Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended November 28, 2004

For the Transition Period from                               to                              

Commission file number 333-117081-27

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

Registrant's telephone number, including area code—(336) 861-3500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

        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

        The aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 28, 2005: not applicable.

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

        Indicated by check mark whether the registrant is an accelerated filer (as defined in File 12b-2 of the Act). Yes o    No ý

        The number of shares of the registrant's common stock outstanding as of January 31, 2005: 1,000.

DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE:    None

PART I

Item 1.    Business

General

        Sealy Mattress Corporation (hereinafter referred to as the "Company", "we", "our" or "us"), through our subsidiaries, is the largest bedding manufacturer in the world and manufactures and markets a complete line of conventional bedding (innerspring) products including mattresses and box springs. Our conventional bedding products include the SEALY®, SEALY POSTUREPEDIC®, STEARNS & FOSTER® and BASSETT® brands and account for approximately 88.4% of our total net sales for the year ended November 28, 2004. We maintain our own component parts manufacturing capability and produce substantially all of our mattress innerspring requirements and approximately 48% of our boxspring component parts requirements. In addition to our innerspring bedding, we also produce a variety of foam latex bedding products, though sales of such products were not significant in 2004. Our subsidiary, Sealy, Inc., provides corporate and administrative services for the Company. Additional information about the Company can be found at our website: www.sealy.com. Information contained on our website does not constitute part of the Annual Report and is not incorporated herein by reference.

Merger and Recapitalization

        On April 6, 2004 our parent company, Sealy Corporation, completed a merger with affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") whereby KKR acquired approximately 92% of Sealy Corporation's capital stock. Certain of Sealy Corporation's stockholders prior to the merger, including affiliates of Bain Capital, LLC and others, retained approximately an 8% interest in Sealy Corporation's stock. In connection with the merger, Sealy Corporation recapitalized substantially all of its outstanding debt. See Note 2 to our Consolidated Financial Statements (Part II, Item 8 included herein) for a full description of the effects of the merger and recapitalization. Subsequent to the recapitalization, we received as contributed capital all of Sealy Corporation's 100% interest in Sealy Mattress Company, and we replaced Sealy Corporation as the parent-guarantor of the 8.25% Senior Subordinated Notes due 2014 issued by Sealy Mattress Company. Accordingly, we are now the reporting guarantor-parent company. The information regarding our results of operations included in this Annual Report reflects the operations of Sealy Corporation through April 6, 2004. Likewise, the information regarding our assets, liabilities and stockholders' deficit included in this Annual Report includes the assets, liabilities and stockholders' deficit of Sealy Corporation immediately following the merger on April 6, 2004.

Conventional Bedding Business

        Industry and Competition.    According to industry sales data compiled by the International Sleep Products Association ("ISPA"), a bedding industry trade group, over 700 manufacturers of mattresses and box springs make up the U.S. conventional bedding industry, generating wholesale revenues of $5.04 billion during calendar year 2003. ISPA estimated that the industry experienced a 5.8% increase in sales in 2003—with a unit increase of 1.8%. According to Furniture Today, approximately 38% of conventional bedding is sold through furniture stores and 30% through specialty sleep shops. Most of the remaining conventional bedding is sold to department stores and membership warehouse clubs. We estimate that approximately 70% of conventional bedding is sold for replacement purposes, and the Better Sleep Council reports that the average time between consumer purchases of mattresses in 2004 is 10.3 years. Factors such as disposable income, sales of homes, a trend toward more bedrooms per home, growth in the U.S. population, and heightened consumer awareness of the bedding category also have an effect on bedding purchases.

        We believe that sales by companies with recognized national brands account for more than half of total conventional bedding sales. We supply such nationally recognized brands as Sealy, Sealy Posturepedic, Stearns & Foster and Bassett. We consider Sealy branded products to be the most well

2

recognized in the domestic conventional bedding industry. Competition in conventional bedding is generally based on quality, product innovation and performance, brand name recognition, service and price. Our largest competitors include Simmons Company and Serta, Inc. We believe that we derive a competitive advantage over our conventional bedding competitors as a result of strong consumer recognition of multiple nationally recognized branded products (Sealy, Stearns & Foster and Bassett), as well as our high quality and innovative product offerings.

        Products.    We manufacture a complete line of conventional bedding options in various sizes ranging in retail price from under $300 to approximately $5,000 per queen size set. The Sealy brand mattress, including the new UniCased® Posturepedic, is the largest selling mattress brand in North America. Approximately 93% of the Sealy brand, Stearns & Foster brand and Bassett brand conventional bedding products sold in North America are produced by us, with the remainder being produced by Sealy Mattress Company of New Jersey, Inc. ("Sealy New Jersey"), a licensee. The Stearns & Foster product line consists of top quality, premium mattresses sold under the Stearns & Foster brand name. The Bassett brand, licensed from Bassett Furniture Industries beginning in 2000, is sold primarily to Bassett Furniture Direct and BJ's Wholesale Club. In addition to our innerspring bedding, we also produce a variety of foam latex bedding products. These are sold principally through our European subsidiary under the Pirelli brand name.

        Customers.    Our customers include furniture stores, national mass merchandisers, specialty sleep shops, department and other stores. In addition, our contract division sells bedding products primarily to the hospitality industry, including many of the leading hotel chains, resorts and cruise lines. The top five conventional bedding customers accounted for approximately 20.2% of our net sales for the year ended November 28, 2004 and no single customer accounted for over 10.0% of our net sales.

        Sales and Marketing.    Our sales depend primarily on our ability to provide quality products with recognized brand names at competitive prices. Additionally, we work to build brand loyalty with our end-use consumers, principally through targeted national advertising and cooperative advertising with our dealers, along with superior "point-of-sale" materials designed to emphasize the various features and benefits of our products which differentiate them from other brands.

        Our national account and regional account sales force is organized along customer lines, and our field sales force is generally structured based on regions of the country and districts within those regions. We have a comprehensive training and development program for our sales force, including our University of Sleep curriculum, which provides ongoing training sessions with programs focusing on advertising, merchandising and sales education, including techniques to help analyze a dealer's business and profitability.

        Our sales force emphasizes follow-up service to retail stores and provides retailers with promotional and merchandising assistance, as well as extensive specialized professional training and instructional materials. Training for retail sales personnel focuses on several programs, designed to assist retailers in maximizing the effectiveness of their own sales personnel, store operations, and advertising and promotional programs, thereby creating loyalty to, and enhanced sales of, our products.

        Suppliers.    We are dependent upon a single supplier for certain key structural components of our new UniCased® Posturepedic line of mattresses. Such components are purchased under a four-year supply agreement, and are manufactured in accordance with a proprietary design exclusive to the supplier. We have incorporated the UniCased® method of construction into substantially all of our Sealy brand products, and have also incorporated the similar TripLCased® construction into some Stearns & Foster branded products. Under the terms of the supply agreement, we have committed to make minimum purchases of the components totaling $70 million through 2006. We believe that our supply requirements will exceed the minimum purchase commitments over the life of the agreement. We purchase our other raw materials and certain components from a variety of vendors. We purchase approximately 52% of our

3

Sealy and Stearns & Foster box spring parts from a single third-party source and manufacture the remainder of these parts. Except for our dependence regarding certain structural components for the UniCased® and TripLCased® mattresses, we do not consider ourselves to be dependent upon any single outside vendor as a source of supply to our conventional bedding business, and we believe that sufficient alternative sources of supply for the same, similar or alternative components are available.

        Manufacturing and Facilities.    We manufacture most conventional bedding to order and have adopted "just-in-time" inventory techniques in our manufacturing process to more efficiently serve our dealers' needs and to minimize their inventory carrying costs. Most bedding orders are scheduled, produced and shipped within five days of receipt. This rapid delivery capability allows us to minimize our inventory of finished products and better satisfy customer demand for prompt shipments.

        We operate 17 bedding manufacturing facilities and three component manufacturing facilities in 16 states, plus three facilities in Canadian provinces, and one each in Puerto Rico, France, Italy, Mexico, Argentina and Brazil. We believe that through the utilization of extra shifts, we will be able to continue to meet growing demand for our products without a significant investment in facilities. See Item 2, "Properties," herein. We also operate a Research and Development center in High Point, North Carolina with a staff which tests new materials and machinery, trains personnel, compares the quality of our products with those of our competitors and develops new products and processes. We have developed advanced proprietary methods (Digital Image Analysis) of dynamically measured spinal morphology on any human subject in any sleep position. This technology is expected to enhance Sealy's Posturepedic brand leadership and market position.

