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TABLE OF CONTENTS3
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

As filed with the Securities and Exchange Commission on June 10, 2011

Registration No. 333-            

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



FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

MATTRESS FIRM HOLDING CORP.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  5712
(Primary standard industrial
classification code number)
  06-1652172
(I.R.S. employer
identification number)

5815 Gulf Freeway
Houston, Texas 77023
(713) 923-1090

(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)



R. Stephen Stagner
President and
Chief Executive Officer
Mattress Firm Holding Corp.
5815 Gulf Freeway
Houston, Texas 77023
(713) 923-1090

(Name, address, including zip code, and telephone number, including area code, of agent for service)



Copies to:

Andrew J. Terry
Ropes & Gray LLP
111 South Wacker Drive, 46th Floor
Chicago, Illinois 60606
Telephone: (312) 845-1200
Facsimile: (312) 845-5500

 

Gene G. Lewis
Charles L. Strauss
Fulbright & Jaworski L.L.P.
Fulbright Tower
1301 McKinney, Suite 5100
Houston, Texas 77010
Telephone: (713) 651-5151
Facsimile: (713) 651-5246

Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.

          If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.     o

          If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     o

          If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     o

          If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     o

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

Large accelerated filer  o   Accelerated filer  o   Non-accelerated filer  ý
(Do not check if a
smaller reporting company)
  Smaller reporting company  o



CALCULATION OF REGISTRATION FEE

       
 
Title of Each Class of
Securities to be Registered

  Proposed Maximum Aggregate
Offering Price(1)(2)

  Amount of Registration Fee
 

Common Stock

  $115,000,000   $13,352

 

(1)
Includes shares to be sold upon exercise of the underwriters' over-allotment option to purchase additional shares of common stock. See "Underwriting (Conflicts of Interest)."

(2)
Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.

           The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine.


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion, dated June 10, 2011

PROSPECTUS


           Shares

LOGO

Common Stock


This is the initial public offering of shares of common stock of Mattress Firm Holding Corp. We are selling                           shares of common stock. We anticipate the initial public offering price will be between $         and $         per share. Prior to this offering, there was no public market for our common stock. The market price of the shares after this offering may be higher or lower than the offering price.

We intend to apply to list our common stock on                           , subject to notice of official issuance, under the symbol "MFRM."

Investing in our common stock involves risks. See "Risk Factors" beginning on page 15 to read about factors you should consider before buying shares of our common stock.

 
  Per share   Total  

Public offering price

  $           $          

Underwriting discounts and commissions

  $           $          

Proceeds, before expenses, to us

  $           $          

We have granted the underwriters a 30-day option to purchase up to an additional                    shares of common stock from us on the same terms and conditions as set forth above if the underwriters sell more than                    shares of common stock in this offering. See the section of this prospectus entitled "Underwriting (Conflicts of Interest)."

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to investors on or about                           , 2011.


Barclays Capital   UBS Investment Bank   William Blair & Company

 



KeyBanc Capital Markets   SunTrust Robinson Humphrey

Prospectus dated                           , 2011


Table of Contents

TABLE OF CONTENTS

 
  Page  

PROSPECTUS SUMMARY

    1  

RISK FACTORS

   
15
 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

   
31
 

USE OF PROCEEDS

   
33
 

DIVIDEND POLICY

   
33
 

CAPITALIZATION

   
34
 

DILUTION

   
35
 

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

   
36
 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   
40
 

BUSINESS

   
62
 

MANAGEMENT

   
78
 

RELATED PARTY TRANSACTIONS

   
101
 

DESCRIPTION OF CERTAIN INDEBTEDNESS

   
104
 

PRINCIPAL STOCKHOLDERS

   
109
 

DESCRIPTION OF CAPITAL STOCK

   
111
 

SHARES ELIGIBLE FOR FUTURE SALE

   
115
 

CERTAIN U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS FOR NON U.S. HOLDERS OF COMMON STOCK

   
117
 

UNDERWRITING (CONFLICTS OF INTEREST)

   
122
 

LEGAL MATTERS

   
130
 

EXPERTS

   
130
 

WHERE YOU CAN FIND MORE INFORMATION

   
130
 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   
F-1
 



         We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is accurate only as of its date.



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NOTE REGARDING TRADEMARKS AND SERVICE MARKS

        We own or have rights to use the trademarks, service marks and trade names that we use in conjunction with the operation of our business. Some of the more important trademarks that we own or have rights to use that appear in this prospectus include " Mattress Firm ®," " Comfort By Color ®," " Mattress Firm Red Carpet Delivery Service ®," " Hampton & Rhodes ®," " YuMe TM ," " Mattress Firm SuperCenter ®," " Happiness Guarantee TM ," " Replace Every 8 ®," " Save Money. Sleep Happy TM ," and " All the best brands...All the best prices! ®." Trademarks, trade names or service marks of other companies appearing in this prospectus are, to our knowledge, the property of their respective owners.


NOTE REGARDING MARKET AND INDUSTRY DATA

        Industry and market data included in this prospectus were obtained from our own internal data, data from industry trade publications and groups (primarily Furniture Today and the International Sleep Products Association, or "ISPA"), consumer research and marketing studies and, in some cases, are management estimates based on industry and other knowledge and experience in the markets in which we operate. Our estimates have been based on information obtained from our suppliers, customers, trade and business organizations and other contacts in the markets in which we operate. We believe these estimates to be accurate as of the date of this prospectus. However, we cannot always verify this information with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in a survey of market size.

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PROSPECTUS SUMMARY

         This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus, including the more detailed information and the financial statements appearing elsewhere in this prospectus. Unless the context otherwise requires, the terms "Mattress Firm," "our company," "the Company," "we," "us," "our" and the like refer to Mattress Firm Holding Corp. and its consolidated subsidiaries. Unless otherwise indicated, (i) the term "our stores" refers to our company-operated stores and our franchised stores; (ii) when used in relation to our company, the terms "market" and "markets" refer to the metropolitan statistical area or an aggregation of the metropolitan statistical areas in which we or our franchisees operate; and (iii) all references to our common stock contained in this prospectus give effect to a                -to-one stock split to be effective immediately prior to consummation of this offering.

         We report on the basis of a 52- or 53-week fiscal year, which ends on the Tuesday closest to January 31. Each fiscal year is described by the period of the calendar year that comprises the majority of the fiscal year period. For example, the fiscal year ended February 1, 2011 is described as "fiscal 2010." Fiscal 2009 and fiscal 2010 contained 52 weeks and fiscal 2008 contained 53 weeks.


Our Company

        We are a leading specialty retailer of mattresses and related products and accessories in the United States. As of February 1, 2011, we and our franchisees operated 592 and 88 stores, respectively, primarily under the Mattress Firm name, in 49 markets across 23 states. In 2010, we ranked first among the top 100 U.S. furniture stores for both growth in store count and percentage increase in sales, according to Furniture Today . We have the largest geographic footprint in the United States among multi-brand mattress specialty retailers and rank second in total sales among mattress specialty retailers. We believe that in our markets Mattress Firm is a highly recognized brand known for its broad selection, superior service, and compelling value proposition. Of our company-operated stores, 75% are located in markets in which we believe we had the number one market share position as of February 1, 2011. Since our founding in 1986 in Houston, Texas, we have expanded our operations across three time zones, with the goal of becoming the premier national mattress specialty retailer.

        We believe our destination retail format, which averages approximately 4,800 square feet per location, provides our customers with a convenient, distinctive and enjoyable shopping experience. Key highlights that make us a preferred destination and that differentiate our brand and services include our:

        Our stores carry both a broad assortment of leading national mattress brands and our exclusive brands. With a wide range of styles, sizes, price points and unique features, we provide our customers with their choice of traditional mattresses, including Sealy and Simmons, as well as specialty mattresses, such as Tempur-Pedic, for which we are a leading retailer. In addition to our broad mattress selection, we offer a variety of bedding-related products and accessories.

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        We have a proven track record of growth and profitability. From January 30, 2008 to February 1, 2011, we grew our net sales, as well as earnings before interest, taxes, depreciation and amortization and other adjustments, or "Adjusted EBITDA," at compound annual rates of 6.8% and 19.2%, respectively, while significantly investing in our corporate infrastructure to support further expansion. In fiscal 2010, we generated net sales and Adjusted EBITDA of $494.1 million and $57.1 million, respectively. (See "—Summary Historical Consolidated Financial and Operating Data" for a definition of Adjusted EBITDA and reconciliation of Adjusted EBITDA and EBITDA to net income.) Through May 31, 2011, we achieved 19 consecutive months of positive comparable-store sales growth. From January 30, 2008 to February 1, 2011, we opened 232 new stores, which includes 38 stores added through acquisitions, demonstrating our strong track record of acquiring and integrating companies. As a result of the fragmented nature of the specialty retail mattress industry, we believe we have a compelling opportunity to further penetrate the sector and continue profitable growth into the future.


Our Industry

Overall Market

        We operate in the U.S. mattress retail market, in which net sales amounted to approximately $11.6 billion in 2010. The market is highly fragmented, with no single retailer holding more than a 7% market share and the top eight participants accounting for approximately one quarter of the total market. In 2008, mattress specialty retailers had a market share in excess of 40%, which represented the largest share of the market, having more than doubled their share over the past 15 years.

        Going forward, we believe that the U.S. mattress retail market will benefit from a number of factors, including improvements in the national economy and the pent-up demand for mattresses and related products. Following the past three recessions (1981-1982, 1990-1991, 2001-2002), the market rebounded 24%, 16% and 21%, respectively, during the two-year period following the recession as consumers who had postponed purchases of mattress products returned to the market. Following the 2008 - 2009 recession, U.S. wholesale unit sales and dollar sales increased 6.2% and 5.5%, respectively, during 2010 compared to the prior year, which we believe evidences the continuation of this trend. According to the information published in May 2011 by ISPA, the industry is expected to grow 7.5% in 2011 and 6.0% in 2012.

        We also believe that several trends support the positive outlook for long-term growth of the U.S. mattress retail market:

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Distribution Channels

        Wholesale.     The U.S. wholesale mattress industry, which includes mattresses and their supporting box springs (also referred to as foundations), as tracked by ISPA, was a $5.9 billion market in 2010. The U.S. wholesale mattress segment (which excludes foundations) accounted for $4.6 billion of the total and has grown at an average annual rate of 5.8% since 1990. The mattress segment has historically experienced stable growth, as 2008 - 2009 was the only period in over thirty years during which the segment experienced a multi-year decline in mattress sales, as wholesale mattress sales dropped from $5.3 billion in 2007 to $4.6 billion in 2010.

        Retail.     The highly fragmented U.S. retail mattress market is made up primarily of mattress specialty retailers, furniture retailers and department stores. Retailers compete based on product selection, customer experience and service, price, store location and brand recognition.

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Bedding Sales by Retail Distribution Channels

GRAPHIC   GRAPHIC

Source: Furniture Today

Brand Overview

        The mattress industry is comprised of a few large manufacturers, with Sealy, Serta, Simmons and Tempur-Pedic representing approximately 59% of the dollar value of the mattress market in 2009 and the 15 largest manufacturers accounting for approximately 81% during the same period. Manufacturers sell traditional innerspring products and specialty products across a wide range of styles, sizes, price points and technologies. In recent years, specialty mattresses, which use foam and air technology, have grown at a much faster rate than the industry as a whole. As new research emerged showing the link between proper sleep and good health, Mattress Firm responded to the growing demand for specialty mattresses by expanding its product selection to include memory foam mattress sets such as Tempur-Pedic products, and mattresses that allow an individual to personalize the comfort characteristics of the sleep surface.


Our Competitive Strengths

        We believe the following business strengths differentiate us from our competitors and favorably position us to execute our growth strategy:

        Distinctive retail format.     We believe our proven and effective operating model combines broad selection, superior service by well-trained associates, a compelling value proposition and highly visible and convenient store locations, resulting in a unique shopping experience at an attractive store destination. The key attributes of the Mattress Firm experience include:

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        Economies of scale and strong market share positions in key markets.     We operate in 49 markets across 23 states through company-operated or franchised stores. We have the largest geographic footprint in the United States among multi-brand mattress specialty retailers and rank second in total sales among mattress specialty retailers. Of our company-operated stores, 75% are located in markets in which we believe we had the number one market share position as of February 1, 2011. We believe our strong market share positions and economies of scale provide us with a number of competitive advantages, including:

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        Highly attractive new store economic model.     We have developed a 4-wall store economic model whereby we typically expect to recoup our initial investment in a new store in less than one year. A new store in our destination retail format, which averages approximately 4,800 square feet in size, typically requires an upfront capital investment of approximately $110,000, net of landlord allowances and vendor incentives, and approximately $16,000 of floor sample inventory.

        Efficient fulfillment model with lower working capital requirements.     We currently operate 27 distribution centers that service all of the markets in which we have company-operated stores. The majority of our distribution centers have excess capacity, which we can leverage as we execute on our growth objectives. Most of our mattress suppliers deliver to our distribution centers within 48 hours following our placement of a purchase order, which enables us to maintain minimal inventory levels but still provide our customers with our Mattress Firm Red Carpet Delivery Service . Furthermore, we typically receive payment from our customers in advance of paying suppliers, which further minimizes our working capital requirements and results in a highly attractive cash flow model.

        Experienced management team.     Our experienced senior management team has an average of ten years of experience with Mattress Firm and an average of 21 years of experience in the retail and mattress industries. Stephen Stagner, our President and Chief Executive Officer, has over 19 years of experience in the mattress industry and originally was a top-performing Mattress Firm franchisee before Mattress Firm purchased his company in December 2004. Steve Fendrich, our Chief Strategy Officer, was a co-founder of Mattress Firm and has 28 years of experience in the mattress industry across various retail and wholesale companies (most recently at Simmons, one of our largest vendors), including 16 years of experience with Mattress Firm . James "Jim" Black, our Chief Financial Officer, has 10 years of experience with Mattress Firm and 20 years of public accounting experience at two leading national accounting firms. Our executive officers and other members of management currently indirectly own approximately    % of our equity (or approximately        % after giving effect to this offering). This strongly aligns the interests of management with those of our stockholders.

        We believe our management's breadth of experience in the industry has enabled us to anticipate and respond effectively to industry trends and competitive dynamics while driving superior customer service and cultivating long-standing relationships with our vendors.

        Proven track record of managing through severe economic conditions.     We have a proven track record of success in challenging economic environments. Over the most recent recessionary period, our management team has shown an ability to outperform the industry, with Mattress Firm being the only leading mattress specialty retail brand to avoid a sales decline in 2009, versus the average leading mattress specialty retailer decline of 9.6%. Our flexible financial model allows us to manage

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discretionary operating expenses through slower sales periods. During the challenging sales environment of fiscal 2009, our Adjusted EBITDA increased $6.2 million, or 15.3%, over fiscal 2008, from $40.2 million to $46.3 million. In fiscal 2010, our Adjusted EBITDA increased $10.8 million, or 23.3%, over fiscal 2009 from $46.3 million to $57.1 million. We believe our company is well positioned to take advantage of opportunities associated with current improvements in the national economy, as evidenced by 19 consecutive months of our positive comparable-store sales growth through May 31, 2011.


Our Growth Strategies

        We seek to enhance our position as a leading specialty retailer of mattresses and related products and accessories with the goal of driving profitable sales growth and becoming the premier national specialty retailer. To achieve these objectives, we plan on executing the following key strategies:

        Expand our company-operated store base.     The highly fragmented U.S. retail mattress market provides us with a significant opportunity to expand our store base. From January 30, 2008 to February 1, 2011, we opened 194 company-operated stores, including 85 stores in fiscal 2010. In addition, during the same period, we acquired 38 additional stores, including 13 store locations that were previously Mattress Firm franchised locations. We plan to continue to expand our store base through a combination of new stores and acquisition opportunities in both existing and new markets. We estimate that we could operate approximately 2,500 Mattress Firm store locations in both existing and new markets in the United States. We believe that attractive opportunities in the real estate market will help us execute our expansion strategy.

        Increase sales and profitability within our existing network of stores.     Our strategy is to drive comparable-store sales growth within our existing portfolio of stores by:

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        As a result of our established infrastructure within our existing markets, improvements in comparable-store sales should drive expansion in our operating profit margins over time. In addition, we will continue to focus on improving the efficiencies of our information systems and distribution infrastructure, which should further benefit our operating margins.

        Selectively expand our franchise network.     Our franchise program is a low cost and high return model for us to expand our store footprint and leverage the Mattress Firm brand name. We partner with qualified franchisee operators to open stores in markets where we do not currently plan to operate. After our franchisee partners achieve a critical mass in a particular market, we may negotiate with them to repurchase their stores, which we believe is a viable, efficient and productive approach to entering certain markets. We purposely seek to include buyback options in our franchise agreements, where appropriate, and maintain the right of first refusal over any sale of stores by a franchisee. Since January 30, 2008, we have acquired 13 locations from two franchisees.

        Continue to expand our proprietary product offering and target additional channels of distribution.     We believe another strong growth avenue for Mattress Firm is to partner with manufacturers to create innovative proprietary products to further differentiate us from our competition. A recent example is our exclusive brand, YuMe , our proprietary temperature-controlled mattress. YuMe , which was created through a partnership among Mattress Firm , Amerigon Inc. and Sleep Inc., is a proprietary concept that allows the individual to control the sleep surface temperature on each side of the mattress. We introduced YuMe in late fiscal 2010 and are currently evaluating our marketing and distribution strategy for the product.

        We also seek alternative distribution channels to further leverage our core competencies, enhance the Mattress Firm brand and increase our market presence. For example, our website, www.mattressfirm.com , features our full line of products and provides useful information to consumers on the features and benefits of our products, store locations and hours of operation. We offer on-line shopping with nationwide delivery, as well as an in-store pickup option. We use the internet as an important customer information resource to drive in-store purchases. In addition, we have created a new temporary "pop-up" store format that we introduced at various special event venues, including state fairs, bridal shows, home and garden shows, conventions, rodeos, boat shows and auto racing events. We expect to drive additional growth through alternative distribution channels in the future.

Risk Factors

        An investment in our common stock involves a high degree of risk. You should carefully consider all of the information set forth in this prospectus and, in particular, evaluate the specific factors set forth under "Risk Factors" in deciding whether to invest in our common stock.

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Our Offices

        Our principal executive offices are located at 5815 Gulf Freeway, Houston, TX 77023 and our telephone number at that address is (713) 923-1090. Our internet address is www.mattressfirm.com . Please note that any references to www.mattressfirm.com in this prospectus are inactive references only and that our website, and the information contained on our website, is not part of this prospectus.

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The Offering

Common stock offered by us

          shares

Common stock to be outstanding immediately after completion of this offering

 

        shares

Over-allotment option

 

        shares

Use of proceeds

 

We expect to receive net proceeds from the sale of shares, after deducting estimated offering expenses and underwriting discounts and commissions, of approximately $        million, based on an assumed offering price of $        per share (the mid-point of the price range set forth in the cover of this prospectus). We intend to use our net proceeds from this offering to:

 

•        pay off the loan facility between Mattress Intermediate Holdings, Inc., or "Mattress Intermediate," our direct subsidiary, and a group of lenders that matures in January 2015, or the "2009 Loan Facility";

 

•        pay accrued management fees and a related termination fee of $             in the aggregate; and

 

•        use the remainder for capital expenditures, working capital and other general corporate purposes, including possible acquisitions and repayment of certain outstanding borrowings under the credit agreement between Mattress Holding Corp., or "Mattress Holding," certain lenders, and UBS Securities LLC, as sole arranger and bookrunner and a lender, or the "2007 Senior Credit Facility."

 

See "Use of Proceeds."

Principal stockholders

 

Upon completion of this offering, investment funds associated with J.W. Childs Associates, L.P., or "J.W. Childs," will indirectly own a controlling interest in us. As a result, we currently intend to avail ourselves of the controlled company exemption under the                        Rules. For more information, see "Management—Board Structure and Committee Composition."

Risk factors

 

You should read carefully the "Risk Factors" section of this prospectus for a discussion of factors that you should consider before deciding to invest in shares of our common stock.

Proposed symbol

 

"MFRM"

        The number of shares of our common stock to be outstanding after this offering is based on        shares of our common stock outstanding as of February 1, 2011. This calculation:

    assumes an offering price of $        per share (the mid-point of the price range set forth on the cover of this prospectus);

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    assumes the underwriters have not exercised the over-allotment option to purchase any additional         shares;

    gives effect to a        for-one stock split resulting in shares of common stock outstanding immediately prior to consummation of this offering;

    assumes        shares issued to the holders of the 12% payment-in-kind investor notes maturing at various times from October 24, 2012 through March 19, 2015, or the "PIK Notes," in exchange for all of the outstanding PIK Notes at a price per share equal to the initial public offering price, which we expect will be effected concurrent with, and conditioned upon, the closing of this offering; and

    excludes        shares of common stock reserved for issuance under our 2011 Long-Term Incentive Plan, none of which have been granted.

Conflicts of Interest

        As described under the caption "Use of Proceeds," we may use net proceeds from this offering to reduce the balance of our 2007 Senior Credit Facility. Because UBS Securities LLC and an affiliate of SunTrust Robinson Humphrey, Inc. are lenders under our 2007 Senior Credit Facility and may receive more than 5% of the net proceeds of this offering due to such repayments, this offering will be conducted in accordance with Rule 5121 of the Financial Industry Regulatory Authority, Inc., or "FINRA." This rule requires, among other things, that a "qualified independent underwriter" has participated in the preparation of, and has exercised the usual standards of "due diligence" with respect to, the registration statement and this prospectus. Barclays Capital Inc. has agreed to act as qualified independent underwriter for the offering. See "Underwriting (Conflicts of Interest)—Relationships."

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Summary Historical Consolidated Financial and Operating Data

        The following tables present our summary historical consolidated financial and operating data. You should read these tables along with "Capitalization," "Selected Consolidated Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes appearing elsewhere in this prospectus. Historical results are not necessarily indicative of the results of operations expected for future periods.

        The historical balance sheet data as of February 1, 2011, and the statement of operations data and per share data for the fiscal years 2008, 2009 and 2010, are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The as adjusted balance sheet data as of February 1, 2011 gives effect to this offering, the application of the net proceeds therefrom as described in "Use of Proceeds" and the exchange of our outstanding PIK Notes for shares of our common stock at a price per share equal to the initial public offering price concurrent with, and conditioned upon, the closing of this offering.

 
  Fiscal Year  
 
  2008   2009   2010  
 
  (dollar amounts in thousands,
except for store units)

 

Statement of Operations:

                   

Net sales

  $ 433,258   $ 432,250   $ 494,115  

Cost of sales

    287,744     280,506     312,637  
               
 

Gross profit from retail operations

    145,514     151,744     181,478  

Franchise fees and royalty income

    2,053     2,100     3,195  
               

    147,567     153,844     184,673  

Sales and marketing expenses

    94,050     95,305     114,017  

General and administrative expenses

    33,781     32,336     35,382  

Goodwill and intangible asset impairment charges(1)

    142,810          

Loss on store closings and impairment of store assets(2)

    7,419     5,179     2,486  
               
 

Income (loss) from operations

    (130,493 )   21,024     32,788  

Other expense (income):

                   
 

Interest income

    (9 )   (12 )   (6 )
 

Interest expense(3)

    28,342     27,126     31,063  
 

Gain from debt extinguishment(4)

        (2,822 )    
               
   

Total other expense

    28,333     24,292     31,057  
               

Income (loss) before income taxes

    (158,826 )   (3,268 )   1,731  

Income tax expense

    2,657     1,405     846  
               

Net income (loss)

  $ (161,483 ) $ (4,673 ) $ 885  
               

Other Financial Data:

                   

EBITDA(5)

  $ (113,407 ) $ 41,275   $ 49,563  

Adjusted EBITDA(6)

  $ 40,168   $ 46,323   $ 57,095  

Adjusted EBITDA, percentage of net sales

    9.3 %   10.7 %   11.6 %

Capital expenditures

  $ 23,888   $ 10,863   $ 27,330  

Depreciation and amortization

  $ 16,209   $ 16,286   $ 15,448  

Operational Data(7):

                   

Comparable-store sales growth (decline)(8)

    (23.7 )%   (4.3 )%   6.1 %

Store units open at period-end

    464     487     592  

Average net sales per store unit(9)

  $ 979   $ 907   $ 927  

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  At February 1, 2011  
 
  Actual   As
Adjusted
 

Balance Sheet Data:

             

Working capital

  $ (7,778 ) $    

Total assets

  $ 519,908   $    

Total debt

  $ 398,703   $    

Stockholder's equity (deficit)

  $ (9,316 ) $    

(1)
During fiscal 2008, we recognized a non-cash impairment charge of $142.8 million attributable to the impairment of our goodwill and other intangible assets.

(2)
Includes a non-cash impairment charge for long-lived assets, consisting primarily of store leasehold costs and related equipment, to reduce the carrying value to estimated fair value, based on our periodic assessment of whether projected future cash flows of individual stores are sufficient to recover the carrying value of the related assets, in the amounts of $6.3 million, $2.3 million and $1.7 million during fiscal 2008, fiscal 2009 and fiscal 2010, respectively.

(3)
Interest expense includes interest that was accrued and paid in kind by adding the interest to the outstanding balance of debt related to our 2009 Loan Facility and the PIK Notes in the amounts of $2.5 million, $17.7 million and $23.2 million during fiscal 2008, fiscal 2009 and fiscal 2010, respectively.

(4)
During fiscal 2009, a gain from debt extinguishment was recognized in connection with the amendment and restatement of the 2009 Loan Facility. The extinguishment resulted in a $5.8 million downward adjustment of the loan carrying value to its fair value, which was partially offset by the write-off of $3.0 million of unamortized deferred loan fees.

(5)
EBITDA represents net income before income tax expense, interest income, interest expense, depreciation and amortization. We have presented EBITDA because we consider it an important supplemental measure of our performance and believe it is frequently used by analysts, investors and other interested parties in the evaluation of companies in our industry. Management uses EBITDA as a measurement tool for evaluating our actual operating performance compared to budget and prior periods. Other companies in our industry may calculate EBITDA differently than we do. EBITDA is not a measure of performance under accounting principles generally accepted in the United States of America, or "U.S. GAAP," and should not be considered as a substitute for net income prepared in accordance with U.S. GAAP. EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

EBITDA does not reflect interest expense or the cash requirements necessary to service interest or principal payments on our debt;

EBITDA does not reflect tax expense or the cash requirements necessary to pay for tax obligations; and

Although depreciation and amortization are non-cash charges, the asset being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements.


We compensate for these limitations by relying primarily on our U.S. GAAP results and using EBITDA only as a supplemental measure.

(6)
Adjusted EBITDA is defined as EBITDA, without giving effect to non-cash goodwill and intangible asset impairment charges, gains or losses on store closings and impairment of store assets, gains or losses related to the early extinguishment of debt, financial sponsor fees and expenses, non-cash charges related to stock-based awards and one-time costs included in earnings related to acquisitions and other one-time expenses. We have presented Adjusted EBITDA because we believe that the exclusion of these one-time items is appropriate to provide additional information to investors about our ongoing operating performance excluding certain non-cash items and unusual or one-time items and to provide additional

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    information with respect to our ability to meet our future debt service and to comply with various covenants in documents governing our indebtedness and as a means to evaluate our period-to-period results. We have provided this information to analysts, investors and other third parties to enable them to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of our ongoing operations. Management uses Adjusted EBITDA to determine executive incentive compensation payment levels as well as our compliance with certain covenants under our Senior Credit Agreement that are calculated based on similar measures. Other companies in our industry may calculate Adjusted EBITDA differently than we do. Adjusted EBITDA is not a measure of performance under U.S. GAAP and should not be considered as a substitute for net income prepared in accordance with U.S. GAAP. Adjusted EBITDA has similar limitations as an analytical tool to those set forth in note (5) related to the use of EBITDA, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only as a supplemental measure.


