SIMMONS CO /GA/ - 10-K Annual Report

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

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 27, 2003

COMMISSION FILE NUMBER 333-76723

SIMMONS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Delaware 13-3875743
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

One Concourse Parkway, Suite 800
Atlanta, Georgia 30328
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 512-7700

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Not applicable Not applicable

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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

Common Stock, $.01 par value per share
(TITLE OF CLASS)

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 23, 2004 was $0.

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes: [X] No: [ ]

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

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of The Act).

Yes: [ ] No: [X]

There were 100 shares of the registrant's common stock outstanding on
March 23, 2004.

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As used within this report, the terms "Company," "we," "our," and "us"
refers to Simmons Company, a Delaware corporation, and its subsidiaries.

PART I

ITEM 1. BUSINESS.

OVERVIEW

Founded in 1870, Simmons Company is a leading manufacturer and
distributor of branded bedding products in the United States and a world leader
in Pocketed Coil(R) innerspring technology. We sell a broad range of mattresses
and foundations under our well-recognized brand names, including Simmons(R),
Beautyrest(R), BackCare(R) and Deep Sleep(R). In 2002, we added to our product
line-up with the introduction of BackCare Kids(TM) mattresses, LivingRight(TM)
adjustable foundations, and a broader assortment of products to serve the
premium bedding segments. Sales of conventional bedding, which include
fully-assembled mattresses and foundations, account for substantially all of our
sales.

We manufacture a full range of mattresses and foundations, with
particular emphasis on products targeted to sell at retail price points above
$799 per queen set. Additionally, we focus on selling queen and larger size
mattresses. For the year ended December 27, 2003, we derived approximately 57%
of our sales from these higher-end retail price points and approximately 83% of
our sales from these larger size mattresses. We believe these product categories
offer faster growth and higher gross margins than other bedding segments.
Primarily as a result of these factors, our AUSP for the year ended December 27,
2003 was approximately 50% above the industry average as reported by ISPA.

We manufacture and supply conventional bedding to approximately 3,400
retail customers, representing over 11,000 outlets, throughout the nation and in
Puerto Rico. Our customers include furniture stores, specialty sleep shops,
department stores and rental stores. We support our customers with significant
local and national brand advertising and promotional spending, as well as
extensive customer support services. We operate 17 strategically located
manufacturing facilities across the United States and in Puerto Rico through our
wholly owned subsidiaries, The Simmons Manufacturing Co., LLC and Simmons
Caribbean Bedding, Inc. We are currently constructing two additional
manufacturing facilities.

We also distribute branded products on a contract sales basis directly
to institutional users of bedding products, such as the hospitality industry and
certain agencies of the U.S. government, through our wholly owned subsidiary,
Simmons Contract Sales, LLC. In addition, we license our trademarks, patents and
other intellectual property to various domestic and foreign manufacturers
principally through our wholly owned subsidiary, Dreamwell, Ltd.

Unlike many of our competitors that operate as associations of
independent licensees, we have national in-house manufacturing capabilities. We
believe that there are a number of important advantages to operating nationally,
including the ability to service multi-state accounts, maintain more consistent
quality of products and leverage research and development activities. Our
just-in-time manufacturing capability enables us to manufacture and ship
approximately 76% of our products to our retail customers within five business
days of receiving their order, and to minimize our working capital requirements.

We have proven research and development capabilities. Guided by our
Better Sleep Through Science(R) philosophy, we apply extensive research to
design, develop, manufacture and market innovative sleep products to provide
consumers with a better night's sleep. Over our 134-year history, our
innovations have included our patented "no flip" mattress, the first
mass-produced innerspring mattress, the Pocketed Coil(R) innerspring, the
"Murphy Bed" and the Hide-a-Bed(R) sofa.

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We also operate 17 retail outlet stores located throughout the United States
through our wholly owned subsidiary, World of Sleep Outlets, LLC, and over 100
retail mattress stores operating under the Mattress Gallery and Sleep Country
USA names in California, Oregon and Washington.

RECENT HISTORY OF THE COMPANY

In November 2003, THL Bedding Company acquired Simmons Holdings, Inc.
for approximately $1.115 billion. Concurrently with the closing of this
transaction, each of THL Bedding Company and Simmons Company merged with and
into Simmons Holdings with Simmons Holdings continuing as the surviving
corporation. Simmons Holdings was renamed Simmons Company. We refer to the
acquisition and mergers, together with the related acquisitions of voting
securities of THL Bedding Holding Company, as the "Acquisition." As a result of
the Acquisition, Thomas H. Lee Equity Fund V, L.P. and its affiliates ("THL")
currently hold approximately 76% of the voting stock of THL Bedding Holding
Company. In connection with the stock purchase and the mergers, Fenway acquired
9.0% of voting stock of THL Holding and the Company's management and directors
acquired 15.2% of the voting stock of THL Holding, after giving effect to
restricted stock issued to management under THL Holding's equity incentive plan.

Concurrently with the closing of the transactions described above, we
entered into the following financing transactions, which we refer to, together
with the Acquisition, as the "Transactions":

- our new senior secured credit facilities, consisting of a
$405.0 million term loan facility and a $75.0 million
revolving credit facility (of which approximately $3.3 million
was drawn on the closing date and approximately $10.5 million
was used to support standby letters of credit) (collectively,
the "new senior secured credit facility");

- a new $140.0 million senior unsecured term loan facility (the
"new senior unsecured facility");

- the repayment of all outstanding amounts under Simmons
Company's existing senior credit facility and the termination
of all commitments under that facility;

- the consummation of a tender offer and consent solicitation
initiated by THL Bedding Company on November 18, 2003 for the
$150.0 million aggregate principal amount outstanding of
Simmons Company's 10.25% Senior Subordinated Notes due 2009.
Holders of $144.9 million aggregate principal amount of the
existing Simmons notes had tendered their notes in connection
with the tender offer; and

- the repayment of all outstanding indebtedness of Simmons
Holdings, Inc. including $22.9 million of 17.5% Junior
Subordinated Payment-In-Kind Notes due October 29, 2011 and
$4.7 million of debt owed to former stockholders of Simmons
Holdings, Inc.

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INDUSTRY OVERVIEW

We compete in the U.S. wholesale bedding industry, which generated
sales of approximately $5.0 billion in 2003, according to ISPA. While there are
approximately 700 bedding manufacturers in the United States, four companies
(including Simmons) account for approximately 60% of the industry's wholesale
revenues. The remainder of the domestic conventional bedding market primarily
consists of hundreds of smaller independent local and regional manufacturers.

The U.S. bedding industry is characterized by growing unit demand,
rising AUSPs and stability in various economic environments. Annual growth of
total bedding industry sales has averaged approximately 5.9% over the last
twenty years. During this period, there has been just one year in which industry
revenues declined (0.3% in 2001). This stability and resistance to economic
downturns is due largely to replacement purchases, which account for an
estimated 70-80% of bedding industry sales. In addition, high shipping costs and
the short lead times demanded by mattress retailers have limited Asian imports
to less than 3% of the U.S. market according to the U.S. Census Bureau.

We believe that current and projected demographic trends are
favorable for the bedding industry and, in particular, for the premium segment
of the market on which we focus. According to ISPA, 20% of the 21.5
million mattress units sold in the U.S. in 2002 were sold at retail price points
greater than $1,000, up 32% from the year before. The factors contributing to
growth in the premium segments include:

- greater relative profitability that higher-end products
provide to our retail customers;

- rapid growth in the 45-64 year old segment of the population,
a group that tends to have more discretionary income and
purchases a disproportionate share of bedding products
relative to the general population;

- growing number and size of bedrooms in homes in the last
twenty years; and

- increasing consumer awareness of the health benefits of sleep.

COMPETITION

While there are approximately 700 bedding manufacturers in the United
States, four companies, Simmons, Sealy, Serta and Spring Air, account for more
than 60% of the industry's wholesale revenues. We believe that we principally
compete against these three competitors on the basis of brand recognition,
product selection, quality and customer service programs, including cooperative
advertising, sales force training and marketing assistance. We believe we
compare favorably to our primary competitors in each of these areas. In
addition, only Simmons and Sealy have national, company-operated manufacturing
and distribution capabilities.

The rest of the U.S. conventional bedding market consists of several
smaller national manufacturers, with the remainder being independent local and
regional manufacturers. These local and regional manufacturers generally focus
on the sale of lower price point products. While we primarily manufacture
differentiated bedding products targeted for mid- to upper-end price points, we
also offer a full line of bedding products to our retailer base in order for
these retailers to maintain their competitive positioning.

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PRODUCTS

We provide our retail customers with a full range of mattress products
that are targeted to cover a breadth of marketplace price points ($199 to $8,775
per queen set) and offer consumers better sleep quality benefits related to
common cases of poor sleep. Our focus on the sleep quality benefits of our
products differs from the majority of the industry in our employment of
differentiated product constructions designed to address specific consumer sleep
needs and marketing programs that promote these better sleep benefits, instead
of the traditional comfort and price feature selling.