        We distinguish ourselves from our major competitors by internally sourcing the majority of our requirements for component parts through our component manufacturing facilities, which manufacture component parts exclusively for use by our bedding plants and licensees. Our component plants currently provide substantially all of our mattress innerspring unit requirements, and supply approximately 48% of our Sealy box spring parts requirements. The three component manufacturing sites are located in Rensselaer, Indiana; Delano, Pennsylvania; and Colorado Springs, Colorado. See Item 2, "Properties," herein.

        In addition to reducing the risks associated with relying on single sources of supply for certain essential raw materials, we believe the vertical integration resulting from our component manufacturing capability provides us with a competitive advantage. We believe that we are the only conventional bedding manufacturer in the United States with substantial innerspring and formed wire component-making capacity.

International

        We have wholly owned subsidiaries in Canada, Mexico, Puerto Rico, Brazil, France, Italy and Argentina which have marketing and manufacturing responsibilities for those markets. We have three manufacturing facilities in Canada and one each in Mexico, Puerto Rico, Argentina, Brazil, France and Italy which comprise all of the company-owned manufacturing operations outside of the U.S. at November 28, 2004. In 2000, we formed a joint venture with our Australian licensee to import, manufacture, distribute and sell Sealy products in Southeast Asia. Except for our European subsidiaries, which manufacture mostly latex foam products, the remainder of our international subsidiaries manufacture and sell primarily conventional innerspring bedding.

        We utilize licensing agreements in certain international markets. Licensing agreements allow us to reduce exposure to political and economic risk abroad by minimizing investments in those markets. Twelve foreign license agreements exist, which provide exclusive rights to market the Sealy brand in Thailand, Japan, the United Kingdom, Spain, Australia, New Zealand, South Africa, Israel, Jamaica, Saudi Arabia, Bahamas and the Dominican Republic. We operate a sales office in Korea and use a contract manufacturer to service the Korean market. In addition, we ship products directly into many small international markets.

4

Licensing

        At November 28, 2004, there are 17 separate license arrangements in effect with six domestic and eleven foreign independent licensees. Sealy New Jersey (a bedding manufacturer), Klaussner Corporation Services (a furniture manufacturer), Kolcraft Enterprises, Inc. (a crib mattress manufacturer), Pacific Coast Feather Company (a pillow, comforter and mattress pad manufacturer), Chairworks Manufacturing Group Limited (an office seating manufacture), and KCB Enterprises (a futon manufacturer) are the only domestic manufacturers that are licensed to use the Sealy trademark, subject to the terms of license agreements. Pacific Coast Feather also has a license to use the Stearns & Foster brand on certain approved products. Under license agreements between Sealy New Jersey and us, Sealy New Jersey has the perpetual right to use certain of our trademarks in the manufacture and sale of Sealy brand and Stearns & Foster brand products in selected markets in the United States.

        Our licensing group generates royalties by licensing Sealy brand technology and trademarks to manufacturers located throughout the world. We also provide our licensees with product specifications, quality control inspections, research and development, statistical services and marketing programs. In the fiscal years ended November 28, 2004, November 30, 2003 and December 1, 2002, the licensing group as a whole generated gross royalties of approximately $15.6 million, $13.7 million and $12.2 million, respectively.

        See the International section for international licensees.

Warranties & Product Returns

        Sealy, Stearns & Foster and Bassett bedding offer limited warranties on our manufactured products. The periods for "no-charge" warranty service vary among products. Prior to fiscal year 1995, such warranties ranged from one year on promotional bedding to 20 years on certain Posturepedic and Stearns & Foster bedding. All currently manufactured Sealy Posturepedic models, Stearns & Foster bedding, Bassett and some other Sealy-brand products offer a 10-year non-prorated warranty service period. Our TrueForm™ visco elastic line of bedding, introduced late in the first quarter of 2005, will carry a 20 year warranty. In fiscal 2000, we amended our warranty policy to no longer require the mattress to be periodically flipped. We also accept, upon occasion, other returns from some of our retailers as an accommodation.

Trademarks and Licenses

        We own, among others, the Sealy and Stearns & Foster trademarks and tradenames and also own the Posturepedic, and University of Sleep trademarks, service marks and certain related logos and design marks. We also license the Bassett and Pirelli tradenames in various territories under certain long term agreements.

Employees

        As of November 28, 2004 we had 6,399 full-time employees. Approximately 70% of our employees at our 25 North American plants are represented by various labor unions with separate collective bargaining agreements. Due to the large number of collective bargaining agreements, we are periodically in negotiations with certain of the unions representing our employees. We consider our overall relations with our work force to be satisfactory. We have only experienced one work stoppage in the last ten years due to labor disputes. Due to the ability to shift production from one plant to another, these lost workdays have not had a material adverse effect on our financial results. We have not encountered any significant organizing activity at our non-union facilities in that time frame. Our current collective bargaining agreements, which are typically three years in length, expire at various times beginning in fiscal 2005 through 2007. As of November 28, 2004, our domestic manufacturing plants employed 644, 885 and 1,398 employees covered under collective bargaining agreements expiring in fiscal 2005, 2006 and 2007,

5

respectively. At our international facilities, there were 824, 557 and 721 employees covered under collective bargaining agreements expiring in fiscal 2005, 2006 and 2007, respectively.

Seasonality/Other

        Our third quarter sales are typically 10% to 15% higher than other quarters. See Note 13 to our Consolidated Financial Statements included in Part II, Item 8 herein.

        Most of our sales are by short term purchase orders. Since the level of production of products is generally promptly adjusted to meet customer order demand, we have a negligible backlog of orders. Most finished goods inventories of bedding products are physically stored at manufacturing locations until shipped (usually within 5 days of accepting the order).

Regulatory Matters

        Our conventional bedding product lines are subject to various federal and state laws and regulations relating to flammability and other standards. We believe that we are in material compliance with all such laws and regulations, including the new California flame retardant regulations related to manufactured mattresses and box springs which became effective January 1, 2005. We do not expect the impact of those regulations to be significant to our results of operations or financial position.

        Our principal waste products are foam and fabric scraps, wood, cardboard and other non-hazardous materials derived from product component supplies and packaging. We also periodically dispose (primarily by recycling) of small amounts of used machine lubricating oil and air compressor waste oil. We are, generally, subject to the Federal Water Pollution Control Act, the Comprehensive Environmental Response, Compensation and Liability Act and amendments and regulations thereunder and corresponding state statutes and regulations. We believe that we are in material compliance with all applicable federal, state and local country environmental statutes and regulations. Except as set forth in Item 3. "Legal Proceedings" below, compliance with federal, state or local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, should not have any material effect upon our capital expenditures, earnings or competitive position. We are not aware of any pending federal environmental legislation which would have a material impact on our operations. Except as set forth in Item 3. "Legal Proceedings," we have not been required to make and do not expect to make any material capital expenditures for environmental control facilities in the foreseeable future.

6

Item 2.    Properties

        Our principal executive offices are located on Sealy Drive at One Office Parkway, Trinity, North Carolina, 27370. Corporate and administrative services are provided to the Company by Sealy, Inc. (a wholly owned subsidiary of the Company).

        We administer our component operations at our Rensselaer, Indiana facility. Our leased facilities are occupied under operating leases, which expire from fiscal 2005 to 2033, including renewal options.

        The following table sets forth certain information regarding manufacturing and distribution facilities operated by the Company at January 31, 2005:

(a)

We have granted a mortgage or otherwise encumbered our interest in this facility as collateral for secured indebtedness.

(b)

In April 2001, we ceased operations at this facility.

(c)

In April 2002, we ceased operations at this facility.

(d)

These properties are being actively marketed for sale and have been written down to their estimated net realizable values.

7

        In addition to the locations listed above, we maintain additional warehousing facilities in several of the states where our manufacturing facilities are located. We consider our present facilities to be generally well maintained and in sound operating condition.

        In December 2004, we sold our Randolph, Massachusetts facility that had been previously closed in May 2004.

Item 3.    Legal Proceedings

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

        We are currently conducting an environmental cleanup at a formerly owned facility in South Brunswick, New Jersey pursuant to the New Jersey Industrial Site Recovery Act. We and one of our subsidiaries are parties to an Administrative Consent Order issued by the New Jersey Department of Environmental Protection. Pursuant to that order, we and our subsidiary agreed to conduct soil and groundwater remediation at the property. We do not believe that our manufacturing processes were the source of contamination. We sold the property in 1997 and retained primary responsibility for the required remediation. We have completed essentially all soil remediation with the New Jersey Department of Environmental Protection approval, and have concluded a pilot test of the groundwater remediation system. We have received approval from the New Jersey Department of Environmental Protection of a remediation plan for the sediment in Oakeys Brook adjoining the site, which we expect to start in 2005. We have recorded a reserve of $2.5 million for the estimated future costs associated with completing this remediation project, and it is reasonably possible that up to an additional $0.3 million may be incurred to complete the project.