The following table contains a reconciliation of our net income (loss) determined in accordance with U.S. GAAP to EBITDA and Adjusted EBITDA for the periods indicated:

 
  Fiscal Year  
 
  2008   2009   2010  
 
  (in thousands)
 

Net income (loss)

  $ (161,483 ) $ (4,673 ) $ 885  
 

Income tax expense

    2,657     1,405     846  
 

Interest income

    (9 )   (12 )   (6 )
 

Interest expense

    28,342     27,126     31,063  
 

Depreciation and amortization

    16,209     16,286     15,448  
 

Intangible assets and other amortization

    877     1,143     1,327  
               

EBITDA

    (113,407 )   41,275     49,563  
               
 

Goodwill and intangible asset impairment charges

    142,810          
 

Loss on store closings and impairment of store assets

    7,419     5,179     2,486  
 

Gain from debt extinguishment

        (2,822 )    
 

Financial sponsor fees and expenses

    490     395     407  
 

Stock-based compensation

    1,299     84     (515 )
 

One-time acquisition and other expenses

    1,557     2,212     5,154  
               

Adjusted EBITDA

  $ 40,168   $ 46,323   $ 57,095  
               
(7)
Operational data relates to company-operated stores only.

(8)
Comparable-store sales is a measure commonly used in the retail industry, which indicates store performance by measuring the growth in revenue for certain stores for a particular period over the corresponding period in the prior year. New stores are included in the comparable-store sales calculation beginning in the thirteenth full month of operation. Acquired stores are included in the comparable-store sales calculation beginning in the first month following the anniversary date of the acquisition. The comparable-store sales calculation includes sales related to our e-commerce and other comparable sales channels. New stores that are relocated within a two mile radius of a closed store are included in the comparable-store sales calculation beginning with the first full month of operations by measuring the growth in revenue against the prior year sales of the closed store. Stores that are closed, other than relocated stores, are removed from the comparable-store sales calculation in the month of closing. Comparable-store sales during fiscal years that are comprised of 53 weeks exclude sales for the fifty-third week of the year. The method of calculating comparable-store sales varies across the retail industry and our method may not be the same as other retailers' methods.

(9)
Calculated using net sales for stores open at both the beginning and the end of the period.

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RISK FACTORS

         An investment in our common stock involves various risks. You should carefully consider the following risks and all of the other information contained in this prospectus before investing in our common stock. The risks described below are those that we believe are the material risks that we face. Additional risks not presently known to us that we currently consider to be common to all businesses similarly situated to ours or that we currently consider immaterial also may adversely affect our company.


Risks Related to Our Business

Our business is dependent on the general economic conditions in our markets.

        Our sales depend, in part, on discretionary spending by our customers. Within the last two years, rising unemployment, reduced consumer confidence and reduced access to credit have combined to lead to sharply reduced consumer spending. If consumer confidence and willingness to spend on discretionary items remains low, our sales and results of operations could be adversely affected. Continued deterioration of financial markets or a worsening or prolonged economic downturn could result in declines in sales and impair our growth. General economic conditions and discretionary spending are beyond our control and are affected by, among other things:

        Increasing volatility in financial markets may cause some of the above factors to change with an even greater degree of frequency and magnitude.

Our ability to grow and remain profitable may be limited by direct or indirect competition in the retail bedding industry, which is competitive and fragmented.

        The retail bedding industry in the United States is highly competitive and highly fragmented. Participants in the bedding industry compete primarily based on store location, service, price, product selection, brand name recognition and advertising. There can be no assurance that we will be able to continue to compete favorably with our competitors in these areas. Our store competitors include regional and local specialty retailers of bedding (such as Mattress Giant and American Mattress, national and regional chains of retail furniture stores carrying bedding (such as Haverty's and Rooms-To-Go), department store chains with bedding departments (such as Macy's, Sears and JC Penney), big box retailers (such as Walmart), warehouse clubs (such as Costco) and factory direct

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stores (such as Original Mattress). In the past, we have faced periods of heightened competition that materially affected our results of operations. Certain of our competitors have substantially greater financial and other resources than us. Accordingly, we may face periods of intense competition in the future that could have a material adverse effect on our planned growth and future results of operations. In addition, the barriers to entry into the retail bedding industry are relatively low. New or existing bedding retailers could enter our markets and increase the competition we face. In addition, manufacturers and vendors of mattresses and related products, including those whose products we currently sell, could enter the U.S. mattress retail market and start directly competing with us. Competition in existing and new markets may also prevent or delay our ability to gain relative market share. Any of the developments described above could have a material adverse effect on our planned growth and future results of operations.

If we fail to successfully manage the challenges our planned growth poses or encounter unexpected difficulties during our expansion, our net sales and profitability could be materially adversely affected.

        One of our central long term objectives is to increase sales and profitability through market share leadership. Our ability to achieve market share leadership, however, is contingent upon our ability to (1) open stores in favorable locations, (2) advertise our stores in an effective and cost-efficient manner and (3) achieve operating results in new stores at the same level as our similarly situated current stores. There can be no assurance, however, that we will be able to open stores in new markets at the rate required to achieve market leadership in such markets, identify and obtain favorable store sites, arrange favorable leases for stores or obtain governmental and other third-party consents, permits and licenses needed to open or operate stores in a timely manner, train and hire a sufficient number of qualified managers for new stores, attract a strong customer base and brand familiarity in new markets, or successfully compete with established mattress stores in the new markets we enter. Moreover, if we are unable to open an adequate number of stores in a market, or if store-level profitability is lower than expectations, we may be unable to achieve the market presence necessary to justify the considerable expense of radio or television advertising and could be forced to rely upon less effective advertising mediums. Failure to open stores in favorable locations or to advertise in an effective and cost-efficient manner could place us at a competitive disadvantage as compared to retailers who were more adept than we at managing these challenges, which, in turn, could negatively affect our overall operating results.

Our comparable-store sales and results of operations fluctuate due to a variety of economic, operating, industry and environmental factors and may not be fair indicators of our performance.

        Our comparable-store sales and operating results have experienced fluctuations, which can be expected to continue. Numerous factors affect our comparable-store sales results, including among others, the timing of new and relocated store openings, the relative proportion of new and relocated stores to mature stores, cannibalization resulting from the opening of new stores in existing markets, the acquisition and rebranding of competitors' stores in existing Mattress Firm markets, changes in advertising and other operating costs, the timing and level of markdowns, changes in our product mix, weather conditions, retail trends, the retail sales environment, economic conditions, inflation, the impact of competition and our ability to execute our business strategy efficiently. As a result, comparable-store sales or operating results may fluctuate, and may cause the price of our common stock to fluctuate significantly. Therefore, we believe period-to-period comparisons of our results may not be a fair indicator of, and should not be relied upon as a measure of, our operating performance.

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We intend to aggressively open additional stores in our existing markets, which may diminish sales by existing stores in those markets and strain our ability to find qualified personnel or divert resources from our existing stores, negatively affecting our overall operating results.

        Pursuant to our expansion strategy, we intend to aggressively open additional stores in our existing markets, including relocations of existing stores. Because our stores typically draw customers from their local areas, additional stores may draw customers away from nearby existing stores and may cause our comparable-store sales performance and customer counts at those existing stores to decline, which may adversely affect our overall operating results. In addition, our ability to open additional stores will be dependent on our ability to promote and/or recruit enough qualified field managers, store managers, assistant store managers and sales associates. The time and effort required to train and supervise a large number of new managers and associates and integrate them into our culture may divert resources from our existing stores. If we are unable to profitably open additional stores in existing markets and limit the adverse impact of those new stores on existing stores, it may reduce our comparable-store sales and overall operating results during the implementation of our expansion strategy.

Our expansion strategy will be dependent upon, and limited by, the availability of adequate capital.

        Our expansion strategy will require additional capital for, among other purposes, opening new stores and entering new markets. Such capital expenditures will include researching real estate and consumer markets, lease, inventory, property and equipment costs, integration of new stores and markets into company-wide systems and programs and other costs associated with new stores and market entry expenses and growth. If cash generated internally is insufficient to fund capital requirements, or if funds are not available under our existing credit facility, we will require additional debt or equity financing. Adequate financing may not be available or, if available, may not be available on terms satisfactory to us. In addition, our debt agreements provide a limit on the amount of capital expenditures we may make annually. If we fail to obtain sufficient additional capital in the future or we are unable to make capital expenditures under our debt agreements, we could be forced to curtail our expansion strategies by reducing or delaying capital expenditures relating to new stores and new market entry. As a result, there can be no assurance that we will be able to fund our current plans for the opening of new stores or entry into new markets.

We may from time to time acquire complementary businesses, including operations of our franchisees, which will subject us to a number of risks.

        Any acquisitions we may undertake involve a number of risks, including:

        If we are unable to integrate or successfully manage any business that we acquire, we may not realize anticipated cost savings, improved efficiencies or revenue growth, which may result in reduced profitability or operating losses. In addition, we may face competition for acquisition candidates, which

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may limit the number of acquisition opportunities and may lead to higher acquisition prices. Moreover, acquisitions of businesses may require the issuance of additional equity financing, which would result in dilution of our existing stockholders. The realization of all or any of the risks described above could materially and adversely affect our reputation and our results of operations.

A deterioration in our relationships with, or a dilution of the brand images of, our primary suppliers could adversely affect our brand and customer satisfaction and result in reduced sales and operating results.

        We currently rely on Sealy, Simmons and Tempur-Pedic as our primary suppliers of branded mattresses. Purchases of products from these three manufacturers accounted for 80% of our mattress product costs for fiscal 2010. Because of the large volume of our business with these manufacturers and our use of their branding in our marketing initiatives, our success depends on the continued popularity and reputation of these manufacturers. Any dilution of their brand images or adverse change in our relationship with any of them or to their financial condition, production efficiency, product development or marketing capabilities could adversely affect our own brand and the level of our customers' satisfaction, among other things, which could result in reduced sales and operating results.

        We use Corsicana as a primary supplier of our private label mattresses, which accounted for 14% of our mattress product costs for fiscal 2010. If our relationships with Sealy, Simmons, Tempur-Pedic or Corsicana are terminated or otherwise impaired, or if any of them materially increase their prices, it could have a material adverse effect on our business, financial condition and results of operations.

We depend on a number of suppliers, and any failure by any of them to supply us with products may impair our inventory and adversely affect our ability to meet customer demands, which could result in a decrease in net sales.

        Through our operating subsidiaries, we maintain supply agreements with Sealy, Simmons, Tempur-Pedic and Corsicana. Our current suppliers may not continue to sell products to us on acceptable terms or at all, and we may not be able to establish relationships with new suppliers to ensure delivery of products in a timely manner or on terms acceptable to us. We may not be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future. We are also dependent on suppliers for assuring the quality of merchandise supplied to us. Our inability to acquire suitable merchandise in the future or the loss of one or more of our suppliers and our failure to replace them may harm our relationship with our customers and our ability to attract new customers, resulting in a decrease in net sales.

If customers are unable to obtain third-party financing at appropriate rates, sales of our products could be materially adversely affected.

        We offer financing to consumers through third party consumer finance companies. Our business is affected by the availability and terms of financing to customers. During much of the fourth quarter of fiscal 2008 and continuing into fiscal 2009, we experienced significantly lower credit approval rates for our customers. Sales results were negatively affected as a result. Another reduction of credit availability to our customers could have a material impact on our results of operations.

We may not be able to successfully anticipate consumer trends and our failure to do so may lead to loss of consumer acceptance of the products we sell, resulting in reduced net sales.

        Our success depends on our ability to anticipate and respond to changing trends and consumer demands in a timely manner. If we fail to identify and respond to emerging trends, consumer acceptance of the merchandise we sell and our image with current or potential customers may be harmed, which could reduce our net sales. For example, the Company has responded to the trend in favor of specialty bedding products and sleep systems, such as viscoelastic foam mattresses, by entering

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into new arrangements with suppliers and reallocating store display space without certainty of success or that existing relationships with conventional mattress suppliers will not be jeopardized. Additionally, if we misjudge market trends, we may significantly overstock unpopular products and be forced to take significant inventory markdowns, which would have a negative impact on our gross profit and cash flow. Conversely, shortages of models that prove popular could also reduce our net sales.

We depend on a few key employees, and if we lose the services of certain of our principal executive officers, we may not be able to run our business effectively.

        Our future success depends in part on our ability to attract and retain key executive, merchandising, marketing and sales personnel. Our executive officers include R. Stephen Stagner, our President and Chief Executive Officer, Stephen G. Fendrich, our Chief Strategy Officer, and James R. Black, our Executive Vice President and Chief Financial Officer. We have an employment agreement with each of Messrs. Stagner, Fendrich and Black. If any of these executive officers ceases to be employed by us, we would have to hire additional qualified personnel. Our ability to successfully hire other experienced and qualified executive officers cannot be assured and may be difficult because we face competition for these professionals from our competitors, our suppliers and other companies operating in our industry. As a result, the loss or unavailability of any of our executive officers could have a material adverse effect on us.

Our substantial debt could adversely affect us, make us more vulnerable to adverse economic or industry conditions and prevent us from fulfilling our debt obligations or from funding our expansion strategy.

        We have a substantial amount of debt outstanding and significant debt service requirements. As of February 1, 2011, on an as adjusted basis after giving effect to the offering, our planned use of proceeds and the exchange of the PIK Notes, we had $         million of total indebtedness, including $         million outstanding under the 2007 Senior Credit Facility and $         million outstanding under the 2009 Loan Facility. Our substantial indebtedness could have serious consequences, such as:

        The potential consequences of our substantial indebtedness make us more vulnerable to defaults and place us at a competitive disadvantage. A substantial or extended increase in interest rates could significantly affect our cash available to make scheduled payments on the 2007 Senior Credit Facility or to fund our expansion strategy. If we do not have sufficient earnings to service our debt, we would need to refinance all or part of our existing debt, sell assets, borrow more money or sell securities, none of which we can guarantee we will be able to achieve on commercially reasonable terms, if at all.

Our debt agreements contain restrictions that limit our flexibility in operating our business.

        The 2007 Senior Credit Facility and the 2009 Loan Facility contain negative covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability and the ability of our restricted subsidiaries to, among other things:

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        A breach of any of these covenants could result in an event of default under the 2007 Senior Credit Facility or the 2009 Loan Facility. Upon the occurrence of an event of default under the 2007 Senior Credit Facility or the 2009 Loan Facility, the lenders could elect to declare all amounts outstanding under such facility to be immediately due and payable and terminate all commitments to extend further credit, or seek amendments to our debt agreements that would provide for terms more favorable to such lenders and that we may have to accept under the circumstances. If we were unable to repay those amounts, the lenders under the 2007 Senior Credit Facility could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under the 2007 Senior Credit Facility. If the lenders under the 2007 Senior Credit Facility accelerate the repayment of borrowings, we cannot be sure that we will have sufficient assets to repay the 2007 Senior Credit Facility, as well as the 2009 Loan Facility.

If we fail to hire, train and retain qualified managers, sales associates and other employees our superior customer service could be compromised and we could lose sales to our competitors.

        A key element of our competitive strategy is to provide product expertise to our customers through our extensively trained, commissioned sales associates. If we are unable to attract and retain qualified personnel and managers as needed in the future, including qualified sales personnel, our level of customer service may decline, which may decrease our net sales and profitability.

Our future growth and profitability will be dependent in part on the effectiveness and efficiency of our advertising expenditures.

        Our advertising expenditures, which are the largest component of our sales and marketing expenses are expected to continue to increase for the foreseeable future. A significant portion of our advertising expenditures are made in the higher cost radio and television formats. We cannot assure you that our planned increases in advertising expenditures will result in increased customer traffic, sales, levels of brand name awareness or market share or that we will be able to manage such advertising expenditures on a cost-effective basis. Should we fail to realize the anticipated benefits of our advertising program, or should we fail to effectively manage advertising costs, this could have a material adverse effect on our growth prospects and profitability.

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Our operating results are seasonal and subject to adverse weather and other circumstances, the occurrence of which during periods of expected higher sales may result in disproportionately reduced sales for the entire year.

        We historically have experienced and expect to continue to experience seasonality in our net sales and net income. We generally have experienced more sales and a greater portion of income during the second and third quarters of our fiscal year due to a concentration of holidays such as Memorial Day, the Fourth of July and Labor Day occurring in the summer and a higher number of home sales occurring in autumn. Over the past five fiscal years, the second quarter generated 26.0% of our net sales and 29.4% of our Adjusted EBITDA and the third quarter generated 26.4% of our net sales and 31.5% of our Adjusted EBITDA, and we generated 39.1% of our Adjusted EBITDA in the other quarters. We expect this seasonality to continue for the foreseeable future. Any decrease in our second or third quarter sales, whether because of adverse economic conditions, a slowdown in home sales, adverse weather conditions, timing of holidays within our quarters or other unfavorable circumstances, could have a disproportionately adverse effect on net sales and operating results for the entire fiscal year.

If we are unable to renew or replace our current store leases or if we are unable to enter into leases for additional stores on favorable terms, or if one or more of our current leases are terminated prior to expiration of their stated term and we cannot find suitable alternate locations, our growth and profitability could be negatively impacted.

        We currently lease all but one of our store locations. Many of our current leases provide for our unilateral option to renew for several additional rental periods at specific rental rates. Our ability to re-negotiate favorable terms on an expiring lease or to negotiate favorable terms for a suitable alternate location, and our ability to negotiate favorable lease terms for additional store locations could depend on conditions in the real estate market, competition for desirable properties, our relationships with current and prospective landlords or on other factors that are not within our control. Any or all of these factors and conditions could negatively impact our growth and profitability.

Because our stores are generally concentrated in the Gulf Coast and Southeast regions of the United States, we are subject to regional risks.

        We have a high concentration of stores in the Gulf Coast and Southeast regions. We therefore have exposure to these local economies as well as weather conditions and natural disasters occurring in these regions, including hurricanes, tornadoes and other natural disasters. If these markets individually or collectively suffer an economic downturn or other significant adverse event, there could be an adverse impact on our comparable-store sales, net sales and profitability and our ability to implement our planned expansion program. Any natural disaster or other serious disruption in these markets due to fire, tornado, hurricane or any other calamity could damage inventory and could result in decreased sales.

Our results may be adversely affected by fluctuations in raw material and energy costs.

        Our results may be affected by the prices of the components and raw materials used in the manufacture of the mattress products and accessories we sell. These prices may fluctuate based on a number of factors beyond our control, including: oil prices, changes in supply and demand, general economic conditions, labor costs, competition, import duties, tariffs, currency exchange rates and government regulation. In addition, energy costs have fluctuated dramatically in the past. These fluctuations may result in an increase in our transportation costs for distribution, utility costs for our retail stores and overall costs to purchase products from our vendors.

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        We may not be able to adjust the prices of our products, especially in the short-term, to recover these cost increases in raw materials and energy. A continual rise in raw material and energy costs could adversely affect consumer spending and demand for our products and increase our operating costs, both of which could have a material adverse effect on our financial condition and results of operations.

We are subject to government regulation and audits from various taxing authorities, which could impose substantial costs on our operations or reduce our operational flexibility.

        Our products and our marketing and advertising programs are and will continue to be subject to regulation in the U.S. by various federal, state and local regulatory authorities, including the Federal Trade Commission. Compliance with these regulations may have an adverse effect on our business. In addition, our operations are subject to federal, state and local consumer protection regulations and other laws relating specifically to the bedding industry. For example, U.S. Consumer Product Safety Commission has adopted rules relating to fire retardancy standards for the mattress and pillow industry. State and local bedding industry regulations vary among the states in which we operate but generally impose requirements as to the proper labeling of bedding merchandise, restrictions regarding the identification of merchandise as "new" or otherwise, controls as to hygiene and other aspects of product handling, sales and resales and penalties for violations. We and/or our suppliers may be required to incur significant expense to the extent that these regulations change and require new and different compliance measures. For example, new legislation aimed at improving the fire retardancy of mattresses or regulating the handling of mattresses in connection with preventing or controlling the spread of bed bugs could be passed, which could result in product recalls or in a significant increase in the cost of operating our business. In addition, failure to comply with these various regulations may result in penalties, the inability to conduct business as previously conducted or at all, and/or adverse publicity, among other things.

        We are also subject to Federal Trade Commission and state laws regarding the offering of franchises and their operations and management. State franchise laws may delay or prevent us from terminating a franchise or withholding consent to renew or transfer a franchise. We may, therefore, be required to retain an underperforming franchise and may be unable to replace the franchise, which could have an adverse effect on franchise revenues. Although we believe that we are in substantial compliance with these bedding industry and franchise regulations, we may be required in the future to incur expense and/or modify our operations in order to ensure such compliance.

        We are also subject to audits from various taxing authorities. Currently, we are not under audit in any of the jurisdictions in which we operate. Changes in tax laws in any of the multiple jurisdictions in which we operate, or adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, could result in an unfavorable change in our effective tax rate, which could have an adverse effect on our business and results of our operations.

Our success is highly dependent on our ability to provide timely delivery to our customers, and any disruption in our delivery capabilities or our related planning and control processes may adversely affect our operating results.

        An important part of our success is due to our ability to deliver mattresses and bedding-related products quickly to our customers. This in turn is due to our successful planning and distribution infrastructure, including merchandise ordering, transportation and receipt processing, and the ability of our suppliers to meet our distribution requirements. Our ability to maintain this success depends on the continued identification and implementation of improvements to our planning processes, distribution infrastructure and supply chain. We also need to ensure that our distribution infrastructure and supply chain keep pace with our anticipated growth and increased number of stores. The cost of these enhanced processes could be significant and any failure to maintain, grow or improve them could

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adversely affect our operating results. Our business could also be adversely affected if there are delays in product shipments to us due to freight difficulties, difficulties of our suppliers involving strikes or other difficulties at their principal transport providers or otherwise.

Our ability to control labor costs is limited, which may negatively affect our business.

        Our ability to control labor costs is subject to numerous external factors, including prevailing wage rates, the impact of legislation or regulations governing healthcare benefits or labor relations, such as the Employee Free Choice Act, and health and other insurance costs. If our labor and/or benefit costs increase, we may not be able to hire or maintain qualified personnel to the extent necessary to execute our competitive strategy, which could adversely affect our results of operations.

There can be no assurance that our warranty claims and comfort exchange return rates will remain within acceptable levels.

        Under the terms of our supply agreements with some of our major suppliers of conventional mattress products, we currently are financially responsible for returns resulting from product defects. We also provide our customers with a 100-day comfort satisfaction guarantee whereby, within 100 days from the date of original purchase, if the new mattress is uncomfortable, we will exchange it for a mattress of equal or similar quality with no exchange fee, subject to standard transportation charges. Additionally, we provide our customers with a low price guarantee whereby if a customer finds the same or comparable sleep set for less than our displayed or advertised price within 100 days of purchase, we will beat the price by 10% and refund the customer the difference. While we establish reserves at the time of sale for these exposures, there can be no assurance that our reserves adequately reflect this enhancement and no assurance that warranty claims and comfort exchange return rates will remain within acceptable levels. An increase in warranty claims and comfort exchange return rates could have a material adverse effect on our business, financial condition and operating results.

If we determine that our goodwill or other acquired intangible assets are impaired, we may have to write off all or a portion of the impaired assets.

        As of February 1, 2011, we had goodwill and intangible assets, net of accumulated amortization, of $293.7 million and $84.9 million, respectively. In fiscal 2008, as a result of the global economic crisis, we incurred goodwill and intangible asset impairments of $142.8 million, and we may incur goodwill and intangible asset impairments in the future. Management is required to exercise significant judgment in identifying and assessing whether impairment indicators exist, or if events or changes in circumstances have occurred, including market conditions, operating results, competition and general economic conditions. Current accounting guidance requires that we test our goodwill and indefinite lived intangible assets for impairment on an annual basis, or more frequently if warranted by the circumstances. Any changes in key assumptions about the business units and their prospects or changes in market conditions or other externalities could result in an impairment charge, and such a charge could have a material adverse effect on our business, results of operations and financial condition.

We are a holding company with no business operations of our own and depend on cash flow from our subsidiaries to meet our obligations.

        We are a holding company with no business operations of our own or material assets other than the stock of our subsidiaries. Accordingly, all of our operations are conducted by our subsidiaries. As a holding company, we require dividends and other payments from our subsidiaries to meet cash requirements. The terms of our credit facility restrict our subsidiaries from paying dividends and otherwise transferring cash or other assets to us. We currently have no obligations that require cash funding from our subsidiaries. If there is an insolvency, liquidation or other reorganization of any of our subsidiaries, our stockholders likely will have no right to proceed against their assets. Creditors of

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those subsidiaries will be entitled to payment in full from the sale or other disposal of the assets of those subsidiaries before we, as an equityholder, would be entitled to receive any distribution from that sale or disposal. If our subsidiaries are unable to pay us dividends or make other payments to us when needed, we will be unable to pay dividends or satisfy our obligations.

Product safety issues, including product recalls, could harm our reputation, divert resources, reduce sales and increase costs.

        The products we sell in our stores are subject to regulation by the Consumer Product Safety Commission and similar state and international regulatory authorities. Such products could be subject to recalls and other actions by these authorities. Product safety concerns may require us to voluntarily remove selected products from our stores. Such recalls and voluntary removal of products can result in, among other things, lost sales, diverted resources, potential harm to our reputation and increased customer service costs, which could have a material adverse effect on our financial condition.

Our business exposes us to personal injury and product liability claims, which could result in adverse publicity and harm to our brands and our results of operations.

        We are from time to time subject to claims due to the injury of an individual in our stores or on our property. In addition, we may be subject to product liability claims for the products that we sell. Subject to certain exceptions, our purchase orders generally require the manufacturer to indemnify us against any product liability claims; however, if the manufacturer does not have insurance or becomes insolvent, there is a risk we would not be indemnified. Any personal injury or product liability claim made against us, whether or not it has merit, could be time consuming and costly to defend, resulting in adverse publicity, or damage to our reputation, and have an adverse effect on our results of operations. In addition, any negative publicity involving our vendors, employees and other parties who are not within our control could negatively impact us.

Our business operations could be disrupted if our information technology systems fail to perform adequately or we are unable to protect the integrity and security of our customers' information.

        We depend largely upon our information technology systems in the conduct of all aspects of our operations. If our information technology systems fail to perform as anticipated, we could experience difficulties in virtually any area of our operations, including but not limited to replenishing inventories or in delivering our products to store locations in response to consumer demands. In addition, we are in the process of replacing our enterprise resource planning, or "ERP," system and plan to commence pilot market testing of the new system by the end of fiscal 2011. We may experience difficulties in transitioning to new or upgraded systems, including loss of data and decreases in productivity as our personnel become familiar with new systems. If we experience difficulties in implementing new or upgraded information systems or experience significant system failures, or if we are unable to successfully modify our information systems to respond to changes in our business needs, our ability to run our business could be adversely affected. It is also possible that our competitors could develop better platforms than ours, which could negatively impact our internet sales. Any of these or other systems-related problems could, in turn, adversely affect our sales and profitability.

        In addition, in the ordinary course of our business, we collect and store certain personal information from individuals, such as our customers and suppliers, and we process customer payment card and check information, including via our internet platform. Computer hackers may attempt to penetrate our computer system and, if successful, misappropriate personal information, payment card or check information or confidential Company business information. In addition, a Company employee, contractor or other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information and may purposefully or inadvertently cause a breach involving such information. Any failure to maintain the security of our customers' confidential

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information, or data belonging to us or our suppliers, could put us at a competitive disadvantage, result in deterioration in our customers' confidence in us, subject us to potential litigation and liability, and fines and penalties, resulting in a possible material adverse impact on our business, results of operations, cash flows and financial performance.


Risks Related to Our Franchises

A portion of our income is generated from our franchisees and our income could decrease if our franchisees do not conduct their operations profitably.

        As of February 1, 2011, approximately 13% of our stores were operated by franchisees. During fiscal 2010 and fiscal 2009, we derived $3.2 million and $2.1 million, respectively, from franchise fees and royalties. Franchisees are independent contractors and are not our employees. We provide training and support to franchisees, but the quality of franchised store operations may be diminished by any number of factors beyond our control. The closing of franchised stores, the failure of franchisees to comply with our standard operating procedures and effectively run their operations or the failure of franchisees to hire and adequately train qualified managers and other personnel could adversely affect our image and reputation, and the image and reputation of other franchisees, and could reduce the amount of our revenues and our franchise revenues, which could result in lower franchise fees and royalties to us. These factors could have a material adverse effect on our financial condition and results of operations. In addition, litigation with franchisees that may arise from time to time could be costly and the outcome thereof would be difficult to predict.