Our mattress products are built from foam and/or one of two spring unit
construction techniques: Pocketed Coil(R) (Marshall Coil) springs or open coil
constructions. The Beautyrest(R) line of products utilizes our patented Pocketed
Coil(R) and Pocketed Cable Coil(TM) technology spring construction. Pocketed
Coil(R) spring technology involves springs whose rows are joined at the center
third of the coils. This patented way of attaching rows of coils allows for each
coil to depress independently of the adjacent coils, resulting in better
conformability to the sleeping body and the reduction of motion transferred
across the bed from one partner to the other. In addition, we recently developed
the patent pending Pocketed Cable Coil(TM) technology, which utilizes stranded
wire for each coil to provide significantly more durability and enhanced motion
separation benefits.

Our open coil products differ from traditional open coil mattresses in
the design of our coil. Our BackCare(R) products offer a unique gradient-zoned
support, featuring five distinct comfort and support zones that mirror the
natural s-shape of the spine, providing additional firmness in the lower back
and thigh for better support. We also use other open coil units in our Deep
Sleep(R) line targeted at the under $500 queen price category. The coil units
used in these products are also unique to our products.

In 2000, we introduced the first full line of mattresses that consumers
never need to flip. This patented design offers enhanced sleep benefits and
product durability, along with the consumer convenience of never having to flip
their mattresses. Every mattress we manufacture features this innovative "no
flip" design.

Beautyrest(R), our flagship premium product, has been our primary brand
since we introduced it in 1925 and is expected to continue generating the
majority of our sales. In October 2003, Simmons introduced the new Beautyrest(R)
2004 line, which continues to offer the Pocketed Coil(R) technology and also
offers new features, including the new Pocketed Cable Coil(TM) technology. We
began shipping this line in December 2003. Mattresses featuring the Pocketed
Cable Coil(TM) technology target retail price points at or above $1,299 per
queen set. Beautyrest(R) is sold primarily through furniture stores, mattress
specialty stores and department stores. All Beautyrest(R) retail floor samples
display a "Window Sticker" label that allows consumers to choose the benefit
package most appealing to them and to compare the Beautyrest(R) Do Not
Disturb(R) benefit to competitive constructions and other Beautyrest(R) models.

Beautyrest(R) World Class(TM) Exceptionale(TM), Latitudes(TM),
Dreamwell(R) and Joseph Abboud(R) products are the luxury price point extensions
of the Beautyrest(R) line. Unlike other mattress brands, which generally build
their luxury line by adding foam, fiber and non-sleep-related accessories to
their mainstream product, the Beautyrest(R) luxury products primarily feature
our exclusive Pocketed Coil(R)-on-Pocketed Coil(R) construction. This unique
construction offers a different comfort level from the mainstream price point
Beautyrest(R) models and the combined benefits of comfort and reduced motion
transfer.

BackCare(R), our second flagship brand, was introduced in 1995 and
redesigned in late 2002 with advanced "gradient support" benefits and with
Simmons' patented "no flip" design. BackCare(R) gradient support, with varying
levels of firmness for different zones of the sleeping body, features a zoned
coil unit, titanium re-inforced lumbar support and new zoned foams that work
together to offer support that mirrors the natural s-shape of the human spine.
BackCare Advanced(TM) offers the BackCare(R) gradient support in a series of
unique constructions featuring foam core constructions in conjunction with
contour memory foam and contour natural foam. It also features an allergy care
fiber which is an environmentally-secure way of helping to reduce indoor
allergens in the mattress that can cause allergic reactions, including asthma.
BackCare Advanced(TM) is

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also available in a Karen Neuberger(R) collection of covers for selected
retailers to leverage the popularity of this well known women's pajama designer.

BackCare Kids(TM) was introduced in 2002 specifically for the unique
sleep needs of children. BackCare Kids(TM) offers three benefits, an allergy
care fiber to help reduce allergens in the bed that can cause allergic
reactions, a Moisture Ban(TM) liquid repellant, and a RiteHeight(TM) option for
bunk beds, trundle beds and day beds that are designed for a lower height
mattress.

Deep Sleep(R) was introduced in 2001 and redesigned in 2002. The Deep
Sleep(R) product line is targeted at the traditional under $500 queen price
points. This product line offers comfort, durability and value, utilizing a
unique product construction in comparison to competitive open coil units,
offering benefits not available from traditional open coil mattresses.

Olympic(R) Queen, the first new size in mattresses distributed on a
national basis since Simmons began distributing king and queen sizes nationally
in 1958, was introduced in 2001. The Olympic(R) Queen offers consumers 10% more
sleeping surface than a traditional queen, without requiring the replacement of
the traditional queen frame with a wider frame. This patent-pending product,
which is available in our Beautyrest(R), BackCare(R) and Deep Sleep(R) lines, is
targeted at queen size mattress owners who would prefer a wider mattress, but
are unwilling to purchase a larger bed because of their existing queen bed frame
or the size of their bedroom. We offer specially designed Egyptian cotton
Olympic(R) Queen sheets for sale by our retailers and through our internet
website, www.simmons.com.

LivingRight(TM) adjustable foundations were introduced in late 2002 as
part of the BackCare(R) and BackCare Advanced (TM) product lines and are now a
feature available in the Beautyrest(R) 2004 line. This product line began
rolling out at retail stores in the first quarter of 2003. LivingRight(TM)
foundations broaden the traditionally older consumer profile for adjustable beds
to the broader market of all adults, reflecting the trend towards using the bed
as more than just a place to sleep (reading in bed, working on the computer,
watching television, gathering with the family, etc.). The unique
LivingRight(TM) design incorporates the benefits of adjustability in a
foundation that looks more like a standard foundation than traditional
adjustable beds.

In 2003, we also launched a number of products in the premium segments.
We introduced the new sang(TM) product line, our entry into visco-elastic sleep
systems, with retail price points ranging from $1,899 to $2,499 for queen sets.
Through our Windsor Bedding subsidiary, we launched several high-end luxury
mattress lines, currently under the names Columbia Fine Bedding(TM) and
Slumberland(R), with retail price points ranging from $2,800 to $8,999 for queen
sets.

CUSTOMERS

Our strong brand names and reputation for high quality products,
innovation and service to our customers, together with the highly attractive
retail margins associated with bedding products, have enabled us to establish a
strong customer base throughout the United States and across all major
distribution channels, including furniture stores, specialty sleep shops,
department stores and rental stores. We manufacture and supply conventional
bedding to over 11,000 outlets, representing approximately 3,400 retail
customers.

We also distribute branded products on a contract sales basis directly
to institutional users of bedding products such as the hospitality industry and
certain agencies of the U.S. government. Major commercial accounts include
Starwood Hotels & Resorts Worldwide, Inc. ("Starwood Hotels"), La Quinta Inns,
Inc., and Best Western International, Inc. In 1999, Starwood Hotels selected our
Beautyrest(R) mattress as the product for their "Heavenly Bed" program, a luxury
hotel room program targeted at their preferred customer club members.

Our ten largest customers accounted for 29.8% of our product shipments for the
year ended December 27, 2003. No one customer represented more than 5% of
product shipments for the year ended December 27, 2003.

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SALES, MARKETING AND ADVERTISING

Our products are sold by approximately 200 local field sales
representatives, backed by sales management at each of our manufacturing
facilities, as well as national account representatives that give direction and
support for sales to national accounts. This selling infrastructure provides
retailers with coordinated national marketing campaigns, as well as local
support tailored to the competitive environments of each individual market.
Additionally, we use approximately 25 independent sales representatives,
principally in the area of contract sales.

Our sales support focuses on two areas:

- cooperative promotional advertising and other retail support
programs designed to complement individual retailer's
marketing programs; and

- national consumer communications designed to establish and
build brand awareness among consumers.

We develop advertising and retail sales incentive programs specifically
for individual retailers. Point-of-sale materials, including mattresses and
foundation displays that we design and supply, highlight the differentiating
features and benefits of our products. In addition, we offer training for retail
sales personnel through an internally developed sales representative training
program. We believe that our sales training and consumer education programs are
the most effective in the industry. We have designed these programs, which are
delivered on-site at our retailers' facilities, our manufacturing facilities or
our research and education center, Simmons Institute of Technology and Education
("SITE"), to teach retail floor salespeople product knowledge and sales skills.
We seek to improve our retailers' unit sales, and increase their sales of
higher-end bedding. We also help establish individual incentive programs for our
customers and their sales personnel. Our sales force is trained extensively in
advertising, merchandising and salesmanship, all of which increase the value of
the marketing support they provide to retailers. We believe that our focus on
better sleep and on the training of our sales representatives and our customers'
retail salespeople differentiates us from our large competitors.

SUPPLIERS

We purchase substantially all of our conventional bedding raw materials
centrally in order to maximize economies of scale and volume discounts. The
major raw materials that we purchase are wire, spring components, lumber, foam,
insulator pads, innersprings and fabrics and other roll goods consisting of
foam, fiber and non-wovens. We obtain a large percentage of our required raw
materials from a small number of suppliers and for the year ended December 27,
2003, we bought approximately 77% of our raw material needs from ten suppliers.
We believe that supplier concentration is common in the bedding industry.