        We are also remediating soil and groundwater contamination at an inactive facility located in Oakville, Connecticut. Although we are conducting the remediation voluntarily, we obtained Connecticut Department of Environmental Protection approval of the remediation plan. We have completed essentially all soil remediation under the remediation plan and are currently monitoring groundwater at the site. We have identified cadmium in the groundwater at the site and intend to address that during 2005. We have recorded a reserve of approximately $0.5 million associated with the additional work and ongoing monitoring. We believe the contamination at the site is attributable to the manufacturing operations of previous unaffiliated occupants of the facility.

        We removed three underground storage tanks previously used for diesel, gasoline, and waste oil from our South Gate, California facility in March 1994 and remediated the soil in the area. Since August 1998, we have been working with the California Regional Water Quality Control Board, Los Angeles Region to monitor ground water at the site.

        While uncertainty exists as to the ultimate resolution of the South Brunswick, Oakville, and South Gate environmental matters, based on facts currently known, we believe that the accruals recorded are adequate and do not believe the resolution of these matters will have a material adverse effect on our financial position or future operations; however, in the event of an adverse decision by one or more of the governing environmental authorities, these matters could have a material adverse effect.

        In 2000, Montgomery Ward, a customer of Sealy, declared bankruptcy and filed for protection under Chapter 7 of the U.S. Bankruptcy Code in the district of Delaware. In 2003, the bankruptcy trustee filed a claim of $3.7 million associated with certain alleged preferential payments by Montgomery Ward to Sealy. In December of 2004, we reached a settlement of this matter with the bankruptcy trustee for $0.2 million and are awaiting approval of this matter from the bankruptcy court.

Item 4.    Submission of Matters to a Vote of Security Holders

        None.

8

PART II

Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters

        There is no established public trading market for any class of our common equity or that of our parent company, Sealy Corporation.

        As of January 31, 2005, there were 24 holders of record of the Class A shares of Sealy Corporation, which owns 100% of our common equity.

        On July 16, 2004 our parent, Sealy Corporation, paid a cash dividend of approximately $0.62 per share of common stock. Any payment of future dividends and the amounts thereof will be dependent upon our earnings, fiscal requirements and other factors deemed relevant by our Board of Directors. Certain restrictive covenants contained in out senior credit agreements and the indenture governing our 8.25% Senior Subordinated Notes due 2014 currently limit our ability to make dividend or other payments.

Item 6.    Selected Financial Data

        The following tables set forth selected consolidated financial and other data of the Company for the years ended November 28, 2004, November 30, 2003, December 1, 2002, December 2, 2001, and November 26, 2000.

        The selected consolidated financial and other data set forth in the following tables has been derived from the our audited consolidated financial statements. The report of Deloitte & Touche LLP, independent registered public accounting firm, covering our Consolidated Financial Statements for the year ended November 28, 2004, and the report of PricewaterhouseCoopers LLP, independent registered public accounting firm, covering our Consolidated Financial Statements for the years ended November 30, 2003, and December 1, 2002, are included elsewhere herein. These tables should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements included elsewhere herein.

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

9

(a)

2001 and 2000 amounts are restated from previously published results due to the adoption of EITF 01-09, "Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Product", as of March 4, 2002.



(b)

Effective at the beginning of fiscal 2002, we adopted the provisions of FAS 142, "Goodwill and Other Intangible Assets". Accordingly, we ceased the recording of goodwill amortization after fiscal 2001. Amortization of goodwill totaled $12.1 million in 2001 and $11.4 million in 2000.



(c)

2004 data includes the following amounts associated with the merger and recapitalization: Costs and expenses $133.1 million; Cash flows provided by (used in): Operating activities $(90.9) million; Investing activities $13.6 million; Financing activities $(35.6) million. See also Note 2 to our Consolidated Financial Statements (Part II, Item 8 included herein).



(d)

In 2001, we recorded a $26.3 million charge associated with the write-down of investments in certain retail entities.



(e)

On November 27, 2000, we adopted FAS 133, "Accounting for Derivative Instruments and Hedging Activities," and recorded a $0.2 million gain net of income tax expense of $0.1 million, which was recorded as a cumulative effect of a change in accounting principle.



(f)

EBITDA as presented herein is a financial measure that is used in our credit agreements and note indentures (the "debt agreements") as a factor in determining our compliance with various covenants and to test whether certain transactions are permitted. In addition, we base our assessment of the recoverability of our indefinite-lived goodwill on a multiple of EBITDA. EBITDA does not represent net income or cash flow from operations as those terms are defined

10

by generally accepted accounting principles ("GAAP") and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. The following table reconciles EBITDA to cash flows from operations:

(g)

For purposes of calculating the ratio of earnings to fixed charges, earnings represent income before income taxes and cumulative effect of change in accounting principle plus fixed charges. Fixed charges consist of interest expense, including amortization of discount and financing costs and the portion of operating lease expense which management believes is representative of the interest component of rent expense. For fiscal years 2004 and 2001, earnings were insufficient to cover fixed charges by $46.8 million and $8.5 million, respectively. The following table provides the calculation of the ratio of earnings to fixed charges:

11

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion and analysis should be read in conjunction with the "Selected Financial Data" and our consolidated financial statements and related notes appearing elsewhere in this report.

Business Overview

        Sealy Mattress Corporation, through our subsidiaries, is the largest bedding manufacturer in the world, with a 21% domestic market share in 2003. We estimate that our market share has increased slightly in 2004. We manufacture and market a complete line of conventional bedding (innerspring) products including mattresses and box springs, holding leading positions in key market segments such as luxury bedding products and among leading retailers. According to Home Furnishing News in 2003, the Sealy brand ranked 9^th among the top 150 home products brands. Our conventional bedding products include the SEALY®, SEALY POSTUREPEDIC®, STEARNS & FOSTER® and BASSETT® brands and account for approximately 88.4% of the our total net sales for the year ended November 28, 2004. In addition to our innerspring bedding, we also produce a variety of foam latex bedding products. Though sales of such products were not significant in 2004, we expect to experience growth in these product lines in 2005 as we seek to strengthen our competitive position in the specialty bedding (non-innerspring mattress) market. We distinguish ourselves from our major competitors by maintaining our own component parts manufacturing capability and producing substantially all of our mattress innerspring requirements and approximately 48% of our boxspring component parts requirements. We believe that our industry is resilient to economic downturns due in part to the large portion of purchases, approximately 70%, which are for mattress replacements. The growth of the bedding industry has been supported by economic and demographic factors such as increasing disposable income among the "baby boomer" segment of the population, an increase in the number of bedrooms per home and also second home purchases, and growing awareness of the health benefits of quality sleep.

        On April 6, 2004 our parent company, Sealy Corporation, completed a merger with affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") whereby KKR acquired approximately 92% of Sealy Corporation's capital stock. In connection with the merger, we recapitalized substantially all of our outstanding debt. See Note 2 to our Consolidated Financial Statements (Part II, Item 8 herein) for a full description of the effects of the merger and recapitalization. Although we incurred substantially increased levels of debt in the recapitalization, our cost of capital was reduced due to lower interest rates on the new debt compared with our earlier financing, and our total interest costs have remained comparable with 2003. Due to our strong operating profitability and cash flow (exclusive of the effects of the recapitalization, which included expenses of $133.1 million, of which $42.4 million was non-cash), we have been able to repay $90 million of our senior secured term debt significantly ahead of schedule. Our strategy in 2005 will be to continue to deleverage our business through additional prepayments of our long-term debt as permitted by our senior credit agreements and our operating cash flow.

        In 2004, we successfully completed the rollout of our new single-sided, "no-flip" Sealy UniCased® and Stearns & Foster TripLCased® product lines in the United States, Canada, and Mexico, representing the broadest product redesign in our history. The manufacture and sale of these products began early in 2003, however our profitability was limited during that time period as we worked to gain manufacturing efficiency with the new products and supported our customers' transition to the new products with price rollbacks. In 2004, with these issues substantially behind us, we began to realize the anticipated contribution of these products to our sales growth and profitability. Our 2004 profitability has been further enhanced by rapid growth among our high-end price point ($1,000 and up) luxury bedding lines. Our shares of the Luxury and Ultra-Luxury product segments are greater than our overall market share, and our Stearns & Foster and Luxury Posturepedic lines directly target these segments.