We may be unable to audit or otherwise independently monitor the results of our franchisees, which could adversely affect our results of operations.

        Franchisees pay us franchise fees and royalties as a percentage of their gross revenues. Although the agreements with our franchisees give us the right to audit their books and records, we may not be able to audit or otherwise readily and independently monitor franchisee performance on a regular basis or at all. As a result, we may experience delays or failures in discovering and/or recouping underpayments. In addition, to the extent that we rely on the integrity of the financial and other information from our franchisees, we may experience difficulties with respect to internal control, measurement and reporting of our franchise fee and royalty receipts and receivables.

The existence of franchisees in some of our markets may restrict our ability to grow in those markets through acquisitions or organically.

        We enter into franchise agreements with our franchisees which, among other things, limit our ability to compete with the franchisees in the markets in which they operate. If we determine at some point in the future that we would like to grow in those markets through acquisitions or organically, our ability to do so may be substantially restricted under the franchise agreements.


Risks Related to this Offering and Our Stock

An active, liquid trading market for our common stock may not develop.

        Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of a trading market on the            or otherwise, or how active and liquid that market may become. If an active and liquid trading market does not develop, you may have difficulty selling any of our common stock that you purchase. The initial public offering price for the shares will be determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. The market price of our common stock may decline below the initial

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offering price, and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all.

Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

        We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including the 2007 Senior Credit Facility (described in "Description of Certain Indebtedness"). As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.

Requirements associated with being a public company will require significant company resources and management attention.

        Prior to this offering, we had not been subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the "Exchange Act," or the other rules and regulations of the Securities and Exchange Commission, or the "SEC," or any securities exchange relating to public companies. We are working with legal, accounting and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public company. These areas include corporate governance, corporate control, internal audit, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas, including our internal controls over financial reporting. However, we cannot assure you that these and other measures we may take will be sufficient to allow us to satisfy our obligations as a public company on a timely basis.

        In addition, compliance with reporting and other requirements applicable to public companies will create additional costs for us, will require the time and attention of management and will require the hiring of additional personnel and outside consultants. We cannot predict or estimate the amount of the additional costs we may incur, the timing of such costs or the degree to which our management's attention will be consumed by these matters. In addition, being a public company could make it more difficult or more costly for us to obtain certain types of insurance, including directors' and officers' liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

Our stock price could be extremely volatile and, as a result, you may not be able to resell your shares at or above the price you paid for them.

        Before this offering there has not been a public market for our common stock, and an active public market for our common stock may not develop or be sustained after this offering. In addition, the stock market in general, and the market for stocks of some specialty retailers in particular, has been highly volatile. As a result, the market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease, which could be substantial, in the value of their stock, including decreases unrelated to our operating performance or prospects, and could lose part or all of their investment. The price of our common stock could be subject to wide fluctuations in

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response to a number of factors, including those described elsewhere in this prospectus and others such as:

        As we are a specialty retailer in a single industry, we are especially vulnerable to these factors to the extent that they affect our industry or our products, or to a lesser extent our markets. Other retailers with more diversified product offerings may not be similarly at risk. For example, department stores that experience adverse developments regarding their bedding products may be better able to absorb the adverse effects. In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management's attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.

There may be sales of a substantial amount of our common stock after this offering by our current stockholders, and these sales could cause the price of our common stock to fall.

        After this offering, there will be                    shares of common stock outstanding. There will be                    shares issued and outstanding if the underwriters exercise in full their option to purchase additional shares. Of our issued and outstanding shares, all the common stock sold in this offering will be freely transferable, except for any shares held by our "affiliates," as that term is defined in Rule 144 under the Securities Act of 1933, as amended, or the "Securities Act." Following completion of this offering, approximately            % of our outstanding common stock (or            % if the underwriters exercise in full their option to purchase additional shares from us) will be held by investment funds associated with J.W. Childs (indirectly through their investment in Mattress Firm Holdings, LLC) and members of our management and employees.

        We expect that Mattress Firm Holdings, LLC and each of our directors, executive officers and significant equity holders of Mattress Firm Holdings, LLC (including affiliates of J.W. Childs) will enter into a lock-up agreement with Barclays Capital Inc. and UBS Securities LLC, on behalf of the underwriters, which regulates their sales of our common stock for a period of 180 days after the date of this prospectus, subject to certain exceptions and automatic extensions in certain circumstances. See "Shares Eligible for Future Sale—Lock-up Agreements."

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        Sales of substantial amounts of our common stock in the public market after this offering, or the perception that such sales will occur, could adversely affect the market price of our common stock and make it difficult for us to raise funds through securities offerings in the future. Of the shares to be outstanding after the offering, the shares offered by this prospectus will be eligible for immediate sale in the public market without restriction by persons other than our affiliates. Our remaining outstanding shares will become available for resale in the public market as shown in the chart below:

Date Available for Resale
  Shares
Eligible
For
Resale
 

180 days after this offering (          ,           ), subject to certain exceptions and automatic extensions

       

Various dates beginning in          ,           

       

        In addition, beginning                    days after this offering, subject to certain exceptions and automatic extensions in certain circumstances, holders of                    shares of our common stock may require us to register their shares for resale under the federal securities laws, and holders of                    additional shares of our common stock would be entitled to have their shares included in any such registration statement, all subject to reduction upon the request of the underwriter of the offering, if any. See "Related Party Transactions—Registration Rights Agreement." Registration of those shares would allow the holders to immediately resell their shares in the public market. Any such sales or anticipation thereof could cause the market price of our common stock to decline.

        In addition, after this offering, we intend to register shares of common stock that are reserved for issuance under our 2011 Long-Term Incentive Plan. For more information, see "Shares Eligible for Future Sale—Registration Statements on Form S-8."

J.W. Childs will continue to indirectly own a controlling interest in our company and may have interests that differ from those of our other stockholders.

        All of our outstanding shares are currently held by Mattress Holdings, LLC. As of February 1, 2011, investment funds associated with J.W. Childs indirectly owned      % of the outstanding shares of our common stock through their investment in Mattress Holdings, LLC. Immediately following this offering, those funds will continue to indirectly own      % of our outstanding common stock, or      % if the underwriters exercise their over-allotment option in full. While we expect that Mattress Holdings, LLC will be dissolved shortly after expiration of the lock-up agreements described under "Shares Eligible for Future Sale," investment funds associated with J.W. Childs will continue to own a majority of our outstanding common stock thereafter. Investors in this offering will not be able to affect the outcome of any corporate action requiring majority stockholder vote at least for so long as investment funds associated with J.W. Childs directly or indirectly own a majority of our outstanding common stock. As a result, J.W. Childs will be able to influence or control all matters affecting us, including:

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        J.W. Childs may have interests that differ from yours and may vote in a way with which you disagree and that may be adverse to your interests. Among other things, its influence over our affairs may adversely affect the price of our common stock due to investors' perception that conflicts of interest may arise. The concentration of stock ownership could also delay, prevent or deter a change in our control or otherwise discourage a potential acquirer from attempting to obtain control of us, which may deprive our stockholders of an opportunity to receive a premium for their common stock.

        In addition, J.W. Childs and its affiliates are in the business of making investments in companies and may, from time to time in the future, acquire interests in businesses that directly or indirectly compete with certain portions of our business. To the extent J.W. Childs invests in such other businesses, it may have interests different than our stockholders. Our amended and restated certificate of incorporation, however, will include a provision that relieves J.W. Childs and its affiliates (including its affiliates serving as our directors) from any breach of fiduciary duty, to the extent permitted by applicable law, if J.W. Childs pursues for its benefit opportunities such as acquisitions that might otherwise be appropriate for us.

After completion of the offering, we intend to rely on exemptions for a "controlled company" under the                    rules to opt out of certain                    corporate governance requirements, and, as a result, our stockholders will not have the protections afforded by these corporate governance requirements.

        Upon completion of this offering, our controlling stockholder will continue to own a majority of our outstanding common stock. As a result, we are a "controlled company" within the meaning of the corporate governance standards. Under the                    rules, a company of which more than 50% of the voting power in the election of directors is held by an individual, group or another company is a "controlled company" and may elect not to comply with certain                    corporate governance requirements, including:

        Following this offering, we intend to utilize these exemptions. As a result, we will not have a majority of independent directors nor will our nominating/corporate governance and compensation committees consist entirely of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the                     corporate governance requirements.

Provisions in our charter documents and Delaware law may deter takeover efforts that you feel would be beneficial to stockholder value.

        In addition to the indirect ownership of a controlling percentage of our common stock held by investment funds associated with J.W. Childs, our certificate of incorporation and bylaws and Delaware law contain provisions which could make it harder for a third party to acquire us, even if doing so might be beneficial to our stockholders. These provisions include a classified board of directors and limitations on actions by our stockholders. In addition, our board of directors has the right to issue preferred stock without stockholder approval that could be used to dilute a potential hostile acquirer.

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Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. As a result, you may lose your ability to sell your stock for a price in excess of the prevailing market price due to these protective measures and efforts by stockholders to change the direction or management of the company may be unsuccessful. See "Description of Capital Stock."

If you purchase shares in this offering, you will suffer immediate and substantial dilution.

        If you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution in the pro forma book value of your stock, which would have been $        per share as of February 1, 2011 based on an assumed initial public offering price of $        per share (the mid-point of the offering range shown on the cover of this prospectus), because the price that you pay will be substantially greater than the net tangible book value per share of the shares you acquire. In addition, you will experience additional dilution upon (i) the exercise of any outstanding and future grants of options and warrants to purchase our common stock and (ii) future grants of restricted stock or other equity awards under our stock incentive plans, including our 2011 Long-Term Incentive Plan. To the extent we raise additional capital by issuing equity securities, our stockholders will also experience substantial additional dilution. See "Dilution."

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus contains forward-looking statements within the meaning of federal securities laws that relate to future events or our future financial performance. In many cases, you can identify forward-looking statements by terminology such as "may," "would," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential" or "continue" or the negative of these terms or other comparable terminology. These forward-looking statements are made based on our management's expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These uncertainties and other factors could cause our actual results to differ materially from those matters expressed or implied by these forward-looking statements.

        Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Important factors that may cause actual results to differ materially from the results expressed or implied by these forward-looking statements are set forth under "Risk Factors." All forward-looking statements in this prospectus are based on information available to us on the date of this prospectus. We undertake no obligation, except as may be required by law, to publicly update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise.

        Some of the important factors that could cause our actual results, performance or financial condition to differ materially from expectations are:

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USE OF PROCEEDS

        Our net proceeds from the sale of                    shares of common stock in this offering at an assumed initial public offering price of $            per share (the mid-point of the range on the cover of this prospectus) are estimated to be $             million, after deducting the estimated underwriting discount and offering expenses payable by us. We intend to use the net proceeds of this offering to pay off the 2009 Loan Facility in the aggregate principal amount of $109.8 million (as of February 1, 2011) plus accrued interests and any prepayment fees, to pay accrued management fees and a related termination fee of approximately $            in the aggregate, and to use the remainder for capital expenditures, working capital and other general corporate purposes, including possible acquisitions or repayment of certain outstanding borrowings under the 2007 Senior Credit Facility. UBS Securities LLC and an affiliate of SunTrust Robinson Humphrey, Inc. are lenders under our 2007 Senior Credit Facility and may receive more than 5% of the net proceeds, not including underwriting compensation, of this offering due to such repayments. See "Underwriting (Conflicts of Interest)—Relationships."

        As of February 1, 2011, we owed $230.2 million under the 2007 Senior Credit Facility and $109.8 million under the 2009 Loan Facility. As of February 1, 2011, the weighted average interest rate under the 2007 Senior Credit Facility was 2.6%. All unpaid principal on the term loan portion of the 2007 Senior Credit Facility is due in 2014. The interest rate applicable to the 2009 Loan Facility is 16.0% per year and it matures on January 18, 2015. From time to time, in the ordinary course of business, we evaluate possible acquisitions of, or investments in, businesses that are complementary to our business. We currently have no arrangements, agreements or understandings for any such acquisitions or investments, and have not identified any businesses that we currently intend to acquire or with respect to which we currently intend to use the proceeds of this offering.

        The amounts and timing of our use of the proceeds of this offering will depend upon numerous factors, including the amount of proceeds actually raised in this offering, the timing of any acquisitions we complete, the availability of debt financing and the amount of cash generated by our operations. Until the proceeds from this offering are used as described above, we intend to invest them in short-term, investment grade securities.

        The above description represents our present intentions based on our current plans and business conditions. Unforeseen events or changed business conditions, however, could result in the application of the net proceeds from this offering in a manner other than as described in this prospectus. Our management will have broad discretion to allocate the net proceeds from this offering.


DIVIDEND POLICY

        We have not paid cash dividends since our acquisition by investment funds associated with J.W. Childs in fiscal 2006. We anticipate that we will retain future earnings, if any, to finance the continued development and expansion of our business. We do not anticipate paying cash dividends in the foreseeable future. Additionally, because we are a holding company, our ability to pay dividends is limited by the ability of our subsidiaries to pay dividends or make distributions to us, including restrictions under the terms of the 2007 Senior Credit Facility and other agreements governing our indebtedness outstanding from time to time. Any future determination with respect to the payment of dividends will be at the discretion of our board of directors and will be dependent upon, among other things, our financial condition, results of operations, capital requirements, the terms of our then existing indebtedness, general economic conditions and other factors considered relevant by our board of directors.

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CAPITALIZATION

        The following table sets forth our cash and cash equivalents and capitalization as of February 1, 2011 on (1) an actual basis and (2) an as adjusted basis, giving effect to this offering and the application of the net proceeds therefrom as described in "Use of Proceeds."

        This table should be read in conjunction with the information provided in "Use of Proceeds," "Selected Consolidated Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 
  As of February 1, 2011  
 
  Actual   As adjusted  
 
  (in thousands, except
share and per
share amounts)

 

Cash and cash equivalents

  $ 4,445   $           
           

2007 Senior Credit Facility, including current portion

  $ 230,243   $           

2009 Loan Facility

    109,755               

PIK Notes(1)

    48,909               

Other long-term debt, including current portion

    9,796               
           
 

Total debt

    398,703               
           

Stockholder's Equity:

             
   

Preferred stock, $0.001 par value; no shares authorized, issued or outstanding on an actual basis;    shares authorized, no shares issued or outstanding on an as adjusted basis

                  
   

Common stock, $0.01 par value (actual); $            par value (as adjusted); 100 shares authorized, 98.653 shares issued and outstanding on an actual basis;            shares authorized,            shares issued and outstanding on an as adjusted basis

                    
   

Additional paid-in capital

    156,465               
   

Accumulated deficit

    (165,781 )             
           
     

Total stockholder's equity (deficit)

    (9,316 )             
           
     

Total capitalization

  $ 389,387   $           
           

(1)
We expect to enter into an agreement with the holders of the PIK Notes to exchange our outstanding PIK Notes for our common stock at a price per share equal to the initial public offering price. We expect the agreement will be effected concurrent with, and conditioned upon, the closing of this offering.

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DILUTION

        If you invest in our common stock, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock after this offering. Dilution results from the fact the per share offering price of the common stock is substantially in excess of the book value per share attributable to the existing stockholders for the presently outstanding stock.

        Our net tangible book value at February 1, 2011 was $(388.0) million, and our net tangible book value per share was $            , before giving effect to this offering. Pro forma net tangible book value per share before the offering has been determined by dividing net tangible book value (total book value of tangible assets less total liabilities) by the number of shares of common stock outstanding at February 1, 2011. Dilution in net tangible book value per share represents the difference between the amount per share that you pay in this offering and the net tangible book value per share immediately after this offering.

        After giving effect to the receipt of the estimated net proceeds from the sale by us of                        shares, assuming an initial public offering price of $            per share (the mid-point of the offering range shown on the cover of this prospectus), and the application of the estimated net proceeds therefrom as described under "Use of Proceeds," our net tangible book value at February 1, 2011 would have been $            , or $            per share of common stock. This represents an immediate increase in net tangible book value per share of $            to existing stockholders and an immediate decrease in net tangible book value per share of $            to you. The following table illustrates the dilution.

Assumed initial public offering price per share

  $           
 

Net tangible book value per share at February 1, 2011

       
 

Increase per share attributable to this offering

       

Net tangible book value per share after this offering

  $           

Dilution per share to new investors

  $           
       

        The following table sets forth, as of February 1, 2011, the differences between the amounts paid or to be paid by the groups set forth in the table with respect to the aggregate number of shares of our common stock acquired or to be acquired by each group.

 
   
   
  Total
Consideration
   
 
 
  Shares Purchased    
 
 
  Average Price
Per Share
 
 
  Number   Percent   Amount   Percent  

Existing stockholders

  $                   % $                   % $           

New investors(1)

                               
                       
 

Total

  $              100 % $              100 % $           
                       

(1)
Before underwriters' commissions and our expenses. The foregoing excludes stock available for future grant or issuance pursuant to our 2011 Long-Term Incentive Plan and stock expected to be issued to the holders of the PIK Notes substantially concurrent with, and conditioned upon, the consummation of this offering, as well as the effect of the exercise of any outstanding options.

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

        The following table sets forth a summary of our selected consolidated financial data. We derived the selected balance sheet data as of February 1, 2011 and February 2, 2010, and the statement of operations data and per share data for the fiscal years ended February 3, 2009, February 2, 2010 and February 1, 2011 from our audited consolidated financial statements included elsewhere in this prospectus. The selected balance sheet data as of January 17, 2007, January 30, 2007, January 29, 2008 and February 3, 2009, and the statement of operations data and per share data for the periods from February 1, 2006 to January 17, 2007 and from January 18, 2007 to January 30, 2007, and the fiscal years ended January 30, 2007 and January 29, 2008, have been derived from our consolidated financial statements for such years, which are not included in this prospectus.

        Our fiscal year consists of 52 or 53 weeks, ending on the Tuesday nearest to January 31. Each fiscal year is described by the period of the year that comprises the majority of the fiscal year period. For example, the fiscal year ended February 1, 2011 is described as "fiscal 2010." All fiscal years presented include 52 weeks of operations, except fiscal 2008, which includes 53 weeks.

        The selected consolidated financial date set forth below are not necessarily indicative of future results of future operations and should be read in conjunction with the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information included elsewhere in this prospectus.

 
  Predecessor    
  Mattress Firm Holding Corp.  
 
  February 1,
2006 to
January 17,
2007(1)
 

  January 18,
2007 to
January 30,
2007
  Fiscal Year  
 
   
  2007   2008   2009   2010  
 
  (unaudited)
   
  (unaudited)
  (unaudited)
   
   
   
 
 
 
(in thousands, except per share data and store units, unless otherwise indicated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Operations:

                                         

Net sales

  $ 365,291       $ 15,066   $ 458,171   $ 433,258   $ 432,250   $ 494,115  

Cost of sales

    208,724         8,684     270,422     287,744     280,506     312,637  
                               

Gross profit from retail operations

    156,567         6,382     187,749     145,514     151,744     181,478  

Franchise fees and royalty income

    1,841         74     2,007     2,053     2,100     3,195  
                               

    158,408         6,456     189,756     147,567     153,844     184,673  

Sales and marketing expenses

    94,512         3,675     118,393     94,050     95,305     114,017  

General and administrative expenses

    28,243         2,544     38,305     33,781     32,336     35,382  

Goodwill and intangible asset impairment charges(2)

                    142,810          

Loss (gain) on store closings and impairment of store assets(3)

    (131 )           1,163     7,419     5,179     2,486  
                               

Income (loss) from operations

    35,784         237     31,895     (130,493 )   21,024     32,788  

Other expense (income):

                                         
 

Interest income

    (8 )           (7 )   (9 )   (12 )   (6 )
 

Interest expense(4)

    4,724         1,205     30,565     28,342     27,126     31,063  
 

Loss (gain) from debt extinguishment(5)

            1,239             (2,822 )    
                               
   

Total other expense

    4,716         2,444     30,558     28,333     24,292     31,057  
                               

Income (loss) before income taxes

    31,068         (2,207 )   1,337     (158,826 )   (3,268 )   1,731  

Income tax (benefit) expense

    12,336         (842 )   484     2,657     1,405     846  
                               

Net income (loss)

  $ 18,732       $ (1,365 ) $ 853   $ (161,483 ) $ (4,673 ) $ 885  
                               

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  Predecessor    
  Mattress Firm Holding Corp.  
 
  February 1,
2006 to
January 17,
2007(1)
 

  January 18,
2007 to
January 30,
2007
  Fiscal Year  
 
   
  2007   2008   2009   2010  
 
  (unaudited)
   
  (unaudited)
  (unaudited)
   
   
   
 
 
 
(in thousands, except per share data and store units, unless otherwise indicated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data:

                                         

Basic net income (loss) per share

                                         

Diluted net income (loss) per share

                                         

Weighted average shares outstanding—Basic

                                         

Weighted average shares outstanding—Diluted

                                         

Other Financial Data:

                                         

EBITDA(6)

  $ 44,351       $ (634 ) $ 44,395   $ (113,407 ) $ 41,275   $ 49,563  

Adjusted EBITDA(7)

  $ 47,703       $ 2,058   $ 53,228   $ 40,168   $ 46,323   $ 57,095  

Adjusted EBITDA, percentage of net sales

    13.1 %       13.7 %   11.6 %   9.3 %   10.7 %   11.6 %

Capital expenditures

  $ 19,334       $ 1,051   $ 26,665   $ 23,888   $ 10,863   $ 27,330  

Depreciation and amortization

  $ 8,341       $ 356   $ 12,126   $ 16,209   $ 16,286   $ 15,448  

Operational Data(8):

                                         

Comparable-store sales growth (decline)(9)

              14.2 %   0.3 %   (23.7 )%   (4.3 )%   6.1 %

Store units open at period-end

              301     406     464     487     592  

Average net sales per store unit(10)

            $ 1,366   $ 1,292   $ 979   $ 907   $ 927  

Balance Sheet Data (at period end):

                                         

Working capital

  $ (6,076 )     $ (297 ) $ (28,312 ) $ (18,724 ) $ (8,486 ) $ (7,778 )

Total assets

  $ 572,197       $ 571,468   $ 635,751   $ 483,835   $ 471,055   $ 519,908  

Total debt

  $ 311,174       $ 311,082   $ 350,780   $ 367,101   $ 369,323   $ 398,703  

Stockholder's equity (deficit)

  $ 155,540       $ 155,370   $ 154,933   $ (5,251 ) $ (9,686 ) $ (9,316 )

(1)
Mattress Firm Holding Corp. commenced operations on January 18, 2007 through the acquisition of Mattress Holding Corp. The Statement of Operations, Per Share Data, Other Financial Data and Balance Sheet Data as of January 17, 2007 and for the period then ended are presented on the historical cost basis of Mattress Holding Corp., which does not give effect to the acquisition and, accordingly, the information is not comparable with the information of Mattress Firm Holding Corp. for the periods subsequent to January 17, 2007. Earnings per share data for the period from February 1, 2006 to January 17, 2007, are presented on a pro forma basis to reflect the basic and diluted shares outstanding for Mattress Firm Holding Corp. as of the January 18, 2007 acquisition date.

(2)
During fiscal 2008, we recognized a non-cash impairment charge of $142.8 million attributable to the impairment of our goodwill and other intangible assets.

(3)
Includes a non-cash impairment charge for long-lived assets, consistently primarily of store leasehold costs and related equipment, to reduce the carrying value to estimated fair value, based on our periodic assessment of whether projected future cash flows of individual stores are sufficient to recover the carrying value of the related assets, in the amounts of $0.5 million, $6.3 million, $2.3 million and $1.7 million during fiscal 2007, fiscal 2008, fiscal 2009 and fiscal 2010, respectively.

(4)
Interest expense includes interest that was accrued and paid in kind by adding the interest to the outstanding balance of debt related to our 2009 Loan Facility and PIK Notes in the amounts of $0.3 million, $2.5 million, $17.7 million and $23.2 million during fiscal 2007, fiscal 2008, fiscal 2009 and fiscal 2010, respectively.

(5)
For the period from January 18, 2007 to January 30, 2007, the loss from debt extinguishment represents the write-off of deferred loan fees resulting from the repayment of debt of Mattress Holding Corp. in connection with our acquisition of Mattress Holding Corp. on January 18, 2007. During fiscal 2009, a gain from debt

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    extinguishment was recognized in connection with the amendment and restatement of the 2009 Loan Facility on March 20, 2009. The extinguishment resulted in a downward adjustment of the loan carrying value to its market value, which was partially offset by the write-off of deferred loan fees.

(6)
EBITDA represents net income before income tax expense, interest income, interest expense, depreciation and amortization. We have presented EBITDA because we consider it an important supplemental measure of our performance and believe it is frequently used by analysts, investors and other interested parties in the evaluation of companies in our industry. Management uses EBITDA as a measurement tool for evaluating our actual operating performance compared to budget and prior periods. Other companies in our industry may calculate EBITDA differently than we do. EBITDA is not a measure of performance under U.S. GAAP and should not be considered as a substitute for net income prepared in accordance with U.S. GAAP. EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

EBITDA does not reflect interest expense or the cash requirements necessary to service interest or principal payments on our debt;

EBITDA does not reflect tax expense or the cash requirements necessary to pay for tax obligations; and

Although depreciation and amortization are non-cash charges, the asset being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements.


We compensate for these limitations by relying primarily on our U.S. GAAP results and using EBITDA only as a supplemental measure.

(7)
Adjusted EBITDA is defined as EBITDA, without giving effect to non-cash goodwill and intangible asset impairment charges, gains or losses on store closings and impairment of store assets, gains or losses related to the early extinguishment of debt, financial sponsor fees and expenses, non-cash charges related to stock-based awards and one-time costs included in earnings related to acquisitions and other one-time expenses. We have presented Adjusted EBITDA because we believe that the exclusion of these one-time items is appropriate to provide additional information to investors about our ongoing operating performance excluding certain non-cash items and unusual or one-time items and to provide additional information with respect to our ability to meet our future debt service and to comply with various covenants in documents governing our indebtedness and as a means to evaluate our period-to-period results. We have provided this information to analysts, investors and other third parties to enable them to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of our ongoing operations. Management uses Adjusted EBITDA to determine executive incentive compensation payment levels as well as our compliance with certain covenants under our Senior Credit Agreement that are calculated based on similar measures. Other companies in our industry may calculate Adjusted EBITDA differently than we do. Adjusted EBITDA is not a measure of performance under U.S. GAAP and should not be considered as a substitute for net income prepared in accordance with U.S. GAAP. Adjusted EBITDA has similar limitations as an analytical tool to those set forth in note (6) related to the use of EBITDA, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only as a supplemental measure.

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The following table contains a reconciliation of our net income (loss) determined in accordance with U.S. GAAP to EBITDA and Adjusted EBITDA for the periods indicated:

   
  Predecessor    
  Mattress Firm Holding Corp.  
   
  February 1,
2006 to
January 17,
2007
 

  January 18,
2007 to
January 30,
2007
  Fiscal Year  
   
   
  2007   2008   2009   2010  
   
  (unaudited)
   
  (unaudited)
  (unaudited)
   
   
   
 
   
 
(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

Net income (loss)

  $ 18,732       $ (1,365 ) $ 853   $ (161,483 ) $ (4,673 ) $ 885  
   

Income tax (benefit) expense

    12,336         (842 )   484     2,657     1,405     846  
   

Interest income

    (8 )           (7 )   (9 )   (12 )   (6 )
   

Interest expense

    4,724         1,205     30,565     28,342     27,126     31,063  
   

Depreciation and amortization

    8,341         356     12,126     16,209     16,286     15,448  
   

Intangible assets and other amortization

    226         12     374     877     1,143     1,327  
                                 
 

EBITDA

    44,351         (634 )   44,395     (113,407 )   41,275     49,563  
                                 
   

Goodwill and intangible asset impairment charges

                    142,810          
   

Loss (gain) on store closings and impairment of store assets

    (131 )           1,163     7,419     5,179     2,486  
   

Loss (gain) from debt extinguishment

            1,239             (2,822 )    
   

Financial sponsor fees and expenses

    2,522         14     454     490     395     407  
   

Stock-based compensation

    252         11     1,068     1,299     84     (515 )
   

One-time acquisition and other expenses

    709         1,428     6,148     1,557     2,212     5,154  
                                 
 

Adjusted EBITDA

  $ 47,703       $ 2,058   $ 53,228   $ 40,168   $ 46,323   $ 57,095  
                                 
(8)
Operational data relates to Company-operated stores only. The operational data for the period ended January 30, 2007, presents the data for the 52-week fiscal year then ended.

