interest rate swaps. As the
future variable-interest rate payments are no longer probable of being made, the amounts which had previously been recorded in
accumulated other comprehensive income were charged to refinancing expense for the three and six months ended May 31, 2009, in accordance with the provisions of FAS 133.

No
assets or liabilities were recognized related to the above swap instruments at May 31, 2009 due to their termination prior to this date. The fair value of the above swap
instruments was a liability of $15.9 million at November 30, 2008.

Additionally,
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 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 values of these swaps was an asset totaling $0.7 million and $0.4 million as of May 31, 2009 and
November 30, 2008, 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 unhedged portion of our variable-rate debt outstanding at May 31, 2009, a 12.5 basis point increase or decrease in variable interest rates would have an insignificant
dollar impact on our annual interest expense.



The cost of our steel innerspring, polyurethane foam, polyester and polyethylene component parts is impacted by the volatility in the
price of steel and petroleum. We achieved decreases in the cost of polyurethane foam, polyester, polyethylene foam and steel innerspring component parts in the first half of fiscal 2009 and expect
these decreases to be maintained through the third quarter of fiscal 2009 due to reductions in various related feed stocks. 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. We do not engage in commodity hedging programs.

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

61

---



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 second quarter of fiscal 2009 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

62

---





PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

See Notes 19 and 25 to the Condensed Consolidated Financial Statements, Part I, Item 1 included herein.

Item 1A.    Risk Factors

The risk factors appearing below should be read in conjunction with the related disclosure contained in the section entitled "Item 1A. Risk Factors" contained in our
Annual Report on Form 10-K for the fiscal year ended November 30, 2008 (File No. 001-08738).

Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our outstanding indebtedness

After the completion of the Refinancing, we continue to have substantial indebtedness. As of May 31, 2009, we had a total of
$853.4 million of debt outstanding, including $335.9 million Senior Notes, $177.1 million related party loans to be replaced with Convertible Notes upon completion of a rights
offering, and $273.9 million Senior Subordinated Notes. We also have approximately $59.4 million of undrawn availability under the ABL Revolver, after taking into account
$16.0 million of outstanding letters of credit and borrowing base limitations.

Our
outstanding indebtedness could have important consequences. For example, it could:



Any
of the above listed factors could materially and adversely affect our business, financial condition or results of operation.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness,
which may not be successful

Our ability to make scheduled payments or to refinance our debt obligations depends on our financial and operating performance, which
is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flow from operating
activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

63

---



If
our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional
capital, or seek to restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of
such operating results and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other
obligations. The ABL Revolver credit agreement and the indentures governing our Senior Notes, Convertible Notes and 2014 Notes will restrict our ability to use the proceeds from asset sales. We may
not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair and proceeds that we do receive may not be adequate to meet any debt service obligations
then due.

Despite our current leverage, we may still be able to incur substantially more debt. This could further exacerbate the risks that we and our subsidiaries face

The terms of the ABL Revolver credit agreement and the indentures governing our Senior Notes, Convertible Notes and 2014 Notes will
restrict the Company and its subsidiaries from incurring substantial additional indebtedness in the future, but will not completely prohibit us from doing so. At May 31, 2009, we have
$59.4 million of undrawn availability under the ABL Revolver, after taking into account $16.0 million of letters of credit and borrowing base limitations. These restrictions are subject
to a number of important qualifications and exceptions and the indebtedness incurred in compliance with these restrictions could be substantial. If new debt is added to our existing debt levels, the
related risks that we now face, including those described above, could intensify.

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

There were no repurchases of the Company's common stock during the second quarter of fiscal 2009 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 May 31, 2009, the approximate dollar value of shares that may yet be purchased under the program was $83,746,985.

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.    Submission of Matters to a Vote of Security Holders



64

---





Shares For

Shares WithheldBrian F. Carroll


79,925,743


4,504,199James W. Johnston


83,929,074


500,868Gary E. Morin


83,942,678


487,264Dean Nelson


79,893,415


4,456,527Paul J. Norris


79,960,274


4,469,668Richard W. Roedel


83,863,382


566,560Andrew J. Bellas


82,140,492


2,289,450




For


84,969,431Against


193,618Abstained


35,346


Item 5.    Other Information

None

Item 6.    Exhibits

| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1   |  | Amendment to Amended and Restated Certificate of Incorporation of Sealy Corporation dated as of June 25, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 4.1    |  | Indenture, dated as of May 29, 2009, among Sealy Corporation, Sealy Mattress Company, the guarantors thereto, and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on June 2, 2009).                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 4.2    |  | Subscription Rights Certificate for Sealy Corporation for 8% Senior Secured Third Lien Convertible Notes due 2016 (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed
on June 2, 2009).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | *10.1  |  | Second Amended and Restated Equity Plan for Key Employees of Sealy Corporation and its Subsidiaries, adopted May 26, 2009 (incorporated herein by reference to Appendix B to Sealy Corporation's Form DEF 14C
(File No. 1-8738) filed June 6, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | *10.2 |  | Form of Performance Restricted Stock Unit Award Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.3   |  | 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. (incorporated by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K filed on June 2, 2009).
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, Sealy Corporation 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 Accounting Officer)


Date:
June 30, 2009

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