        The growth of the specialty bedding market both domestically and internationally, including latex foam, visco-elastic and air-adjustable mattress products, presents both a challenge and opportunity to our

12

company. While certain of our competitors hold a significantly higher share of this market at the end of 2004, we have responded by creating our own separate marketing department for specialty bedding and we conducted extensive consumer research which has lead to the launch of our own TrueForm™ visco-elastic bedding product line late in the first quarter of 2005. We believe that by successfully leveraging our strong brand advantage and our marketing and distribution capabilities, we have the potential to make significant gains in the specialty bedding market.

        Our industry continues to be challenged by the high cost of steel and petroleum products, which affect the cost of our steel innerspring and our polyurethane foam and polyethylene component parts. Thus far, we have been able to successfully address these cost pressures though a price increase announced in May of 2004 and cost reduction efforts. We expect the cost of these components to remain elevated above their recent historical averages throughout 2005.

        Historically, the bedding industry has had limited exposure to competition from imports due to high shipping costs, short lead times, the large number of finished goods SKUs and the importance of brands. Recently, however Chinese bedding manufactures have begun to explore the feasibility of exporting their products into the United States. We do not expect that competition from Chinese bedding imports will have a significant impact on our business. We believe that by focusing on further improvements in the efficiency of our supply chain, controlling costs, and continuing to invest in product innovation and our brands, we can ensure that our domestically produced products will remain competitive with Chinese bedding imports. Furthermore, we believe that the relatively low labor content of our domestically produced mattresses lessens any competitive advantage provided by lower Chinese labor costs.

Critical Accounting Estimates

        Our analysis and discussion of our financial condition and results of operations are based upon our Consolidated Financial Statements that have been prepared in accordance with generally accepted accounting principles in the United States (US GAAP). The preparation of financial statements in accordance with US GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. US GAAP provides the framework from which to make these estimates, assumptions and disclosures. We choose accounting policies within US GAAP that our management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Our management regularly assesses these policies in light of current and forecasted economic conditions. Our accounting policies are stated in Note 1 to the Consolidated Financial Statements (Part II, Item 8 included herein). We believe the following accounting estimates are critical to understanding our results of operations and affect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements:

        Cooperative Advertising and Rebate Programs—We enter into agreements with our customers to provide funds to the customer for advertising and promotion of our products. We also enter into volume and other rebate programs with our customers whereby funds may be rebated to the customer. When sales are made to these customers, we record liabilities pursuant to these agreements. We periodically assess these liabilities based on actual sales and claims to determine whether all of the cooperative advertising earned will be used by the customer or whether the customers will meet the requirements to receive rebated funds. We generally negotiate these agreements on a customer-by-customer basis. Some of these agreements extend over several periods and are linked with supply agreements. Most of these agreements coincide with our fiscal year, however our customers typically have ninety days following the end of a period to submit claims for reimbursement of advertising and promotional costs. Therefore, significant estimates are required at any point in time with regard to the ultimate reimbursement claimed by our customers. Subsequent revisions to such estimates are recorded and charged to earnings in the period in which they are identified. Costs of these programs totaled $171.4 million in 2004 of which $41.9 is recorded as a reduction of sales.

13

        Allowance for Doubtful Accounts—We actively monitor the financial condition of our customers to determine the potential for any nonpayment of trade receivables. In determining our reserve for bad debts, we also consider other general economic factors. Our management believes that our process of specific review of customers combined with overall analytical review provides an accurate evaluation of ultimate collectibility of trade receivables. Our loss experience was $3.1 million, or approximately 0.2 percent of sales in 2004.

        Warranties and Product Returns—Our warranty policy provides a 10-year non-prorated warranty service period on all currently manufactured Sealy Posturepedic, Stearns & Foster and Bassett bedding products and some other Sealy-branded products and a 20-year warranty period on our True Form™ visco-elastic product introduced late in the first quarter of 2005. Our policy is to accrue the estimated cost of warranty coverage at the time the sale is recorded based on historical trends of warranty costs. Our estimate involves an average lag time in days between the sale of a bed and the date of its return applied to the current rate of warranty returns. Our accrued warranty liability totaled $13.9 million as of November 28, 2004.

        Impairment of Goodwill—We perform an annual assessment of our goodwill for impairment as of the beginning of the fiscal fourth quarter. We base our assessment of recoverability on a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA). At least annually, or when events or circumstances indicate that their carrying value may not be recoverable from future cash flows, we assess our goodwill and other intangible assets for impairment. The use of the EBITDA multiple is considered by our management to be the most meaningful measurement. The EBITDA multiple selected is based on comparison of other companies in the furnishings and consumer durable industry sectors. These comparable multiples have historically ranged from 5.0 to 9.6. We consider comparable factors in determining which multiple should be utilized. These factors include among others, company size, estimated market share or dominance, recent trends and forecasted results. Our 2004 test for impairment indicated that utilizing an EBITDA measure of less than 4.0 times would likely result in an indication of impairment requiring a further assessment of potential impairment. Should market factors or our performance result in either a lower valuation multiple or decreased EBITDA, impairment could result which may be material. The total carrying value of our goodwill at November 28, 2004 was $387.5 million.

        Income Taxes—We record an income tax valuation allowance when the realization of certain deferred tax assets, including net operating losses and capital loss carryforwards, is not likely. These deferred tax items represent expenses recognized for financial reporting purposes, which may result in tax deductions in the future. Certain judgments, assumptions and estimates may affect the carrying value of the valuation allowance and income tax expense in the consolidated financial statements. Our net deferred tax assets at November 28, 2004 were $13.1 million, net of a $19.8 million valuation allowance. Significant judgment is also required in evaluating our federal, state and foreign tax positions and in the determination of our tax provision. Despite our belief that our tax return positions are fully supportable, we may establish and have established reserves when we believe that certain tax positions are likely to be challenged and we may not fully prevail in overcoming these challenges. We may adjust these reserves as relevant circumstances evolve, such as guidance from the relevant tax authority, our tax advisors, or resolution of issues in the courts. Our tax expense includes the impact of reserve provisions and changes to reserves that we consider appropriate, as well as related interest. Accruals for tax contingencies are included in other noncurrent liabilities.

Merger and Recapitalization

        As more fully discussed in Note 2 to the Condensed Consolidated Financial Statements (Part II, Item 8 included herein), on April 6, 2004 our parent company, Sealy Corporation, completed a merger with affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") whereby KKR acquired approximately 92% of Sealy Corporation's capital stock. Certain of Sealy Corporation's existing stockholders, including affiliates

14

of Bain Capital, LLC and others (the "Rollover Stockholders"), retained approximately an 8% interest in Sealy Corporation's stock.

        In connection with the merger, Sealy Corporation paid off substantially all of its outstanding debt and accrued interest as of April 6, 2004 totaling $751.1 million. Sealy Corporation's capital stock outstanding immediately prior to the merger, except with respect to those shares to be retained by the Rollover Stockholders, was cancelled and exchanged for aggregate cash consideration of approximately $740.5 million plus direct costs of $7.6 million.

        Sealy Corporation issued new Class A common stock to KKR in exchange for cash in the amount of $436.1 million, and the Rollover Stockholders retained their Class A common stock in proportion to their respective ownership interests. We issued new debt totaling $1,050 million consisting of a new $125 million floating rate senior secured revolving credit facility with a six-year maturity (under which no amounts were drawn at the time of the recapitalization), a new $560 million floating rate senior secured term loan facility with an eight-year maturity, $100 million under a floating rate senior unsecured term loan with a nine-year maturity, and $390 million aggregate principal amount of new Senior Subordinated Notes bearing interest at 8.25% due June 2014. On September 29, 2004, we completed an exchange offer whereby all of the Senior Subordinated Notes were exchanged for publicly traded, registered securities with identical terms (other than certain terms relating to registration rights and certain interest rate provisions otherwise applicable to the original senior subordinated notes).

        Concurrent with the recapitalization, the option agreements of three officers of the Company were amended to provide them with the right to put their vested shares held under their options back to the Company upon their retirement. We recorded an obligation of approximately $2.5 million to recognize the resulting obligation to repurchase vested shares under options held by these officers.

        In connection with the recapitalization, we incurred costs and expenses totaling $177.1 million, including $36.4 million capitalized as deferred debt issuance costs to be amortized over the respective terms of the new debt, and $7.6 million of costs charged against additional paid-in capital associated with the repurchase of previously outstanding shares as noted above. The remaining $133.1 million of expenses resulted in a pre-tax charge against earnings for the year ended November 28, 2004. Included in the charge were compensation expenses of approximately $53.8 million for the cash settlement and change in the measurement date for options that remained outstanding, management transaction bonuses and the cancellation of an executive's contract. Also included were $11.8 million for the write-off of debt issuance costs and premiums associated with debt extinguished in the transaction, and $20.4 million for the payment of premium and consent fees associated with the repayment of the previous public debt. The remaining charges represent other non-recurring charges primarily associated with advisory fees and expenses paid in connection with the merger and recapitalization. Of the total pre-tax charge of $133.1 million, approximately $42.2 million were non-cash charges. Cash costs and pre-tax expenses connected with the recapitalization, including the payment of certain previously accrued expenses of approximately $1.1 million, and totaled approximately $136.9 million.