(9)
Comparable-store sales is a measure commonly used in the retail industry, which indicates store performance by measuring the growth in revenue for certain stores for a particular period over the corresponding period in the prior year. New stores are included in the comparable-store sales calculation beginning in the thirteenth full month of operation. Acquired stores are included in the comparable-store sales calculation beginning in the first month following the anniversary date of the acquisition. The comparable-store sales calculation includes sales related to our e-commerce and other comparable sales channels. New stores that are relocated within a two mile radius of a closed store are included in the comparable-store sales calculation beginning with the first full month of operations by measuring the growth in revenue against the prior year sales of the closed store. Stores that are closed, other than relocated stores, are removed from the comparable-store sales calculation in the month of closing. Comparable-store sales during fiscal years that are comprised of 53 weeks exclude sales for the fifty-third week of the year. The method of calculating comparable-store sales varies across the retail industry and our method may not be the same as other retailers' methods.

(10)
Calculated using net sales for stores open at both the beginning and the end of the period.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

         The following discussion should be read in conjunction with "Selected Consolidated Financial and Operating Data" and our consolidated financial statements and the notes thereto included in this prospectus. The discussion in this section contains forward-looking statements that involve risks and uncertainties. See "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" included elsewhere in this prospectus for a discussion of important factors that could cause actual results to differ materially from those described or implied by the forward-looking statements contained herein.

Executive Summary

        We operate in the U.S. mattress retail market, in which net sales amounted to $11.6 billion in calendar year 2010. The market is highly fragmented, with no single retailer holding more than a 7% market share and the top eight participants accounting for approximately one quarter of the total market. Mattress specialty retailers have a market share in excess of 40%, which represents the largest share of the market, having more than doubled their share over the past 15 years.

        Net sales in fiscal 2010 improved $61.9 million from fiscal 2009 levels in response to a gradually improving national economy and consumer confidence, and our growth through the addition of new and acquired store units. We believe that our net sales growth is outpacing our competitors in most of the markets in which we operate and is resulting in increased market share. Net income and other profitability measures improved during fiscal 2010. The improvement resulted from the net sales growth and our ability to gain leverage on certain costs through increasing sales per store, which was partially offset by an increase in spending in certain expense categories during fiscal 2010. Such expenses included advertising and general and administrative expenses, which we curtailed during fiscal 2008 and fiscal 2009 in response to the downturn in the national economy. Key results for fiscal 2010 include:

 
  Fiscal
2008
  Fiscal
2009
  Fiscal
2010
 

Store units, beginning of period

    406     464     487  

New stores

    71     37     86  

Acquired stores

    5         33  

Closed stores

    (18 )   (14 )   (14 )
               

Store units, end of period

    464     487     592  
               

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        In connection with our long-term growth plans, we commenced an initiative to review, select and implement an ERP system to replace our current systems with the objective of commencing pilot market testing by the end of fiscal 2011. Our current ERP systems have sufficient capacity and functionality to allow us to achieve our growth plan objectives in the near-term. See "Risk Factors—Our business operations could be disrupted if our information technology systems fail to perform adequately or we are unable to protect the integrity and security of our customers' information"for additional information relating to some important risks relating to our information technology.

        Going forward, we believe that the U.S. mattress retail market will benefit from the pent-up demand for mattresses and related products that has developed in recent years as consumers delayed purchases of big-ticket home furnishings, including mattresses, in response to the downturn in the national economy. We believe that this pent-up demand will result in sales growth for the Company as the national economy and consumer confidence continue to improve. We expect to continue the expansion of our company-operated store base through new store openings in existing markets to increase our market share and new store openings in new markets to provide a platform for future growth. We plan to open 100 new company-operated stores in fiscal 2011. In addition, we intend to evaluate strategically valuable acquisition opportunities in existing and new markets that may arise from time to time.

        We also strive to increase sales and profitability within our existing network of stores through a combination of (1) advertising and marketing initiatives that are aimed at increasing customer traffic, (2) improved customer conversion through our merchandising approach that improves the customer's shopping experience and the efforts of our highly trained sales associates and (3) increasing the average price of a transaction through effective sales techniques and the increasing demand for specialty and personalized mattresses.

General Definitions for Operating Results

         Net sales includes fees collected for delivery services and is recognized upon delivery and acceptance of mattresses and bedding products by our customers and is recorded net of estimated returns. Customer deposits collected prior to the delivery of merchandise are recorded as a liability. Net sales are recognized net of sales tax collected from customers and remitted to various taxing jurisdictions.

         Cost of sales consist of the following:

         Gross profit from retail operations is net sales minus cost of sales.

         Franchise fees and royalty income represents initial franchise fees earned upon the opening of new franchisee stores and ongoing royalties based on a percentage of gross franchisee sales.

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         Sales and marketing expenses consist of the following:

         General and administrative expenses consists of the following:

         Goodwill and intangible asset impairment charges consists of a non-cash impairment charge of $142.8 million attributable to the impairment of our goodwill and other intangible assets in fiscal 2008.

         Loss (gain) on store closings and impairment of store assets consists of the following:

         Income (loss) from operations consists of gross profit from retail operations plus franchise fees and royalty income, minus the sum of sales and market expenses, general and administrative expenses, goodwill and intangible asset impairment charges, and loss (gain) on store closings and impairment of store assets.

         Total other expense includes interest income, interest expense and gain (loss) on early debt extinguishments. Interest expense includes interest on outstanding debt, amortization of debt discounts and amortization of financing costs.

Results of Operations

        The following table presents the consolidated historical financial operating data for our business expressed as a percentage of net revenues for each period indicated. Our fiscal year consists of 52 or 53 weeks, ending on the Tuesday nearest to January 31. Each fiscal year is described by the period of the calendar year that comprises the majority of the fiscal year period. The fiscal year ended February 1, 2011 is described as "fiscal 2010," the fiscal year ended February 2, 2010 is described as "fiscal 2009" and the fiscal year ended February 3, 2009 is described as "fiscal 2008." All fiscal years presented include 52 weeks of operations, except fiscal 2008, which includes 53 weeks. For purposes of

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annual comparisons, unless otherwise noted, we have not adjusted for this difference. The historical results are not necessarily indicative of results to be expected for any future period.

 
  Fiscal
2008
  Fiscal
2009
  Fiscal
2010
 

Net sales

    100.0 %   100.0 %   100.0 %

Cost of sales

    66.4 %   64.9 %   63.3 %
               

Gross profit from retail operations

    33.6 %   35.1 %   36.7 %

Franchise fees and royalty income

    0.5 %   0.5 %   0.6 %

Sales and marketing expenses

    21.7 %   22.0 %   23.1 %

General and administrative expenses

    7.8 %   7.5 %   7.2 %

Goodwill and intangible asset impairment charges

    33.0 %   0.0 %   0.0 %

Loss on store closings and impairment of store assets

    1.7 %   1.2 %   0.5 %
               

Income (loss) from operations

    (30.1 )%   4.9 %   6.6 %

Other expense, net

    6.5 %   5.6 %   6.3 %
               

Income (loss) before income taxes

    (36.7 )%   (0.8 )%   0.4 %

Income tax expense

    0.6 %   0.3 %   0.2 %
               

Net income (loss)

    (37.3 )%   (1.1 )%   0.2 %
               

Fiscal 2010 Compared to Fiscal 2009

        Net sales.     Net sales increased $61.9 million, or 14.3%, to $494.1 million for fiscal 2010, compared to $432.3 million for 2009. The components of the net sales increase in fiscal 2010 were as follows (in millions):

 
  Increase
(decrease)
in net sales
 

Comparable-store sales

  $ 26.1  

New stores

    36.3  

Acquired stores

    5.4  

Closed stores

    (5.9 )
       

  $ 61.9  
       

        The increase in comparable-store net sales represents a 6.1% comparable-store sales growth, which was primarily the result of an increase in the average sales price of mattress products that we sold. The increase in our net sales from new stores was the result of 85 new stores opened at various times throughout fiscal 2010 compared to 37 stores opened in fiscal 2009, prior to their inclusion in the comparable-store calculation in fiscal 2010 beginning with the thirteenth full month of operations. The increase in net sales for acquired stores was the result of the acquisition of 33 stores during fiscal 2010 from two separate acquisitions in October 2010 and December 2010. We acquired no stores during fiscal 2009. We closed 14 stores in fiscal 2010 and 14 stores in fiscal 2009 and the reduction in sales during fiscal 2010 from these closings totaled $5.9 million. We operated 592 stores at the end of fiscal 2010, compared with 487 stores at the end of fiscal 2009.

        Cost of sales.     Cost of sales increased $32.1 million, or 11.5%, to $312.6 million for fiscal 2010, compared to $280.5 million for fiscal 2009. The major components of the increase in cost of sales are explained below. Cost of sales as a percentage of net sales decreased to 63.3% for fiscal 2010, compared to 64.9% for fiscal 2009.

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        Product costs increased $21.7 million, or 13.4%, to $183.8 million for fiscal 2010, compared with $162.1 million for fiscal 2009. Product costs as a percentage of net sales decreased to 37.2% for fiscal 2010, as compared to 37.5% for fiscal 2009. The increase in the amount of product costs for fiscal 2010 is the result of the corresponding increase in net sales. The reduction of this expense as a percentage of net sales for fiscal 2010 is primarily the result of improved product gross margins on certain products and a higher volume-based vendor incentives earned on certain products.

        Store and warehouse occupancy costs, consisting primarily of lease-related costs of rented facilities, increased $7.3 million, or 10.0%, to $80.5 million for fiscal 2010, compared to $73.2 million for fiscal 2009. Store and warehouse occupancy costs as a percentage of net sales decreased to 16.3% for fiscal 2010, as compared to 16.9% for fiscal 2009. The increase in the amount of expense during fiscal 2010 is mainly attributable to the increase in the number of stores we operated. The reduction of expense as a percentage of net sales was primarily attributable to improving sales per store in fiscal 2010 as compared with the prior year.

        Depreciation expense of leasehold improvements and other fixed assets used in store and warehouse operations decreased $0.5 million, or 3.7%, to $13.1 million for fiscal 2010, compared with $13.6 million for fiscal 2009. Depreciation expense in fiscal 2010 was reduced compared to fiscal 2009 as a result of a decrease in the depreciable amount of fixed assets, which was partially offset by an increase in depreciation expense attributable to capital expenditures in fiscal 2010. The decrease in the amount of depreciable fixed assets in fiscal 2010 was attributable to (a) an impairment charge of $2.3 million recognized at the end of fiscal 2009 to reduce the carrying value of certain long-lived assets, consisting primarily of store leasehold costs and related equipment, to fair value, and (b) an increase in fully depreciated fixed assets.

        Other cost of sales increased $3.6 million during fiscal 2010 compared with the prior year primarily as a result of the increase in net sales and in the number of stores we operated during fiscal 2010.

        Gross profit from retail operations.     As a result of the foregoing, gross profit from retail operations increased $29.7 million, or 19.6%, to $181.5 million, as compared with $151.7 million for fiscal 2009. Gross profit from retail operations as a percentage of net sales increased to 36.7% for fiscal 2010, as compared to 35.1% for fiscal 2009.

        Franchise fees and royalty income.     Franchise fees and royalty income is comprised of initial fees earned upon the opening of each new franchisee store and ongoing royalty income that is earned on a percentage of franchisee net sales. Franchise fees and royalty income increased $1.1 million, or 52.1%, to $3.2 million for fiscal 2010, compared with $2.1 million for fiscal 2009. The increase in income was comprised of a $0.6 million increase in initial fees, which was attributable to an increase in the number of new franchisee stores opened during fiscal 2010 as compared with fiscal 2009, and a $0.5 million increase in royalty income, which was mainly attributable to an increase in gross sales per store results for franchisee stores as compared with fiscal 2009.

        Sales and marketing expenses.     Sales and marketing expenses increased $18.7 million, or 19.6%, to $114.0 million for fiscal 2010, compared to $95.3 million for fiscal 2009. The components of sales and marketing expenses are explained below. Sales and marketing expenses as a percentage of net sales increased to 23.1% for fiscal 2010, compared to 22.0% for fiscal 2009.

        Advertising expense increased $10.3 million, or 34.9%, to $39.7 million for fiscal 2010, compared with $29.4 million for fiscal 2009. Advertising expense as a percentage of net sales increased to 8.0% for fiscal 2010, as compared to 6.8% for fiscal 2009. The increase in the amount of advertising spending was mainly attributable to our efforts to increase the number of customers shopping in our stores and, to a lesser extent, to an increase in the number of markets in which we operate as a result of new store growth and acquisitions. We receive funds from time to time from certain vendors to advertise their products that are recognized as a direct reduction of advertising expense. The amount of vendor

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advertising funds that were recognized as a reduction of advertising expense totaled $3.7 million for fiscal 2010, compared with $0.9 million for fiscal 2009.

        Other sales and marketing expenses increased $8.4 million during fiscal 2010 compared with the prior year primarily as a result of the increase in net sales during fiscal 2010. Such increase also includes a one-time charge of $1.6 million resulting from the settlement on May 26, 2011 (subject to court approval) of a lawsuit involving alleged violations of the Fair Labor Standards Act brought in April 2010 by a former employee. We are obligated to pay the settlement amount of $1.6 million to a claims-made reversionary fund no later than July 25, 2011, and such amount is included in accrued liabilities as of February 1, 2011. We are entitled to recover any funds from the claims-made reversionary fund not distributed pursuant to the terms of the settlement. Funds that will revert back to us (if any) will be recognized as a reduction of expense when the claim settlement process concludes.

        General and administrative expenses.     General and administrative expenses increased $3.0 million, or 9.4%, to $35.4 million for fiscal 2010, compared to $32.3 million for fiscal 2009. General and administrative expenses as a percentage of net sales decreased to 7.2% for fiscal 2010 as compared to 7.5% for fiscal 2009. General and administrative expenses increased during fiscal 2010 primarily as a result of our growth, including a $2.6 million increase in wages and benefits resulting from employee additions in our corporate office and an aggregate increase of $2.7 million in various general and administrative expense categories. The aforementioned increases during fiscal 2010 were partially offset by a $1.8 million reduction in performance-based compensation costs and a one-time benefit in stock-based compensation costs of $0.5 million resulting from a revision of the estimate of forfeited equity awards to employees.

        Loss on store closings and impairment of store assets.     Loss on store closings and impairment of store assets decreased $2.7 million to $2.5 million during fiscal 2010 compared with $5.2 million during fiscal 2009. The decrease in the loss during fiscal 2010 was mainly attributable to a reduction in the amount of remaining lease commitments on stores that we closed during the fiscal year.

        Other expense, net.     Other expense, net for fiscal 2010 consists primarily of interest expense. Interest expense increased $3.9 million, or 14.5%, to $31.1 million for fiscal 2010, as compared to $27.1 million for fiscal 2009. The increase in interest expense for fiscal 2010 was attributable to (1) the compounding effect of our 2009 Loan Facility and PIK Notes, which provide for the payment of interest through the addition of accrued interest to the outstanding loan balances and (2) the full year effect of the amendment of the 2009 Loan Facility on March 20, 2009, which increased the loan agreement interest rate from 12.5% to 16.0% and the effective interest rate for financial reporting purposes to 17.2%.

        Income tax expense.     We recognized $0.8 million of income tax expense for fiscal 2010 compared to $1.4 million in fiscal 2009. The effective tax rate for fiscal 2010 was 48.9% compared to a negative effective tax rate of 43.0% for fiscal 2009, and differs primarily as a result of changes in the valuation allowance for deferred tax assets. The effective tax rate for fiscal 2010 differs from the federal statutory rate primarily due to the effect of state income taxes, change in valuation allowance and stock-based compensation.

        Net income (loss).     As a result of the foregoing, our net income was $0.9 million for fiscal 2010 compared to a loss of $4.7 million for fiscal 2009.

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Fiscal 2009 Compared to Fiscal 2008

        Net sales.     Net sales decreased $1.0 million, or 0.2%, to $432.3 million for fiscal 2009, compared to $433.3 million for 2008. The components of the net sales decrease in fiscal 2009 were as follows (in millions):

 
  Increase
(decrease)
in net sales
 

Comparable-store sales

  $ (17.9 )

New stores

    25.7  

Acquired stores

    3.2  

Closed stores

    (4.0 )

Effect of 53 week year in fiscal 2008

    (8.0 )
       

  $ (1.0 )
       

        The decrease in comparable-store net sales represents a 4.3% comparable-store sales decline, which was primarily the result of a decrease in the number of customers. The increase in our net sales from new stores was the result of 37 new stores opened at various times throughout fiscal 2009 compared to 71 stores opened in fiscal 2008, prior to their inclusion in the comparable-store calculation in fiscal 2009 beginning with the thirteenth full month of operations. The increase in net sales for acquired stores was the result of an acquisition of five stores in December 2008 and represents sales of the acquired stores prior to their inclusion in the comparable-store calculation beginning in the month following the anniversary date of the acquisition. We closed 14 stores in fiscal 2009 and 18 stores in fiscal 2008 and the reduction in sales during fiscal 2009 from these closings totaled $4.0 million. Fiscal 2008 and fiscal 2009 were comprised of 53 weeks and 52 weeks, respectively, resulting in one fewer week of operations in fiscal 2009, which resulted in lower net sales in fiscal 2009 lower by $8.0 million. We operated 487 stores at the end of fiscal 2009, compared with 464 stores at the end of fiscal 2008.

        Cost of sales.     Cost of sales decreased $7.2 million, or 2.5%, to $280.5 million for fiscal 2009, compared to $287.7 million for fiscal 2008. The major components of the decrease in cost of sales are explained below. Cost of sales as a percentage of net sales decreased to 64.9% for fiscal 2009, compared to 66.4% for fiscal 2008.

        Product costs decreased $7.0 million, or 4.2%, to $162.1 million for fiscal 2009, compared with $169.2 million for fiscal 2008. Product costs as a percentage of net sales decreased to 37.5% for fiscal 2009, as compared to 39.0% for fiscal 2008. The reduction of expense as a percentage of net sales for fiscal 2009 was primarily the result of improved product gross margins on certain products and higher volume-based vendor incentives earned on certain products.

        Store and warehouse occupancy costs, consisting primarily of lease-related costs of rented facilities, increased $1.5 million, or 2.0%, to $73.2 million for fiscal 2009, compared to $71.7 million for fiscal 2008. Store and warehouse occupancy costs as a percentage of net sales increased to 16.9% for fiscal 2009, as compared to 16.6% for fiscal 2008. The increase in the amount of expense during fiscal 2009 is mainly attributable to the increase in the number of stores we operated. The increase in expense was partially offset by negotiated rent reductions totaling $1.2 million. The increase in expense as a percentage of net sales for was primarily attributable to declining sales per store in fiscal 2009 as compared with the prior year.

        Depreciation expense of leasehold improvements and other fixed assets used in store and warehouse operations decreased $0.2 million, or 1.4%, to $13.6 million for fiscal 2009, compared with $13.8 million for fiscal 2008. Depreciation expense in fiscal 2009 was reduced compared to fiscal 2008 as a result of a decrease in the depreciable amount of fixed assets, which was partially offset by an

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increase in depreciation expense attributable to capital expenditures in fiscal 2009. The decrease in the amount of depreciable fixed assets in fiscal 2009 was attributable to (a) an impairment charge of $6.3 million recognized at the end of fiscal 2008 to reduce the carrying value of certain long-lived assets, consisting primarily of store leasehold costs and related equipment, to fair value, and (b) an increase in fully depreciated fixed assets.

        Other components of cost of sales decreased $1.8 million during fiscal 2009 compared with the prior year primarily as a result of efficiencies gained over store and warehouse operating and delivery costs.

        Gross profit from retail operations.     As a result of the foregoing, gross profit from retail operations increased $6.2 million, or 4.3%, to $151.7 million, as compared with $145.5 million for fiscal 2009. Gross profit from retail operations as a percentage of net sales increased to 35.1% for fiscal 2009, as compared to 33.6% for fiscal 2008.

        Franchise fees and royalty income.     Franchise fees and royalty income remained at $2.1 million during fiscal 2009 and fiscal 2008. An increase in royalty income attributable to an increase in franchisee gross sales was primarily offset by a decrease in initial fees due to fewer new store openings.

        Sales and marketing expenses.     Sales and marketing expenses increased $1.3 million, or 1.3%, to $95.3 million for fiscal 2009, compared to $94.1 million for fiscal 2008. The major components of the increase in sales and marketing expenses are explained below. Sales and marketing expenses as a percentage of net sales increased to 22.0% for fiscal 2009, compared to 21.7% for fiscal 2008.

        Advertising expense decreased $2.9 million, or 9.1%, to $29.4 million for fiscal 2009, compared with $32.4 million for fiscal 2008. Advertising expense as a percentage of net sales decreased to 6.8% for fiscal 2009, as compared to 7.5% for fiscal 2008. The decrease in the amount of advertising spending was mainly attributable to discretionary reductions in spending in response to macroeconomic effects that reduced the effectiveness of advertising in driving customer traffic. We receive funds from time-to-time from certain vendors to advertise their products that are recognized as a direct reduction of advertising expense. The amount of vendor advertising funds that were recognized as a reduction of advertising expense totaled $0.9 million for fiscal 2009, compared with $1.9 million for fiscal 2008.

        Other components of sales and marketing expenses increased $4.2 million during fiscal 2009 compared with the prior year as a result of increases in the number of stores we operated and the percentage of sales for which customers elected to utilize the promotional financing options offered through financial institutions, which resulted in a higher cost to us. An increase in instances in which sales associates did not earn commissions in excess of the minimum draw, due to lower sales per store, contributed to higher sales and marketing expense as a percentage of sales.

        General and administrative expenses.     General and administrative expenses decreased $1.4 million, or 4.3%, to $32.3 million for fiscal 2009, compared to $33.8 million for fiscal 2008. General and administrative expenses as a percentage of net sales decreased to 7.5% for fiscal 2009, compared to 7.8% for fiscal 2008. We reduced discretionary expenses in certain areas during fiscal 2009, such as training and relocation ($2.4 million reduction), consulting and outside professional services ($1.0 million reduction), and other various areas ($0.9 million reduction) in response to macroeconomic effects. The reductions in some areas represented a deferral of costs to fiscal 2010. Offsetting the aforementioned reductions were increases during fiscal 2009 in performance-based compensation costs of $2.4 million and depreciation and amortization of $0.5 million.

        Goodwill and intangible asset impairment charges.     During fiscal 2008, in connection with our annual impairment testing of goodwill and intangible assets, we determined that the fair values were less than the carrying amounts for those assets. As a result, we recognized pre-tax impairment charges totaling $142.8 million during fiscal 2008 in order to reduce the carrying amount of our goodwill and intangible

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assets to their estimated fair values. The decline in the estimated fair values of our goodwill and intangible assets was primarily attributable to the economic downturn affecting the U.S. economy during fiscal 2008 and the impact that downturn had on our estimates of the future cash flows of the Company and in the valuation multiples of comparable companies. No impairment charges related to our goodwill or intangible assets were recognized in fiscal 2009.

        Loss on store closings and impairment of store assets.     Loss on store closings and impairment of store assets decreased $2.2 million to $5.2 million during fiscal 2009 compared with $7.4 million during fiscal 2008. The decrease in the loss during fiscal 2009 was mainly attributable to a reduction of $4.0 million in the amount of impairment on store assets, which was partially offset by an increase in the amount of remaining lease commitments on stores that we closed during the fiscal year.

        Other expense, net.     Other expense, net for fiscal 2009 consists primarily of interest expense and a gain on early extinguishment of debt.

        Interest expense decreased $1.2 million, or 4.3%, to $27.1 million for fiscal 2009, as compared to $28.3 million for fiscal 2008. The decrease in interest expense for fiscal 2009 was mainly attributable to reductions in LIBOR that occurred throughout fiscal 2009, which reduced the interest expense incurred on the 2007 Senior Credit Facility in the amount of $5.5 million. The aforementioned decrease was partially offset by higher interest expense during fiscal 2009 that was attributable to (1) the issuance of $16.9 million of PIK Notes on March 20, 2009, (2) the compounding effect of our 2009 Loan Facility and PIK Notes, which provide for the payment of interest through the addition of accrued interest to the outstanding loan balances and (3) the amendment of the 2009 Loan Facility on March 20, 2009, which increased the loan agreement interest rate from 12.5% to 16.0% and the effective interest rate for financial reporting purposes to 17.2%.

        The gain from debt extinguishment in fiscal 2009 represents the amendment and restatement of the 2009 Loan Facility on March 20, 2009 that was accounted for as an extinguishment of debt and resulted in a downward adjustment of the loan carrying value to its market value, which effect was partially offset by the write-off of deferred loan fees, resulting in a net gain of $2.8 million.

        Income tax expense.     We recognized $1.4 million of income tax expense for fiscal 2009 compared to $2.7 million in fiscal 2008. The effective tax rate for fiscal 2009 was a negative 43.0% compared to a negative effective tax rate of 1.7% for fiscal 2008, and differs primarily as a result of changes in the valuation allowance for deferred tax assets. The effective tax rate for fiscal 2009 differs from the federal statutory rate primarily due to the effect of state income taxes and the change in valuation allowance for deferred tax assets.

        Net income (loss).     As a result of the foregoing, our net loss was $4.7 million for fiscal 2009 compared to a net loss of $161.5 million for fiscal 2008.

Liquidity and Capital Resources

Debt Structure and Effect of Proposed Offering

        As of February 1, 2011, we were party to three main debt agreements: (i) the 2007 Senior Credit Facility, (ii) the 2009 Loan Facility and (iii) the PIK Notes. Mattress Holding, our indirect subsidiary, is the borrower under the 2007 Senior Credit Facility. Mattress Intermediate Holdings, Inc., or "Mattress Intermediate," our direct subsidiary, is the borrower under the 2009 Loan Facility, and Mattress Firm Holding Corp. is the borrower under the PIK Notes.

        Mattress Firm Holding Corp. and Mattress Intermediate have no direct sources of cash flow and substantially no assets other than equity interests in the respective subsidiaries held by us and Mattress Intermediate. Mattress Holding and its subsidiaries own substantially all of the assets and conduct the operations of our retail business. The terms of the 2007 Senior Credit Facility, among other things,

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contain restrictions on the ability of Mattress Holding to distribute dividends, subject to certain exceptions. As a result, Mattress Firm Holding Corp. and Mattress Intermediate can make principal and interest payments on the 2009 Loan Facility and the PIK Notes, as they become payable, only to the extent that capital contributions can be obtained from our equity investors, or through other financing sources. Prior to April 2014, we may elect, in lieu of payment of interest in cash, to pay up to all of the interest due and payable with respect to the 2009 Loan Facility on any interest payment date by adding such interest to the principal amount of the loans outstanding under the 2009 Loan Facility on such interest payment date. The terms of the PIK Notes also permit scheduled interest payments to be added to the outstanding principal amount of the PIK Notes in lieu of payment of interest in cash. See "—Debt Service—2009 Loan Facility" and "—Debt Service—PIK Notes" below for further information.

        We intend to utilize the net proceeds from the proposed offering to repay all outstanding loans under the 2009 Loan Facility, to pay accrued management fees and a termination fee of $            in the aggregate, and to utilize the remaining net proceeds for working capital and other general corporate purposes, including possible acquisitions, principal prepayments of outstanding obligations under the 2007 Senior Credit Facility and as funding source for capital contributions to Mattress Holding for purpose of increasing the permitted amount of capital expenditures under the 2007 Senior Credit Facility. Concurrent with the completion of this offering, we expect to enter into an agreement with the holders of the PIK Notes whereby those notes will be exchanged for shares of our common stock at a price per share equal to the initial public offering price.