We have long-term supply agreements with several suppliers, including
L&P and National Standard Company. L&P supplies the majority of several
components, including certain spring components, insulator pads, wire, fiber,
quilt backing and flange material, to the bedding industry. For the year ended
December 27, 2003, we purchased approximately one-third of our raw materials
from L&P. To ensure a long-term and adequate supply of various components, we
have entered into agreements with L&P, generally expiring in the year 2010, for
the supply of grid tops and open coil innersprings. Among other things, these
agreements generally require us to purchase a majority of our requirements of
several components from L&P. National Standard Company, a new supplier, provides
stranded wire used to manufacture our Pocketed Cable Coil(TM) products.

With the exception of L&P and National Standard Company, we believe
that we could replace our other suppliers, if or when the need arises, within 90
days as we have already identified and use alternative sources.

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SEASONALITY/OTHER

For the past several years there has not been significant seasonality
in our wholesale bedding business. Our retail bedding business, which accounted
for $97.9 million, or 12.1%, of net sales for the year ended December 27, 2003
has historically experienced, and we expect will continue to experience,
seasonal and quarterly fluctuations in net sales and operating income. As is the
case with many bedding retailers, our retail business is subject to seasonal
influences, characterized by strong sales for the months of May through
September, which impact our second and third quarter results.

MANUFACTURING AND FACILITIES

We currently operate 18 bedding manufacturing facilities in 16 states
and Puerto Rico. We are in the process of closing our Columbus, Ohio plant and
we anticipate opening a new plant in July 2004. We manufacture most conventional
bedding to order and use "just-in-time" inventory techniques in our
manufacturing processes to more efficiently serve our customers' needs and to
minimize our inventory carrying costs. We generally schedule, produce and ship
over 76% of our bedding orders within five business days of receipt of the
order. This rapid delivery capability allows us to minimize our inventory of
finished products and better satisfy customer demand for prompt shipments.

We invest substantially in new product development, enhancement of
existing products and improved operating processes, which we believe is crucial
to maintaining our strong industry position. We keep abreast of bedding industry
developments through sleep research conducted by industry groups and by our own
marketing and engineering departments. We also participate in the Better Sleep
Council, an industry association that promotes awareness of sleep issues, and
ISPA. Our marketing and manufacturing departments work closely with the
engineering staff to develop and test new products for marketability and
durability.

We also seek to reduce costs and improve productivity by continually
developing more efficient manufacturing and distribution processes at SITE, our
state-of-the-art 38,000 square foot research and education center in Atlanta,
Georgia. As of December 27, 2003, we had 18 engineers and technicians employed
full-time at SITE. These employees ensure that we maintain high quality products
by conducting product and materials testing, designing manufacturing facilities
and equipment and improving process engineering and development. We believe that
our engineering staff gives us a competitive advantage over most of our
competitors who do not have significant in-house engineering resources.

WARRANTIES AND PRODUCT RETURNS

Our conventional bedding products generally offer ten-year limited
warranties against manufacturing defects. We believe that our warranty terms are
generally consistent with those of our primary national competitors. The
historical costs to us of honoring warranty claims have been within management's
expectations. We have also experienced non-warranty returns for reasons
generally related to order entry errors and shipping damage. We resell our
non-warranty returned products primarily through as-is furniture dealers and our
World of Sleep outlet stores.

PATENTS AND TRADEMARKS

We own many trademarks, including Simmons(R), Beautyrest(R),
BackCare(R), Deep Sleep(R), Olympic(R) Queen and Pocketed Coil(R), most of which
are registered in the United States and in many foreign countries. We protect
portions of our manufacturing equipment and processes as trade secrets and
through patents. We possess several patents on the equipment and processes used
to manufacture our Pocketed Coil(R) innersprings. We do not consider our overall
success to be dependent upon any particular intellectual property rights. We
cannot assure that the degree of protection offered by the various patents will
be sufficient, that patents will be issued in respect of pending patent
applications, that it will be commercially reasonable or cost effective to
enforce our patents, or that we will be able to protect our technological
advantage upon the expiration of our

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patents. If we were unable to maintain the proprietary nature of our
intellectual property, our financial condition or results of operations could be
materially adversely affected.

LICENSING

During the late 1980's and early 1990's, we disposed of most of our
foreign operations and secondary domestic lines of business via license
arrangements. We now license internationally the Simmons(R) mark and many of our
trademarks, processes and patents generally on an exclusive perpetual or
long-term basis to third-party manufacturers which produce and distribute
conventional bedding products within their designated territories. These
licensing agreements allow us to reduce exposure to political and economic risk
abroad by minimizing investments in those markets. We currently have 18 foreign
licensees and 14 foreign sub-licensees that have rights to sell Simmons-branded
products in nearly 100 countries.

As of December 27, 2003, we had 11 domestic third-party licensees. Some
of these licensees manufacture and distribute juvenile bedding,
healthcare-related bedding and furniture and non-bedding upholstered furniture,
primarily on perpetual, long-term or automatically renewable terms.
Additionally, we have licensed the Simmons(R) mark and other trademarks,
generally for limited terms, to manufacturers of occasional use airbeds, feather
and down comforters, sheets and synthetic comforter sets, pillows, mattress
pads, blankets, bed frames, futons, specialty sleep items and other products.

In 2001, 2002 and 2003, our licensing agreements as a whole generated
royalties and technology fees of $9.5 million, $9.0 million and $10.6 million,
respectively. These royalty and technology fees are accounted for as a reduction
in selling, general and administrative expenses in the accompanying consolidated
statements of operations.

EMPLOYEES

As of December 27, 2003, we had approximately 3,200 full-time
employees. Approximately 1,000 of these were represented by labor unions.
Employees at eight of our eighteen manufacturing facilities are represented by
various labor unions with separate collective bargaining agreements. Collective
bargaining agreements typically are negotiated for two- to four-year terms. Most
of our union contracts expire in 2004 or 2005. Employees of our new
manufacturing plant under construction will not be represented by a labor union.

The locations where our employees are covered by collective bargaining
agreements and the contract expiration dates are as follows:

FACILITY LABOR UNION EXPIRATION DATE
-------- ----------- ---------------

Atlanta United Steel Workers of America October 2005
Columbus(1) United Steel Workers of America October 2004
Columbus(1) International Association of Machinists February 2004
Dallas United Steel Workers of America October 2004
Honolulu International Longshoremen and Warehousemen's Union January 2005
Kansas City United Steel Workers of America April 2004
Los Angeles United Steel Workers of America October 2005
Los Angeles International Brotherhood of Teamsters October 2006
Piscataway United Steel Workers of America October 2005
Piscataway International Association of Machinists November 2004
San Leandro United Furniture Workers April 2004

- --------------

(1) Plant scheduled to cease operations in April 2004.

We consider overall relations with our workforce to be satisfactory. We
have had no labor-related work stoppages in over twenty years.

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REGULATORY MATTERS

As a manufacturer of bedding and related products, we use and dispose
of a number of substances, such as glue, lubricating oil, solvents, and other
petroleum products, that may subject us to regulation under numerous federal and
state statutes governing the environment. Among other statutes, we are subject
to the Federal Water Pollution Control Act, the Comprehensive Environmental
Response, Compensation and Liability Act, the Resource Conservation and Recovery
Act, the Clean Air Act and related state statutes and regulations. We have made
and will continue to make capital and other expenditures to comply with
environmental requirements. As is the case with manufacturers in general, if a
release of hazardous substances occurs on or from our properties or any
associated offsite disposal location, or if contamination from prior activities
is discovered at any of our properties, we may be held liable, the amount of
such liability could be material and our financial condition or results of
operations could be materially adversely affected. We are currently evaluating
our potential liability with respect to the cleanup of environmental
contamination at and in the vicinity of our former facility in Jacksonville,
Florida, and have submitted a final remediation plan for our former facility in
Linden/Elizabeth, New Jersey.

We have recorded a reserve based upon our best estimate to reflect our
potential liability for environmental matters. Because of the uncertainties
associated with environmental remediation, the costs incurred with respect to
the potential liabilities could exceed our recorded reserves.

Our conventional bedding and other product lines are subject to various
federal and state laws and regulations relating to flammability, sanitation and
other standards. We believe that we are in material compliance with all such
laws and regulations.

The state of California adopted new flame retardant regulations related
to manufactured mattresses and foundations which will be effective January 1,
2005. These regulations could be preempted by the U.S. Consumer Product Safety
Commission, which is also considering new rules related to open flame resistance
standards. Other jurisdictions are also considering similar standards. These
regulations, or any new regulations adopted nationally or elsewhere, may
adversely affect our manufacturing processes and material costs. Although we are
developing product solutions that are intended to enable us to meet the
regulations, we have not yet finalized our final design solution and can give no
assurances that these solutions are sufficient until after such design is
finalized.