15

Results of Operations

Tabular Information

        The following table sets forth our summarized results of operations for fiscal years 2004, 2003 and 2002, expressed in millions of dollars as well as a percentage of each year's net sales:

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

        Geographic distribution of sales:

        We anticipate our 2005 geographic distribution will be relatively consistent with 2004.

16

        The following table shows our net sales and margin profitability for the major geographic regions of our operations, including local currency results for the significant international operations:

Year Ended November 28, 2004 Compared With Year Ended November 30, 2003

        Net Sales.    Our total net sales for the year ended November 28, 2004 increased $124.1 million, or 10.4% from the year ended November 30, 2003. The domestic sales increase of $85.4 million, or 9.0% from fiscal 2003 was attributable to a 1.6% increase in volume and a 7.3% increase in average unit selling price. The increase in average unit selling price is due primarily to price increases announced in May 2004 to offset the effects of rising steel costs, and an improved sales mix from our new UniCased® Posturepedic and TripLCased® Stearns & Foster lines. Also, net sales for fiscal 2003 were reduced by the effects of price

17

roll-backs on existing products in conjunction with the roll-out of our new product lines. Our total international sales increased $38.7 million, or 16.2%, over fiscal 2003. Sales improvements were further increased by favorable exchange rate fluctuations, most notably in our European and Canadian markets, where local currency sales gains of 7.2% and 19.2%, respectively, translated in to gains of 14.1% and 24.5%, respectively, in US Dollars. Local currency gains in our Canadian market were driven by a 7.3% increase in average unit selling price resulting from the successful introduction of our UniCased® product line, combined with an 11% increase in volume primarily attributable to market share gains with national retail accounts. Sales gains in the European market were primarily attributable to increased volume. Elsewhere, sales gains in our South American markets were slightly offset by continued weakness in Mexico.

        Cost of Goods Sold.    Our cost of goods sold for year ended November 28, 2004, as a percentage of net sales, decreased 2.1 percentage points compared to fiscal 2003. Cost of goods sold for our domestic business, as a percentage of net sales, decreased 2.7 percentage points. This decrease (as a percentage of net sales) is due primarily to the increase in average unit selling price as discussed above, partially offset by increased material costs. On a per unit basis, material costs increased 2.8% relative to fiscal 2003 due primarily to increased steel costs partially offset by material cost savings associated with the new one-sided mattress construction. In addition, variable conversion costs increased 0.5% primarily due to higher product return costs, partially offset by increased manufacturing efficiency. Fixed manufacturing costs increased 6.3% per unit primarily driven by increased incentive compensation, higher rent costs associated with our new Albany facility and higher supervisory costs. Cost of goods sold for our international business, as a percentage of net sales, decreased 0.2 percentage points. This decrease is primarily due to increased manufacturing efficiency in Canada associated with the new product lines and better product mix in Brazil and Argentina, partially offset by higher material costs in the European market.

        Selling, General, and Administrative.    Selling, general, and administrative expenses increased $32.5 million compared to the year ended November 30, 2003. As a percentage of net sales, selling, general, and administrative expenses decreased by 0.7 percentage points. Selling, general, and administrative expenses for 2004 include a $4.0 million (0.3% of net sales) one time management bonus paid to the holders of Sealy Corporation stock options in lieu of the cash dividend which was paid to stockholders in association with our parent company's financing transaction (see Note 19 to the Consolidated Financial Statements (Part II, Item 8 included herein)). Other increases include: $4.6 million (0.4% of net sales) higher incentive compensation over 2003 for our selling and administrative personnel resulting from improved performance against budgeted targets and approximately $2.5 million (0.2% of net sales) for higher incremental consulting fees associated with a new product development process and Sarbanes-Oxley compliance. These increases were offset in part by certain decreases which include: promotional, co-op advertising and national advertising, which as a percentage of net sales declined 0.8 percentage points from 2003, and bad debt expense, which declined to 0.2% of net sales in 2004 from 0.4% in 2003.

        Recapitalization Expense.    We incurred approximately $133.1 million of recapitalization expenses in the year ended November 28, 2004 in connection with our merger with affiliates of Kohlberg Kravis Roberts & Co., L.P., completed April 6, 2004 (see Merger and Recapitalization).

        Plant/Business Closure and Restructuring Charges.    Charges of $0.6 million were incurred in 2004 related to the closure of our Randolph, Massachusetts manufacturing facility. Such charges consist primarily of employee severance and retention payments. All restructuring costs related to this plant closure have been paid as of November 28, 2004. The land and building were sold on December 10, 2004, which will result in a gain in fiscal 2005 of approximately $0.2 million.

18

        Royalty Income, net of royalty expense.    Our net royalty income for the year ended November 28, 2004 increased $1.7 million over the year ended November 30, 2003. Our net domestic royalty income and net international royalty income increased $0.9 million and $0.8 million over 2003, respectively.

        Interest Expense.    Our interest expense in 2004 increased $1.4 million over 2003. Lower effective interest rates on our new debt largely offset the effect of the increased debt levels resulting from our recapitalization. Our weighted average borrowing cost during 2004 was approximately 7.6% compared to approximately 9.1% for 2003. We also incurred a $1.2 million charge to write off a portion of the previously capitalized debt issuance costs associated with the senior secured term loan due to unscheduled debt paydowns. See also the previous discussion in Merger and Recapitalization related to the recapitalization and its effects on the Company's debt structure, as well as Note 6 to our Consolidated Financial Statements (Part II, Item 8 included herein).

        Income Tax.    Our effective income tax rate generally differs from the federal statutory rate due to the effects of certain foreign tax rate differentials and state and local income taxes. In 2004, the rate has also been affected by certain expenses associated with the recapitalization and loss carryforwards for which we do not expect a benefit. Our effective tax rate for the year ended November 28, 2004 was 18.3%. Our effective rate for the year ended November 30, 2003 was 49.9%. Our effective tax rate in 2003 differs from the federal statutory rate due to the effects of certain foreign tax rate differentials and state and local income taxes. Also in 2003 the rate has been affected by uncertainty surrounding the reclassification of certain capital loss carryforwards.

Year Ended November 30, 2003 Compared With Year Ended December 1, 2002

        Net Sales.    Our net sales for the year ended November 30, 2003 increased $0.7 million from the year ended December 1, 2002. Total domestic sales declined $21.7 million from 2002, attributable to a 3.7% decrease in volume partially offset by a 1.6% increase in average unit selling price. This unit volume decrease was primarily due to lower sales to current and prior affiliates as they transitioned from single vendor to multi-vendor supply relationships. Additionally, year to date sales were negatively impacted by slower economic activity during the first half of 2003. Improving economic conditions and the success of the launch of our UniCased® Posturepedic line during the second half of 2003 contributed to a 2.0% increase in sales volume over the corresponding period in 2002. Excluding the effects of lower sales from current and former affiliates, sales volume increased 6.0% over the second half of the year. The increase in average unit selling price was due primarily to an improved sales mix from both our existing core Posturepedic line and the new Unicased® Posturepedic line, partially offset by lower sales of other higher-end products and increased price roll-backs on existing products in conjunction with the roll-out of the Unicased® Posturepedic line. For the year ended November 30, 2003, sales to affiliates included sales to one affiliate for the entire period and sales to a prior affiliate for approximately four and a half months, while sales to affiliates for the year ended December 1, 2002 included sales to three affiliates. Total international sales increased $22.4 million, or 10.3%, primarily attributable to favorable currency fluctuations in Canada and Europe and volume gains in Argentina and Brazil, partially offset by continued weakness in the Mexican market.

        Cost of Goods Sold.    Our cost of goods sold for the year ended November 30, 2003, as a percentage of net sales, increased 1.2 percentage points compared to fiscal 2002. Cost of goods sold for our domestic business, as a percentage of net sales, increased 1.3 percentage points. This increase was primarily due to lower absorption of fixed costs due to lower unit sales, higher variable costs associated with health insurance costs, higher costs associated with product returns, a lower mix of higher-end products that typically carry a higher margin than other products, costs associated with the shutdown of the Taylor facility in December 2002, manufacturing costs and roll-back pricing related to the roll out of the new Unicased® design for our Posturepedic bedding line. Cost of goods sold for our international business, as a percentage of net sales, increased 0.4 percentage points compared to 2002. This increase was primarily due to labor

19

increases in the European business partially offset by lower material costs in the Canadian business, due primarily to the weakening of the US dollar relative to the Canadian dollar as our Canadian business purchases a large percentage of its raw materials payable in US dollars.