Sources of Liquidity and Capital Requirements

        Our primary uses of cash are to fund growth capital and maintenance expenditures for our stores and distribution centers, purchase and replace floor sample inventories maintained in our stores, scheduled debt service payments and strategic acquisitions of mattress specialty retailers. Historically, we have satisfied these cash requirements from cash flows provided by our operations, availability under the revolving portion of the 2007 Senior Credit Facility and proceeds from the issuance of the PIK Notes.

        Historically, we have collected payment from our customers at or near the time of sale, and, as such, we do not carry significant accounts receivable balances. Most of our suppliers deliver product to our distribution centers within 48 hours following our placement of a purchase order, which allows us to carry lower inventory levels. We pay our vendors for our purchases on terms that, on average, allow us to collect payments on the sale of our products before we must pay our vendors. The attributes of our operating cycle lower our working capital requirements and have historically allowed us to operate for extended periods while maintaining a negative working capital position.

        Our future capital requirements will vary based on the number of additional stores, including relocated stores, we open and the number of stores we choose to renovate, and the number and size of any acquisitions we choose to make, including franchisee acquisitions. Our decisions regarding opening, relocating or renovating stores, and whether to engage in strategic acquisitions, are based in part on macroeconomic factors and the general state of the U.S. economy, as well as the local economies in the markets in which our stores are located.

        We plan to spend approximately $32.0 million in capital expenditures during fiscal 2011, of which we anticipate approximately 72% will be for new store growth and major remodels, approximately 22% for equipment and computers, including the implementation of a new ERP system, and approximately 6% for other capital expenditures. Of our total capital expenditures projected for fiscal 2011, we have already invested $3.3 million during the quarterly period ended May 3, 2011. We plan to open 100 stores during fiscal 2011 and have already entered into lease agreements for a majority of them.

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        As further discussed in "Description of Certain Indebtedness—2007 Senior Credit Facility," the terms of the 2007 Senior Credit Facility limit the permitted capital expenditures of Mattress Holding to $20.0 million per year. The permitted limit may be increased for any year by the amount of equity capital that is contributed to Mattress Holding during the year for that purpose. In addition, if the capital expenditures made in any year are less than the permitted amount, the amount of the shortfall in that year may increase the permitted amount of capital expenditures for the immediately succeeding (but not any other) year. The permitted capital expenditure limit has been raised in recent years by making capital contributions to Mattress Holding for that purpose. Each such capital contribution was funded through the issuance of PIK Notes. Our ability to complete our capital expenditure plan for fiscal 2011 will be dependent upon our ability to fund capital contributions to Mattress Holding for that purpose.

        We believe that we will be able to satisfy our capital requirements for the next 12 months, including supporting our existing operations, continuing our growth strategy, and satisfying our scheduled debt service payments, through a combination of our existing reserves of cash and cash equivalents, internally generated cash flows from operations, and, as required, borrowings under the revolving portion of the 2007 Senior Credit Facility. The revolving portion of the 2007 Senior Credit Facility allows us to borrow up to $25.0 million, of which up to $15.0 million is available for issuance as letters of credit. There were no outstanding borrowings on the revolving facility as of February 2, 2010. On February 1, 2011, outstanding letters of credit under the revolving facility were $1.0 million, resulting in $24.0 million of available borrowings as of such date. In addition, we had $4.4 million of cash and cash equivalents as of February 2, 2011, compared to cash and cash equivalents of $0.4 million as of February 2, 2010. Our working capital deficit was $7.8 million as of February 1, 2011, compared to a working capital deficit of $8.5 million as of February 2, 2010. The improvement in our net working capital deficit was attributable primarily to the increased amount of cash and cash equivalents we had at February 1, 2011, partially offset by a decrease in other working capital components.

        We generated tax operating losses in recent years that have significantly reduced the cash requirements for federal and state income taxes. At February 1, 2011, we had $47.6 million of net operating loss carryforwards that expire at various dates beginning in 2018, if not utilized to offset future taxable income. Our cash requirements for income taxes will increase significantly if and when the current amount of net operating loss carryforwards is utilized. Further, if we undergo a more than 50% "ownership change" within the meaning of Section 382 of the Internal Revenue Code, our ability to utilize pre-change losses may be limited.

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Cash Flows

        The following table summarizes the principal elements of our cash flow for the past three years:

 
  Fiscal 2008   Fiscal 2009   Fiscal 2010  
 
  (in thousands)
 

Net cash provided by operating activities

  $ 12,996   $ 20,857   $ 42,429  

Net cash used in investing activities

    (24,285 )   (10,863 )   (38,092 )

Net cash provided by (used in) financing activities:

                   
 

Proceeds from issuance of debt

    42,260     24,191     2,985  
 

Principal payments of debt

    (30,562 )   (33,537 )   (3,271 )
 

Debt issuance costs

        (1,001 )    
               
   

Total net cash provided by (used in) financing activities

    11,698     (10,347 )   (286 )
               

Increase (decrease) in cash and cash equivalents

    409     (353 )   4,051  
               

Cash and cash equivalents, beginning of period

    338     747     394  
               

Cash and cash equivalents, end of period

  $ 747   $ 394   $ 4,445  
               

        Operating cash flows.     Net cash provided by operating activities was $42.4 million for fiscal 2010, compared to $20.9 million for fiscal 2009. The $21.5 million increase in cash flows from operating activities was primarily attributable to an increase in our net income resulting from higher net sales during fiscal 2010, which was partially offset by an increase in cash used for payments to our vendors and increased floor sample inventory purchases for the new stores we opened during fiscal 2010.

        Net cash provided by operating activities was $13.0 million for fiscal 2008. The $7.9 million increase in cash flows in fiscal 2008 from operating activities was primarily due to lower cash payments for interest on our debt instruments, which was partially offset by a decrease in accounts payable due primarily to the increasing frequency of payments to our trade vendors beginning in fiscal 2009 to align with shorter repayment terms, and an increase in inventory purchases and other net working capital items. The decrease in cash interest payments was due to lower interest rates on the 2007 Senior Credit Facility and an amendment of the 2009 Loan Facility, which provided that future interest payments would be made by adding the accrued interest to the outstanding balance of the note.

        Investing cash flows.     Our investing cash flows consist primarily of our capital expenditures. Net cash used in investing activities was $38.1 million during fiscal 2010, compared to $10.9 million in fiscal 2009. Capital expenditures increased $16.4 million. Excluding stores added through acquisitions, we opened 85 new stores during 2010, compared to 37 new stores in fiscal 2009. Also contributing to the increase in cash used for investing activities during fiscal 2010 was $10.8 million of cash used to complete our acquisitions, net of $1.9 million of cash acquired. These acquisitions added 33 new stores during fiscal 2010.

        Net cash used in investing activities was $24.3 million in fiscal 2008. The decrease over fiscal 2008 was attributable to lower capital expenditures as a result of opening fewer stores during fiscal 2009. We opened 37 stores during fiscal 2009, compared to 71 stores in fiscal 2008.

        Financing cash flows.     Our financing cash flows consist primarily of proceeds from the issuance of debt, borrowings and repayments under the revolving portion of the 2007 Senior Credit Facility and scheduled debt service payments. During fiscal 2010, net cash used in financing activities was $0.3 million, compared to $10.3 million in fiscal 2009. The decrease in net cash used in financing activities during fiscal 2010 was attributable to lower net borrowings and repayments on the revolving portion of the 2007 Senior Credit Facility.

        Net cash provided by financing activities was $11.7 million for fiscal 2008. Net cash used in financing activities during fiscal 2009 increased due to payments made to reduce the outstanding

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balance under the revolving portion of the 2007 Senior Credit Facility. These cash outflows were partially offset by increased cash inflows from the proceeds of the PIK Notes.

Debt Service

        As of February 1, 2011, we had total indebtedness of $398.7 million. The components of our debt as of February 1, 2011 were as follows (amounts in thousands):

2007 Senior Credit Facility

  $ 230,243  

2009 Loan Facility

    109,755  

PIK Notes

    48,909  

Other

    9,796  
       

Total long-term debt

  $ 398,703  
       

        2007 Senior Credit Facility.     On January 18, 2007, Mattress Holding, an indirect subsidiary of the issuer, entered into a credit agreement with UBS Securities LLC and certain of its affiliates and other lenders for a term loan and revolving credit facility, which was amended and restated on February 16, 2007 (as amended and restated, the "2007 Senior Credit Facility"). As of February 1, 2011, the 2007 Senior Credit Facility consisted of (i) a $240.0 million term loan facility maturing January 2014 and (ii) a $25.0 million revolving credit facility maturing in January 2013, which includes a $15.0 million letter of credit subfacility and a $5.0 million swingline loan subfacility. As of February 1, 2011, there was an aggregate of $230.2 million of term loan borrowings outstanding under the 2007 Senior Credit Facility, which is net of an unamortized debt discount of $0.5 million. As of February 1, 2011, there were no outstanding borrowings under the revolving portion of the 2007 Senior Credit Facility and there was approximately $1.0 million in outstanding letters of credit. In addition, we may, under certain circumstances and subject to receipt of additional commitments from existing lenders or other eligible institutions, request additional term loan tranches up to an aggregate amount of $10.0 million.

        Borrowings under the 2007 Senior Credit Facility bear interest at a rate equal to an applicable margin plus, at our option, either (a) a base rate determined by reference to the highest of (i) the corporate base rate of interest established by the administrative agent and (ii) the federal funds effective rate from time to time plus 0.50%, or (b) the London Interbank Offered Rate, or "LIBOR," determined by reference to the costs of funds for deposits for the interest period relevant to such borrowing adjusted for certain additional costs.

        The applicable margin percentages for term loans are 1.25% for base rate loans and 2.25% for LIBOR loans. The applicable margin percentages for revolving loans are based upon our total leverage ratio and vary from 1.25% to 1.75% for base rate loans and from 2.25% to 2.75% for LIBOR loans. As of February 1, 2011, the applicable margin percentage for revolving loans was 1.25% for base rate loans and 2.25% for LIBOR loans, and as of that date, no such loans were outstanding. Swingline loans bear interest at an interest rate equal to the interest rate for base rate loans, and as of February 1, 2011, no such borrowings were outstanding. On the last day of each quarter, we also pay a commitment fee (payable in arrears) in respect of any unused commitments under the revolving credit facility, subject to adjustment based upon the level of the total leverage ratio which varies from 0.375% to 0.50%. As of February 1, 2011, the commitment fee was 0.375%. We also pay fees for the issuance and maintenance of letters of credit.

        Outstanding borrowings under the 2007 Senior Credit Facility are payable in quarterly principal installments of approximately $599,000, with the outstanding balance due at maturity on January 18, 2014. Furthermore, we are subject to an annual mandatory principal prepayment in an amount equal to a portion of "excess cash flow," as defined in the 2007 Senior Credit Facility, payable no later than 120 days after the end of each fiscal year. Such prepayments are first applied to reduce scheduled quarterly principal repayments for the next four quarters in order of maturity and then to reduce future quarterly payments through maturity on a pro-rata basis. We made excess cash flow payments in the

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amounts of approximately $761,000 and $2.1 million on June 1, 2011 and May 21, 2010, respectively, with respect to excess cash flows related to fiscal 2010 and 2009, respectively. There are other mandatory prepayment requirements, subject to certain exceptions, from the net cash proceeds of certain asset sale and casualty and condemnation events, subject to reinvestment rights, from the net cash proceeds of any incurrence of certain debt, other than debt permitted under the 2007 Senior Credit Facility, and from the net cash proceeds of specified issuances of preferred equity securities. No such prepayments were required in fiscal 2009 or 2010. We may voluntarily repay outstanding loans under the 2007 Senior Credit Facility at any time without premium or penalty, other than customary "breakage" costs with respect to LIBOR loans.

        As further discussed in "Description of Certain Indebtedness—2007 Senior Credit Facility," the agreement related to the 2007 Senior Credit Facility requires that we maintain compliance with certain covenants.

        2009 Loan Facility.     On January 18, 2007, Mattress Holding entered into a financing agreement with a group of institutional investors for a senior subordinated loan facility for term borrowings in the original amount of $120.0 million. The institutional investors also own equity interests in Mattress Holdings, LLC. The financing agreement was amended on February 16, 2007, which included a prepayment of the original borrowing in the amount of $40.0 million (the "2007 Subordinated Loan Facility"). The 2007 Subordinated Loan Facility was originally guaranteed by each existing subsidiary of Mattress Holding and its immediate parent Mattress Holdco, Inc. ("Mattress Holdco"). On March 20, 2009, Mattress Intermediate, an indirect parent of Mattress Holding and a direct subsidiary of Mattress Firm Holding Corp. assumed all obligations of Mattress Holding in respect of the 2007 Subordinated Loan Facility, including accrued interest through such date, and the obligations and guarantees of Mattress Holding, Mattress Holdco and their respective subsidiaries were released and discharged. In connection therewith, the 2007 Subordinated Loan Facility was amended and restated. The amended and restated facility is referred to in this prospectus as the "2009 Loan Facility." As of February 1, 2011, there was an aggregate of $109.8 million outstanding under the 2009 Loan Facility, which is net of an unamortized debt discount of $5.4 million.

        Effective with the amendment and restatement on March 20, 2009, the 2009 Loan Facility interest rate was increased to 16% per annum (from 12.5% per annum under the 2007 Subordinated Loan Facility). Accrued interest on the amounts borrowed under the 2009 Loan Facility is payable quarterly. Prior to April 2014, we may elect, in lieu of payment of interest in cash, to pay up to all of the interest due and payable on any interest payment date by adding such interest to the principal amount of the loans outstanding on such interest payment date.

        The amendment and restatement on March 20, 2009 was recognized as an extinguishment of the 2007 Subordinated Loan Facility for financial reporting purposes. Accordingly, the carrying value of the debt was adjusted to its estimated fair value as of March 20, 2009, which resulted in a $5.8 million debt discount and recognition of a gain on extinguishment. In addition, the unamortized loan fees of the 2007 Subordinated Loan Facility in the amount of $3.0 million were written off, resulting in a net gain on extinguishment of $2.8 million. The debt discount is being amortized over the remaining term of the 2009 Loan Facility, resulting in a 17.2% effective interest rate. The Company incurred $1.0 million of direct costs related to the amendment and restatement, which is being amortized over the remaining term of the 2009 Loan Facility.

        As further discussed in "Description of Certain Indebtedness—2009 Loan Facility," the agreement related to the 2009 Loan Facility requires that we maintain compliance with certain covenants. We plan to pay off the 2009 Loan Facility with a portion of the net proceeds from this offering.

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        PIK Notes.     At various times from October 24, 2007 to May 20, 2009, we issued PIK Notes to the equity investors of our parent company, Mattress Holdings, LLC, and to affiliates of such equity investors. The PIK Notes bear interest at a rate of 12% per annum. Accrued interest is payable either annually or semiannually, as is applicable for each separate note issuance, with each such interest payment to be made through the addition of such interest amount to the outstanding principal amount of the PIK Notes. The PIK Notes mature at various times from October 24, 2012 through March 19, 2015. The proceeds from the issuance of PIK Notes were contributed to the capital of Mattress Holding and used by Mattress Holding for various purposes, including a strategic acquisition, to increase the permitted capital expenditures limitation under the 2007 Senior Credit Facility, and as an equity cure under the covenant requirements of the 2007 Senior Credit Facility (see "—Covenant Compliance" below for additional information regarding the equity cure).

        As discussed in "—Debt Structure and Effect of Proposed Offering" above, concurrent with, and conditioned upon, the completion of this offering, we expect that the PIK Notes will be exchanged for shares of our common stock at a price per share equal to the initial public offering price.

        Other Indebtedness.     Our subsidiaries have various mortgage notes payable, seller financing notes, and notes payable related to the purchase of equipment totaling $9.8 million that bear interest at rates ranging from 6.8% to 10.0%, with monthly principal and interest payments of various amounts through 2013. Notes payable for financing of equipment purchases are collateralized by certain equipment with carrying amounts that approximate the outstanding principal balances of the related notes payable as of February 1, 2011.

Covenant Compliance

        As further discussed in "Description of Certain Indebtedness—2007 Senior Credit Facility," we exercised an equity cure right under the 2007 Senior Credit Facility on March 20, 2009, which allowed us to maintain compliance with the financial covenants for the fiscal quarter ended April 30, 2009.

        We were in compliance with all of the covenants required under the 2007 Senior Credit Facility, the 2009 Loan Facility, the PIK Notes, and our other indebtedness as of February 1, 2011. We believe that we will be able to maintain compliance with the various covenants required under our debt facilities for the next twelve months without amending any of the credit facilities or requesting waivers from the lenders that are party to the agreements.

Critical Accounting Policies and Use of Estimates

        Our consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

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        Our significant accounting policies are discussed in Note 1, Business and Summary of Significant Accounting Policies , of the Notes to Consolidated Financial Statements, included elsewhere in this prospectus. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with the audit committee of our board of directors.

 
Description
  Judgments and Uncertainties
  Effect if Actual Results
Differ From Assumptions

 
Revenue Recognition        

Sales revenue, including fees collected for delivery services, is recognized upon delivery and acceptance of mattresses and bedding products by the Company's customers and is recorded net of returns. Customer deposits collected prior to the delivery of merchandise are recorded as a liability.

The Company accrues a liability for estimated sales returns and exchanges in the period that the related sales are recognized. The Company provides its customers with a comfort satisfaction guarantee whereby the customer may return or exchange the original mattress anytime during 100 days from the date of original purchase. Mattresses received back are reconditioned pursuant to state law and resold through the Company's clearance center stores as used merchandise. The Company accrues a liability for the estimated costs, net of estimated restocking fees, related to the diminishment in value of the returned merchandise at the time the sale is recognized based upon historical experience. The liability for sales returns and sales exchanges is included in other accrued liabilities.

 

Our revenue recognition accounting methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate future sales returns and exchanges and the associated costs.

Effective August 2010, we revised our return and exchange policy to enable our customers to return products for any reason up to 100 days after the purchase date for either a full refund or exchange credit without the incurrence of exchange or other fees. The new policy is referred to as the Happiness Guarantee . Prior to this new policy, a customer could exchange a mattress for a similar mattress from 30 days to 90 days from the original purchase date, subject to a restocking fee, although the restocking fee could be waived at the discretion of the sales associate.

We expect that the Happiness Guarantee will result in an increased amount of returns and exchanges. The increased activity and the elimination of exchange fee collections are expected to increase the estimated cost of sales returns and exchanges.

 

We have not made any material changes in the policy we use to measure the estimated liability for sales returns and exchanges. However, we expect that the new Happiness Guarantee will result in an increase in such costs and we will review and revise our estimates as additional experience is obtained. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
 

Vendor Incentives

 

 

 

 

Cash payments received from vendors as incentives to enter into or to maintain long-term supply arrangements, including payments received in connection with the opening of new stores, are deferred and amortized as a reduction of cost of sales using a systematic approach. Payments received from vendors in connection with new store openings are deferred and amortized over 36 months, which is the estimated period over which the incentives are earned.

Vendor incentives that are based on a percentage of the cost of purchased merchandise, such as cooperative advertising funds, are accounted for as a reduction of the price of the vendor's products and result in a reduction of cost of sales when the merchandise is sold. Vendor incentives that are direct reimbursements of costs incurred by the Company to sell the vendor's products are accounted for as a reduction of the related costs when recognized in the Company's results of operations.

 

Certain of our vendor agreements contain purchase volume incentives that require minimum purchase volumes and may provide for increased incentives when graduated purchase volumes are met. Amounts accrued as vendor receivables throughout the year could be impacted if actual purchase volumes differ from projected annual purchase volumes.

 

We have not made any material changes in the policy we use to recognize vendor receivables during the past three fiscal years.

If actual results are not consistent with the assumptions and estimates used, we may be exposed to additional adjustments that could materially, either positively or negatively, impact our gross profit and inventory valuation. However, substantially all receivables associated with these activities are collected within the following fiscal year and all amounts deferred against inventory turnover within the following fiscal year and, therefore, do not require subjective long-term estimates. Adjustments to our gross profit and inventory in the following fiscal year have historically not been material.
 

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Description
  Judgments and Uncertainties
  Effect if Actual Results
Differ From Assumptions

 

Self-Insured Liabilities

 

 

 

 

We are self-insured for certain losses related to employee health and workers' compensation liability claims. However, we obtain third-party insurance coverage to limit our exposure to these claims.

When estimating our self-insured liabilities, we consider a number of factors, including historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries.

Periodically, we review our assumptions and the valuation provided by independent third-party actuaries to determine the adequacy of our self-insured liabilities.

 

Our self-insurance liabilities contain uncertainties because management is required to make assumptions and to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported at the balance sheet date.

 

We have not made any material changes in the policy we use to establish our self-insured liabilities during the past three fiscal years.

We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions we use to calculate our self-insured liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
 

Goodwill and Indefinite Lived Intangible Assets

 

 

 

 

We evaluate goodwill and indefinite lived intangible assets for impairment annually and whenever events or changes in circumstances indicate the carrying value of the goodwill or indefinite-lived intangible assets may not be recoverable.

We assign the carrying value of these intangible assets to their "reporting units" and apply the impairment test at the reporting unit level. We complete our impairment evaluation by performing internal valuation analyses, considering other publicly available market information and using an independent valuation firm, as appropriate.

In the fourth quarter of fiscal 2008, we completed our annual impairment testing using the methodology described herein, and, as a result of reductions in estimated cash flows and in multiples of comparable companies, determined that there was impairment of $138.1 million related to goodwill and $4.7 million related to indefinite-lived intangible assets.

The carrying value of goodwill at February 1, 2011, was $293.7 million. The carrying value of indefinite-lived intangible assets, consisting of trade names and trademarks at February 1, 2011 was $80.6 million.

 

We determine fair value using widely accepted valuation techniques, including discounted cash flows and market multiple analyses. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as our future expectations.

The impairment test for goodwill is applied separately to each "reporting entity." A reporting unit is defined as an operating segment or one level below a segment if discrete information is prepared and reviewed regularly by management. Moreover, reporting units are required to be aggregated for impairment testing if they have similar economic characteristics. We prepare and review information separately for each market in which we operate company-operated stores. We aggregate the separate market results into a single reporting unit for goodwill impairment testing since the markets have similar economic characteristics.

 

We have not made any material changes in the policy we use to assess impairment loss during the past three fiscal years.

We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for impairment of goodwill and other indefinite-lived intangible assets. However, if actual results are not consistent with our estimate or assumptions, we may be exposed to an impairment charge that could be material.
 

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Description
  Judgments and Uncertainties
  Effect if Actual Results
Differ From Assumptions

 

Long-Lived Assets

 

 

 

 

Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our investment in store leasehold improvements, including fixtures and equipment, is the most significant long-lived asset.

When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the asset's undiscounted estimated future cash flows. If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset's estimated fair value, which is based on estimated future discounted cash flows. We recognize impairment if the amount of the asset's carrying value exceeds the asset's estimated fair value.

Based upon the impairment review, and a decline in performance of certain stores, impairment losses of approximately $6.3 million, $2.3 million and $1.7 million were recognized during fiscal 2008, fiscal 2009 and fiscal 2010, respectively.

 

The impairment review of long-lived assets related to stores is evaluated at the individual store level. The results of individual stores may deteriorate based on factors outside the control of the Company, such as the proximity of competitors, shifting retail trade area demographics and other macro-economic factors.

Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimated future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.

 

We have not made any material changes in the policy we use to assess impairment losses during the past three fiscal years.

We do not believe there is a reasonable likelihood that there will be a material charge in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material.
 

Costs Associated With Location Closings

 

 

 

 

We lease the vast majority of our stores and other locations under long-term leases and we occasionally vacate locations prior to the expiration of the related lease. For vacated locations that are under long-term leases, we record an expense for the difference between our future lease payments and related costs (e.g., real estate taxes and common area maintenance) from the date of closure through the end of the remaining lease term, net of expected future sublease rental income.

Our estimate of future cash flows is based on historical experience; our analysis of the specific real estate market, including input from independent real estate firms; and economic conditions that can be difficult to predict. We do not discount cash flows in estimating the liability recorded for location closures.

The estimated liability for location closings was $0.2 million at February 1, 2011. The effect of changes in previous estimated liabilities resulted in charges to earnings of approximately $0.4 million, $0.6 mllion and $(0.1) million during fiscal 2008, 2009 and 2010, respectively.

 

The liability recorded for location closures contains uncertainties because management is required to make assumptions and to apply judgment to estimate the duration of future vacancy periods, the amount and timing of future settlement payments, and the amount and timing of potential sublease rental income. When making these assumptions, management considers a number of factors, including the historical settlement experience, the owner of the property, the location and condition of the property, the terms of the underlying lease, the specific marketplace demand and general economic conditions.

 

We have not made any material changes in the policy we use to establish our location closing liability during the past three fiscal years.

We believe there is a reasonably possible likelihood that there will be a material change in the estimates or assumptions we use to calculate our location closing liability that are outside of our control and we may be exposed to losses or gains that could be material.

A 10% change in our location closing liability at February 1, 2011, would have affected net earnings by less than $0.1 million in fiscal 2010.
 

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Description
  Judgments and Uncertainties
  Effect if Actual Results
Differ From Assumptions

 

Acquisitions—Purchase Price Allocation

 

 

 

 

In accordance with accounting for business acquisitions, we allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded to goodwill.

 

Our purchase price allocation methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities.

Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.

We typically engage an independent valuation firm to assist in estimating the fair value of significant assets and liabilities of acquired businesses.

 

We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to complete the purchase price allocation and estimate the fair values of acquired assets and liabilities for those acquisitions completed in fiscal 2010. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gain that could be material.
 

Product Warranties

 

 

 

 

We provide a 10-year non-prorated manufacturer service warranty and an additional five-year extended warranty on certain products. The customer is not charged a fee for warranty coverage and we are financially responsible for the basic and extended warranties on these products.

We accrue for the estimated cost of warranty coverage at the time the sale is recognized.

 

In estimating the liability for product warranties, we consider the impact of recoverable salvage value on the product received back under warranty. Based upon our historical warranty claims experience, as well as recent trends that might suggest that past experience may differ from future claims, we periodically review and adjust, if necessary, the liability for product warranties.

 

If our actual claims during the period are materially different than our provision for warranty claims, our results could be materially and adversely affected.

During the past three fiscal years we have not made any material changes to the methodology we use to establish our reserves for warranty claims. A 10% change in our provision for warranty claims at February 1, 2011, would have reduced our net earnings by approximately $0.2 million for fiscal 2010.

We do not believe that there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to establish our provision for warranty claims. However, if actual warranty claims are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
 

Income Taxes

 

 

 

 

Deferred tax assets and liabilities are reflected on the balance sheet for temporary differences between the amount of assets and liabilities for financial and tax reporting purposes that will reverse in subsequent years. Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are estimated to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income or expense in the period that the change is effective. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not to be realized.

 

In estimating the value of our deferred tax assets and liabilities, we are required to make judgments about the tax rates expected to be in effect in the years in which those temporary differences are estimated to be realized or settled. In addition, we are also required to make estimates about the valuation allowances that we carry against our deferred tax assets in order to bring them to their net realizable value. Finally, our estimates of reserves related to potential tax exposures when it is more likely than not that a taxing authority will take a sustainable position that is contrary to ours requires significant judgment.

 

During fiscal 2008, we determined that it was more likely than not that 100% of the deferred tax benefit related to our net operating losses ("NOLs") would not be realized in future periods; as such, we recognized a valuation allowance to reduce the deferred tax asset to its net realizable value. As of February 1, 2011, the valuation allowance on our deferred tax assets was $22.3 million.

We do not believe that there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to establish our deferred tax assets and liabilities.
 

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Seasonality

        Our business is subject to seasonal fluctuations and we generally have experienced more sales and a greater portion of income during the second and third quarters of our fiscal year due to a concentration of summer season holidays, including Memorial Day, the Fourth of July and Labor Day and other seasonal factors. We expect this trend to continue for the foreseeable future.