FORWARD-LOOKING STATEMENTS

Safe Harbor" statement under the Private Securities Litigation
Reform Act of 1995. When used in this Annual Report on Form 10-K, the words
"believes," "anticipates," "expects," "intends," "projects" and similar
expressions are used to identify forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements relate to future financial and operating results, including expected
benefits from our Better Sleep Through Science(R) philosophy. Any
forward-looking statements contained in this report represent management's
current expectations, based on present information and current assumptions, and
are thus prospective and subject to risks and uncertainties which could cause
actual results to differ materially from those expressed in such forward-looking
statements. Actual results could differ materially from those anticipated or
projected due to a number of factors. These factors include, but are not limited
to, anticipated sales growth, success of new products, increased market share,
reduction of manufacturing costs, generation of free cash flow and reduction of
debt, changes in consumer confidence or demand, expansion of the market value of
retail operations, and other risks and factors identified from time to time in
the Predecessor's or Company's reports filed with the Securities and Exchange
Commission, including the Form 10-K for 2002 and the Form 10-Qs for the first,
second, and third quarters of 2003. The Company undertakes no obligation to
update or revise any forward-looking statements, either to reflect new
developments, or for any other reason.

9

ITEM 2. PROPERTIES.

Our corporate offices are located in approximately 49,000 square feet of leased
office space at One Concourse Parkway, Atlanta, Georgia 30328. The following
table sets forth selected information regarding manufacturing and other
facilities we operated as of December 27, 2003:

DATE YEAR OF LEASE SQUARE
LOCATION OCCUPIED EXPIRATION FOOTAGE
- -------- -------- ---------- -------

Manufacturing facilities:
Mableton, Georgia (Atlanta)............................... 1991 2007 148,300
Charlotte, North Carolina................................. 1993 2010 144,280
Grove City, Ohio (Columbus) (1)........................... 1987 2004 190,000
Coppell, Texas (Dallas)................................... 1998 2008 140,981
Aurora, Colorado (Denver)................................. 1998 2008 129,000
Fredericksburg, Virginia.................................. 1994 2009 128,500
Honolulu, Hawaii.......................................... 1992 2008 63,280
Jacksonville, Florida(2) ................................. 1973 2004 205,729
Janesville, Wisconsin..................................... 1982 Owned 288,700
Shawnee Mission, Kansas (Kansas City)..................... 1997 Owned 130,000
Compton, California (Los Angeles)......................... 1974 2005 223,382
Tolleson, Arizona (Phoenix)............................... 1997 2007 103,408
Piscataway, New Jersey.................................... 1988 2004 264,908
Salt Lake City, Utah...................................... 1998 2008 77,500
San Leandro, California................................... 1992 2007 250,600
Sumner, Washington (Seattle).............................. 2003 2014 235,000
Agawam, Massachusetts (Springfield)....................... 1993 2006 125,000
Trujillo Alto, Puerto Rico................................ 1998 Owned 50,000
---------
Subtotal................................................ 2,898,568

Other facilities in Atlanta, Georgia:
Corporate Headquarters.................................... 2000 2011 49,045
SITE (Norcross, Georgia).................................. 1995 2005 38,000
SITE Showroom (Norcross, Georgia)......................... 2002 2005 4,534
Gwinnett Storage.......................................... 2002 2005 6,660

- -----------

(1) Plant scheduled to cease operations in April 2004. Current lease
expires July 2004. One new plant opened in March 2004 and a second
plant is scheduled to open in July 2004.

(2) Plant ceased operations in December 2003. Lease expired in January
2004.

Management believes that our facilities, taken as a whole, have
adequate productive capacity and sufficient manufacturing equipment to conduct
business at levels exceeding current demand.

In addition, as of December 27, 2003, we operated 17 retail outlet
stores through our World of Sleep Outlets, LLC subsidiary, 56 retail mattress
stores in the aggregate and an office/warehouse through our Gallery Corp.
subsidiary, and 47 retail mattress stores and two additional office/warehouses
through our SC Holdings, Inc. subsidiary.

10

ITEM 3. LEGAL PROCEEDINGS.

From time to time, we have been involved in various legal proceedings.
We believe that all current litigation is routine in nature and incidental to
the conduct of our business, and that none of this litigation, if determined
adversely to us, would have a material adverse effect on our financial condition
or results of our operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders during the
fourth quarter of 2003.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

There is no established public trading market for any class of common
equity of the Company. As of December 27, 2003, there was one holder of record
of the Company's common shares.

No dividends have been paid on any class of common equity of the
Company during the last three fiscal years. Any payment of future dividends and
the amounts thereof will be dependent upon the Company's earnings, fiscal
requirements and other factors deemed relevant by the Company's Board of
Directors. The ability of the Company to pay dividends on its common stock is
restricted by the terms of the Senior Credit Facility, Senior Unsecured Term
Loan and the Indenture governing the New Notes.

RECENT SALES OF UNREGISTERED SECURITIES

We have not issued nor sold securities within the past three years
pursuant to offerings that were not registered under the Securities Act of 1933,
as amended (the "Securities Act"), except on December 19, 2003 as part of the
Transactions, we issued $200.0 million in principal amount of 7.875% senior
subordinated notes due 2014 to Goldman, Sachs & Co., Deutsche Bank Securities
Inc., and UBS Investment Bank for $ 194.5 million.

The proceeds of the transaction set forth above were used to repay all
outstanding amounts under Simmons Company's Senior Credit Facility and the
termination of all commitments under that facility, the consummation of a tender
offer and consent solicitation initiated by THL Bedding Company on November 18,
2003 for the $150.0 million aggregate principal amount outstanding of Simmons
Company's 10.25% Senior Subordinated Notes due 2009, the repayment of all
outstanding indebtedness of Simmons Holdings, Inc. including $22.9 million of
17.5% Junior Subordinated Payment-In-Kind Notes due October 29, 2011 and $4.7
million of debt owed to former stockholders of Simmons Holdings, Inc.

The transaction set forth above was undertaken in reliance upon
exemption from the registration requirements of the Securities Act afforded by
Section 4(2), Rule 144A under the Securities Act and/or Regulation D and
Regulation S promulgated thereunder, as sales not involving a public offering.

ITEM 6. SELECTED FINANCIAL DATA.

SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER OPERATING DATA

Set forth below is selected historical consolidated financial and other
operating data for Simmons Company. We derived our historical Statement of
Operations and Balance Sheet data for 1999, 2000, 2001, 2002 and 2003 from our
consolidated financial statements. The Company's capital structure changed
significantly as a result of the December 19, 2003 acquisition and the
concurrent and subsequent refinancing of debt. Due to required purchase
accounting adjustments relating to such transaction the consolidated financial
and other data for the period subsequent to the acquisition (the "Successor"
period) is not comparable to such data for the periods prior to the acquisition
(the "Predecessor" periods). The accompanying selected historical consolidated
financial and other operating data contain all adjustments that, in the opinion
of management, are necessary to present fairly the financial position of Simmons
for the periods presented. All adjustments in the periods presented herein are
normal and recurring in

11

nature unless otherwise disclosed. The information presented below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and our consolidated financial statements
and related notes and other financial information appearing elsewhere herein.

- ---------------

(1) Variable stock compensation expense related to director, consultant and
employee regular and superincentive stock options.

(2) Includes ESOP expense of $7.2 million, $7.1 million and $2.8 million for the
years ended 1999, 2000, and 2001, respectively; goodwill impairment charges
of $7.9 million and $20.3 million for the years ended 2001 and 2002,
respectively; $21.5 million of transaction expenses related to THL's
acquisition of Simmons in Predecessor '03; and other charges of $0.9 million
for Predecessor '03.

(3) Includes for the period December 29, 2002 through December 19, 2003 tender
premium of $10.8 million for Old Notes and $8.9 million of unamortized debt
issuance costs expensed related to debt repaid in connection with the
Acquisition.

(4) Primarily consists of management advisory and consultant fees paid to Fenway
Partners and affiliates.

(5) Defined as current assets (excluding cash and assets held for sale), less
current liabilities (excluding current maturities of long-term debt and
liabilities held for sale).

(6) EBITDA is presented because we consider it to be a measure of our ability to
incur and service debt. EBITDA as presented herein is a financial measure
that is used in the Company's New Senior Credit Facility, Senior Unsecured
Loan Facility, and the indenture to our Exchange Notes as a factor in
determining our compliance with various covenants and to test whether
certain transactions are permitted. In addition, we base our assessment on
the recoverability of our indefinite-lived goodwill on a multiple of EBITDA.
EBITDA does not represent net income or cash flow from operations as those
terms are defined by generally accepted accounting principles ("GAAP") and
does not necessarily indicate whether cash flows will be sufficient to fund
cash needs. The following table reconciles EBITDA to cash flows from
operations:

12

13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

OVERVIEW

We are a leading manufacturer and distributor of branded bedding products
in the United States. We sell a broad range of mattresses and foundations under
our well-recognized brand names, including Beautyrest(R), our flagship product
line introduced in 1925, and BackCare(R).

We manufacture a full range of mattresses and foundations, with particular
emphasis on products targeted to sell at retail price points above $799 per
queen set. Additionally, we focus on selling queen and larger size mattresses.
For the year ended December 27, 2003, we derived approximately 57% of our sales
from these higher-end retail price points and approximately 83% of our sales
from these larger size mattresses. We believe these product categories offer
faster growth and higher gross margins than other bedding segments.