        Selling, General, and Administrative.    Our selling, general, and administrative expenses decreased $12.8 million compared to fiscal 2002, a decline of 1.1 percentage points as a percentage of net sales. This decrease was primarily attributable to a $26.2 million decrease in bad debt expense. During 2002 we recorded a charge of $22.6 million for bad debt expense associated with affiliated customers (as discussed fully in Note 18 to the Consolidated Financial Statements). Also, during 2002 we recorded a charge of $6.1 million for bad debts as a result of difficulties in an accounts receivable system conversion. The difficulties negatively impacted our collections during 2002 and through the second quarter of 2003. Accordingly, during the second quarter of 2003 we reassessed the progress of our collection efforts and determined that it was necessary to record an increase of $2.0 million in our reserve for bad debts. Since then we have made significant progress in resolving our accounts receivable processing issues and our accounts receivable statistics had improved significantly by November 30, 2003. No additional charges were necessary during the second half of the year. The decrease in bad debt expense was partially offset by increased employment costs of $10.3 million. Salaries increased $8.5 million, of which $2.4 million was due to normal merit and cost of living increases, with the remaining $6.1 million primarily attributable to increased head count. Fringe benefits increased $1.8 million over 2002, attributable mainly to increased headcount. The remaining increase of $3.3 million is primarily associated with increased promotional and advertising costs, including those incurred to support the roll out of our new Unicased® Posturepedic line.

        Restructuring Charge.    Due to continued weak performance of our only remaining retail subsidiary, as well as the fact that it is not our strategy to own or control retail operations, we committed to a plan in the fourth quarter of 2003 to dispose of our wholly-owned retail subsidiary by sale or liquidation in early 2004. Accordingly, we recognized a non-cash impairment charge of $1.8 million during the fourth quarter, which included the $1.6 million write-off goodwill on the books of the subsidiary plus impairment charges for leasehold improvements likely to be abandoned. Following the disposal of this subsidiary in May of 2004, we no longer have a direct interest in any domestic mattress retailer.

        Interest Expense.    Interest expense decreased $4.0 million primarily due to lower effective interest rates. This lower rate was primarily due to the favorable impact from the interest rate swaps as the interest rate on the majority of our bank debt floated during a time of declining interest rates. In 2000, we entered into an interest rate swap agreement that effectively converted $236 million of our floating-rate debt to a fixed-rate basis through December 2006. In the second quarter of 2002, we entered into another interest rate swap agreement that had the effect of reestablishing as floating rate debt the debt previously converted to fixed rate debt through December 2006. While the $236 million of our bank debt was fixed at approximately 6% for the first half of 2002, the entire balance was at a floating rate for all of 2003 during a time of declining interest rates. This had the effect of reducing the weighted average cost of our bank debt from 5.6% in 2002 to 3.7% in 2003. In May 2003, we issued an additional $50.0 million of 9.875% senior subordinated notes, due in December, 2007 ("public debt"). The proceeds were used to prepay all quarterly principal payments on our Senior AXELs Credit Facility ("bank debt") through March, 2004. The exchange of bank debt for public debt increased our interest expense by approximately $1.8 million for 2003. While all of the aforementioned debt was repaid in connection with the recapitalization on April 6, 2004, the interest rate swap agreements remain in effect.

        Income Tax.    Our effective income tax rates in 2003 and 2002 differ from the Federal statutory rate principally because of the effect of certain foreign tax rate differentials and state and local income taxes. In addition, no tax benefit was recorded in 2001 on the $26.3 million impairment charge recognized due to the uncertainty at that time concerning the recoverability of such loss. In 2002, we reduced a portion of the loss for tax purposes as MHI sold its equity interest in Malachi Mattress America, Inc. Our effective tax rate for the year ended November 30, 2003 was approximately 49.9% compared to 29.9% in 2002.

20

Liquidity and Capital Resources

        Our principal sources of funds are cash flows from operations and borrowings under our senior secured revolving credit facility. Our principal use of funds consists of operating expenditures, payments of principal and interest on our senior credit agreements, capital expenditures and interest payments on our outstanding senior subordinated notes. Capital expenditures totaled $22.8 million for the year ended November 28, 2004. We expect 2005 capital expenditures to be approximately $30 million. We believe that annual capital expenditure limitations in our current debt agreements will not significantly prevent us from meeting our ongoing capital needs. At November 28, 2004, we had approximately $91.9 million available under our revolving credit facility after taking into account letters of credit issued totaling $28.1 million. Our net weighted average borrowing cost was 7.6% and 9.1% for the years ended November 28, 2004 and November 30, 2003, respectively. The decline in our borrowing cost was due to lower rates on our new debt as compared with that retired at the recapitalization.

Debt

        As part of the recapitalization we have incurred substantial debt, including new senior credit facilities consisting of a $125 million senior secured revolving credit facility with a six-year maturity, a $560 million senior secured term loan facility with an eight-year maturity. The Company also borrowed $100 million under a senior unsecured term loan, due in 2013, and issued $390 million aggregate principal amount of new Senior Subordinated Notes due 2014. See Note 6 to our Consolidated Financial Statements (Part II, Item 8 included herein) for more information regarding the terms and conditions of our debt. Since the recapitalization and through November 28, 2004, we have repaid $90.0 million of the original $560.0 million outstanding under our senior secured term loan. In doing so, we have effectively prepaid all principal payments due prior to the maturity of the loan in 2012. Substantially all of the prepayments have been funded out of our operating cash flow, with only $5.0 million outstanding under our senior secured revolving credit facility at November 28, 2004, at which time we had approximately $91.9 million available under the revolving credit facility after taking into account letters of credit issued totaling $28.1 million. Subsequent to November 28, 2004 and through February 25, 2005, we have repaid an additional $5.0 million of our senior secured term loan, with $22.0 million outstanding under our revolving credit facility.

        Borrowings under our new senior secured credit facilities bear interest at our choice of the Eurodollar rate or adjusted base rate ("ABR"), in each case, plus an applicable margin, subject to adjustment based on a pricing grid. On August 6, 2004, we amended the senior secured credit facility to reduce the applicable margin by 25 basis points. On June 3, 2004, we entered into an interest rate swap agreement effective July 6, 2004 effectively fixing the floating portion of the interest rate at 3.725% on $200 million of the outstanding balance under the senior secured term loan through November 2005, declining to $150 million through November 2007. To retain the designation of this swap as a hedging instrument, we must select the Eurodollar rate on the hedged portion of the senior secured term loan during the term of the swap.

        The $100 million senior unsecured term loan will mature in 2013 and will bear interest at our choice of the Eurodollar rate or ABR, plus an applicable margin, subject to adjustment based on a pricing grid. All principal amounts outstanding under the senior unsecured term loan are to be repaid at maturity.

21

        The outstanding Senior Subordinated Notes consist of $390 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. On September 29, 2004, we completed an exchange offer whereby all of the Senior Subordinated Notes were exchanged for publicly traded, registered securities with identical terms (other than certain terms relating to registration rights and certain interest rate provisions otherwise applicable to the original senior subordinated notes).

        At November 28, 2004, we were in compliance with the covenants contained within our senior credit agreements and note indenture.

        The following table summarizes our changes in cash:

*

2004 data includes the following amounts associated with the merger and recapitalization: Cash flows provided by (used in): Operating activities $(90.9) million; Investing activities $13.6 million; Financing activities $(35.6) million. See also note 2 to our Consolidated Financial Statements (Part II, Item 8 included herein)

Year Ended November 28, 2004 Compared With Year Ended November 30, 2003

        Cash Flows from Operating Activities.    Our cash flow from operations decreased $43.6 million to $43.5 for the year ended November 28, 2004, compared to $87.1 million for the year ended November 30, 2003, primarily due to $90.9 million of cash expenses associated with the recapitalization. Excluding the effect of the recapitalization, our cash flow from operations increased $47.3 million. Contributing to the improvement before the effect of the recapitalization were higher operating margins, and improved working capital management. These improvements were partially offset by higher interest payments in the first six months of 2004, due in part to the payoff of debt in connection with the recapitalization, and also to the prepayment of interest late in the 2002 fiscal year, thus lowering cash interest payments in 2003.