Summary Disclosures about Contractual Obligations and Commercial Commitments

        The following summarizes certain of our contractual obligations at February 1, 2011 and the effect such obligations are expected to have on our liquidity and cash flows in future periods:

 
  Payments Due by Period  
 
  Fiscal
2011
  Fiscal
2012
  Fiscal
2013
  Fiscal
2014
  Fiscal
2015
  Thereafter   Total  
 
  (in thousands)
 

Long-term debt, including principal and interest(1)

  $ 23,701   $ 53,153   $ 251,476   $ 216,687   $ 34,972   $   $ 579,989  

Operating leases

    68,576     61,497     50,763     39,946     28,222     40,062     289,066  

Management fees(2)

                3,458             3,458  

Reserves for uncertain tax positions(3)

                            369  

Acquisition contingent payment obligation(4)

    1,980                         1,980  

Letters of credit(5)

    807                     225     1,032  
                               
 

Total

  $ 95,064   $ 114,650   $ 302,239   $ 260,091   $ 63,194   $ 40,287   $ 875,894  
                               

(1)
We expect to pay off all amounts currently outstanding under the 2009 Loan Facility and reduce the amount outstanding under the term loan portion of the 2007 Senior Credit Facility with proceeds from this offering. In addition, we expect to enter into an agreement with the holders of the PIK Notes pursuant to which the PIK Notes will be exchanged for shares of our common stock at a price per share equal to the initial public offering price.

(2)
Represents management fees payable to J.W. Childs and interest accrued thereon. Management fees are fixed at $360,000 per year, payable monthly in the amount of $30,000. The management fee payments are deferred, bearing interest at 16% per annum, compounded quarterly and accruing daily in arrears until the first day that we pay the interest due under the 2009 Loan Facility in cash rather than in kind. These deferred management fees become immediately due and payable by us on the earlier of (a) the first day on which we have made aggregate principal payments of $15 million or more under the 2009 Loan Facility and (b) the end of the first 365 day period in which we have paid all interest due under the terms of the 2009 Loan Facility in cash rather than in kind. We expect to terminate the management services agreement with J.W. Childs for a payment of $             million, payable from the proceeds of this offering.

(3)
Because our reserves for uncertain tax positions are based on potential exposures when it is considered more likely than not that a taxing authority may take a sustainable position on a matter contrary to our position, we cannot determine what date, if at all, the reserve will result in an obligation that must be settled.

(4)
Represents a contingent payment obligation relating to our acquisition of Peak Management, LLC, a former Mattress Firm franchisee, that was completed on October 15, 2010. The contingent payment ranges from zero to $2.0 million based on sales results during the 12-month period ending November 30, 2011, and is payable no later than December 31, 2011.

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(5)
We have outstanding letters of credit at February 1, 2011, which expire at varying times through 2017, including $0.8 million that are subject to automatic renewal for an additional one-year period on the anniversary date of the agreement, unless we receive notice from the counterparty that the letter of credit agreement has been terminated at least 30 days prior to the automatic renewal date.

Off-Balance Sheet Arrangements

        Except for guarantees that we have provided with respect to one real estate lease of a franchisee, we do not have any "off-balance sheet arrangements" (as such term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Information regarding guarantees provided with respect to certain real estate leases of franchisees is discussed under "—Liquidity and Capital Resources."

Recent Accounting Pronouncements

        In December 2010, the Financial Accounting Standards Board, or "FASB," issued new guidance that modifies Step 1 of the impairment test for goodwill for reporting units with zero or negative goodwill carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In evaluating whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The Company adopted the provisions of this new guidance on February 2, 2011 and does not believe that the adoption of the revised guidance will have a material impact on the Company's financial position, results of operations, or cash flows.

        In December 2010, the FASB issued new guidance regarding the disclosure requirements related to supplementary pro forma financial information about business combinations. For entities that enter into business combinations that are material, either individually or in the aggregate, the revised guidance requires that public entities disclose the revenue and earnings of the combined entity as if the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendment also expands the supplemental pro forma disclosures required to include a description of the nature and amount of material, non-recurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The new guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2010, and early adoption is permitted. The Company adopted the provisions of the new guidance on February 2, 2011 and the adoption of this standard may result in additional disclosures, but it will not have a material impact on the Company's financial position, results of operations, or cash flows.

        In May 2011, the FASB issued new guidance regarding fair value measurements to ensure consistency between U.S. GAAP and International Financial Reporting Standards. The new guidance applies to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity's stockholders' equity in the financial statements. The new guidance applies prospectively effective during periods beginning after December 15, 2011. Early application is not permitted. The new guidance may require additional disclosures, but we do not believe it will have a material impact on the Company's financial position, results of operations, or cash flows.

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Quantitative And Qualitative Disclosures About Market Risk

        Interest Rate Risk.     Our earnings are affected by changes in interest rates due to the impact those changes have on our interest expense on borrowings under the 2007 Senior Credit Facility with interest rates that vary in direct relationship to changes in the prime interest rate or LIBOR. Our floating rate indebtedness was approximately $232.8 million and $230.2 million at February 2, 2010 and February 1, 2011, respectively. All of our floating rate debt outstanding at February 1, 2011 originated with the term loan portion of our 2007 Senior Credit Facility. If short-term floating interest rates increased by 100 basis points during fiscal 2010, our interest expense, would have increased by approximately $2.3 million during that year. This amount is determined by considering the impact of the hypothetical change in interest rates on our average amount of floating rate indebtedness outstanding and cash equivalent balances for fiscal 2010.

        Impact of Inflation.     We believe that inflation has not had a material impact on our results of operations for any year during the three-year period ended February 1, 2011. We cannot be sure that inflation will not have an adverse impact on our operating results or financial condition in future periods.

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BUSINESS

Our Company

        We are a leading specialty retailer of mattresses and related products and accessories in the United States. As of February 1, 2011, we and our franchisees operated 592 and 88 stores, respectively, primarily under the Mattress Firm name, in 49 markets across 23 states. In 2010, we ranked first among the top 100 U.S. furniture stores for both growth in store count and percentage increase in sales according to Furniture Today . We have the largest geographic footprint in the United States among multi-brand mattress specialty retailers and rank second in total sales among mattress specialty retailers. We believe that in our markets Mattress Firm is a highly recognized brand and known for its broad selection, superior service, and compelling value proposition. Of our company-operated stores, 75% are located in markets in which we believe we had the number one market share position as of February 1, 2011. Since our founding in 1986 in Houston, Texas, we have expanded our operations across three time zones, with the goal of becoming the premier national mattress specialty retailer.

        We believe our destination retail format, which averages approximately 4,800 square feet per location, provides our customers with a convenient, distinctive and enjoyable shopping experience. Key highlights that make us a preferred destination and that differentiate our brand and services include our:

        Our stores carry both a broad assortment of leading national mattress brands and our exclusive brands. With a wide range of styles, sizes, price points and unique features, we provide our customers with their choice of traditional mattresses, including Sealy and Simmons, as well as specialty mattresses, such as Tempur-Pedic, for which we are a leading retailer. In addition to our broad mattress selection, we offer a variety of bedding-related products and accessories.

        We have a proven track record of growth and profitability. From January 30, 2008 to February 1, 2011, we grew our net sales as well as Adjusted EBITDA at compound annual rates of 6.8% and 19.2%, respectively, while significantly investing in our corporate infrastructure to support further expansion. In fiscal 2010, we generated net sales and Adjusted EBITDA of $494.1 million and $57.1 million, respectively. (See "Prospectus Summary—Summary Historical Consolidated Financial and Operating Data" for a definition of Adjusted EBITDA and reconciliation of Adjusted EBITDA and EBITDA to net income.) Through May 31, 2011, we achieved 19 consecutive months of positive comparable-store sales growth. Since January 30, 2008 to February 1, 2011, we opened 232 new stores, which includes 38 stores added through acquisitions, demonstrating our strong track record of acquiring and integrating companies. As a result of the fragmented nature of the specialty retail mattress industry, we believe we have a compelling opportunity to further penetrate the sector and continue profitable growth into the future.

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Our Industry

Overall Market

        We operate in the U.S. mattress retail market, in which net sales amounted to $11.6 billion in 2010. The market is highly fragmented, with no single retailer holding more than a 7% market share and the top eight participants accounting for approximately one quarter of the total market. In 2008, mattress specialty retailers had a market share in excess of 40%, which represented the largest share of the market, having more than doubled their share over the past 15 years.

        Going forward, we believe that the U.S. mattress retail market will benefit from a number of factors, including improvements in the national economy and the pent-up demand for mattresses and related products. Following the past three recessions (1981-1982, 1990-1991, 2001-2002), the market rebounded 24%, 16% and 21%, respectively, during the two-year period following the recession as consumers who had postponed purchases of mattress products returned to the market. Following the 2008 - 2009 recession, U.S. wholesale unit sales and dollar sales increased 6.2% and 5.5%, respectively, during 2010 compared to the prior year, which we believe evidences the continuation of this trend. According to the information published in May 2011 by ISPA, the industry is expected to grow 7.5% in 2011 and 6.0% in 2012.

        We also believe that several trends support the positive outlook for long-term growth of the U.S. mattress retail market:

Distribution Channels

        Wholesale.     The U.S. wholesale mattress industry, which includes mattresses and their supporting box springs (also referred to as foundations), as tracked by ISPA, was a $5.9 billion market in 2010. The U.S. wholesale mattress segment (which excludes foundations) accounted for $4.6 billion of the total and has grown at an average annual rate of 5.8% since 1990. The mattress segment has historically experienced stable growth, as 2008-2009 was the only period in over 30 years during which the segment experienced a multi-year decline in mattress sales, as wholesale mattress sales dropped from $5.3 billion in 2007 to $4.6 billion in 2010.

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        Retail.     The highly fragmented U.S. retail mattress market is made up primarily of mattress specialty retailers, furniture retailers and department stores. Retailers compete based on product selection, customer experience and service, price, store location and brand recognition.


Bedding Sales by Retail Distribution Channels

GRAPHIC   GRAPHIC

Source: Furniture Today

Brand Overview

        There are nearly 500 manufacturers in the beddings industry, with the four largest manufacturers, Sealy, Serta, Simmons and Tempur-Pedic, representing approximately 59% of the dollar value of the mattress market in 2009 and the 15 largest manufacturers accounting for approximately 81% during the same period. Sealy, our largest supplier, is the largest and most recognized bedding brand in the world, accounting for approximately 19.6% of all wholesale bedding shipments in the United States in 2009. In general, the bedding industry has faced little competition from imported products as a result of the

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short lead times required by mattress retailers, high shipping costs and relatively low direct labor expenses in mattress manufacturing. Manufacturers sell traditional innerspring products and specialty products across a wide range of styles, sizes, price points and technologies. While conventional mattresses still accounted for approximately 75% of total bedding sales in the United States in 2010, in recent years, specialty mattresses, which use foam and air technology, have grown at a much faster rate than the industry as a whole. In 2009, specialty bedding producers Tempur Pedic and Select Comfort combined to account for an approximate 12.2% market share. As new research emerged showing the link between proper sleep and good health, Mattress Firm responded to the growing demand for specialty mattresses by expanding its product selection to include memory foam mattress sets such as Tempur-Pedic products, and mattresses that allow an individual to personalize the comfort characteristics of the sleep surface.

Our Competitive Strengths

        We believe the following business strengths differentiate us from our competitors and favorably position us to execute our growth strategy:

        Distinctive retail format.     We believe our proven and effective operating model combines broad selection, superior service by well-trained associates, a compelling value proposition and highly visible and convenient store locations, resulting in a unique shopping experience at an attractive store destination. The key attributes of the Mattress Firm experience include:

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        Economies of scale and strong market share positions in key markets.     We operate in 49 markets across 23 states through company-operated or franchised stores. We have the largest geographic footprint in the United States among multi-brand mattress specialty retailers and rank second in total sales among mattress specialty retailers. Of our company-operated stores, 75% are located in markets in which we believe we had the number one market share position as of February 1, 2011. We believe our strong market share positions and economies of scale provide us with a number of competitive advantages, including:

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        Highly attractive new store economic model.     We have developed a 4-wall store economic model whereby we typically expect to recoup our initial investment in a new store in less than one year. A new store in our destination retail format, which averages approximately 4,800 square feet in size, typically requires an upfront capital investment of approximately $110,000, net of landlord allowances and vendor incentives, and approximately $16,000 of floor sample inventory.

        Efficient fulfillment model with lower working capital requirements.     We currently operate 27 distribution centers that service all of the markets in which we have company-operated stores. The majority of our distribution centers have excess capacity, which we can leverage as we execute on our growth objectives. Most of our mattress suppliers deliver to our distribution centers within 48 hours following our placement of a purchase order, which enables us to maintain minimal inventory levels but still provide our customers with our Mattress Firm Red Carpet Delivery Service . Furthermore, we typically receive payment from our customers in advance of paying suppliers, which further minimizes our working capital requirements and results in a highly attractive cash flow model.

        Experienced management team.     Our experienced senior management team has an average of ten years of experience with Mattress Firm and an average of 21 years of experience in the retail and mattress industries. Stephen Stagner, our President and Chief Executive Officer, has over 19 years of experience in the mattress industry and originally was a top-performing Mattress Firm franchisee before Mattress Firm purchased his company in December 2004. Stephen Fendrich, our Chief Strategy Officer, was a co-founder of Mattress Firm and has 28 years of experience in the mattress industry across various retail and wholesale companies (most recently at Simmons, one of our largest vendors), including 16 years of experience with Mattress Firm . Jim Black, our Chief Financial Officer, has 10 years of experience with Mattress Firm and 20 years of public accounting experience at two leading national accounting firms. Our executive officers and other members of management currently indirectly own approximately    % of our equity (or approximately        % after giving effect to this offering). This strongly aligns the interests of management with those of our stockholders.

        We believe our management's breadth of experience in the industry has enabled us to anticipate and respond effectively to industry trends and competitive dynamics while driving superior customer service and cultivating long-standing relationships with our vendors.

        Proven track record of managing through severe economic conditions.     We have a proven track record of success in challenging economic environments. Over the most recent recessionary period, our management team has shown an ability to outperform the industry, with Mattress Firm being the only leading mattress specialty retail brand to avoid a sales decline in 2009, versus the average leading mattress specialty retailer decline of 8.9%. Our flexible financial model allows us to manage discretionary operating expenses through slower sales periods. During the challenging sales environment of fiscal 2009, our Adjusted EBITDA increased $6.2 million, or 15.3%, over fiscal 2008, from $40.2 million to $46.3 million. In fiscal 2010, our Adjusted EBITDA increased by $10.8 million, or 23.3%, over fiscal 2009 from $46.3 million to $57.1 million. We believe our company is well positioned to take advantage of opportunities associated with current improvements in the national economy, as evidenced by 19 consecutive months of our positive comparable-store sales growth through May 31, 2011.

Our Growth Strategies

        We seek to enhance our position as a leading specialty retailer of mattresses and related products and accessories with the goal of driving profitable sales growth and becoming the premier national specialty retailer. To achieve these objectives, we plan on executing the following key strategies:

        Expand our company-operated store base.     The highly fragmented U.S. retail mattress market provides us with a significant opportunity to expand our store base. In the period from January 30,

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2008 to February 1, 2011, we opened 194 company-operated stores, including 85 in fiscal 2010. In addition, during the same period, we acquired 38 additional stores, including 13 store locations that were previously Mattress Firm franchised locations. We plan to continue to expand our store base through a combination of new stores and acquisition opportunities in both existing and new markets. We estimate that we could operate approximately 2,500 Mattress Firm store locations in both existing and new markets in the United States. We believe that the attractive opportunities in the real estate market will help us execute our expansion strategy.

        Increase sales and profitability within our existing network of stores.     Our strategy is to drive comparable-store sales growth within our existing portfolio of stores by:

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        As a result of our established infrastructure within our existing markets, improvements in comparable-store sales should drive expansion in our operating profit margins over time. In addition, we will continue to focus on improving the efficiencies of our information systems and distribution infrastructure, which should further benefit our operating margins.

        Selectively expand our franchise network.     Our franchise program is a low cost and high return model for us to expand our store footprint and leverage the Mattress Firm brand name. We partner with qualified franchisee operators to open stores in markets where we do not currently plan to operate. After our franchisee partners achieve a critical mass in a particular market, we may negotiate with them to repurchase their stores, which we believe is a viable, efficient and productive approach to entering certain markets. We purposely seek to include buyback options in our franchise agreements, where appropriate, and maintain the right of first refusal over any sale of stores by a franchisee. Since January 30, 2008, we have acquired 13 locations from two franchisees.

        Continue to expand our proprietary product offering and target additional channels of distribution.     We believe another strong growth avenue for Mattress Firm is to partner with manufacturers to create innovative proprietary products to further differentiate us from our competition. A recent example is our exclusive brand, YuMe , our proprietary temperature-controlled mattress. YuMe , which was created through a partnership among Mattress Firm , Amerigon Inc. and Sleep Inc., is a proprietary concept that allows the individual to control the sleep surface temperature on each side of the mattress. We introduced YuMe in late fiscal 2010 and are currently evaluating our marketing and distribution strategy for the product.

        We also seek alternative distribution channels to further leverage our core competencies, enhance the Mattress Firm brand and increase our market presence. For example, our website, www.mattressfirm.com , features our full line of products and provides useful information to consumers on the features and benefits of our products, store locations and hours of operation. We offer on-line shopping with nationwide delivery, as well as an in-store pickup option. We use the internet as an important customer information resource to drive in-store purchases. In addition, we have created a new temporary "pop-up" store format that we introduced at various special event venues, including state fairs, bridal shows, home and garden shows, conventions, rodeos, boat shows and auto racing events. We expect to drive additional growth through alternative distribution channels in the future.

Merchandising

        We believe our destination store retail concept provides our customers with a distinctive shopping experience, by offering an extensive assortment of mattresses and bedding-related products, featuring the best known national brands, a strong value proposition and superior service in a conveniently located, comfortable store environment.

Products

        We carry over 52 different models and styles of conventional and specialty mattresses and bedding-related products across a wide range of price points. We focus on the best-known national brands but also offer our customers our Hampton & Rhodes private label mattresses and have recently introduced YuMe , our exclusive, proprietary brand. Because of our strong relationships with our key suppliers, we are able to offer our customers many exclusive products, which are available only to us in our markets which also adds to our competitive differentiation. Periodically, we also carry limited quantities of special/opportunistic buys and our SuperCenter stores carry additional special buys as well as refurbished and marked-down merchandise. All of our mattresses are manufactured in the United States, and certain bedding-related furniture products are sourced from Asia.

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        Conventional Mattresses.     Conventional mattresses, such as those of Sealy (including Sealy Posturepedic and Stearns & Foster ) and Simmons (including Simmons Beautyrest ), utilize steel-coil innersprings to provide comfort and support. These conventional mattresses represented approximately 75% of industry sales in the United States and approximately 56.6% of our total bedding sales in fiscal 2010. In addition to these national brands, we also offer our Hampton & Rhodes private label mattresses to provide our customers a greater choice of values among conventional mattresses and, as noted above, have recently introduced YuMe , our exclusive, proprietary brand.

        Specialty Mattresses.     In recent years, specialty mattresses, such as those manufactured by Tempur-Pedic and Select Comfort, which utilize materials other than steel-coil innersprings to provide comfort and support, have grown at a much faster rate than the industry as a whole. In response to this industry trend, we are expanding our assortment in the following categories:

        Furniture and Accessories.     As one of our merchandising initiatives, we are in the process of introducing new headboards and footboards, which complement our current bedding products. We plan to offer an assortment of these products in most of our markets primarily to attract additional customer traffic. In addition, all of our stores also carry an assortment of bedding-related accessories, including bed frames, mattress pads and pillows. Bedding-related products and accessories represented approximately 7% of our sales from company-operated stores in fiscal 2010.

Pricing Strategy

        Our strong price and value proposition is a critical element of our merchandise strategy. We strive to provide customers the best possible value in our markets, supported by event driven print, radio and television advertising and promotions, and offer our customers a low price guarantee whereby we will refund 110% of the price difference on comparable products at any time within 100 days after purchase. In addition, we supplement our regular merchandise line-up with special buys and refurbished and clearance products at our Mattress Firm SuperCenter stores to reinforce our value proposition and strong price image by offering a wide range of price points from promotional products (such as a $59 twin-size mattress) to premium products (such as a $8,100 king-size set).

Customer Service

        We enhance our customers' shopping experience with a superior level of service. Our sales associates are well trained in our products and unique comfort testing process, and empowered to satisfy our customers' comfort, value and service requirements consistent with established company guidelines. Their goal is to simplify the buying process and narrow customer choices to the one that meets his or her comfort and price needs. They are also trained to explain our comfort satisfaction and price guarantees as well as our third party deferred financing programs and product warranties. We clearly price all of our merchandise and provide our customers with a clear and concise product and pricing guide.

        After-sale service represents an important part of our overall customer service offering. We believe our Mattress Firm Red Carpet Delivery Service , under which we provide same day delivery service

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approximately one quarter of the time, is distinctive in the industry. We also provide our customers with comfort satisfaction and price guarantees, and a manufacturer's warranty for product defects.

Store Design and Layout

        We utilize two store prototypes: our traditional store format, which averages approximately 4,400 square feet, and our larger SuperCenter store format which averages approximately 6,100 square feet. As of February 1, 2011, we had 436 stores in our traditional store format and 156 stores in our SuperCenter store format. Our traditional stores are bright and open and have a warm, contemporary feel. We use wood, ceramic tile and carpet flooring and natural wood fixtures and shutters to create a comfortable, home-like look and feel. They feature a Value Center display area that efficiently conveys a broad assortment of value priced/promotional conventional bedding. In total, we offer over 50 different models and styles of conventional and specialty mattresses and bedding-related products across a wide range of price points in our stores conveying category dominance to our customers.

        Our SuperCenter stores incorporate all of the design elements of our traditional stores and also have a specially merchandised warehouse rack area to display our clearance, overstock and returned products. The warehouse rack merchandise display and signage reinforce our value proposition for customers.

        To enhance our customer in-store experience, our stores are designed to be comfortable and easy-to-shop with our proprietary Comfort by Color shopping program. With Comfort by Color , customers have the opportunity to determine the physical comfort that is best for them by comparing the feel of samples for all four different surface comfort options (Firm, Plush, Pillow-top, and Contoured) in our Comfort Comparison Center. Each comfort style is assigned a particular color in our stores (Yellow, Orange, Red, or Green), as denoted through bright and colorful pillows and foot protectors on all mattresses. Once customers have "found their comfort," they simply then "follow their color," by focusing the balance of their selection time on mattresses that fall into one of the particular color-coded comfort options. Comfort by Color simplifies shopping for customers and makes it easier to train new associates on the store layout.

        Our interior and exterior signage is an important element of our store design and selling strategy. We utilize bright banners, signs and lifestyle photographs to highlight the important features of each of our products as well as promotional pricing information. We display light boxes, neon signs, and professionally designed promotional posters in our windows to convey our national brand focus and value proposition. Through signage and other promotional materials, we can emphasize our strong relationship with the key mattress manufacturers we do business with.

Marketing and Advertising

        The primary objective of our marketing program is to drive traffic into Mattress Firm stores, with our brand promise of Save Money. Sleep Happy . With what we believe to be a strong market penetration model, we leverage our advertising spending on a cost-effective basis to build our market leadership position and brand awareness.

        Message.     Our marketing campaign has a three-prong approach to inform and educate customers as to why they should buy, why they should choose Mattress Firm and why they should buy now. Replace Every 8 is our key campaign message. We capture consumer interest and educate them on the recommended mattress replacement frequency for optimal health and comfort. Happiness Guarantee is Mattress Firm 's differentiated offer to ensure customers are happy with their price, comfort and delivery. Promotional events featuring long term financing and All the best brands...All the best prices! offer compelling reasons for consumers to buy today.

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        Media.     Historically, our advertising program consisted primarily of radio and television, with the balance being print. In early fiscal 2008, due to the economic recession, we altered our marketing in light of decreased consumer confidence and traffic trends. For cost effectiveness, we increased our print program and focused primarily on price with limited-time offers. In fiscal 2010 and 2011, we increased advertising spending which allowed us to shift our media mix to approximately two-thirds broadcast, designed to build greater recognition of the Mattress Firm brand, and emphasize what we believe to be our key competitive strengths. We have also increased our online search engine marketing and alternative media presence. The results have been positive with increased traffic, same store sales, market share and EBITDA.

        Alternative Media.     The primary objective of our social media strategy is to build awareness and engage interaction as the relevant source of information in our industry. We follow online conversations daily and develop engaging content to distribute via our Facebook, Twitter, Blog or YouTube sites. In addition, to expose Mattress Firm to additional potential consumers across existing markets and drive qualified, invested traffic, we have partnered with Groupon for their "deal of the day" specials. We have successfully targeted new consumers with no advertising costs to drive incremental sales.

        Analysis.     To ensure focused marketing, we have implemented a targeted market-level media and message program. To maximize the efficiencies and effectiveness of these efforts, we use ShopperTrak, a nationally recognized company that monitors store traffic patterns and sales key performance indicators. As of February 1, 2011, we utilized ShopperTrak in approximately 77% of our company-operated stores. We believe that this is a critical component to understanding our advertising program, spotting trends, supporting market-level tests and increasing local market share.

Purchasing and Distribution

        Our merchandising team is responsible for all product selection, supplier negotiations, procurement, initial pricing determinations, product marketing plans and promotions, and coordination with local store and distribution center managers to implement our merchandise programs. Our merchandising team also regularly communicates with our field management and franchisees to monitor shifts in consumer preferences and market trends.

        As of February 1, 2011, we operated 27 distribution centers, supporting all of our company-operated stores. In substantially all of our markets, a single distribution center serves all of the stores in that market. Our four major suppliers ship mattresses to each of our distribution centers within 48 hours of order, up to five days per week. We replenish our distribution centers based on the rate of sales, promotions and predetermined stocking levels. Our merchandise is received, inspected and processed at our distribution centers and then delivered to our customers' homes or to our stores. Approximately one quarter of the time, we deliver to our customers' homes on a same-day basis, which we believe is a key competitive strength. In all but one of our markets, we contract for the delivery of merchandise to our customers; and in one market, we utilize our own fleet and delivery services.

Retail Store Operations

        The principal objective of our store operations program is to provide our guests with what we believe is a superior level of customer service by staffing our stores with knowledgeable and enthusiastic sales associates, and expertly training those associates to satisfy customers' needs while achieving store performance objectives.

        Field Management Organization and Store Staffing.     Our store operations are centralized, with corporate-level guidelines providing for chain-wide consistency, while still allowing store level flexibility to meet our customers' value and service requirements. As of February 1, 2011, we employed eight regional sales managers, 61 district managers and 137 area managers, who, in conjunction with our

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corporate recruiting and training department, are responsible for the hiring and training of store associates, assistant managers and store managers. Our training and communications programs are designed to ensure chain-wide consistency of merchandise presentation, communicate corporate information to stores and monitor sales and profit performance. In addition, our district and area managers are primarily responsible for developing store managers, assistant managers and sales associates for succession and career development purposes.

        Each store is staffed with one store manager and the appropriate number of associates, depending on the sales volume of the store. Store managers are responsible for maintaining visual merchandise presentations, ensuring the cleanliness and orderliness of the store and achieving store performance targets.

        Recruiting and Training.     We attempt to recruit sales associates and store managers who are highly motivated, goal oriented and who are seeking to take advantage of the career development opportunities we offer. Our recruitment portfolio includes an employee referral program, campus recruitment at select colleges and universities, and targeted recruiting in local markets of candidates who have relevant retail or consumer product experience. All of our sales associates attend our extensive internal training program, participate in product training sessions provided by vendors, and are enrolled in our online corporate university for extended learning and development opportunities. This training emphasizes product knowledge, selling skills, and store operations fundamentals. Our sales associates are trained to explain our comfort satisfaction and price guarantees as well as our third-party deferred financing programs and product warranties; they are also empowered to satisfy our customers' comfort, value and service requirements consistent with established company guidelines. Our corporate and field training function is responsible for developing and providing new-hire training, advanced training and in-store new product training, and ensuring the implementation of our store assessment program, which is conducted by an independent third party to measure and ensure the effectiveness and consistency of our selling process, in-store promotions, cleanliness and overall customer experience. The store assessment program also serves as an additional educational tool for our sales associates.