We sell to a diverse nationwide base of approximately 3,400 retail
customers, representing over 11,000 outlets, including furniture stores,
specialty sleep shops, department stores, and rental stores. Our sales force has
added over 700 net new retail accounts since January 2001, broadening our
revenue base and improving customer credit quality. We support these retailers
with significant advertising and promotional spending, as well as extensive
customer service. In addition, as of December 27, 2003, we operated over 100
retail mattress stores, of which 56 stores are classified as assets held for
sale on our balance sheet.

CRITICAL ACCOUNTING POLICIES

Our acquisition by THL Bedding Holding Company ("THL Holding") was
accounted for using the purchase method of accounting. As a result, the
Acquisitions affected our results of operations in certain significant respects.
The purchase price of approximately $1.115 billion, including related
acquisition costs, was allocated to the tangible and intangible assets acquired
and assumed liabilities based upon their respective fair values as of the date
of the Acquisitions. The allocation of the purchase price of the assets acquired
in the Acquisitions will result in a significant increase in our annual
depreciation and amortization expense. In addition, due to the effects of the
increased borrowings to finance the Acquisitions, our interest expense increased
significantly in the periods following the Acquisitions.

In preparing the consolidated financial statements in conformity with US
GAAP, Simmons' management must make decisions which impact the reported amounts
and the related disclosures. Such decisions include the selection of the
appropriate accounting principles to be applied and the assumptions on which to
base estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an on-going basis, Simmons evaluates its estimates,
including those related to allowance for doubtful accounts, impairment of
long-lived assets, impairment of goodwill, warranties, cooperative advertising
and rebate programs, variable stock compensation, income taxes, litigation and
contingencies. Simmons bases its estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. Simmons' management believes the critical accounting
policies described below are the most important to the fair presentation of
Simmons' financial condition and results. The following policies require
management's more significant judgments and estimates in the preparation of
Simmons' consolidated financial statements.

Allowance for doubtful accounts. Our management must make estimates of the
uncollectibility of our accounts receivable. Management specifically analyzes
accounts receivable and analyzes historical bad debts, customer concentrations,
customer credit-worthiness, current economic trends and changes in our customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. Actual losses for uncollectible accounts have generally been
consistent with management's estimates. However, deteriorating financial
conditions of certain key customers or a significant slow down in the economy
could have a material

14

negative impact on our ability to collect on accounts, in which case additional
allowances may be required. Our accounts receivable balance was $65.9 million
and $67.4 million, net of allowance for doubtful accounts of $5.0 million and
$5.2 million, respectively, as of December 27, 2003 and December 28, 2002,
respectively.

Impairment of long-lived assets. We regularly assess all our long-lived
assets, including intangibles, for impairment whenever events or circumstances
indicate its carrying value may not be recoverable. Management assesses whether
there has been an impairment by comparing anticipated undiscounted future cash
flows from operating activities with the carrying value of the asset. The
factors considered by management in this assessment include operating results,
trends and prospects, as well as the effects of obsolescence, demand,
competition and other economic factors. If an impairment is deemed to exist,
management records an impairment charge equal to the excess of the carrying
value over the fair value of the impaired assets.

Impairment of goodwill. We test goodwill and other indefinite-lived
intangible assets for impairment on an annual basis by comparing the fair value
of our reporting units to their carrying values. Fair value is determined by the
assessment of future discounted cash flows. Additionally, goodwill is tested for
impairment between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of an entity below its carrying
value. These events or circumstances would include a significant change in the
business climate, legal factors, operating performance indicators, competition,
sale or disposition of a significant portion of the business, or other factors.

As part of the adoption of SFAS 142, we performed initial valuations during
the first quarter of 2002 to determine if any impairment of goodwill and
indefinite-lived intangibles existed and determined that no impairment of
goodwill and indefinite-lived intangible assets existed. In accordance with SFAS
142, we tested goodwill again at December 28, 2002 for impairment by comparing
the fair value of our reporting units to their carrying values. As a result, our
retail segment recognized a goodwill impairment of $20.3 million in 2002.
Management determined that no other impairment of goodwill existed as of
December 27, 2003.

Warranty accrual. Our management must make estimates of potential future
product returns related to current period product revenue for our wholesale
segment. Management analyzes historical returns when evaluating the adequacy of
the warranty accrual. Significant management judgments and estimates must be
made and used in connection with establishing the warranty accrual in any
accounting period. Our warranty policy provides a ten-year non-prorated warranty
service period on all first quality products currently manufactured, except for
certain products for the hospitality industry which have varying non-prorated
warranty periods ranging from five to ten years. Our policy is to accrue the
estimated cost of warranty coverage at the time the sale is recorded. As of
December 27, 2003 and December 28, 2002, Simmons had a warranty accrual of $3.8
million and $3.4 million, respectively.

Cooperative advertising and rebate programs. We enter into agreements with
our customers to provide funds for advertising and promotion of our products. We
also enter into volume and other rebate programs with certain customers whereby
funds may be rebated to the customer. When sales are made to these customers, we
record accrued liabilities pursuant to these agreements. Management regularly
assesses these liabilities based on forecasted and actual sales and claims and
management's knowledge of customer purchasing habits to determine whether all
the cooperative advertising earned will be used by the customer, whether the
cooperative advertising costs meet the requirement for classification as
selling, general and administrative expense versus a reduction of sales, and
whether the customer will meet the requirements to receive rebated funds. Costs
of these programs totaled $99.8 million, $86.4 million and $75.9 million for the
fiscal years of 2003, 2002 and 2001, respectively.

Variable stock compensation expense. Prior to the Acquisitions, we
recorded variable stock compensation expense, related to director and employee
regular stock options, utilizing the intrinsic value method as prescribed by
Accounting Principle Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25") and related interpretations. Management estimated the
employee service period over which the compensation was awarded, generally four
to five years. Additionally, because the vesting of the plan options was
dependent upon achieving an annual Adjusted EBITDA target or as otherwise
established by the Compensation Committee of the board of directors, management
estimated the ultimate number of shares that would vest. We recorded additional
adjustments to variable stock compensation expense for changes in

15

the intrinsic value of vested regular options in a manner similar to a stock
appreciation right because the option holder could compel Simmons to settle the
award by transferring cash or other assets rather than our common stock. Simmons
utilized a third-party valuation firm to determine the intrinsic value of our
common stock, including option shares, on a quarterly basis. This valuation firm
also made estimates in determining the intrinsic value. We recorded variable
stock compensation expense of $68.4 million, $15.6 million and $14.8 million
related to regular and superincentive options for the period from December 29,
2002 to December 19, 2003, and for fiscal years 2002 and 2001, respectively. As
a result of the Transactions, the stock option plans were terminated and we no
longer have an accrued stock compensation liability as of December 27, 2003. As
of December 28, 2002, we had a liability of $26.8 million for variable stock
compensation expense.

Income taxes. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and to operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized as income or expense in the period that
includes the effective date of enactment. A valuation allowance is established,
when necessary, to reduce deferred tax assets to amounts expected to be
realized.

At December 27, 2003, we had net operating loss carryforward benefits for
federal income tax purposes of $94.1 million. These carryforward benefits
included $14.6 million which were generated by Sleep Country and are subject to
limitations imposed by the Internal Revenue Code. The net operating loss
carryforwards expire on various dates through 2022. Our management must make
estimates regarding the future realization of these net operating loss benefits.
Realization of the net operating loss carryforward benefits is dependent upon
future profitable operations and reversals of existing temporary differences.
Although realization is not assured, we believe it is more likely than not that
most of the net recorded benefits will be realized through the reduction of
future taxable income. However, due to the uncertainty regarding the realization
of Sleep Country's net tax benefits as of December 27, 2003, the Company
recorded a valuation allowance of $10.0 million against Sleep Country's net
deferred tax assets, which consist primarily of net operating loss
carryforwards.

Litigation and contingent liabilities. From time to time, Simmons and its
operations are parties to or targets of lawsuits, claims, investigations and
proceedings, including product liability, personal injury, patent and
intellectual property, commercial, contract, environmental, health and safety,
and employment matters, which are handled and defended in the ordinary course of
business. Simmons accrues a liability for such matters when it is probable that
a liability has been incurred and the amount can be reasonably estimated. We
believe the amounts reserved are adequate for such pending matters; however,
results of operations could be negatively affected by significant litigation
adverse to us.

16

RESULTS OF OPERATIONS

- ---------------

(1) For purposes of the above table and discussion below, the results of
operations for the year ended December 27, 2003 represent the mathematical
addition of the historical amounts for the Predecessor period (December 29,
2002 through December 19, 2003) and the Successor period (December 20, 2003
through December 27, 2003) and are not indicative of the results that would
actually have been obtained if the Acquisitions had occurred on December 29,
2002. It should be noted that the results for the year ended December 27,
2003 include eight days of the Successor results. The Successor period
results include $8.7 million, or 1.1%, of net sales for 2003 and also
include $1.7 million for the step-up of inventory to fair market value which
had the effect of lowering gross profit by such an amount.

YEAR ENDED DECEMBER 27, 2003 COMPARED TO YEAR ENDED DECEMBER 28, 2002

Net sales. Net sales for the year ended December 27, 2003 increased $97.7
million, or 13.8%, to $806.3 million from $708.6 million for the year ended
December 28, 2002.