        Cash Flows from Investing Activities.    Our cash flows used in investing activities increased primarily due to $9.5 million of increased capital expenditures over 2003, partially offset by $1.5 million higher net proceeds from the sale of property plant and equipment, $1.4 million of which was associated with the sale of our former Albany, New York facility. Also in 2004, we collected a $13.6 million note receivable from a prior affiliate in connection with the recapitalization, compared to $13.6 million received in 2003 on another affiliate note and investment.

        Cash Flows from Financing Activities.    Our cash flow used in financing activities increased $101.4 million from 2003, primarily due to the $90.0 million prepayment of our senior secured term loan funded primarily out of operating cash flow, whereas our debt repayments in 2003 had been substantially

22

funded by the issuance of subordinated notes registered under the Securities Act of 1933. The net use of cash from financing activities associated with the recapitalization was $35.6 million in 2004, primarily for debt issuance costs.

Year Ended November 30, 2003 Compared With Year Ended December 1, 2002

        Cash Flows from Operating Activities.    Our cash flow from operations decreased $13.2 million from $100.3 million for 2002 to $87.1 million for the year ended November 30, 2003. This decrease in operating cash flows was primarily the result of lower operating margins, higher cash tax payments, and higher payments in the first quarter associated with incentive compensation that were not made in the first quarter of 2002, partially offset by improved working capital management.

        Cash Flows from Investing Activities.    Our cash flow from investing activities increased from fiscal 2002 primarily due to $13.6 million received in 2003 on an affiliate note and investment. In 2002, the Company loaned this affiliate $12.5 million in the form of a long-term note. The Company also made $6.8 million in cash payments in fiscal 2002 associated with business acquisitions. There were no such acquisitions in fiscal 2003.

        Cash Flows from Financing Activities.    Our cash flows from financing activities increased from fiscal 2002 primarily due to $51.5 million in proceeds from the issuance of senior subordinated notes which were used to fund the retirement of a portion of our senior secured term debt.

        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. Based upon the current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under the senior credit agreement, will be adequate to meet the future liquidity needs throughout 2005. We will make regularly scheduled principal payments of approximately $8.5 million in 2005, substantially all of which is for debt owed by our international subsidiaries. However, as we continually evaluate our ability to make additional prepayments as permitted under our senior credit agreements, it is possible that we will make substantial prepayments on our senior debt in 2005. There can be no assurance that we will generate sufficient cash flow from operations, that anticipated revenue growth and operating improvements will be realized or that future borrowings will be available under the senior credit agreements in an amount sufficient to enable us to service our indebtedness or to fund other liquidity needs. In addition, there can be no assurance that we will be able to effect any future refinancing of our debt on commercially reasonable terms or at all.

Debt Covenants

        Our new long-term obligations contain various financial tests and covenants. Our senior secured credit facilities require us to meet a minimum interest coverage ratio and a maximum leverage ratio. The indenture governing our new senior subordinated notes also requires us to meet a fixed charge coverage ratio in order to incur additional indebtedness, subject to certain exceptions. We are currently in compliance with all debt covenants. The specific covenants and related definitions can be found in the applicable debt agreements, each of which we have previously filed with the Securities and Exchange Commission.

        The covenants contained in our senior secured credit facilities are based on what we refer to herein as "Adjusted EBITDA". In the senior secured credit facilities, 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.

23

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 covenants discussed above.

        EBITDA and Adjusted EBITDA are not recognized terms under GAAP and do not purport to be alternatives to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, they are not intended to be measures of free cash flow for management's discretionary use, as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of other companies. See Part II, Item 6 herein for a reconciliation of EBITDA to our cash flows from operations.

        The following table sets forth a reconciliation of net loss to EBITDA and EBITDA to Adjusted EBITDA for the year ended November 28, 2004:

Contractual Obligations, Commercial Commitments, and Off-Balance Sheet Arrangements

        As previously discussed, our debt at November 28, 2004 consists of $5 million outstanding under a $125 million senior secured revolving credit facility with a six-year maturity, $470 million outstanding under a senior secured term loan facility with an eight-year maturity, $100 million outstanding under a senior unsecured term loan due in 2013, $390 million outstanding aggregate principal amount of senior subordinated notes due 2014, and an additional $8.5 million owed by our international subsidiaries.

        We also occupy premises and utilize equipment under operating leases that expire at various dates through 2033. The obligations under those leases are not recorded on our balance sheet in accordance with generally accepted accounting principles. Many of these leases provide for payment of certain expenses and contain renewal and purchase options.

        We engage in various hedging activities in order to mitigate the risk of variability in future cash flows resulting from floating interest rates on our debt and projected foreign currency purchase requirements. Accordingly, we have entered into contractual arrangements for interest rate swaps and forward purchases of foreign currency. The related assets and liabilities associated with the fair value of such derivative instruments are recorded on our balance sheet. Changes in the fair value of these derivatives are recorded

24

in our income statement, except for those associated with our interest rate swap agreement which has been designated as a cash flow hedge for accounting purposes.

        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 tax return positions are fully supportable, we have established reserves where we believe that certain tax positions are likely to be challenged and we may not fully prevail in overcoming these challenges. Because we are not currently undergoing examinations of any of our corporate income tax returns by tax authorities, we believe that it is unlikely that an audit could be initiated which would result in assessment and payment of taxes related to these positions during 2005. We also cannot predict when or if any other future tax payments related to these tax positions may occur.

        We are involved in a joint venture to develop markets for Sealy brand products in Asia. The joint venture is not considered to be a variable interest entity and is therefore not consolidated into our financial statements. We account for our interest in the joint venture under the equity method, and our net investment of $0.7 million is recorded in our balance sheet at November 28, 2004. We believe that any possible commitments arising from this joint venture will not be significant to our financial position or results of operations.

        The Company's contractual obligations and other commercial commitments as of November 28, 2004 are summarized below (in thousands):

(1)

$575 million of our outstanding debt at November 28, 2004 is subject to floating interest rates. Interest payments are projected based on rates in effect at November 28, 2004 assuming no variable rate fluctuations going forward.



(2)

Net cash payments (receipts) on our hedging instruments consist of the projected net settlements of our interest rate swaps as of November 28, 2004 based on the projected interest rates used to value the swaps on that date. Also included are projected net payments to settle foreign currency forward purchase contracts of $3.1 million, based upon the fair value settlement position of those contracts at November 28, 2004.



(3)

Obligations under operating leases include only projected payments under current lease terms, excluding renewal options and assuming no exercise of any purchase options.



(4)

We are dependent upon a single supplier for certain key structural components of our Unicased® and TripLCased®designs. Such components are purchased under a four-year supply agreement through 2006, and are manufactured in accordance with a proprietary process of the supplier. Under the terms of the supply agreement, we are required to make minimum purchases of the components totaling $70 million through 2006.



(5)

We issue letters of credit in the ordinary course of business primarily to back our various obligations under workers compensation and other insurance programs, environmental liabilities, and open positions on certain

25

of our derivative instruments. These obligations will renew automatically on an annual basis unless cancelled per our instructions.

        As discussed in Note 12 to our Consolidated Financial Statements (Part II, Item 8 herein), we have a $3.9 million long-term obligation arising from an under funded pension plan. Future minimum pension funding requirements are not included in the schedule above as they are not available for all periods presented. During 2005, we estimate that we will make approximately $1.0 million in contributions to the plan. In 2004, we contributed $2.2 million into the plan.

        We have an obligation to repurchase equity securities of Sealy Corporation from certain of our executives upon their retirement. The value of the obligation is determined based on a formulated estimate of Sealy Corporation's book value per share. Future payments associated with this obligation are not included in the schedule above as their timing and amount is contingent upon when the executives retire and the number of underlying shares owned by the executives at that time. At November 28, 2004, we have a noncurrent liability on our balance sheet of $2.4 million for this obligation.

        Only agreements to purchase goods or services with fixed or minimum obligations are included in the schedule above. It does not include normal purchases which are made in the ordinary course of business.

Foreign Operations and Export Sales

        We own three manufacturing facilities in Canada, and one each in Mexico, Argentina and Brazil. In addition, we own Sapsa Bedding S.A.S., a leading European manufacturer of latex bedding products in Europe, with headquarters in Italy and manufacturing operations in France and Italy. In 2000, we formed a joint venture with our Australian licensee to import, manufacture, distribute and sell Sealy products in South East Asia. We operate a Korean sales office and use a contract manufacturer to help service the Korean market. We also export products directly into many small international markets, and have license agreements in Thailand, Japan, the United Kingdom, Spain, Australia, New Zealand, South Africa, Israel, Jamaica, Saudi Arabia, the Bahamas and the Dominican Republic.