        We have developed a proprietary internal best-practice sharing video network for all associates called Project 180. Project 180 complements our training efforts by allowing associates to view and contribute to "how-to" videos posted by peer associates offering practical tips and best-practice considerations for particular product-related or general selling concepts. With an active library of approximately 500 videos, this informal social learning tool has quickly become a high-impact staple in our training portfolio.

        Compensation.     We believe that our store associate compensation system is competitive and designed to create an incentive and urgency to sell. In addition to a base salary drawn against commissions, our sales associates can earn incentive bonuses based on store performance. All of our field management (regional managers, district managers and distribution center managers) earn a base salary and are eligible for incentive bonuses based on certain individual performance criteria.

Franchise Operations

        As of February 1, 2011, our 13 franchisees operated 88 stores in 16 markets. In fiscal 2010, we received $3.2 million in franchise fees and royalty income from our franchisees. We grant franchises by territory, and have granted more than one franchise territory to some of our franchisees. Although we have franchises in the Denver, Colorado and Milwaukee, Wisconsin markets, most of our current franchises are located in markets with a population of less than 1.5 million people. We believe we are diligent in our selection of our franchisees, putting them through multiple vetting processes to ensure they are capable of operating the business at a high level.

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        Our outstanding franchise agreements typically give franchisees the exclusive right to operate Mattress Firm stores in a specified territory for a 20 or 30 year term and are renewable at the option of the franchisee for an additional 5- to 10-year period, subject to certain conditions. The franchisees are required to pay an initial fee each time they open a store. In addition, the franchisees also pay us royalties based on gross sales. The agreements require franchisees to operate their businesses in accordance with our standard operating procedures, including specifications for the appearance, floor plans, signage, fixtures, displays, staffing and operations of stores. The agreements also require franchisees to provide us with quarterly profit and loss statements, so we can monitor their ongoing performance and proactively identify any trouble areas, and give us the right to inspect and audit their books and records at any time during business hours. During the term of the franchise agreement and, subject to certain geographic limitations, for three years thereafter, franchisees may not operate, directly or indirectly, any other business selling bedding products or furniture. In exchange, we provide franchisees with our standard operations manual, sales training, print advertising materials, and assistance in selecting store sites. We also have a right of first refusal on the sale of each franchise and/or its equipment and inventory.

Retail Stores and Markets

Site Selection

        Our site selection strategy is to select or develop premium locations, which maximize our sales per store. We select geographic markets and store sites on the basis of demographics, quality of neighboring tenants, store visibility and signage opportunities, accessibility and lease economics. Key demographics include population density, household income and growth rates. We also utilize relative market share analyses to determine the likelihood of becoming the market leader in each market we serve within a certain period of time.

        Our internal real estate group identifies opportunities for new and relocated stores with the involvement of our senior executives. We also contract with third party real estate brokers in each of our markets to identify sites and negotiate lease details. We prefer to develop freestanding units located in high traffic power centers with major retailers, such as Target, or other specialty and home furnishings retailers, such as Bed Bath & Beyond, Best Buy, Costco, Dick's Sporting Goods, The Home Depot and Whole Foods. If a free-standing unit or site is unavailable, we prefer to locate our in-line stores on the end of the strip center for greater visibility.

Hours

        Our stores are open 362 days a year, seven days a week, generally from 10:00 a.m. to 9:00 p.m. Monday through Friday, 10:00 a.m. to 8:00 p.m. on Saturday and 12:00 p.m. to 6:00 p.m. on Sunday.

Seasonality

        Our business is subject to seasonal fluctuation, with the highest sales activity normally occurring during the second and third quarters of our fiscal year.

Properties

        Our corporate headquarters are located in Houston, Texas and adjoin one of our Mattress Firm SuperCenter stores. We lease all but one of our company-operated stores, which are located in 19 states, including Texas, Florida, Georgia, North Carolina and Virginia. Initial lease terms are generally for five to ten years, and most leases contain multiple five-year renewal options and rent escalation provisions. We have historically been able to renew or extend leases for our company-operated stores. Our franchisees also lease their own space.

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        We also lease all the distribution centers that serve our company-operated stores, generally subject to five-year leases, most of which contain renewal options ranging from two to ten years. As we expand our operations, we may need to find additional distribution center locations. We believe that we would not have any difficulty replacing these facilities if we were required to do so. The following chart illustrates the locations of the 27 distribution centers that currently serve our company-operated stores, the lease termination date (assuming no exercise of renewal options, if any) and square footage:

Location
  Lease Termination
Date*
  Square
Footage
 

Austin, Texas

  3/31/2016     32,000  

Birmingham, Alabama

  7/31/2012     21,646  

Charlotte, North Carolina

  7/31/2013     17,600  

Chattanooga, Tennessee

  6/30/2015     12,000  

Cincinnati, Ohio

  1/14/2012     21,600  

Colombus, Ohio

  8/31/2015     13,150  

Dallas, Texas

  6/30/2013     58,290 (1)

Dania Beach, Florida

  5/31/2012     31,200  

Fenton, Missouri

  4/30/2014     22,500  

Greenville, South Carolina

  12/31/2012     10,000  

Houston, Texas

  1/31/2015     55,381  

Indianapolis, Indiana

  10/31/2011     12,626 (1)

Jacksonville, Florida

  10/31/2011     16,200 (1)

Las Vegas, Nevada

  4/30/2013     26,720 (1)

Lenexa, Kansas

  11/30/2015     27,000  

Memphis, Tennessee

  8/31/2016     14,299 (1)

Mebane, North Carolina

  6/30/2020     37,500  

Nashville, Tennessee

  7/13/2015     15,396  

N. Charleston, South Carolina

  12/31/2011     10,000  

Oklahoma City, Oklahoma

  12/31/2014     12,000  

Orlando, Florida

  6/30/2012     22,075  

Phoenix, Arizona

  8/31/2014     29,672 (1)

Roswell, Georgia

  7/31/2016     59,607  

St. Petersburg, Florida

  3/31/2014     34,500 (1)

St. Rose, Louisiana

  8/31/2016     18,352  

San Antonio, Texas

  7/31/2015     32,000  

Virginia Beach, Virginia

  12/31/2015     34,693 (1)

*
Does not give effect to lease renewal options.

(1)
This facility includes both a distribution center and a retail store.

Information Systems

        We have been using GERS Retail Systems since May 2005. This system provides sales, inventory, financial information and warehouse management. Due to current and planned store growth, the GERS Retail System is reaching its maximum capacity. We are in the process of implementing Microsoft Dynamics AX for Retail. We believe that this system will provide all of the same functionality as the GERS system with the added ability to support our growth strategy. In addition, we believe that it will allow us to support multiple brands, multiple legal entities, shared warehouses, various pricing structures, improved inventory management, multiple franchises and store growth on a single platform. We also believe that the Microsoft Dynamics point-of-sale functionality will allow us to enhance the overall customer experience, capture critical customer information and interface directly

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with the warehouse home delivery scheduling system. The planned implementation date for this new system is late 2011.

        In November 2006, we implemented the Microsoft Business Intelligence suite for data warehousing. This provides access to information from virtually any data source across the organization through interactive, content-driven dashboards and scorecards that combine data from multiple systems into a single browser-based experience. We also have the capability to produce sales, financial and analytical reports.

        In April 2009, we implemented an e-commerce solution which integrates with the existing GERS Retail system. This allows our customers to shop on the web, purchase products and schedule in-home delivery nationwide. In addition, the e-commerce system allows customers to shop in a store, save the sale price for up to 30 days and finalize the sale via the website. The website also utilizes social media to build a community of customers and interactive chat to improve the customer's web experience.

        Our stores, distribution centers and corporate office are all connected by a secure Virtual Private Network, or "VPN," which enables us to take advantage of the cost efficiencies of the internet without compromising data security. The infrastructure that facilitates our VPN is housed in a secure, off-site location. We leverage our VPN to route our sales transactions, bankcard processing, third party financing and funding through this communications network. We believe our management information systems efficiently support our current operations and provide a solid foundation for future growth.

Employees

        As of February 1, 2011, we had approximately 1,675 employees, substantially all of whom were employed by us on a full-time basis. None of our employees are covered by a collective bargaining agreement. We have not experienced any work stoppages and we consider our relations with our employees to be good.

Government Regulation

        We believe that we are in compliance in all material respects with the laws to which we are subject. In particular, our business subjects us to regulation in the following areas:

        Regulations relating to consumer protection and the bedding industry.     Our operations are subject to state and local consumer protection regulations and other regulations relating specifically to the bedding industry. These regulations vary among the states where we operate, but generally impose requirements as to the proper labeling of bedding merchandise, restrictions regarding the identification of merchandise as "new" or otherwise, controls as to hygiene and other aspects of product handling and sale and penalties for violations. We also are subject to a standard established by the U.S. Consumer Product Safety Commission, which sets mandatory national fire performance criteria for all mattresses sold in the United States on or after July 1, 2007.

        Franchise laws and regulations.     We are also subject to FTC regulations and various state laws regulating the offer and sale of franchises. The FTC and various state laws require us to furnish to prospective franchisees a franchise disclosure document containing prescribed information. We are currently registered to offer and sell franchises in eight states. The states in which we are registered, and a number of states in which we may franchise, require registration of a franchise offering circular or a filing with state authorities. Substantive state laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states, and bills have been introduced in Congress from time to time which provide for federal regulation of the franchisor-franchisee relationship in certain respects. The state laws often limit, among other things, the duration and scope of non-competition provisions and the ability of a franchisor to terminate or refuse to renew a franchise. The failure to comply with these laws and regulations in any jurisdiction or to obtain

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required government approvals could result in a ban or temporary suspension on future franchise sales, fines or other penalties or require us to make offers of rescission or restitution, any of which could adversely affect our business and operating results.

Litigation

        From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We believe that we are not a party to any legal proceedings which, if determined adversely to us, individually or in the aggregate, would have a material adverse effect on our financial position, results of operations or cash flows.

        In April 2010, a former employee of the Company filed a claim on behalf of himself and others similarly situated alleging that the Company failed to pay him overtime compensation in violation of the Fair Labor Standards Act. The case was filed as Civil Action No. 3:10-CV-294-J-32JRK in the United States District Court, Middle District of Florida, Jacksonville Division. On May 26, 2011, following a court-ordered mediation, the parties reached final settlement whereby the Company agreed, without admitting any of the allegations, to make a payment of $1.6 million into a claims-made reversionary fund covering claims by employees that had been identified as potentially entitled to receive damages. The settlement is contingent upon court approval. Pursuant to the settlement, the Company is obligated to make such payment no later than July 25, 2011 and has accrued a liability for this matter as of February 1, 2011, with a corresponding charge to sales and marketing expense. The Company does not believe that the ultimate resolution of this matter will result in additional charges in excess of the amounts already accrued.

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MANAGEMENT

Executive Officers and Directors

        The following table sets forth our executive officers, key employees and directors and their ages as of February 1, 2011:

Name
  Age   Position

R. Stephen Stagner

    42   President, Chief Executive Officer and Director

Stephen G. Fendrich

    49   Chief Strategy Officer

James R. Black

    52   Executive Vice President and Chief Financial Officer

Kenneth E. Murphy III

    35   National Vice President, Sales

Bruce Levy

    53   Vice President, Real Estate and Construction

Christine Brinkley

    42   Vice President, Human Resources

Karrie Forbes

    35   Vice President, Marketing

Craig McAndrews

    42   Vice President, Merchandising

George W. McGill

    52   Vice President, Field Operations

John W. Childs

    69   Director

Adam L. Suttin

    43   Director

David A. Fiorentino

    35   Director

William E. Watts

    58   Director, Chairman of the Board

Frederick C. Tinsey III

    59   Director

         R. Stephen Stagner became our Chief Operating Officer in January 2005 as a result of the merger between Mattress Firm and his former Mattress Firm franchise, Elite Management Team, or Elite. He was promoted to our President and Chief Executive Officer in February 2010. From 1995 to 2005, Mr. Stagner was the Chief Executive Officer of Elite, after which he served as our President and Chief Operating Officer from February 2006 until his promotion to President and Chief Executive Officer. Mr. Stagner has 19 years of experience in the bedding industry, including employment with Sealy Corporation and Simmons Bedding Company, and owning and operating the largest franchise in the Mattress Firm network while with Elite. Mr. Stagner has also served in various capacities with the Mattress Firm Foundation, including as its President since January 2011 and director from January 2007 until December 2010. Since October 2009, Mr. Stagner has served as director of Rousche College of Business Advisory Council at the Stephen F. Austin State University. Mr. Stagner's experience as our President and Chief Executive Officer, and formerly his experience as Chief Operating Officer, coupled with his in-depth knowledge of our Company and industry, led to the conclusion that he should serve as a director of the Company.

         Stephen G. Fendrich became our Chief Strategy Officer upon his return to Mattress Firm in September 2010. He co-founded Mattress Firm in 1986 with two other partners. He was involved with all aspects of the business but was directly responsible for the financial, real estate, information technology and franchise areas of Mattress Firm until 2002. From 2002 to 2010 he held several management positions within the bedding industry, including President and Chief Executive Officer of The Sleep Country, Inc., and Executive Vice President of Sales and President and Chief Operating Officer of Simmons Bedding Company. While with Simmons, the company filed for Chapter 11 bankruptcy and, during 2009, Mr. Fendrich led Simmons through its balance sheet restructuring that culminated with its sale in January 2010.

         James R. Black became our Executive Vice President and Chief Financial Officer in September 2000. Prior to joining Mattress Firm , Mr. Black spent 20 years with public accounting firms, the majority with the international firms of Ernst & Young, LLP and PricewaterhouseCoopers, LLP. He is a certified public accountant and member of the American Institute of Certified Public Accountants.

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         Kenneth E. Murphy III became our National Vice President of Sales in September 2010 after holding various positions within Mattress Firm since 2005, including Director of Training and Recruiting, Vice President of Field and Talent Management and Regional Vice President of Sales. From 2003 to 2005, Mr. Murphy was as an account manager at Sealy. Mr. Murphy is also currently serving on the board of the David F. Miller Center for Retailing Education and Research at the University of Florida and the Stephen F. Austin University General Business Advisory Board.

         Bruce Levy became our Vice President of Real Estate and Construction in January 2009 to focus on continuing our nationwide expansion. Prior to joining Mattress Firm , Mr. Levy was a Limited Partner at Interface Properties, Inc., having been involved with locating land and developing multi-tenant retail buildings. Mr. Levy has over 25 years of experience as a senior officer of several Fortune 500 companies in the real estate and construction sector, including the Office Depot, Inc., Blockbuster L.L.C., Gateway, Inc., Tweeter Home Entertainment Group, Inc. and PETCO Animal Supplies, Inc. Mr. Levy's experience includes opening retail stores throughout the United States, Europe and Asia.

         Christine Brinkley joined Mattress Firm in March 2008 as our Vice President of Human Resources, responsible for establishing employee-focused programs to sustain our overall strategic business plan and objectives. Ms. Brinkley has also served as a director of Mattress Firm Foundation since November 2008. From 2003 to 2008, Ms. Brinkley served as the Vice President of Human Resources at Academy Sports and Outdoors, including overseeing the company's human resource functions, recruiting, benefits and compensation. Having spent over 20 years working in a human resource capacity, Ms. Brinkley has experience in a wide range of industries, including big box and specialty retail, grocery, government, and oil, during which time she has demonstrated the ability to lead, execute, and develop her staff in category leading retailers. Ms. Brinkley is a certified facilitator through Development Dimensions International and holds her Senior Professional of Human Resources certification.

         Karrie Forbes became our Vice President of Marketing in January 2008, responsible for the strategic direction of the marketing, advertising and communication. Ms. Forbes joined a Mattress Firm franchise in 1997 and held positions of increasing responsibility in sales, customer service, recruiting, training and advertising through 2005, when she joined Mattress Firm as Director of Merchandising. Ms. Forbes also serves on the advisory board with the Better Sleep Council and Clear Channel Radio Houston. Ms. Forbes is married to Matthew Forbes, our Director of Sales and Field Operations.

         Craig McAndrews was promoted to Vice President of Merchandising in February 2010 from his previous position as our Regional Sales Manager, which he held from February 2009 until his promotion. Prior to joining Mattress Firm , Mr. McAndrews was the owner and director of Innovative Retail Group from 2003 to 2009. From 1999 until 2003, he was President of a Mattress Firm franchise, which he had co-founded. Previously, he was Vice President of Sales at Simmons Bedding Company.

         George W. McGill was promoted to Vice President of Field Operations in July 2009 from his previous position as our Vice President of Operations, which he held from January 2007, until his promotion. Prior to joining us in 2007, he was Vice President of Operations for Ultimate Acquisition Partners, LP (f/k/a Ultimate Electronics) from 2002 to 2006. Mr. McGill worked for 12 years at Circuit City Stores, Inc. in supply chain management.

         John W. Childs joined us as a Director in August 2007. Mr. Childs has been Chairman and Chief Executive Officer of J.W. Childs, one of our affiliates, since 1995. From 1991 to 1995 Mr. Childs was Senior Managing Director of the Thomas H. Lee Company and from 1987 to 1990 was a Managing Director of Thomas H. Lee Company. Prior to 1987, Mr. Childs was associated with the Prudential Insurance Company of America for 17 years where he held various executive positions in the investment area, ultimately serving as Senior Managing Director in charge of the Capital Markets Group where he was responsible for Prudential's approximately $77 billion fixed income portfolio, including all the Capital Markets Group's investments in leveraged acquisitions. He is currently Chairman of the Board of CHG Healthcare Services, Inc. and a Director of Sunny Delight Beverages

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Co., Esselte Ltd. and Simcon, Inc. and was a Director at Advantage Sales and Marketing, Inc. from 2006 until 2010. Mr. Childs's experience serving as a director of various companies, including his experience with Mattress Firm , and his expertise in private equity led to the conclusion that he should serve as a director of the Company.

         Adam L. Suttin joined us as a Director in August 2007 and is currently a member of our audit committee. Mr. Suttin is also a Partner of one of our affiliates, J.W. Childs, which he co-founded in July 1995. Previously, Mr. Suttin was an Associate at Thomas H. Lee Partners, where he was employed from 1989 until 1995. Mr. Suttin is currently a Director of Brookstone, Inc., The Nutrasweet Company, Sunny Delight Beverages Co., JA Apparel Corp. and Esselte Ltd., and was a Director at Advantage Sales and Marketing, Inc. from March 2006 until December 2010. Mr. Suttin's experience as a co-founder of J.W. Childs, coupled with his experience as a director of various companies, including Mattress Firm , led to the conclusion that Mr. Suttin should serve as a director of the Company.

         David A. Fiorentino joined us as a Director in August 2007 and is currently a member of our audit committee. Mr. Fiorentino is also a Partner at J.W. Childs, which is one of our affiliates. Prior to arriving at J.W. Childs in July 2000, Mr. Fiorentino worked in the investment banking division of Morgan Stanley. He is currently a Director of CHG Healthcare Services, Inc., WS Packaging Group, Inc., Fitness Quest, Inc., JA Apparel Corp. and Esselte Ltd. Mr. Fiorentino's financial industry background as well as his experience as a Partner at J.W. Childs and as a director of various companies, including Mattress Firm , led to the conclusion that Mr. Fiorentino should serve as a director of the Company.

         William E. Watts joined us as a Director in January 2007. Mr. Watts is also an Operating Partner of J.W. Childs, which is one of our affiliates. Prior to joining J.W. Childs in 2001, Mr. Watts was President and Chief Executive Officer of General Nutrition Companies from 1991 until 2001. Prior to being named President and Chief Executive Officer in 1991, Mr. Watts held the positions of President and Chief Operating Officer of General Nutrition, President and Chief Operating Officer of General Nutrition Center, Senior Vice President of Retailing and Vice President of Retail Operations. Mr. Watts currently serves as Chairman of the Board of JA Apparel Corp. and is a Director of Brookstone, Inc. and Fitness Quest, Inc. and was a Director at EmployBridge, Inc. from September 2006 until May 2011. Mr. Watts's experience as a director of various companies, including Mattress Firm , as well as his experience as Chief Executive Officer of a company with a well-known brand, led to the conclusion that he should serve as a director of the Company.

         Frederick C. Tinsey III joined us as a Director in August 2007, currently serving as chairman of our audit Committee, and is a certified public accountant with a degree in Accounting and Finance. Mr. Tinsey is the owner of Tinsey Financial Consulting, at which he has served since 2003, and he has served on the board and audit committees of various privately held companies, including Murray's Discount Auto Stores, Fitness Quest Inc., WS Packaging Group, Inc. and IDQ Holdings. Mr. Tinsey was at PricewaterhouseCoopers LLP from 1973 until 1993 and served as the co-head of its national retail practice from 1991 to 1993, having engaged with various private and public retail clients. From 1994 through 2003, Mr. Tinsey served as the President and Chief Financial Officer of Murray's Discount Auto Stores. His experience as a certified public accountant, coupled with his experience as an officer or director of various companies, including Mattress Firm , led to the conclusion that he should serve as a director of the Company.

        Our board of directors is elected annually. Effective upon the closing of this offering, our board of directors will be divided into three classes, with one class being elected at each year's annual meeting of stockholders. Class I directors will serve for a term ending upon the annual meeting of stockholders held in 2012, Class II directors will serve for a term ending upon the annual meeting of stockholders held in 2013 and Class III directors will serve for a term ending upon the annual meeting of stockholders held in 2014. At each annual meeting of stockholders beginning with the annual meeting

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of stockholders held in 2012, successors to the class of directors whose term expires at such annual meeting shall be elected for a three-year term. No director serves as such pursuant to any arrangement or understanding between him and any other person. Our board of directors currently consists of six members, at least one of whom satisfies the independence requirements of                 and SEC rules. We are planning to add one director meeting the                independence standards within 90 days, and another independent director within one year, after the completion of this offering. Our executive officers are elected by the board of directors and serve until their successors have been duly elected and qualified or until their earlier resignation or removal. Except as described above, there are no family relationships among any of our directors or officers.

Code of Business Conduct and Ethics

        We will adopt a written code of business conduct and ethics applicable to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Following this offering, a current copy of the code will be posted on the Corporate Governance section of our website, which is located at www.mattressfirm.com .

Board Structure and Committee Composition

        Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. Each committee will operate under a charter that will be approved by our board of directors. The composition of each committee will be effective upon the closing of this offering.

        Because we intend to avail ourselves of the "controlled company" exception under the                    Rules, neither our compensation committee nor our nominating and corporate governance committee will be composed entirely of independent directors as defined under the                    Rules. The controlled company exception does not modify the independence requirements for the audit committee, and we intend to comply with the requirements of the Sarbanes-Oxley Act and the                        Rules, which require that our audit committee be composed of at least three members, a majority of whom will be independent within 90 days of the date of this prospectus, and all of whom will be independent within one year of the date of this prospectus.

Audit Committee

        The purpose of the audit committee will be set forth in the audit committee charter. The audit committee's primary duties and responsibilities will be to:

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        Upon completion of this offering, the audit committee will consist of            ,             and            , and will have at least one independent director and at least one audit committee financial expert. Prior to the consummation of this offering, our board of directors will adopt a written charter under which the audit committee will operate. A copy of the charter, which will satisfy the applicable standards of the SEC and                                    , will be available on our website.

Compensation Committee

        The purpose of the compensation committee is to discharge the responsibilities of our board of directors relating to compensation of our directors and executive officers. The compensation committee reviews and recommends to our board of directors compensation plans, policies and programs and approves specific compensation levels for all executive officers. Upon completion of this offering, the compensation committee will consist of            ,             and            , and will have at least one independent director. Prior to the consummation of this offering, our board of directors will adopt a written charter under which the compensation committee will operate. A copy of the charter, which will satisfy the applicable standards of the SEC and                                , will be available on our website.

Nominating and Corporate Governance Committee

        Upon completion of this offering, the nominating and corporate governance committee will consist of            ,              and            , and will have at least one independent director. The nominating and corporate governance committee will be responsible for recruiting and retention of qualified persons to serve on our board of directors, including proposing such individuals to the board of directors for nomination for election as directors, for evaluating the performance, size and composition of the board of directors and for oversight of our compliance activities. Prior to the consummation of this offering, our board of directors will adopt a written charter under which the nominating and corporate governance committee will operate. A copy of the charter, which will satisfy the applicable standards of the SEC and                                , will be available on our website.

Compensation Committee Interlocks and Insider Participation

        None of our executive officers serves as a member of the compensation committee of our board of directors or the compensation committee or other committee serving an equivalent function of any other entity that has one or more of its executive officers serving as a member of our board of directors or compensation committee.

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

        This section discusses the principles underlying our policies and decisions with respect to the compensation of our executive officers who are named in the Summary Compensation Table and the most important factors relevant to an analysis of these policies and decisions. Our "named executive officers" for the 2010 fiscal year were:

        While this compensation discussion focuses primarily on the information contained in the tables below and related footnotes and the narrative discussion, we also describe compensation actions taken after the last completed fiscal year to the extent that such discussion enhances the understanding of our executive compensation programs.

Overview of Fiscal 2010 Performance and Compensation

        We believe our success depends on the continued contributions of our named executive officers. Our executive compensation programs are designed to attract and retain experienced and qualified executive officers and to incentivize them to achieve overall business results and individual performance goals. Our compensation programs also support our strategic objectives by aligning the interests of our executive officers with those of our stockholders through the use of operational and financial performance goals and equity-based compensation.

        Our compensation policies and compensation-related decisions center on the following objectives:

        Each of the key elements of our executive compensation programs is discussed in more detail below. Our executive compensation programs are designed to complement and to collectively serve the compensation objectives described above. We have not adopted formal policies for allocating compensation between short-term and long-term compensation, between cash and non-cash compensation or among different forms of cash and non-cash compensation; we have, however, created base salary, annual bonus and equity award guidelines to set compensation amounts and opportunities

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in a manner internally consistent across job positions for all employees, including our named executive officers.

Highlights of Fiscal 2010 Performance

        During fiscal 2010, we achieved strong financial performance, and we believe our named executive officers were instrumental in helping us achieve these results. Highlights of our fiscal year 2010 performance include the following:

Compensation Framework: Policies and Processes

        Historically, our CEO, CFO and CSO have been responsible for recommending and determining base salary amounts and increases for executive officers (other than themselves), and have recommended the annual bonus goals under our annual incentive program to the Board of Managers of Mattress Holdings, LLC (the "Board of Managers") for its approval. The Board of Managers has been responsible for determining the elements that comprise our executive compensation program in general, as well as approving the performance objectives associated with our annual bonus programs and approving the equity grants made to employees, both as described below.

        The compensation for our CEO, CFO and CSO is governed by their employment agreements, which are described below. These agreements were approved by the Board of Managers. The Board of Managers provides oversight of the compensation practices with respect to these three named executive officers. Our Company Compensation Committee, which is described below, does not make any compensation determinations for these three individuals.

        In fiscal 2011, we established a Company-level compensation committee, which is comprised of three voting members (our CEO, CFO and CSO) and four non-voting members (all of whom are members of either our human resources or finance departments) (the "Company Compensation Committee"). Prior to fiscal 2011, no such formal committee existed; however, procedures similar to those described below for the Company Compensation Committee were followed by our then current CEO, CFO, CSO and our human resources and finance departments. In establishing the Company Compensation Committee, our goal was to formalize the processes we had previously established and operated.

        As noted above, our board of directors has established a compensation committee of our board (the "Board Compensation Committee"). The Board Compensation Committee will be responsible for developing and administering our executive compensation programs and determining the level and

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types of compensation of our named executive officers. The Board Compensation Committee plans to adopt a written charter under which it will operate. This charter will be available on our website.

        Each year, certain members of our human resources department conduct an analysis of our executive compensation programs relative to those of other comparable companies to gain a general understanding of whether our executive compensation programs are competitive. In addition, our human resources department receives a compensation review from an independent consultant, Triad Consultants, Inc., which uses a number of sources to provide us with market data.

        While we have historically reviewed this data and from time to time adjusted our compensation practices in light of such data, we have not formally benchmarked executive compensation at a specified level as compared to the gathered survey data or against any specific group of companies.

Elements of Named Executive Officer Compensation

        The following is a discussion of the primary elements of the compensation for each of our named executive officers. Compensation for our named executive officers consisted of the following elements for fiscal 2010:

Base Salary

        We believe that base salary is required in order to provide our named executive officers with a stable income stream that is commensurate with their responsibilities and competitive market conditions. The base salaries of Messrs. Stagner, Black and Fendrich are set forth in their respective employment agreements, which were each approved by the Board of Managers. Their employment agreements also provide for an automatic annual cost of living adjustment to their base salaries.

        Recommendations for the base salaries of Messrs. McGill and Levy are made by our human resources department, in accordance with our salary administration policy. Our salary administration policy is an internal tool that establishes a salary range for each job position covered by the policy. We generally do not deviate from these guidelines when setting base compensation or increasing base

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salary, although from time to time we have done so in circumstances warranting special considerations. Our human resources department, when recommending an executive's initial base salary, reviews the salary guidelines, the individual's role, expected responsibilities, skills, experience, prior compensation levels and general market data. When recommending subsequent increases to base salary, our human resources department reviews the salary guidelines, the executive's contributions to the Company, individual performance, and general market trends.

        Each year, our human resources department presents, for review and approval of our CEO, CFO and CSO, initial salary recommendations and recommendations for base salary increases for all other employees, including Messrs. McGill and Levy. Our CEO, CFO and CSO then recommend to the chairman of the Board of Managers an aggregate amount for base salary increases for all employees. The chairman of the Board of Managers approves the aggregate amount, but not any individual base salary increases. Our CEO, CFO and CSO then review and approve the individual base salary increases for our other executive officers.

        At the beginning of our 2010 fiscal year, Mr. Stagner was promoted to CEO. In connection with his promotion, Mr. Stagner executed an amended and restated employment agreement under which his base salary was increased from $340,000 to $400,000. When determining the increase to his base salary, the Board of Managers took into account his new roles, increased responsibilities and the compensation levels of our prior chief executive officers.

        In addition, during fiscal 2010, Mr. Black's base salary was increased from $277,200 to $285,500, in accordance with the terms of his employment agreement. Mr. Fendrich, who commenced employment with the Company during fiscal 2010, executed an employment agreement under which his base salary is $325,000. When determining Mr. Fendrich's base salary, the Board of Managers took into account his expected roles and responsibilities, as well as his previous experience. Mr. McGill's base salary was increased from $215,000 to $218,500, based on the factors described above. Mr. Levy's base salary was increased from $225,000 to $234,000, which resulted in a base salary for him that is outside the parameters set forth in our salary administration policy for his position. Our CEO, CFO and CSO approved this increase due to Mr. Levy's strong performance during fiscal 2010, particularly in the area of new store openings, as described below.

Bonus and Short-Term Incentive Arrangements

        In addition to receiving base salaries, our named executive officers are eligible to earn annual cash bonuses based upon the attainment of specific business and, for certain executives, individual objectives.

        All or part of a named executive officer's bonus is determined based on the achievement of the Company's Adjusted EBITDA target. (See "Prospectus Summary—Summary Historical Consolidated Financial and Operating Data" for a definition of Adjusted EBITDA and reconciliation of Adjusted EBITDA and EBITDA to net income.) Depending on the named executive officer's position within the Company, his bonus potential is based solely on the achievement of the Company's Adjusted EBITDA target, or is based on a combination of Adjusted EBITDA target achievement and attainment of pre-determined individual performance goals in accordance with our Management Bonus Objectives program ("MBO"). The purpose of the MBO is to enhance Company performance by rewarding certain employees for achievement of individualized goals that are set based on their duties and responsibilities.

        Messrs. Stagner, Black, Fendrich and McGill are each eligible for a bonus based solely on achievement of the Company's Adjusted EBITDA goals. Mr. Levy is eligible for a bonus, based on both the Company's achievement of its Adjusted EBITDA target and Mr. Levy's attainment of individual performance goals, as described below.

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        The cash bonuses (as a percentage of base salary) payable to each named executive officer if the relevant performance goals associated with his bonus were achieved for fiscal 2010 were as follows:

 
  Target Cash Bonus as a
% of Base Salary
 
Name
  Target   Maximum  

R. Stephen Stagner(1)

    50 %   100 %

Stephen G. Fendrich(1)

    50 %   100 %

James R. Black(1)

    50 %   100 %

George W. McGill(2)

    25 %   50 %

Bruce Levy(2)

    25 %   50 %

(1)
Mr. Fendrich's target and maximum percentages are established by the terms of his employment agreement, described below. While the employment agreements of Messrs. Stagner and Black provide for a target cash bonus of 100% of base salary if the Company achieves 100% of its annual Adjusted EBITDA target, the Company's longstanding practice has been to provide Messrs. Stagner and Black with a target cash bonus of 50% of base salary if the Company achieves 100% of its annual Adjusted EBITDA target, and a maximum cash bonus of 100% of base salary if the Company achieves its maximum Adjusted EBITDA target.

(2)
Each of Mr. McGill's and Mr. Levy's target percentage is established by the terms of their offer letters, described below. Mr. Levy's target cash bonus is based 60% on the Company's achievement of the annual Adjusted EBITDA target and is based 40% on the achievement of his MBO goals, as described below.

        The Board of Managers, after consultation with the CEO, CFO and CSO, sets the annual Adjusted EBITDA target at a level it believes is both challenging and achievable. By establishing a target that is challenging, we believe that the performance of our employees, and therefore our performance, is maximized. By setting a target that is also achievable, we believe that employees remain motivated to perform at the high level required to achieve the target. If the Company does not achieve 90% or more of the annual Adjusted EBITDA target, the executive is not entitled to an annual cash bonus. If the Company achieves between 90% and 100% of the annual Adjusted EBITDA target, the cash bonuses of Messrs. Stagner, Fendrich and Black are determined by linear interpolation between 0% and 50% of base salary, the cash bonus of Mr. McGill is determined by linear interpolation between 0% and 25% of base salary, and the cash bonus of Mr. Levy that is attributable to the Company's annual Adjusted EBITDA target is determined by linear interpolation between 0% and 15% of base salary.

        In the case of Mr. Levy, if, with respect to a fiscal year, the Company's actual Adjusted EBITDA is less than 90% of the target, he will not be entitled to receive any annual cash bonus for such year. If the Company's actual Adjusted EBITDA is between 90% and 100% of the Adjusted EBITDA target for a given year, the total bonus potential for his MBO-based award for such year will be reduced to 50% of the bonus that otherwise could have been earned based on achievement of his MBO goals.

        For fiscal 2010, the annual Adjusted EBITDA target was $60 million and the 90% threshold Adjusted EBITDA level was $54 million. In addition, the Board of Managers set a maximum level of Adjusted EBITDA of $65 million. If the actual Adjusted EBITDA achieved for fiscal 2010 was in excess of this maximum level, bonuses would be capped at twice the target bonus amount (or, in the case of Mr. Levy, the portion of his cash bonus that is attributable to the Company's annual Adjusted EBITDA target would be capped at twice such amount).

        At the conclusion of the fiscal year, Adjusted EBITDA results are calculated by our finance department and are presented to the Board of Managers for review and approval. Actual Adjusted

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EBITDA for fiscal 2010 was $57.1 million, which is in excess of the 90% threshold Adjusted EBITDA level of $54 million. This resulted in a payout to Messrs. Stagner, Black, Fendrich and McGill of 51.1% of their target cash bonus.

        Mr. Levy's bonus was allocated 60% to the Adjusted EBITDA target and 40% to his MBO target. However, since actual Adjusted EBITDA for fiscal 2010 was below target, Mr. Levy was only eligible to receive 50% of the MBO-based bonus that he would have otherwise received.

        For fiscal 2010, Mr. Levy had two individual performance goals, each of which was worth 50% of his MBO-based bonus. The first goal was to maximize the number of weeks during which new stores would be open by managing the real estate transactions and associated processes necessary to open new stores. Performance was measured equally by the number of new stores that were opened during fiscal 2010 and by the number weeks during which such new stores were open. During fiscal 2010, Mr. Levy opened 85 new stores (which exceeded his target goal of 75 new stores), and these new stores were open for a total number of 1,753 weeks. Accordingly, the CEO and CSO determined that Mr. Levy was to be awarded 150% of the bonus attributable to the achievement of this MBO goal.

        The second goal, which is to be completed by the end of fiscal 2011, is to create and implement a process by which the Company can measure a new store's actual sales against its projected sales. For fiscal 2010, performance was measured by the dates by which Mr. Levy (in collaboration with other executive officers of the Company, if applicable) accomplished the following: development of a process to manage sales projections, identification of underperforming new stores, and development of ways in which to increase such store's performance. In accordance with these performance metrics, Mr. Levy developed a process to manage sales projections by July 10, 2010 (which exceeded his target date of August 10, 2010) and identified a group of underperforming stores by October 15, 2010. Because Mr. Levy had developed a sales projection process a month earlier than his target date, even though he did not obtain his goal of developing ways in which to increase underperforming store sales, the CEO and CSO nonetheless determined that Mr. Levy was to be awarded 100% of the bonus attributable to the achievement of this MBO goal. As a result of Mr. Levy's performance with respect to each of his MBO goals, he received a total MBO-based bonus in fiscal 2010 of $14,625.

        In addition to the bonuses described above, Messrs. Stagner, Black, and Fendrich are also eligible to share with other members of the senior management of the Company an incremental bonus pool of 10% of the actual amount of annual Adjusted EBITDA in excess of the annual Adjusted EBITDA maximum level target for each fiscal year that the executive is employed by us. Because the fiscal 2010 maximum level Adjusted EBITDA target was not achieved, no cash bonus of this kind was paid to Messrs. Stagner, Black or Fendrich.

        The actual bonuses paid to our named executive officers with respect to fiscal 2010 are set forth in the "Summary Compensation Table" below.

Stock-Based Incentive Arrangements

        Mattress Holdings, LLC, the sole stockholder of the Company, established a class of equity ownership units, or "Class B Units," that may be issued to employees of the Company providing services to or for the benefit of Mattress Holdings, LLC at the discretion of the Board of Managers. The Company does not have an equity program in place and has not granted any equity awards. The Class B Units are granted under the terms of the Mattress Holdings, LLC Second Amended and Restated Limited Liability Company Agreement and are administered by the Board of Managers.

        All Class B Units are approved and granted by the Board of Managers. Each of our named executive officers received an initial grant of Class B Units on a date that was the earlier of (i) March 5, 2007 or (2) the commencement of his employment, except for Messrs. Stanger and Black, who each reached their initial grant on January 18, 2007. In determining the size of the Class B Unit grant to be

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awarded to Messrs. Stagner, Black and Fendrich, the Board of Managers took into account a number of factors such as the responsibilities associated with the named executive officer's position and the value of the long-term incentive awards of executives. The size of the Class B Unit grants awarded to Messrs. McGill and Levy was determined in accordance with the Company's equity guidelines, which provide recommended grant amounts based on the title or pay grade of our employees.

        Each holder of vested Class B Units is entitled to its pro rata share of future distributions to the equity owners of Mattress Holdings, LLC after certain other equity holders have received aggregate preferred distributions equal to the greater of (i) $154.3 million or (ii) the fair value of Mattress Holdings, LLC's equity on the grant date of the Class B Units of such holder. Each Class B Unit grant is comprised of four tranches with separate vesting criteria. The Class B-1 Unit tranche comprises 40% of the total units granted and vests over five years in 20% increments on January 18 of each year, subject to continued employment, with the exception of Messrs. Stagner and Black, who if terminated after January 18, 2012, will not forfeit the vested portions of their Class B-1 Units or the earned portions of their Class B-2 Units. Any unvested portion of the Class B-1 Unit tranche fully vests immediately prior to a change of control or, if earlier, immediately prior to the completion of an initial public offering. The Class B-2, B-3 and B-4 Unit tranches comprise the remaining portion of each Class B Unit grant and vest in their entirety immediately prior to a change of control or, if earlier, the date of expiration of the lock-up agreements entered into by JWC Mattress Holdings, LLC, JWC Equity Funding III, Inc. and their respective affiliates that are unit holders of Mattress Holdings, LLC (collectively, "JWC Investors") in connection with an initial public offering (the "Lock-up Expiration Date"), in each case if the return on investment to entities affiliated with JWC Investors meets or exceeds established performance thresholds.

        In addition, in fiscal 2009, Mattress Holdings, LLC granted Class C-2 Units to certain members of its management, including Messrs. Stagner and Black. These grants were made in consideration for services provided to or for the benefit of Mattress Holdings, LLC, and were granted in response to the dilution in these employees' Class A equity holdings that resulted from an investment in Mattress Holdings, LLC that was made in fiscal 2009. The Class C-2 Units were fully vested on the date of grant. No Class C-2 Units were granted in fiscal 2010. The Class C-2 Units are subject to forfeiture upon termination of the holder's employment other than by the Company without cause or by the holder for good reason; provided that, in the case of Messrs. Stagner and Black, neither executive will forfeit his Class C-2 Units even if he terminates his employment without good reason so long as he does not commence employement with another employer or become self-employed.

Employment and Severance Arrangements

        We have entered into employment contracts with Messrs. Stagner, Black, and Fendrich and provided our other named executive officers with offer letters. The material terms of these arrangements are summarized below.

    Employment Agreement with Mr. Stagner.   Mr. Stagner is a party to an amended and restated employment agreement, effective February 3, 2010, under which he is entitled to receive an annual base salary of $400,000 (automatically adjusted annually for cost of living) and is eligible for an annual target cash bonus. The amended and restated employment agreement also provides for certain payments and benefits to be provided upon a qualifying termination of Mr. Stagner's employment, as described below under "Potential Payments Upon Termination or Change of Control."

    Employment Agreement with Mr. Black.   Mr. Black is a party to an employment agreement, effective January 18, 2007, under which he is entitled to receive an annual base salary of $265,000 (automatically adjusted annually for cost of living) and is eligible for an annual target cash bonus. The agreement also provides for certain payments and benefits to be provided upon a qualifying termination of Mr. Black's employment, as described below under "Potential Payments Upon Termination or Change of Control."

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    Employment Agreement with Mr. Fendrich.   Mr. Fendrich is a party to an employment agreement, effective September 24, 2010, under which he is entitled to receive an annual base salary of $325,000 (automatically adjusted annually for cost of living) and is eligible for an annual target cash bonus. The agreement also provides for certain payments and benefits to be provided upon a qualifying termination of Mr. Fendrich's employment, as described below under "Potential Payments Upon Termination or Change of Control."

    Letter Agreements with Messrs. McGill and Levy.   Messrs. McGill and Levy are parties to offer letter agreements with the Company that provide for an annual base salary of $215,000 and $225,000, respectively, and provide that each is eligible for an annual target cash bonus. Under these agreements, Messrs. McGill and Levy are at-will employees, and are not entitled to payments upon a termination of employment.

Retirement and Welfare Benefits

        We maintain a retirement savings plan, which is a 401(k) defined contribution plan (the "401(k) Plan"), for the benefit of all eligible employees, including our named executive officers (on the same basis as all eligible employees). The 401(k) Plan provides for an annual match of 33 1 / 3 % of contribution amounts up to an annual amount of $1,600.

        In addition to the 401(k) Plan, we sponsor the Executive Nonqualified Excess Plan, an unfunded, unsecured nonqualified deferred compensation plan under which certain management employees may elect to defer a percentage or specific dollar amount of their compensation until a later date. We offer this plan because it facilitates retirement savings and provides financial flexibility for our key employees. While the Company may, at its discretion, provide matching and profit-sharing contributions under the Executive Nonqualified Excess Plan, we have not, as of this time, elected to make any such contributions.

        We also provide our eligible employees, including our named executive officers, with medical, dental, and vision coverage, life and accidental death and dismemberment insurance, short-term and long-term disability insurance, and the opportunity to enroll in our flexible spending account.

Executive Perquisites

        We provide for limited executive perquisites, including Company payment of medical, dental and vision premiums for certain named executive officers, as well as provision and payment of separate life and disability insurance policies for Messrs. Stagner, Black and Fendrich. In addition, we have also provided certain named executive officers with relocation benefits, as needed, including the costs of temporary housing. All relocation benefits are grossed up for tax purposes, to the extent that they are taxable benefits. The costs associated with all perquisites are included in the Summary Compensation Table, below.

Tax and Accounting Considerations

        Section 162(m) disallows a tax deduction for any publicly held corporation for individual compensation exceeding $1 million in any taxable year for a company's named executive officers, other than its chief financial officer, unless such compensation qualifies as performance-based under such section. As we are not currently publicly traded, neither our Company Compensation Committee nor the Board of Managers has previously taken the deductibility limit imposed by Section 162(m) into consideration in setting compensation. Following this offering, at such time as we are subject to the deduction limitations of Section 162(m), we expect that our Board Compensation Committee will seek to qualify the variable compensation paid to our named executive officers for an exemption from the deductibility limitations of Section 162(m). However, our Board Compensation Committee may, in its

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judgment, authorize compensation payments that do not comply with the exemptions in Section 162(m) when it believes that such payments are appropriate to attract and retain executive talent.

        Our Company Compensation Committee and the Board of Managers, in connection with decisions that relate to our equity incentive award plans and programs, consider the accounting implications of significant compensation decisions. As accounting standards change, we may revise certain programs to appropriately align accounting expenses of our equity awards with our overall executive compensation philosophy and objectives.

Compensation of Named Executive Officers

        The tables in the following sections provide information required by the SEC regarding compensation paid to or earned by our named executive officers.

Summary Compensation Table

        The following table sets forth the total compensation awarded to, earned by, or paid to our named executive officers for all services rendered in all capacities to us or Mattress Holdings, LLC in fiscal 2010.

Name and Principal Position
  Year   Salary
($)(a)
  Bonus
($)
  Stock
Awards
($)(b)
  Non-Equity
Incentive Plan
Compensation
($)(c)
  All Other
Compensation
($)(e)
  Total
($)
 

R. Stephen Stagner

    2010   $ 395,000           $ 102,168   $ 14,249   $ 511,417  
 

President and Chief Executive Officer

                                           

Stephen G. Fendrich(d)

   
2010
 
$

125,625
   
 
$

57,500
 
$

48,424
 
$

19,447
 
$

250,996
 
 

Chief Strategy Officer

                                           

James R. Black

   
2010
 
$

285,500
   
   
 
$

72,923
 
$

12,626
 
$

371,049
 
 

Executive Vice President and Chief Financial Officer

                                           

George W. McGill

   
2010
 
$

218,500
   
   
 
$

27,905
 
$

1,600
 
$

248,005
 
 

Vice President of Field Operations

                                           

Bruce Levy

   
2010
 
$

234,000
   
   
 
$

32,556
 
$

18,950
 
$

285,506
 
 

Vice President of Real Estate

                                           

(a)
Amounts shown in this column are not reduced to reflect any deferrals under the Executive Nonqualified Excess Plan (our nonqualified deferred compensation plan) or the 401(k) Plan.

(b)
Amounts shown in the column reflect the fair value of the unit awards on their grant date. The underlying valuation assumptions for Class B Unit awards are further discussed in Note 14 to the consolidated financial statements for fiscal 2010 ("2010 Financials").

(c)
Amounts shown in this column represent the named executive officer's annual bonus payment. The annual bonus is either based solely on achievement of the Company's Adjusted EBITDA target, or for Mr. Levy, based on a combination of Adjusted EBITDA target achievement and individual performance. Bonus amounts are not reduced to reflect any deferrals under the Executive Nonqualified Excess Plan (our nonqualified deferred compensation plan) or the 401(k) Plan. See "Compensation Discussion and Analysis—Elements of Named Executive Officer Compensation— Bonus and Short-Term Incentive Arrangements ".

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(d)
Mr. Fendrich joined the Company as Chief Strategy Officer on September 24, 2010. The amounts shown for Mr. Fendrich reflect his compensation for the portion of fiscal 2010 during which he was employed by the Company.

(e)
Amounts shown in the "All Other Compensation" column include the following items, as applicable to each named executive officer, for fiscal 2010: Company-paid premiums for life and disability insurance and health coverage, Company contributions to the 401(k) Plan, relocation expenses, and temporary housing expenses.

    2010 All Other Compensation Table

Name
  Year   Company-Paid
Premiums for Life
and Disability
Insurance
($)(a)
  Company-Paid
Premiums
for Health
Coverage
($)(b)
  Company
Contributions
to 401(k)
Plan
($)(c)
  Relocation
Expenses
($)
  Total
($)
 

R. Stephen Stagner

    2010   $ 2,628   $ 11,056   $ 565       $ 14,249  

Stephen G. Fendrich

    2010       $ 1,843       $ 17,604 (d) $ 19,447  

James R. Black

    2010   $ 1,570   $ 11,056           $ 12,626  

George W. McGill

    2010           $ 1,600       $ 1,600  

Bruce Levy

    2010               $ 18,950 (e) $ 18,950  

(a)
Amounts shown reflect the Company-paid premiums for Messrs. Stagner and Black's life and disability insurance.

(b)
Amounts shown reflect the Company-paid premiums for Messrs. Stagner, Fendrich and Black's health coverage, including medical, dental and vision coverage. Messrs. Stagner and Black received Company-paid health coverage during all of fiscal 2010. Mr. Fendrich received Company-paid health coverage for the months of December 2010 and January 2011.

(c)
Amounts shown reflect the Company's matching contributions to the named executive officer's 401(k) Plan account. The 401(k) Plan provides for an annual match of 33 1 / 3 % of contribution amounts up to an annual amount of $1,600.

(d)
Amount shown reflects reimbursement of relocation expenses in connection with Mr. Fendrich's relocation to Houston, Texas, including for airfare and eligible travel expenses between Mr. Fendrich's home in Atlanta, GA and the Company's place of business in Houston, Texas, of $3,621, moving expenses of $723, temporary housing expenses of $8,400, and a "gross-up" of $4,860 to cover taxes on his temporary housing expenses.

(e)
Amount shown reflects temporary housing expenses for Mr. Levy. Mr. Levy is also entitled to reimbursement of expenses in connection with his relocation to Houston, Texas. However, Mr. Levy did not request reimbursement for any such expenses for fiscal 2010.

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Grants of Plan-Based Awards Table

        The following table sets forth information regarding grants of plan-based awards made to our named executive officers during fiscal 2010:

 
   
   
   
   
   
   
   
   
  All other
stock
awards:
number of
shares or
stock
or units
(#)(d)
   
 
 
   
   
  Estimated Future Payouts
Under Non-Equity
Incentive Plan Awards
  Estimated Future Payouts
Under
Equity Incentive Plan Awards
   
 
 
   
   
  Grant date
fair value of
awards
($)(e)
 
Name
   
  Grant
Date
  Threshold
($)
  Target
($)(c)
  Maximum
($)(c)
  Threshold
(#)
  Target
(#)(d)
  Maximum
(#)
 

R. Stephen Stagner

  Bonus(a)           $ 200,000   $ 400,000                          

Stephen G. Fendrich

 

Bonus(a)

   
   
 
$

94,792
 
$

189,583
   
   
   
   
   
 

  B Units(d)     9/24/2010                     150,000         100,000   $ 57,500  

James R. Black

 

Bonus(a)

   
   
 
$

142,750
 
$

285,500
   
   
   
             

George W. McGill

 

Bonus(b)

   
   
 
$

54,625
 
$

109,250
   
   
   
             

Bruce Levy

 

Bonus(b)

   
   
 
$

58,500
 
$

117,000
   
   
   
             

(a)
Non-equity incentive plan compensation for Messrs. Stagner, Fendrich and Black is determined and paid in accordance with the terms of their respective employment agreements, and is based on achievement of Company performance targets approved by the Board of Managers.

(b)
Non-equity incentive plan compensation for Messrs. McGill and Levy is determined and paid in accordance with the terms of their respective letter agreements, and is based on achievement of Company performance targets approved by the Board of Managers and, for Mr. Levy, is based in part on achievement of his individual performance goals.

(c)
These figures represent target and maximum bonus opportunities for each of the named executive officers. The actual amount of the bonus earned by each named executive officer for fiscal 2010 is reported in the Summary Compensation Table. For a description of the performance targets relating to the Company's bonus opportunities for fiscal 2010, please refer to "Compensation Discussion and Analysis—Elements of Named Executive Officer Compensation— Bonus and Short-Term Incentive Arrangements " above.

(d)
Mr. Fendrich was granted 250,000 Class B Units upon his commencement of employment with the Company on September 24, 2010, which are comprised of the following: 100,000 Class B-1 Units; 100,000 Class B-2 Units; 25,000 Class B-3 Units; and 25,000 Class B-4 Units. The Class B-1 Units vest ratably over a period of five years, subject to continued employment. In general, the Class B-2, B-3 and B-4 Units vest upon the achievement of performance targets following a change of control or initial public offering. For a description of the Class B Units, please refer to "Compensation Discussion and Analysis—Elements of Named Executive Officer Compensation— Stock-Based Incentive Arrangements ".

(e)
Amounts shown reflect the fair value of the Class B Units on the grant date. The underlying valuation assumptions for Class B Unit awards are further discussed in Note 14 to the 2010 Financials.

Narrative Disclosure to Summary Compensation Table and Grant of Plan-Based Awards Table

        Each of our named executive officers is party to an employment agreement (in the cases of Messrs. Stagner, Fendrich and Black) or an offer letter (in the cases of Messrs. McGill and Levy) that provides for a base salary and other benefits, as described above in the Compensation Discussion and Analysis. The employment agreements for Messrs. Stagner, Fendrich and Black provide for an automatic increase each year to their base salaries based on an annual cost of living adjustment factor (Consumer Price Index). All of our named executive officers were eligible to participate in our Executive Nonqualified Excess Plan (our nonqualified deferred compensation plan) and our benefit plans and programs.

        Our named executive officers, other than Mr. Levy, were also eligible to receive a bonus based solely on the Company's achievement of an Adjusted EBITDA target for fiscal 2010. The Adjusted EBITDA target is set by the Board of Managers, after consultation with our CEO, CFO and CSO. If the Adjusted EBITDA target is achieved, Messrs. Stagner, Fendrich and Black are entitled to receive a target bonus equal to 50% of base salary, and Mr. McGill is entitled to receive a target bonus equal to 25% of base salary. For Messrs. Stagner, Fendrich, Black and McGill, if the Company achieves between 90% and 100% of the annual Adjusted EBITDA target, the cash bonus is determined by linear interpolation between 0% and 25% or 50% of base salary, as applicable. If the Company achieves

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greater than 100% of the annual Adjusted EBITDA target, each such executive has the opportunity to receive a bonus of up to twice their target cash bonus.

        Mr. Levy is eligible to receive a bonus of 25% of base salary based on a combination of the Company's achievement of an Adjusted EBITDA target and realization of his individual performance goals under our MBO. Sixty percent of Mr. Levy's target bonus is based on Adjusted EBITDA, while the remaining 40% is based on achievement of MBO goals.

        The Board of Managers approved the grant to Mr. Fendrich of 250,000 Class B Units upon his commencement of employment with the Company on September 24, 2010. For a description of the Class B Units, please refer to "Compensation Discussion and Analysis—Elements of Named Executive Officer Compensation— Stock-Based Incentive Arrangements ."

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Outstanding Equity Awards as of Fiscal-Year End

        The following table summarizes the number of Class B Units underlying outstanding equity awards for each named executive officer as of February 1, 2011, the last day of our 2010 fiscal year. These Class B Units are equity awards made by our sole stockholder, Mattress Holdings, LLC, and are not equity awards of the Company.

Name
  Grant Date   Equity Class(a)   Number of Shares
or Units of Stock
That Have Not
Vested
(#)
  Market Value of
Shares or Units of
Stock That Have
Not Vested
($)(f)