Wholesale bedding segment sales increased $82.1 million, or 12.5%, to
$741.0 million for fiscal year 2003 from $659.0 million for fiscal year 2002.
The wholesale bedding segment sales increase was primarily due to an increase of
5.6% in both unit shipments and AUSP compared to 2002. Our AUSP benefited from a
shift in sales mix toward our higher priced Beautyrest(R) and BackCare(R)
products. Unit volume growth resulted from additional floor placements at new
and existing customers and an improved retail sales environment in the second
half year.

Our 2003 wholesale bedding sales, exclusive of certain sales deductions,
which is the methodology used by the International Sleep Products Association
("ISPA") in calculating market share, were up 11.4% over the prior year. In
comparison, ISPA reported that for 2003 total U.S. bedding manufacturers' sales
were up 5.8% over the prior year, comprised of an increase in unit shipments and
AUSP of 1.8% and 3.9%, respectively. We estimate our 2003 industry market share
to be 15.6%.

Our retail segment sales for fiscal year 2003 increased $26.1 million, or
36.4%, to $97.9 million from $71.8 million for fiscal year 2002. On a comparable
store basis, sales for our retail stores increased 14.9% for 2003 versus 2002.
The retail segment sales increase was due principally to (i) the acquisition of
26 retail stores in Southern California from Mattress Discounters Corporation
("Mattress Discounters") in December

17

2002; (ii) an increase in advertising expenditures which led to higher sales;
and (iii) an improving retail sales environment.

Cost of Products Sold. Cost of products sold, as a percentage of net
sales, for fiscal year 2003 decreased 0.4 percentage points to 51.8% from 52.2%
in fiscal year 2002, resulting in a gross margin increase to 48.2% for 2003 from
47.8% for 2002. Our fiscal year 2003 gross margin increased primarily due to (i)
a decrease in promotional expenditures classified as a reduction of sales; and
(ii) better absorption of manufacturing fixed costs due to unit volume growth.
Offsetting these improvements were (i) cost increases for certain raw material
components without a corresponding price increase in our Beautyrest(R) product
line in 2003; and (ii) increased labor costs resulting from increased production
demands. For the aforementioned reasons, exclusive of the decrease of
promotional expenditures classified as a reduction of sales, our gross margin
for 2003 decreased 0.1 percentage points from 2002. We expected the roll-out of
the Beautyrest(R) 2004 product line would improve our 2004 gross margins,
however due to unprecedented raw material costs increases expected in 2004
primarily for steel, our gross margins may be negatively impacted unless our
products have a corresponding price increase.

Selling, General and Administrative Expenses. For fiscal year 2003,
selling, general and administrative expenses, as a percentage of net sales,
increased 0.3 percentage points to 36.6% from 36.3% in fiscal year 2002. This
increase as a percentage of net sales was principally attributable to an
increase in the percentage of promotional expenditures, classified as selling,
general and administrative expense instead of as a reduction of net sales, from
57.8% of such expenditures in 2002 to 64.4% in 2003. Exclusive of the increase
in the percentage of promotional expenditures classified as a selling, general
and administrative expense, our selling, general and administrative expenses
decreased 0.2 percentage points due to greater leverage of our fixed selling,
general and administrative expenditures resulting from the above mentioned
increase in sales versus the prior year.

Variable Stock Compensation Expense. Variable stock compensation expense
increased $52.9 million to $68.4 million for fiscal year 2003 from $15.6 million
in fiscal year 2002. The increase was attributable to (i) the vesting of all
Regular and Superincentive employee and director stock options as a result of
the Transactions; and (ii) a 57.6% increase in the value of our common stock
from December 28, 2002 through the date of the Transactions.

Amortization of Goodwill and Intangibles. Amortization of goodwill and
intangibles decreased $20.9 million, or 97.2%, to $0.6 million for fiscal 2003
from $21.5 million in fiscal year 2002 due to (i) to our retail segment
recognizing a non-cash goodwill impairment charge in the fourth quarter of 2002
of $20.3 million related to our Sleep Country subsidiary; and (ii) the
expiration in early 2003 of the amortization period for certain patents.

Interest Expense, Net. Interest expense, net, increased $17.8 million, or
55.5%, to $49.8 million for fiscal year 2003, from $32.0 million in fiscal year
2002 due to the following expenditures related to the Transactions: (i) the
payment of $10.8 million in tender fees related to our early redemption of
$144.9 million of the $150.0 million 10.25% Senior Subordinated Notes due 2009;
(ii) the write-off of $7.1 million of the remaining debt issuance costs related
to debt repaid in connection with the Transactions; and (iii) the payment of
$3.5 million in bridge loan commitment fees which were expensed. Exclusive of
the expenses incurred in connection with the Transactions, interest expense
decreased due to a (i) decline in our average outstanding borrowings; (ii) lower
Prime and LIBOR base rates on our variable rate borrowings; and (iii) lower
interest rate margins on our then existing senior credit facility obligations
for the first six months of 2003. Our interest paid in 2003 was $53.6 million, a
114.6% increase from $24.9 million paid in 2002, due principally to payments of
(i) $10.8 million in tender fees as previously noted; (ii) Jr. Subordinated PIK
note interest of $13.7 million; and (iii) $3.5 million in bridge loan commitment
fees.

Other Expense, Net. Other expense, net, increased $0.8 million, or 33.9%,
to $3.3 million for fiscal year 2003 compared to $2.5 million in fiscal year
2002. This increase was primarily attributable to (i) higher management advisory
fees paid to Fenway; and (ii) the write-off of an investment in a licensee.

Income Taxes. Our combined federal, state and foreign effective income tax
benefit rate of 19.0% for fiscal year 2003 differs from the federal statutory
rate of 35.0% primarily from the net effect of non-deductible transaction costs,
partially offset by the benefit of additional prior period net operating losses
not previously recognized. Our combined federal, state and foreign effective
income tax rate of 116.7% for fiscal year 2002

18

was greater than the federal statutory rate due principally to an increase in
the valuation allowance for Sleep Country's net deferred tax assets state income
taxes, and non-deductible interest expense.

Net Loss. For the reasons set forth above, our net loss increased $40.7
million to $41.3 million for the year ended December 27, 2003 compared to net
loss of $0.6 million for the year ended December 28, 2002.

YEAR ENDED DECEMBER 28, 2002 COMPARED TO YEAR ENDED DECEMBER 29, 2001

Net Sales. Net sales for the year ended December 28, 2002 increased $53.4
million, or 8.1%, to $708.6 million in 2002 from $655.2 million in 2001. Our
sales increase is primarily attributable to an increase in wholesale bedding
segment sales, partially offset by a decrease in retail segment sales.

Wholesale bedding segment sales increased $57.1 million, or 9.5%, to $659.0
million in fiscal year 2002 from $601.8 million in fiscal year 2001. The
wholesale bedding segment sales increase was primarily due to (i) a 10.7%
increase in bedding AUSP resulting from a shift in sales mix toward higher
priced products which increased sales by $68.5 million in the aggregate; (ii) an
increase in customers added over the last year and (iii) the adoption of EITF
01-9, Accounting for Consideration Given by a Vendor to a Customer or Reseller
of the Vendor's Products, at the beginning of fiscal year 2002, which resulted
in the reclassification of certain payments to customers, such as co-operative
advertising expenditures, promotional money expenditures, volume rebates and
amortization of supply agreements, from selling, general and administrative
expenses and cost of products sold to a reduction of revenue. Payments treated
as a sales reduction were $26.6 million less in 2002 than in 2001. The amounts
reclassified from selling, general and administrative expenses and cost of
products sold totaled $49.7 million and $0.7 million, respectively, in fiscal
year 2002 versus $76.3 million and $0.8 million, respectively, in fiscal year
2001. The increase in 2002 net sales was partially offset by a 5.7% decrease in
bedding unit sales volume largely due to the loss of high volume, low margin
business resulting from customer bankruptcies in the August 2000 to July 2001
period and a general economic slowdown. The aggregate sales decline in 2002 for
customers which filed for bankruptcy and ceased business in 2001 totaled
approximately $18 million.

Our adoption of a more stringent proof of advertising policy late in 2001
resulted in less co-operative advertising expenditures being classified as a
reduction of revenue in fiscal year 2002. Wholesale bedding segment sales,
exclusive of the aforementioned EITF 01-9 reclassifications, of $709.4 million
in 2002 increased $30.5 million, or 4.5%, from $678.9 million in 2001. This
methodology for calculating sales is comparable to that used by ISPA in
calculating market share. ISPA estimated that 2002 industry sales were up 3.8%
over the prior year, comprised of an increase in unit shipments and AUSP of 0.7%
and 3.1%, respectively.

Retail segment sales decreased $5.6 million, or 7.3%, to $71.8 million in
fiscal year 2002 from $77.4 million in fiscal year 2001. On a comparable store
basis, sales for our retail stores decreased 8.5% in fiscal year 2002 versus
2001. The retail segment sales decline was due principally to the general
economic slowdown and a reduction in advertising expenditures.

Cost of Products Sold. As a percentage of net sales, cost of products sold
in fiscal year 2002 decreased 5.7 percentage points to 52.2% from 57.9% in
fiscal year 2001. Our 2002 gross margin improvement to 47.8% reflects expansion
of both wholesale bedding segment and retail segment gross margins.