Impact of Recently Issued Accounting Pronouncements

        In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46-R", as revised December 2003 with respect to effective dates). The primary objectives of FIN 46-R are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46-R requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. We adopted FIN 46-R in our second fiscal quarter of 2004, however we do not believe we are a primary beneficiary of a VIE or hold any significant interests or involvement in a VIE, therefore adoption of FIN 46-R did not have an impact on our consolidated financial statements.

        In December 2003, The FASB issued FAS 132 (Revised), "Employers' Disclosure about Pensions and Other Postretirement Benefits." A revision of the pronouncement originally issued in 1998, FAS 132R expands employers' disclosure requirements for pension and postretirement benefits to enhance information about plan assets, obligations, benefit payments, contributions, and net benefit cost. FAS 132R does not change the accounting requirements for pensions and other postretirement benefits. This statement is effective for fiscal years ending after December 15, 2003, with interim-period disclosure requirements effective for interim periods beginning after December 15, 2003. Accordingly, we

26

implemented FAS 132R beginning with our second fiscal quarter of 2004. The adoption of this statement did not have an impact on our financial position or results of operations.

        In November of 2004, the FASB issued SFAS 151, "Inventory Costs, an amendment of ARB No. 43 Chapter 4". This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and requires that those items be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for fiscal years beginning after June 15, 2005. We will adopt this statement as of the beginning of fiscal 2006, and do not expect it to have a material impact on our financial position or results of operations.

        In December 2004, the FASB issued FAS 123 (Revised), "Share-Based Payment" ("FAS 123R") which replaces FAS 123 and supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). This statement requires compensation costs relating to share-based payment transactions to be recognized in financial statements based upon the fair value of the award. FAS 123R eliminates the option to account for the cost of stock-based compensation using the intrinsic value method as allowed under APB 25. Having no publicly traded equity securities, we are considered a "nonpublic entity" as defined in the statement. FAS 123R is effective for nonpublic entities for fiscal years beginning after December 15, 2005. Therefore, we expect to adopt FAS 123R as of the beginning of our fiscal year ending December 2, 2007. We currently measure compensation costs related to our share-based awards under APB 25, as allowed by FAS 123, and provide pro forma disclosure in the notes to our financial statements of the effects of accounting for share-based payments under FAS 123, as required by that standard (See Note 1 to our Consolidated Financial Statements, Part II, Item 8 included herein). As the intrinsic value method of APB 25 has rarely resulted in the recognition of expense in our financial statements, we expect the adoption of FAS 123R to have an impact on our results of operations. We are still in the process of evaluating the extent of such impact.

General Business Risk

        Our customers include furniture stores, specialty sleep shops, department stores, membership warehouse clubs, contract customers and other stores. In the future, these retailers may consolidate, undergo restructurings or reorganizations, or realign their affiliations, any of which could decrease the number of stores that carry our products. These retailers are also subject to changes in consumer spending and the overall state of the economy both domestically and internationally. We are dependent upon a single supplier for certain key structural components of our Unicased® and TripLCased® designs. Such components are purchased under a four-year supply agreement, and are manufactured in accordance with a proprietary design exclusive to the supplier. Any of these factors could have a material adverse effect on our business, financial condition or results of operations.

Fiscal Year

        We use a 52-53 week fiscal year ending on the closest Sunday to November 30, but no later than December 2. The fiscal years ended November 28, 2004, November 30, 2003 and December 1, 2002 were 52-week years.

Forward Looking Statements

        "Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995. When used in this Annual Report on Form 10-K, the words "believes," "anticipates," "expects," "intends," "projects" and similar expressions are used to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to future financial and operational results. Any forward-looking statements contained in this report represent our management's

27

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:

—

the level of competition in the bedding industry;



—

legal and regulatory requirements;



—

the success of new products;



—

our relationships with our major suppliers;



—

fluctuations in costs of raw materials;



—

our relationship with significant customers and licensees;



—

our labor relations;



—

departure of key personnel;



—

encroachments on our intellectual property;



—

product liability claims;



—

the timing, cost and success of opening new manufacturing facilities;



—

our level of indebtedness;



—

interest rate risks;



—

future acquisitions;



—

an increase in return rates; and



—

other risks and factors identified from time to time in the Company's reports filed with the Securities and Exchange Commission ("SEC").

        All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Annual Report on Form 10-K and are expressly qualified in their entirety by the cautionary statements include in this Annual Report on From 10-K. Except as may be required by law, we undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

Item 7a.    Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exposures

        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, swap and option 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 not be material to our earnings or financial position. 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 with forward and option contracts. At November 28, 2004, the Company had forward contracts to sell a total of 32.5 million Canadian dollars with expiration dates ranging from December 8, 2004 through November 1, 2005. At November 28, 2004, the fair value of the Company's net obligation under the forward contracts was $3.1 million. We generally

28

do not designate our foreign currency hedges for accounting purposes, therefore all changes in fair value are charged to earnings.

Interest Rate Risk

        As more fully discussed in Note 9 to our Consolidated Financial Statements (Part II, Item 8 included herein), we had entered into two interest rate swap agreements associated with debt existing prior to the recapitalization. Although the related debt was repaid in connection with the recapitalization, the related swaps remain in effect and are scheduled to expire in December 2006. Because the first swap converted a portion of our floating rate debt to a fixed rate and a subsequent swap effectively re-established a floating rate on the same debt, the effect of the two instruments on both cash flows and earnings is largely off-setting. As a result of the recapitalization and repayment of the related debt, $4.7 million of changes in fair value previously recorded in accumulated other comprehensive loss were included in recapitalization expenses charged against earnings during the fiscal year ended November 28, 2004 (see Merger and Recapitalization). The combined fair value carrying amount of these swap instruments at November 28, 2004 and November 30, 2003 was a net obligation of $4.3 and $8.1 million, respectively.

        We had also entered into an interest rate cap agreement associated with previous debt that caps the floating rate on the debt at 8% through June 2005. The agreement also remains in effect following the repayment of the related debt. This agreement has not been designated for hedge accounting and, accordingly, any changes in the fair value are recorded in interest expense. The fair value of this instrument is not material.

        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.

        On June 3, 2004, we entered into an interest rate swap agreement effective July 6, 2004 effectively fixing the floating portion of the interest rate at 3.725% on $200 million of our outstanding balance under the senior secured term loan through November 2005, declining to $150 million through November 2007. The fair value of this swap instrument at November 28, 2004 was an obligation of $2.0 million.

        Based on the unhedged portion our variable rate debt outstanding at November 28, 2004, a 12.5 basis point increase or decrease in variable interest rates would have an approximately $0.5 million dollar impact on our annual interest expense.

Commodity Price Risks

        The cost of our steel innerspring and our polyurethane foam and polyethylene component parts are impacted by volatility in the price of steel and petroleum. We expect the cost of the components to remain elevated above their recent historical averages throughout 2005. Thus far, we have been able to successfully address these cost pressures through a price increase announced in May of 2004 and cost reduction efforts. We do not engage in commodity hedging programs.

29

Item 8.    Financial Statements and Supplementary Data

SEALY MATTRESS CORPORATION
Consolidated Financial Statements
November 28, 2004 and November 30, 2003
(With Independent Registered Public Accounting Firms' Reports Thereon)

30

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Sealy Mattress Corporation:

        We have audited the accompanying consolidated balance sheet of Sealy Mattress Corporation and subsidiaries (the "Company") as of November 28, 2004, and the related consolidated statements of income, stockholders' deficit, and cash flows for the year ended November 28, 2004. Our audit also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial schedule based on our audit. The financial statements of Sealy Corporation for the years ended November 30, 2003 and December 1, 2002 were audited by other auditors whose report, dated February 10, 2004, on those statements included an explanatory paragraph that described the adoption of the provisions of Statement of Financial Accounting Standards No. 142 effective the beginning of the year ended December 1, 2002.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sealy Mattress Corporation and subsidiaries as of November 28, 2004, and the results of their operations and their cash flows for the year ended November 28, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP

Charlotte, North Carolina
February 28, 2005

31

Report of Independent Registered Public Accounting Firm

To the Board of Directors and
Stockholders of Sealy Corporation:

        In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 15 present fairly, in all materials respects, the financial position of Sealy Corporation and its subsidiaries (the "Company") at November 30, 2003 and the results of their operations and their cash flows for each of the two years in the period ended November 30, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjuction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        As discussed in Note 5 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standard No. 142 effective the beginning of the year ended December 1, 2002.

/s/ PricewaterhouseCoopers LLP

Greensboro, North Carolina
February 10, 2004

32

SEALY MATTRESS CORPORATION

Consolidated Balance Sheets
(in thousands, except share amounts)