Our 2002 wholesale bedding segment gross margin improvement of 6.4
percentage points to 46.0% reflects (i) the above mentioned lower EITF 01-9
sales reduction in fiscal year 2002 as compared to fiscal year 2001; (ii) the
above mentioned 10.7% increase in AUSP; (iii) lower material costs due in part
to our "Zero Waste" cost reduction initiative which began in fiscal year 2001
and continued in fiscal year 2002; and (iv) lower labor costs due to management
of factory headcount and labor hours. The average factory worker headcount for
fiscal year 2002 was 6.8% less than fiscal year 2001. Exclusive of the EITF 01-9
reclassifications mentioned above, our wholesale bedding gross margin improved
3.4 percentage points in fiscal year 2002 to 49.8%.

Our 2002 retail segment gross margin improvement of 2.3 percentage points
to 51.0% resulted principally from a shift in sales mix toward products that
have higher margins.

19

Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for fiscal year 2002
increased 3.7 percentage points to 36.3% from 32.6% in fiscal year 2001. The
2002 increase was attributable to additional wholesale bedding segment selling,
general, and administrative expenses, partially offset by a decrease in our
retail segment selling, general and administrative expenses.

Our wholesale bedding segment selling, general and administrative expenses,
as a percentage of net sales, increased 4.6 percentage points to 33.2% in fiscal
year 2002. The 2002 increase was principally attributable to the above mentioned
adoption of EITF 01-9 resulting in $49.7 million and $76.3 million in fiscal
year 2002 and fiscal year 2001, respectively, of costs historically
characterized as selling, general and administrative expenses being
characterized as a reduction of revenue. In fiscal year 2002, selling, general
and administrative expenses, inclusive of the expenditures characterized as a
reduction of revenue due to the adoption of EITF 01-9, increased 1.4 percentage
points to 37.9% from 36.5% in fiscal year 2001. This increase was primarily
attributable to an increase in co-operative advertising expenditures due to a
shift in our sales mix toward products that have higher subsidies and selling
expenses.

Our retail segment selling, general and administrative expenses, as a
percentage of net sales, decreased 0.7 percentage points to 53.2% in fiscal year
2002 due principally to a decrease in advertising expenditures.

Variable Stock Compensation Expense. Variable stock compensation expense
increased $0.7 million in fiscal year 2002 to $15.6 million from $14.8 million
in fiscal year 2001. The 2002 expense resulted from a 40.1% increase in the
underlying value of the Company's common stock during 2002 and an increase in
the number of vested stock options outstanding at December 28, 2002 versus
December 29, 2001.

ESOP Expense. In fiscal year 2001, we allocated the remaining ESOP shares
to plan participants. Therefore, beginning with the first quarter of 2002, we no
longer incurred an expense associated with the ESOP plan.

Amortization of Intangibles. Amortization of intangibles increased $2.2
million to $21.5 million in fiscal year 2002 from $19.3 million in fiscal year
2001. This increase was principally due to our retail segment recognizing a
non-cash goodwill impairment charge in the fourth quarter of 2002 of $20.3
million related to our Sleep Country subsidiary. A review of Sleep Country's
goodwill for impairment was necessary due to the continued weakness in the
retail economy and the failure of Sleep Country to reach the sales and profit
levels included in its original impairment test as of January 1, 2002. Exclusive
of Sleep Country's goodwill impairment charge, amortization of intangibles
decreased in fiscal year 2002 due to (i) our retail segment recognizing a
non-cash impairment charge in the fourth quarter of 2001 of $7.9 million to
write down the goodwill of our wholly-owned subsidiary Gallery Corp. to market
value with no similar impairment charge being required in fiscal year 2002; (ii)
the adoption of SFAS No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets,
at the beginning of our 2002 fiscal year; and (iii) a decrease in amortization
of patents due to the expiration of certain patents. As a result of the adoption
of SFAS 142 at the beginning of 2002, we discontinued the amortization of
goodwill and performed a transitional test of goodwill impairment, which
resulted in no impairment charge. Had this accounting pronouncement been adopted
at the beginning of 2001, amortization of intangibles, exclusive of impairment
charges, would have been reduced by $8.3 million to $3.1 million in 2001.

Interest Expense, Net. Interest expense, net decreased $7.5 million, or
18.9%, to $32.0 million in fiscal year 2002 from $39.5 million in 2001 due
primarily to (i) decreased average outstanding borrowings; (ii) lower Prime and
LIBOR base rates in 2002; and (iii) lower interest rate margins on our then
existing senior credit facility obligations. Our interest paid in 2002 was $24.9
million, a 14.7% decrease from $29.2 million paid in 2001.

Other Expense, Net. Other expense, net decreased approximately $1.5
million in fiscal year 2002. In fiscal year 2001, we wrote off acquisition costs
of $0.8 million related to a non-consummated transaction.

Income Tax Expense. Our effective income tax rate of 116.7% for fiscal
year 2002 differed from the federal statutory rate primarily due to the change
in the valuation allowance against Sleep Country's net deferred tax asset, state
income taxes and non-deductible interest expense. Our effective income tax
benefit
20

rate of 43.2% for fiscal year 2001 differed from the federal statutory rate
primarily due to the net change in deferred tax valuation allowances, and the
benefit of state net operating losses and foreign tax credits, partially offset
by the amortization and impairment of goodwill not being tax deductible.

Minority Interest in Loss. Minority interest in Sleep Country's loss
increased $0.6 million to $1.1 million in fiscal year 2002 from a loss of $0.5
million in fiscal year 2001.

Net Loss. For the reasons set forth above, we had net loss of $0.1 million
in fiscal year 2002 compared to a net loss of $9.7 million in fiscal year 2001.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of cash to fund liquidity needs are (i) cash provided
by operating activities and (ii) borrowings available under our new Senior
Credit Facility ("New Senior Credit Facility"). Our primary use of funds
consists of payments of principal and interest for our debt, capital
expenditures, acquisitions, and funding for working capital increases.

Our New Senior Credit Facility is comprised of a $405.0 million term loan
facility, which will mature in 2011, and a $75.0 million Revolving Loan Facility
(of which approximately $61.2 million was available for borrowings as December
27, 2003 after giving effect to $3.3 million of borrowings and $10.5 million
that was reserved for standby letters of credit), which will mature in 2009. We
are permitted to incur up to an additional $100.0 million of senior secured debt
at the option of participating lenders, so long as no default or event of
default under the senior secured credit facility has occurred or would occur
after giving effect to such incurrence and certain other conditions are
satisfied. The New Senior Credit Facility is guaranteed by THL-SC Bedding
Company and by all our domestic subsidiaries. Our and the guarantors'
obligations are secured by all or substantially all of our and the guarantors'
assets, including a pledge of our stock, a pledge of stock of all our domestic
subsidiaries and our pledge of 65% of stock of our foreign subsidiaries. We also
have a Senior Unsecured Term Loan Facility of $140.0 million, which will mature
in June 2012.

The New Credit Facility and the Senior Unsecured Term Loan Facility bear
interest at our choice of the Eurodollar Rate or Base Rate (both as
defined), plus the following applicable interest rate margins as follows:

The weighted average interest rates per annum in effect as of December 27,
2003 for the Revolving Loan Facility, Tranche B Term Loan and Senior Unsecured
Term Loan were 3.69%, 3.94% and 4.94%, respectively.

Under the Tranche B Term Loan, quarterly amortization payments of
approximately $1.0 million are required during the first seven years, with the
balance of the facility to be repaid quarterly during the eighth year. There are
no scheduled amortization payments prior to the maturity date of the Senior
Unsecured Term Loan.

Our New Senior Credit Facility requires us to meet a minimum interest
coverage ratio and a maximum leverage ratio, and includes a maximum capital
expenditures limitation. In addition, the New Senior Credit Facility contains
certain restrictive covenants which, among other things, limit the incurrence of
additional indebtedness, investments, dividends, transactions with affiliates,
asset sales, acquisitions, mergers and consolidations, prepayments of other
indebtedness, liens and encumbrances and other matters customarily restricted in
such agreements. The New Senior Credit Facility also contains certain customary
events of defaults, subject to cure periods as appropriate.

Our long-term obligations contain various financial tests and covenants. We
were in compliance with such covenants as of the year ended December 27, 2003.
The most restrictive covenants relate to ratios of adjusted EBITDA to interest
coverage and total debt to adjusted EBITDA, all as defined in the New Senior
Credit Facility. The specific ratio requirements can be found in the credit
agreements filed with the Securities and Exchange Commission. We expect to meet
such covenants in 2004. Adjusted EBITDA (as defined in the New Senior Credit
Facility) differs from the term "EBITDA" as it is commonly used. In addition to
adjusting net income to exclude interest expense, income taxes, depreciation
and amortization, adjusted EBITDA (as defined in the New Senior Credit Facility)
also adjusts net income by excluding items or expenses not typically excluded in
the calculation of "EBITDA" such as management fees; ESOP expenses; the
aggregate amount of the fees, costs and cash expenses paid by the Company in
connection with the consummation of the Acquisitions (including, without
limitation, bonus and option payments); other non-cash items reducing
Consolidated Net Income (including, without limitation, non-cash purchase
accounting adjustments and debt extinguishment costs); the cure amount, if any,
received by the Company in respect of such period; any extraordinary, unusual or
non-recurring gains or losses or charges or credits; and any reasonable expenses
or charges related to any issuance of securities, Investments permitted,
Permitted Acquisitions, recapitalizations, Asset Sales permitted, or
Indebtedness permitted to be incurred, less other non-cash items increasing
Consolidated Net Income, all of the foregoing as determined on a consolidated
basis for the Company and its subsidiaries in conformity with generally accepted
accounting principles ("GAAP"). Adjusted EBITDA is presented herein because it
is a material component of the covenants contained within the aforementioned
credit agreements. Non-compliance with such covenants could result in the
requirement to immediately repay all amounts outstanding under such agreements.
While the determination of "unusual and nonrecurring losses" is subject to
interpretation and requires judgment, we believe the items listed below are in
accordance with the New Credit Facility. EBITDA does not represent net income or
cash flow from operations as those terms are defined by GAAP and does not
necessarily indicate whether cash flows will be sufficient to fund cash needs.

The following is a calculation of the our adjusted EBITDA for the years
ended December 27, 2003 and December 28, 2002:

Our Senior Unsecured Term Loan Facility does not contain any financial
maintenance covenants, but does contain affirmative covenants similar to those
contained in our New Senior Credit Facility. Additionally, the Senior Unsecured

21

Facility contains negative covenants similar to those contained in the New
Senior Credit Facility, except that certain negative covenants, including
limitations on indebtedness, asset sales and restricted junior payments.

The use of interest rate risk management instruments is required under the
terms of the New Senior Credit Facility. We are required to maintain protection
against fluctuations in interest rates, and may do so through utilizing
Eurodollar Rate loans having twelve-month interest periods or through one or
more interest rate agreements, such as collars and swaps.

In order to address interest rate risk, we have developed and implemented a
policy to utilize extended Eurodollar contracts to minimize the impact of near
term Eurodollar rate increases. On January 26, 2004, we elected to set the
interest rate at the twelve-month Eurodollar Rate for approximately $325.0
million of the Tranche B Term Loan and the $140 million Senior Unsecured Term
Loan, which fixed the Eurodollar Rate at 1.375% through January 26, 2005 for
approximately 84% of our floating rate debt outstanding as of December 27, 2003.
Additionally, to further address interest rate risk, we entered into an interest
rate cap agreement on February 11, 2004 for a notional amount of $170.0 million
which capped the Eurodollar Rate at 5.0% for the period of January 26, 2005
through January 26, 2006.

On December 19, 2003, we completed a financing, which consisted of the sale
of $200.0 million of 7.875% Senior Subordinated Notes due 2014 (the "New Notes")
pursuant to a private offering. The New Notes bear interest at the rate of
7.875% per annum, which is payable semi-annually in cash in arrears on January
15 and July 15. The Notes mature on January 15, 2014. The New Notes are
subordinated in right of payment to all our existing and future senior
indebtedness. We plan to issue 7.875% Senior Subordinated Notes due 2014 (the
"Exchange Notes") in exchange for all New Notes, pursuant to an exchange offer
whereby holders of the New Notes will receive Exchange Notes which have been
registered under the Securities Act of 1933, as amended, but are otherwise
identical to the New Notes.

At anytime prior to January 17, 2007, we may redeem up to 40% of the
aggregate principal amount of the New Notes at a price of 107.875% in connection
with an Equity Offering, as defined. With the exception of an Equity Offering,
the New Notes are redeemable at our option beginning January 15, 2009 at prices
decreasing from 103.938% of the principal amount thereof to par on January 15,
2012 and thereafter. We are not required to make mandatory redemption or sinking
fund payments with respect to the New Notes.

The indenture for the New Notes requires us and our subsidiaries to comply
with certain restrictive covenants, including a restriction on dividends; and
limitations on the incurrence of indebtedness, certain payments and
distributions, and sales of the our assets and stock.

The 10.25% Series B Senior Subordinated Notes ("Old Notes") bear interest
at the rate of 10.25% per annum, which is payable semi-annually in cash in
arrears on March 15 and September 15. On November 18, 2003, we initiated a
tender offer for the Old Notes and a consent solicitation to remove
substantially all restrictive covenants in the indenture governing the Old
Notes. As a result of the tender offer, $144.9 million principal amount of Old
Notes were tendered at a premium of $10.4 million. On March 10, 2004, we gave
notice to tender on April 12, 2004 the remaining $5.1 million of Old Notes
outstanding at 105.125% of the principal amount thereof. The Old Notes are
subordinated in right of payment to all existing and future senior indebtedness
of the Company. As a result of the Transactions, we marked the Old Notes to fair
market value as of the date of the Transactions.

The New Notes and Old Notes are fully and unconditionally guaranteed on an
unsecured, senior subordinated basis by all of our active domestic subsidiaries.

Future principal debt payments are expected to be paid out of cash flows
from operations, borrowings on our new revolving credit facility, and future
refinancing of our debt. Historically we have not been obligated to pay federal
income taxes as a result of net operating loss carryforwards; however, we expect
to be obligated to pay federal income taxes beginning in 2005.

Our operating activities provided cash of $56.5 million for the year ended
December 27, 2003, compared to $75.6 million for the year ended December 28,
2002. The following items principally account

22

for the cash provided from operations for each of the periods: (i) operating
income, exclusive of transaction expenses, variable stock compensation and
goodwill impairment, of $92.9 million for the year ended December 27, 2003
versus $80.6 million for the comparable prior year period; and (ii) an increase
in working capital, exclusive of assets and liabilities held for sale, of $16.6
million versus a decrease of $16.0 million for the comparable prior year period.

Capital expenditures totaled $8.8 million for the year ended December 27
2003. We expect to spend an aggregate of approximately $19 million for capital
expenditures in fiscal year 2004. We believe that annual capital expenditure
limitations in our New Senior Credit Facility will not significantly inhibit us
from meeting our ongoing capital expenditure needs.

We have identified a potential buyer for our Mattress Gallery subsidiary,
which is considered an asset held for sale, and anticipate a closing by the end
of our second quarter. We do not believe that such sale will have a significant
impact on our liquidity.

The following table sets forth our contractual obligations as of December
27, 2003 (dollars in thousands):

- ---------------

(1) Includes $5,284 of 10.25% Series B Senior Subordinated Notes that will be
redeemed in April 2004.

SEASONALITY/OTHER

For the past several years, there has not been significant seasonality in
our wholesale bedding business. Our retail bedding business, which accounted for
$97.9 million, or 12.1%, of net sales for the year ended December 27, 2003, has
historically experienced, and we expect will continue to experience, seasonal
and quarterly fluctuations in net sales, operating income and Adjusted EBITDA.
As is the case with many bedding retailers, our retail business is subject to
seasonal influences, characterized by strong sales for the months of May through
September, which impacts our second and third quarter results.

23

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The following discussion about our risk-management activities includes
forward-looking statements that involve risk and uncertainties. Actual results
could differ materially from those projected in the forward-looking statements.
See Item 1 "Business -- Forward-Looking Statements" for additional information.

We are exposed to market risk from changes in interest rates. In order to
address this risk, the New Senior Credit Facility requires us to adopt interest
rate protection measures on our variable rate indebtedness such that 50% of our
consolidated funded indebtedness is either fixed or protected.

In order to address interest rate risk, we have developed and implemented
a policy to utilize extended Eurodollar contracts to minimize the impact of
near term Eurodollar rate increases. On January 26, 2004, we elected to set the
interest rate at the twelve-month Eurodollar Rate for approximately $325.0
million of the Tranche B Term Loan and the $140 million Senior Unsecured Term
Loan, which fixed the Eurodollar Rate at 1.375% through January 26, 2005 for
approximately 84% of our floating rate debt outstanding as of December 27,
2003. Additionally, to further address interest rate risk, we entered into an
interest rate cap agreement on February 11, 2004 for a notional amount of
$170.0 million which capped the Eurodollar Rate at 5.0% for the period of
January 26, 2005 through January 26, 2006.

All other factors remaining unchanged, a hypothetical 10% increase or
decrease in interest rates for one year on our variable rate financial
instruments would not have a material impact on earnings during the current
year, but would result in an additional $2.4 million of interest expense in
the next fiscal year.

24

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

SIMMONS COMPANY AND SUBSIDIARIES

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors of
Simmons Company

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Simmons Company (the "Company") at December 27, 2003, and the results of its
operations and its cash flows for the period from December 20, 2003 through
December 27, 2003 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial
statement schedule on page 81 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP
Atlanta, Georgia
March 19, 2004

25

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors of
Simmons Company

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows present fairly, in all material respects, the financial position
of Simmons Company (the "Company") at December 28, 2002, and the results of its
operations and its cash flows for the period from December 29, 2002 through
December 19, 2003, and each of the two years in the period ended December 28,
2002 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedule on page 81 presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP
Atlanta, Georgia
March 19, 2004

26

SIMMONS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS