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

The accompanying notes are an integral part of these consolidated financial
statements.

27

SIMMONS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial
statements.

28

SIMMONS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

The accompanying notes are an integral part of these consolidated financial
statements.

30

SIMMONS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated financial
statements.

31

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A -- THE COMPANY

Simmons Company ("Simmons" or "the Company") is one of the largest bedding
manufacturers in the United States of America. The Company operates in two
business segments, (1) wholesale bedding and (2) retail bedding. The wholesale
bedding segment consists of (i) the manufacture, sale and distribution of
premium branded bedding products; (ii) the licensing of intellectual property to
other manufacturers; and (iii) the sale of product returns, off-quality product
and excess inventory through retail outlet stores. The retail bedding segment
operates specialty sleep stores in California, Oregon and Washington that sell
to consumers principally premium-branded bedding products.

The Company manufactures mattresses, foundations, and sleep accessories
through its wholly-owned subsidiaries, The Simmons Manufacturing Co., LLC and
Simmons Caribbean Bedding, Inc. Simmons and its subsidiaries 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.

Simmons also distributes branded bedding products on a contract sales basis
directly to institutional users, such as the hospitality industry and certain
agencies of the U.S. government, through the Company's wholly-owned subsidiary,
Simmons Contract Sales, LLC. The Company licenses its trademarks, patents and
other intellectual property to various domestic and foreign manufacturers
principally through its wholly-owned subsidiary, Dreamwell, Ltd.

Additionally, the Company operated at December 27, 2003 seventeen retail
outlet stores located throughout the United States of America through the
Company's wholly-owned subsidiary, World of Sleep Outlets, LLC; 56 retail
mattress stores operating as Mattress Gallery located in Southern California
through the Company's wholly-owned subsidiary, Gallery Corp. (of which 26 stores
were added in December 2002 by assuming the leases and acquiring certain
inventory from Mattress Discounters Corporation, which was in bankruptcy, for
approximately $1.7 million); and 47 retail mattress stores operating as Mattress
Gallery and Sleep Country USA located in Oregon and Washington through the
Company's subsidiary, SC Holdings, Inc. ("Sleep Country").

On February 28, 2003, the Company, through an agreement and plan of merger,
acquired the stock of Sleep Country from an affiliate of Fenway Partners
("Fenway") for approximately $18.4 million, plus additional contingent
consideration based upon future performance. Because the Company and Sleep
Country were controlled by affiliates of Fenway at the time of the acquisition,
the Company is required to account for the acquisition as a transfer of assets
within a group under common control. Under this accounting methodology, the
Company and Sleep Country are treated as if they had been combined in a manner
similar to the pooling of interests method for accounting and financial
reporting purposes for the periods in which both entities were controlled by
Fenway (from March 1, 2000).

THE ACQUISITIONS

In November 2003, THL Bedding Company acquired the Company for
approximately $1.115 billion, including related acquisition costs (the
"Acquisitions"). Concurrently with the closing of this transaction on December
19, 2003, each of THL Bedding Company and the former Simmons Company merged with
and into the Company with the Company continuing as the surviving corporation.
The Company, formerly known as Simmons Holdings, Inc., was renamed Simmons
Company.

The financing for the Acquisitions (including the refinancing of
outstanding debt) was provided by (i) borrowings under a new $480.0 million
Senior Secured Credit Facility, consisting of a $405 million term

32

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

loan facility and a $75.0 million revolving credit facility, which refinanced
the Company's existing senior and subordinated loans, (ii) borrowings under a
new $140.0 million senior unsecured term loan facility; (iii) issuance of $200.0
million senior subordinated notes; and (iv) $387.8 million of capital provided
by Thomas H. Lee Equity Fund V, L.P. and its affiliates ("THL"), affiliates of
Fenway and management of the Company.

As a result of the Acquisitions, THL acquired approximately 75.8% of the
voting stock of THL Bedding Holding Company ("THL Holding"), the Company's
indirect parent. 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.

In connection with the Transactions, certain members of the Company's
management deferred $19.8 million of their proceeds from the Acquisitions into a
deferred compensation plan of THL Holding. The deferred proceeds were deemed
invested in Class A common stock of THL Holding ("Deemed Shares"). The Deemed
Shares convert into cash or common stock of THL Holding based upon the outcome
of uncertain events such as a change of control or initial public offering, or
they will convert into common stock of THL Holding after ten years. The Deemed
Shares have a put option that gives the holder the right for cash settlement
under certain circumstances outside THL Holding's control. Accordingly, the
deferred compensation plan has been recorded as a liability on THL Holding and
is marked to market based upon a quarterly valuation of the common stock of THL
Holding. The changes in the market value of the liability will be recorded as a
compensation expense of the Company. THL Holding is unable to repurchase Deemed
Shares without receiving dividends from the Company. The Company's New Senior
Credit Facility, Senior Unsecured Term Loan Facility, and indenture for the New
Notes restrict the payment of dividends by the Company to THL Holding for the
purchase of Deemed Shares.

The Acquisitions were accounted for as a purchase as prescribed by
Statement of Financial Accounting Standards No. 141, Business Combinations, in
accordance with Emerging Issues Task Force ("EITF") No. 88-16, Basis in
Leveraged Buyout Transactions. This guidance requires the continuing residual
interest retained by the continuing management investors, as a result of the
Transactions, be reflected at its predecessor basis. In accordance with EITF
Issue No. 90-12, Allocating Basis to Individual Assets and Liabilities for
Transactions within the Scope of Issue No. 88-16, a step-up of assets and
liabilities to fair value has been recorded in purchase accounting for the
remaining interest in the Company acquired by THL and Fenway. The amount of
carryover basis determined has been reflected as a deemed dividend of $100.5
million in the consolidated balance sheet.

The purchase price allocation has not been finalized, and a tentative
allocation has been made using the values that have been determined and the
preliminary estimates for the values that have not yet been determined. The
valuation of certain identifiable intangible assets are subject to completion,
as certain assumptions have not yet been finalized. Following is a summary of
the estimated fair values of the assets acquired and liabilities assumed as of
the date of the Acquisitions:

Since the Acquisitions were accounted for as a stock purchase, the
respective tax basis of the assets and liabilities were not changed.

The following condensed pro forma disclosure for net sales and net income
are based on the consolidated financial statements included elsewhere herein,
adjusted to give effect to (i) the Acquisitions; and (ii) the issuance of new
debt (collectively the "Transactions"). These pro forma disclosures assume that
the Transactions were consummated as of December 30, 2001 and December 29, 2002
and do not purport to be indicative of the results that would actually have been
obtained if the Transactions had occurred on the date indicated or of the
results that may be obtained in the future.

33

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

For purposes of identification and description, Simmons Company is referred
to as the "Predecessor" for the period prior to the Acquisitions, the
"Successor" for the period subsequent to the Acquisitions, and the "Company" for
both periods. For purposes of financial reporting, the period from December 29,
2002 through December 19, 2003 is referred to as "Predecessor '03" and the
period from December 20, 2003 through December 27, 2003 is referred to as
"Successor '03." The 2003 period including both Predecessor '03 and Successor
'03 is referred to as "Combined '03".

THE RECAPITALIZATION

On July 16, 1998, the Company entered into a recapitalization agreement
with its subsidiary, the former Simmons Company, and REM Acquisition, Inc., a
transitory Delaware merger corporation ("REM"), sponsored by Fenway. Pursuant to
the agreement, on October 29, 1998, REM merged with and into the Company (the
"Recapitalization"), with the Company being the surviving corporation. As a
result of the Recapitalization, Simmons Holdings, LLC, an entity controlled by
funds affiliated with Fenway, acquired 75.1% of the outstanding voting shares of
the Company, and management, the ESOP and Investcorp retained approximately
5.9%, 13.7% and 5.3%, respectively, of the outstanding shares of the Company.
The Company accounted for the Recapitalization as a leveraged recapitalization,
whereby the historical bases of the assets and liabilities of the Company were
maintained through December 19, 2003.

NOTE B -- PRINCIPAL ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements of the Company include the accounts
of the Company and all of its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.

34

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

USE OF ESTIMATES AND RECLASSIFICATIONS

The consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("US GAAP"). Such financial statements include estimates and assumptions
that affect the reported amount of assets and liabilities, disclosure of
contingent assets and liabilities, and the amounts of revenues and expenses.
Actual results could differ from those estimates.

Certain amounts in the 2002 and 2001 financial statements and related
footnotes have been reclassified to conform with the current presentation.

FISCAL YEAR

The Company operates on a 52/53 week fiscal year ending on the last
Saturday in December. Fiscal years 2003 (Successor '03 and Predecessor '03
periods combined), 2002 and 2001 comprised 52 weeks.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an initial
maturity of three months or less to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value.

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or
net realizable value. The cost of inventories includes raw materials, direct
labor and manufacturing overhead costs. The Company provides inventory reserves
for excess, obsolete or slow-moving inventory based on changes in customer
demand, technology developments or other economic factors.

SUPPLY AGREEMENTS

The Company's wholesale segment from time to time enters into long-term
supply agreements with its customers. Any initial cash outlay by the Company is
capitalized and amortized as a reduction to revenue over the life of the
contract and is ratably recoverable upon contract termination. Such capitalized
amounts are included in other assets in the Company's consolidated balance
sheets. Amortization expense related to these contracts was $0.2 million, $8.4
million, $4.6 million, and $4.2 million in Successor '03, Predecessor '03, 2002
and 2001, respectively.

PROPERTY, PLANT AND EQUIPMENT

The Acquisitions resulted in a new basis of the value of the Company's
property, plant and equipment. Accordingly, property, plant and equipment were
adjusted to their estimated fair value and estimated useful lives were adjusted.
Depreciation expense is determined principally using the straight-line method
over the estimated useful lives for financial reporting and accelerated methods
for income tax purposes. Expenditures that substantially increase asset values
or extend useful lives are capitalized. Expenditures for maintenance and repairs
are expensed as incurred. When property items are retired or otherwise disposed
of, amounts applicable to such items are removed from the related asset and
accumulated depreciation accounts and any resulting gain or loss is credited or
charged to income. Useful lives are generally as follows:

Buildings and improvements.................................. 22 - 45 years
Leasehold improvements...................................... 2 - 12 years
Machinery and equipment..................................... 2 - 15 years
Computers and software...................................... 2 - 7 years

35

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INTANGIBLE ASSETS

Definite lived intangible assets are amortized using the straight-line
method, which the Company believes is most appropriate, over their estimated
period of benefit, ranging from one to eleven years. Indefinite lived intangible
assets, such as goodwill, brands, trademarks, customer lists, supplier
agreements and domain names, are not amortized.

The Company tests goodwill and other indefinite-lived intangible assets for
impairment on an annual basis by comparing the fair value of the Company's
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.
Other indefinite-lived intangible assets are tested between annual tests if
events or changes in circumstances indicate that the asset might be impaired.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company regularly reviews all of its long-lived assets, including
intangibles with finite lives, for impairment whenever events or circumstances
indicate their carrying value may not be recoverable. Management reviews 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 would record an impairment charge equal to the excess of the carrying
value over the fair value of the impaired assets.

As discussed in Note H to the consolidated financial statements, the
Company recognized impairment charges related to its retail segment in 2002 and
2001 of $20.3 million and $7.9 million, respectively.

DEBT ISSUANCE COSTS

The Company capitalizes costs associated with the issuance of debt and
amortizes the cost as additional interest expense over the lives of the debt
using the effective interest rate method. Amortization expense of $0.1 million,
$9.5 million (of which $7.1 million represented the remaining unamortized debt
issuance costs related to debt repaid in connection with the Acquisitions), $4.3
million, and $2.5 million for Successor '03, Predecessor '03, 2002 and 2001,
respectively, is included as a non-cash component of interest expense in the
accompanying Consolidated Statements of Operations.

Due to the adoption of SFAS No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS
145"), $0.5 million of extraordinary expense, net of tax, related to accelerated
debt payments in 2001 has been reclassified to interest expense ($0.9 million)
with the related tax benefit ($0.4 million) reclassified to income tax benefit
in the accompanying Consolidated Statements of Operations.

REVENUE RECOGNITION

The Company's wholesale segment recognizes revenue, net of estimated
returns, when title and risk of ownership passes, which is generally upon
delivery of shipments. Sales are presented net of cash discounts, rebates,
returns and certain consideration provided to customers such as co-operative
advertising costs, promotional monies and amortization of supply agreements. The
Company uses historical trend information regarding returns to reduce sales for
estimated future returns. The Company provides an allowance for bad debts for
estimated uncollectible accounts receivable, which is included in selling,
general and administrative expenses in the accompanying Consolidated Statements
of Operations.
36

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's retail segment recognizes revenue when title and risk of
ownership passes, which is generally upon delivery of the products to customers.
The Company's retail segment allows customers to exchange products within 60
days of purchase. Historically, those returns have not been material and,
accordingly, no reserves for retail sales returns have been included in the
accompanying Consolidated Statements of Operations.

PRODUCT DELIVERY COSTS

Product delivery costs for our wholesale segment are billed to the
Company's customers and are included as a component of net sales. The Company's
wholesale segment incurred $0.4 million, $35.9 million, $31.4 million, and $30.9
million in shipping and handling costs associated with the delivery of finished
mattress products to its customers in Successor '03, Predecessor '03, 2002 and
2001, respectively. These costs are included in selling, general and
administrative expenses in the accompanying Consolidated Statements of
Operations.

EMPLOYEE STOCK OWNERSHIP PLAN

Prior to 2002, the Company recognized ESOP expense as an amount equal to
the fair market value of the shares committed to be released to participants'
accounts. As of December 29, 2001, all the plan shares had been committed to be
released to participants' accounts. The unearned compensation balance was
previously amortized using the shares allocated method (i.e., at cost). The
difference in the fair market value and the cost of the shares, if any, was
recorded as an adjustment to additional paid-in capital.

Because of the Company's obligation to repurchase shares from the ESOP
under certain circumstances for their then current fair value, the Company has
classified the redemption value of such shares in the accompanying consolidated
balance sheets as redemption obligation -- ESOP as of December 28, 2002,
respectively. In connection with the Acquisitions, the Company repurchased
3,382,739.58 shares of the Company held by the ESOP for $95.9 million which
satisfied the redemption obligation.

STOCK OPTION PLANS

The Company applied the intrinsic value-based method of accounting
prescribed by Accounting Principle Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25"), and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation (an interpretation of APB No. 25), to account for its previous
employee stock option plans. Under this method, compensation expense was
recorded over the service period based upon the intrinsic value of the options
as they were earned by the employees. SFAS No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS 123, the Company adopted the
disclosure-only provisions and continued to apply the intrinsic value-based
method of accounting as described above. The accounting for awards of
stock-based compensation where an employee can compel the entity to settle the
award by transferring cash or other assets to employees rather than by issuing
equity instruments is substantially the same under SFAS 123 and APB 25.
Accordingly, SFAS 123 pro-forma disclosures are not presented.

FOREIGN CURRENCY

Subsidiaries located outside the United States of America generally use the
local currency as the functional currency. Assets and liabilities are translated
at exchange rates in effect at the balance sheet date and income and expense
accounts at average exchange rates during the year. Resulting translation
adjustments are recorded directly to accumulated other comprehensive income
(loss), a separate component of stockholders' deficit.

37

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PRODUCT DEVELOPMENT COSTS

Costs associated with the development of new products and changes to
existing products are charged to expense as incurred. These costs amounted to
approximately $0.1 million, $3.0 million, $2.4 million and $1.8 million for
Successor '03, Predecessor '03, 2002 and 2001, respectively.

REBATES

The Company's wholesale segment provides volume rebates to certain
customers for the achievement of various purchase volume levels. The Company
recognizes a liability for the rebate at the point of revenue recognition for
the underlying revenue transactions that result in progress by the customer
towards earning the rebate. Measurement of the liability is based on the
estimated number of customers that will ultimately earn and claim the rebates or
refunds under the offer. Rebates were $0.1 million, $15.7 million, $10.4 million
and $10.6 million in Successor '03, Predecessor '03, 2002 and 2001,
respectively, and are included as a reduction of sales in the accompanying
Consolidated Statements of Operations.

ADVERTISING COSTS

The Company's wholesale segment records the cost of advertising, including
co-op advertising, as an expense or a reduction of net sales when incurred or no
later than when the advertisement appears or the event is run. Advertising costs
were $0.6 million, $98.5 million, $85.2 million and $72.5 million for Successor
'03, Predecessor '03, 2002 and 2001, respectively, and are included as either a
reduction of net sales or a component of selling, general and administrative
expenses in the accompanying Consolidated Statements of Operations.

The Company's retail segment records advertising costs, including
promotional materials, and media production costs to expense as incurred. Costs
for placement of advertisements and airtime are charged to expense once
broadcast. Retail segment advertising expense, net of co-operative advertising
receipts, aggregated $0.1 million, $3.1 million, $3.6 million, $4.4 million for
Successor '03, Predecessor '03, 2002 and 2001, respectively.

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 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 in income in the period that includes the enactment date. A
valuation allowance is established, when necessary, to reduce deferred tax
assets to amounts expected to be realized.

WARRANTIES

The Company's wholesale segment warranty policy provides a 10-year
non-prorated warranty service period on all first quality products, except for
certain products for the hospitality industry which have varying non-prorated
warranty periods generally ranging from five to ten years. The Company's policy
is to accrue the estimated cost of warranty coverage at the time the sale is
recorded. Accrued warranties totaled $3.8 million

38

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and $3.4 million, respectively, as of December 27, 2003 and December 28, 2002.
The following table presents a reconciliation of the Company's warranty
liability at December 27, 2003 (amounts in thousands):

ENVIRONMENTAL COSTS

Environmental expenditures that relate to current operations are expensed
or capitalized when it is probable that a liability exists and the amount or
range of amounts can be reasonably estimated. Remediation costs that relate to
an existing condition caused by past operations are accrued when it is probable
that the costs will be incurred and can be reasonably estimated.

DERIVATIVE INSTRUMENTS

Effective January 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). This statement, as
amended, standardized the accounting for derivative instruments, including
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the balance sheet and measure
them at fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or in other comprehensive income, depending on
whether a derivative is designated as part of a hedging relationship and, if it
is, depending on the type of the hedging relationship. The cumulative effect
upon prior years of adopting SFAS 133 was not material.

SIGNIFICANT CONCENTRATIONS OF RISK

Cash and cash equivalents are maintained with several major financial
institutions in the U.S., Puerto Rico and Canada. Deposits held with banks may
exceed the amount of insurance provided on such deposits. Generally, these
deposits may be redeemed upon demand. Additionally, the Company monitors the
financial condition of such institutions and considers the risk of loss remote.

The Company's wholesale bedding segment manufactures and markets sleep
products, including mattresses and foundations to retail establishments
primarily in the U.S. The wholesale bedding segment performs periodic credit
evaluations of its customers' financial condition and generally does not, in
most cases, require collateral. Shipments to the wholesale bedding segment's
five largest customers aggregated approximately 19%, 17% and 17% of total
wholesale shipments for each of Combined '03, 2002 and 2001, respectively, and
no single customer accounted for over 10% of the wholesale bedding segment's net
sales.

Purchases of raw materials from one vendor represented approximately 21%,
21% and 20% of the wholesale bedding segment cost of products sold for Combined
'03, 2002 and 2001, respectively. The wholesale bedding segment also primarily
utilizes two third-party logistics providers which, in the aggregate, accounted
for 74%, 66% and 63% of outbound wholesale shipments in Combined '03, 2002 and
2001, respectively.

ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities ("FIN 46"), principally to provide guidance on the
identification of entities for which control is

39

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

achieved through means other than through voting rights ("variable interest
entities" or "VIEs") and how to determine when and which business enterprise
should consolidate the VIE (the "primary beneficiary"). This new model for
consolidation applies to an entity which either (1) the equity investors (if
any) do not have a controlling financial interest or (2) the equity investment
at risk is insufficient to finance that entity's activities without receiving
additional subordinated financial support from other parties. In addition, FIN
46 requires that both the primary beneficiary and all other enterprises with a
significant variable interest in a VIE make additional disclosures. FIN 46 was
effective for the Company's first quarter 2003 with transitional disclosure
required with these financial statements. The Company does not have any variable
interest entities.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 113 on
Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The amendments set forth by SFAS 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. SFAS 149 is generally effective for contracts entered into or
modified after June 30, 2003. The guidance is to be applied prospectively. The
adoption of this Statement did not have a significant impact on the Company's
consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS 150").
This statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. SFAS 150 improves the accounting
for certain financial instruments that, under previous guidance, issuers could
account for as equity. The new guidance requires that those instruments be
classified as liabilities in statements of financial position. The adoption of
this Statement did not have a significant impact on the Company's consolidated
financial statements.

In December 2003, The FASB issued SFAS No. 132 (Revised), Employers'
Disclosure about Pensions and Other Postretirement Benefits ("SFAS 132R"). A
revision of the pronouncement originally issued in 1998, SFAS 132R expands
employers' disclosure requirements for pension and postretirement benefits to
enhance information about plan assets, obligations, benefit payments,
contributions, and net benefit cost. SFAS 132R does not change the accounting
requirements for pensions and other postretirement benefits. This statement is
effective for fiscal years ending after December 15, 2003, with interim-period
disclosure requirements effective for interim periods beginning after December
15, 2003. The adoption of this Statement did not have a significant impact on
the Company's consolidated financial statements.

NOTE C -- SEGMENT INFORMATION

The Company operates in two business segments, (1) wholesale bedding and
(2) retail bedding. The wholesale bedding segment consists of (i) the
manufacture, sale and distribution of premium branded bedding products; (ii) the
licensing of intellectual property to other manufacturers; and (iii) the sale of
product returns, off-quality product and excess inventory through retail outlet
stores. The retail bedding segment operates specialty sleep stores in
California, Oregon and Washington, that sell to consumers principally premium
branded bedding products.

The Company is currently pursuing the sale of one of its retail bedding
subsidiaries and has classified the assets and liabilities for this subsidiary
as held for sale in the accompanying balance sheets (see Note D to the
consolidated financial statements for further explanation).

The Company evaluates performance and allocates resources based on net
sales, operating income and earnings before income taxes, depreciation and
amortization. The following table summarizes segment

40

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

information as of and for the Successor '03, Predecessor '03, December 28, 2002
and December 29, 2001 are as follows:

41

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

* The table above presents "Adjusted EBITDA" which as presented is a financial
measure that is used in the credit agreement for the senior secured credit
facility. The credit agreement for the senior secured credit facility requires
us to comply with a specified debt-to-Adjusted EBITDA leverage ratio and a
specified Adjusted EBITDA-to-cash-interest expense ratio for specified
periods. Borrowings under the senior secured credit facility will be a key
source of our liquidity. Our ability to borrow under the senior secured credit
facility depends on, among other things, our compliance with the financial
ratio covenants set forth in the credit agreement. Failure to comply with
these financial ratio covenants would result in a violation of the credit
agreement for the senior secured credit facility and, absent a waiver or an
amendment from the lenders under such agreement, permit the acceleration of
all outstanding borrowings under such credit agreement.

EBITDA and Adjusted EBITDA are not defined terms under GAAP and should not be
considered as alternatives to operating income or net income as measures of
operating results or cash flows as a measure of liquidity. EBITDA represents
earnings before interest expense, income tax expense and depreciation and
amortization. Adjusted EBITDA differs from the term "EBITDA" as it is commonly
used by other companies and by Simmons. Adjusted EBITDA adjusts net income by
excluding certain items. EBITDA and Adjusted EBITDA have important limitations
as analytical tools, and you should not consider them in isolation, or as a
substitute for analysis of our results as reported under GAAP.

For example, EBITDA and Adjusted EBITDA: do not reflect our cash expenditures,
or future requirements, for capital expenditures or contractual commitments;
do not reflect changes in, or cash requirements for, our working capital
needs; do not reflect the significant interest expense, or the cash
requirements necessary to service interest or principal payments, on our
debts; exclude tax payments that represent a reduction in cash available to
us; do not reflect any cash requirements for the assets being depreciated and
amortized that may have to be replaced in the future; and Adjusted EBITDA does
not reflect the impact of earnings or charges resulting from matters that we
and the lenders under the senior secured credit facility may consider not to
be indicative of our ongoing operations. In particular, the definition of
Adjusted EBITDA in our senior secured credit facility allows us to add back
certain non-cash, extraordinary, unusual or non-recurring charges that are
deducted in calculating net income. However, these are expenses that may
recur, vary greatly and are difficult to predict. They can represent the
effect of long-term strategies as opposed to short-term results. In addition,
certain of these expenses can represent the reduction of cash that could be
used for other corporate purposes. Because of these limitations, we rely
primarily on our GAAP results and use EBITDA and Adjusted EBITDA only
supplementally.

In the "Eliminations" column of each period presented above, the segment
assets consists primarily of investments in subsidiaries, receivables and
payables, and gross wholesale bedding profit in ending retail

42

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

inventory. The segment operating income (loss) has been adjusted to eliminate
the wholesale bedding profit in ending retail inventory.

NOTE D -- ASSETS/LIABILITIES HELD FOR SALE

In April 2003, the Company initiated a sales process of its retail
operations in one or more transactions. Following the Acquisitions, the Board of
Directors decided to continue a sales process for the Mattress Gallery retail
operations in California and to continue to operate the Sleep Country Oregon and
Washington retail operations. The Company has identified a potential buyer of
Mattress Gallery and anticipates a closing in the second quarter of 2004.

In accordance with the provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company has reflected assets
and liabilities for Mattress Gallery as held for sale in the consolidated
balance sheets. The Company has not reflected the results of operations for its
Mattress Gallery as discontinued operations since the Company believes it is
likely it will have an ongoing interest in the cash flows of the operations
through a long-term supply agreement.

The components of the assets and liabilities held for sale as of December
27, 2003 are as follows (amounts in thousands):

ASSETS HELD FOR SALE

Accounts receivable, net.................................... $1,522
Inventories................................................. 4,996
Other current assets........................................ 221
Property, plant and equipment, net.......................... 1,057
Other assets................................................ 768
------
Total assets held for sale................................ $8,564
======

LIABILITIES HELD FOR SALE

Accounts payable............................................ $ 503
Other current liabilities................................... 1,207
Other long-term liabilities................................. 354
------
Total liabilities held for sale........................... $2,064
======

NOTE E -- EMPLOYEE STOCK OWNERSHIP PLAN

Prior to the Acquisitions, the Company was structured so that many
employees of the Company had a beneficial ownership of the stock of the Company
through their participation in the ESOP. Through 2002, the Company made annual
contributions to the ESOP in an amount up to 25% of eligible participant
compensation, subject to certain limitations and conditions. The ESOP used all
such contributions to repay the ESOP loan. As a result, there were no cash costs
associated with the contributions to the ESOP. Following 2002, no further
Company contributions were made to the ESOP.

ESOP assets are held in trust by State Street Bank and Trust Company, the
ESOP trustee. Prior to repayment of the ESOP loan in full in 2002, the ESOP
shares were held in a suspense account and were released to the ESOP
participants' accounts based on debt service. In 2001, 988,124 shares were
released to participants' accounts for the 2000 ESOP allocation. In 2002,
298,006 shares were released to participants'

43

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

accounts for the 2001 ESOP allocation. At December 28, 2002, all shares of the
Company's common stock in the ESOP were allocated, resulting in no further
scheduled allocation of shares to participants.

Under the provisions of the ESOP, the Company was obligated to repurchase
participant shares distributed under the terms of the ESOP, as long as the
shares were not publicly traded or the shares were subject to trading
limitations. The Company regularly repurchased shares from the ESOP to provide
liquidity for cash distributions. Prior to the Acquisitions, the Company
repurchased approximately 26,065 shares and 29,345 shares from the ESOP in 2003
and 2002, respectively, at an average price of $17.8891 and $15.2038 per share,
respectively. The ESOP held 3,414,300 as of December 28, 2002. In connection
with the Acquisitions, the Company repurchased 3,382,740 shares of the Company
held by the ESOP for $95.9 million which satisfied the redemption obligation.

Although the ESOP no longer has a beneficial ownership of the stock of the
Company, the plan remains in existence. Approximately 35% of the Company's
full-time employees are participants in the ESOP.

NOTE F -- INVENTORIES

Inventories consisted of the following as of December 27, 2003 and December
28, 2002 (amounts in thousands):

NOTE G -- PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following as of December 27,
2003 and December 28, 2002 (amounts in thousands):

Depreciation expense for the Successor '03, Predecessor '03, 2002 and 2001
was $0.2 million, $13.7 million and $12.2 million, respectively.

44

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE H -- GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets consisted of the following as of December 27, 2003 and
December 28, 2002 (amounts in thousands):

As a result of the Acquisitions, the Company recorded additions of $150.8
million in intangible assets based upon preliminary valuations.

On December 30, 2001 (the first day of fiscal year 2002), the Company
adopted SFAS 142 and ceased to amortize goodwill and costs associated with
indefinite life trademarks. As required by SFAS 142, the Company reassessed
the expected useful lives of existing intangible assets. This reassessment
resulted in no changes to the expected useful lives of the Company's patents
and licenses. The following table presents the Company's Successor '03,
Predecessor '03, 2002 and 2001 results on a basis comparable to the 2003
results, adjusted to exclude amortization expense (including any related tax
effects) related to goodwill (amounts in thousands):

In connection with the acquisition of substantially all of the retail store
locations and other assets of H&H Sleep Centers, Inc. ("H&H") and CBMC Corp.
("CBMC") by Gallery Corp. ("Gallery") in 2000, the Company recorded $16.1
million of goodwill. This represented the excess of the purchase price over the
fair value of assets acquired and was being amortized on a straight line basis
over a twenty year period. Due to various Gallery operating factors, in the
fourth quarter of 2001 the Company reviewed the carrying value of Gallery's
goodwill in accordance with the Company's accounting policies and recorded an
impairment charge of $7.9 million to write down the Gallery goodwill to its
estimated market value. There were no goodwill additions for the year ended
December 28, 2002.

45

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As part of the adoption of SFAS 142, the Company performed initial
valuations during the first quarter 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, goodwill was again tested at December 28, 2002 for
impairment by comparing the fair value of the Company's reporting units to their
carrying values. Fair values were determined by the assessment of future
discounted cash flows. As noted in the following paragraph, based upon the
impairment test performed, a goodwill impairment charge was recorded in 2002 for
the Company's retail segment. This impairment test will be performed each year
on the last day of the Company's fiscal year unless circumstances or events
necessitate an evaluation at an interim date.

In connection with the acquisition of 51 retail store locations and other
stock of Sleep Country USA, Inc., Sleep Country of Oregon, Inc. and Sleep Train,
Inc. by SC Holdings, Inc. ("Sleep Country") in 2000, the Company recorded $40.5
million of goodwill. The goodwill represented the excess of the purchase price
over the fair value of assets acquired and was being amortized on a straight
line basis over a fifteen year period prior to the adoption of SFAS 142. In the
fourth quarter of 2002, Sleep Country recognized a goodwill impairment of $20.3
million. The review of the 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.

NOTE I -- ACCRUED LIABILITIES

Accrued liabilities consisted of the following as of December 27, 2003 and
December 28, 2002 (amounts in thousands):

46

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE J -- LONG-TERM DEBT

Long-term debt consisted of the following at December 27, 2003 and December
28, 2002 (amounts in thousands):

In connection with the Acquisitions on December 19, 2003, the Company
entered into a new Senior Credit Facility (the "New Senior Credit Facility"), a
Senior Unsecured Term Loan Facility, and issued 7.875% Senior Subordinated
Notes, the aggregate proceeds of which repaid the outstanding amounts under the
old senior credit facility, notes payable to former shareholders, junior
subordinated payment-in-kind, and a portion of the Company's 10.25% Senior
Subordinated Notes.

The New Senior Credit Facility provides for a $75.0 million revolving
credit facility. The revolving credit facility will expire on the earlier of (a)
December 19, 2009 or (b) such other date as the revolving credit commitments
thereunder shall terminate in accordance with the terms of the New Senior Credit
Facility. The New Senior Credit Facility also provides for a $405.0 million
Tranche B term loan facility. The Tranche B term loan has a final scheduled
maturity date of December 19, 2011.

As of December 27, 2003, the Company had availability to borrow $61.2
million under the Revolving Loan Facility after giving effect to $3.3 million of
borrowings and $10.5 million that was reserved for the Company's reimbursement
obligations with respect to outstanding letters of credit. The remaining
availability under the Revolving Loan Facility may be utilized to meet the
Company's current working capital

47

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

requirements, including issuance of stand-by and trade letters of credit. The
Company also may utilize the remaining availability under the Revolving Loan
Facility to fund distributions, acquisitions and capital expenditures.

The Senior Unsecured Term Loan Facility which provides for a $140 million
Senior Unsecured Term Loan. The Senior Unsecured Term loan has a final scheduled
maturity date of June 17, 2012.

The New Senior Credit Facility and the Senior Unsecured Term Loan bear
interest at the Company's choice of 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.

The use of interest rate risk management instruments, such as collars and
swaps, is required under the terms of the New Senior Credit Facility. The
Company is 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.

In order to address interest rate risk, the Company has developed and
implemented a policy to utilize extended Eurodollar contracts to minimize the
impact of near term Eurodollar rate increases. On January 26, 2004, the Company
elected to set its 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 floating rate debt outstanding as of
December 27, 2003. Additionally, to further address interest rate risk, the
Company 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, the Company 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 existing and future senior indebtedness
of the Company. The Company plans 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 any time prior to January 17, 2007, the Company 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 the option of the Company beginning
January 15, 2009 at prices decreasing from 103.938% of the principal amount
thereof to par on January 15, 2012 and thereafter. The Company is not required
to make mandatory redemption or sinking fund payments with respect to the New
Notes.

48

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The indenture for the New Notes requires the Company and its 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 Company's 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, the Company
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, the
Company 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 for a total
payment of $5.3 million. 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, the Company 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 the Company's active domestic
subsidiaries. The following Supplemental Consolidating Condensed Financial
Statements provide additional guarantor/non-guarantor information.

49

SIMMONS COMPANY AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 27, 2003
(IN THOUSANDS)

50

SIMMONS COMPANY AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEETS
As of December 27, 2003
(IN THOUSANDS)

SIMMONS COMPANY AND SUBSIDIARIES

SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE COMBINED YEAR ENDED DECEMBER 27, 2003
(IN THOUSANDS)

51

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The PIK note relates to a loan from the previous majority owner. The PIK
note had a stated interest rate of 17.5%, with detachable warrants. The warrants
were valued in accordance with APB 14, Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants, recorded as discount on the PIK note and
amortized as interest expense over the repayment term of the note. There were
1,653,703 warrants to purchase shares of the Company, exercisable over seven
years, with an exercise price of $6.73 per warrant. The warrants were exercised
and the PIK note, with accrued interest, was repaid in connection with the
Acquisitions.

The New Senior Credit Facility requires the Company to maintain certain
financial ratios including cash interest coverage and total leverage ratios. The
New Senior Credit Facility also contains covenants which, among other things,
limit capital expenditures, the incurrence of additional indebtedness,
investments, dividends, transactions with affiliates, asset sales, mergers and
consolidations, prepayments of other indebtedness, liens and encumbrances and
other matters customarily restricted in such agreements. As of December 27,
2003, the Company was in compliance with all of its financial covenants.

Future maturities of long-term debt as of December 27, 2003 are as follows
(amounts in thousands):

2004........................................................ $ 9,512
2005........................................................ 5,571
2006........................................................ 3,457
2007........................................................ 4,463
2008........................................................ 4,463
Thereafter.................................................. 742,787
--------
$770,253
========

The fair value of the Company's long-term debt is estimated based on the
current rates offered for debt of similar terms and maturities. All long-term
debt approximates fair value as of December 27, 2003.

NOTE K -- LICENSING

The Company licenses internationally the Simmons(R) mark and many of its
other trademarks, processes and patents generally on an exclusive long-term
basis to third-party manufacturers which produce and distribute conventional
bedding products within their designated territories. These licensing agreements
allow the Company to reduce exposure to political and economic risks abroad by
minimizing investments in those markets. The Company has eighteen foreign
licensees and fourteen sub-licensees with operations in Argentina, Australia,
Brazil, Canada, Chile, Colombia, Dominican Republic, Ecuador, El Salvador,
England, France, Hong Kong, Israel, Italy, Jamaica, Japan, Korea, Mexico,
Morocco, New Zealand, Oman, Panama, Singapore, South Africa, Sweden, Taiwan, and
Venezuela. These foreign licensees have rights to sell Simmons-branded products
in approximately 100 countries.

Additionally, the Company has eleven domestic third-party licensees. Some
of these licensees manufacture and distribute juvenile furniture and bedding and
healthcare-related furniture, primarily on long-term or automatically renewable
terms. Additionally, the Company has licensed the Simmons(R) mark and other
trademarks, generally for limited terms, to manufacturers of upholstered
furniture, airbeds, feather and down comforters, sheets, synthetic comforter
sets, pillows, mattress pads, blankets, bed frames, metal beds, futons, and
other related products.

For Successor '03, Predecessor '03, 2002 and 2001 the Company's licensing
agreements as a whole generated royalties and technology fees of approximately
$0.2 million, $10.4 million, $9.0 million and $9.5 million, respectively, which
are accounted for as a reduction of selling, general and administrative expenses
in the accompanying Consolidated Statements of Operations.

NOTE L -- OTHER EXPENSE, NET

Other expense, net is comprised of the following (amounts in thousands):

NOTE M -- LEASES AND OTHER COMMITMENTS

The Company leases certain manufacturing facilities, retail locations and
equipment under operating leases. The Company's commitments under capital leases
are not material enough to necessitate separate disclosure. The Company's
wholesale segment rent expense was $0.5 million, $18.7 million, $17.8 million,
and $16.2 million for Successor '03, Predecessor '03, 2002 and 2001,
respectively. The Company's retail segment rent expense was $0.4 million, $15.0
million, $10.6 million and $9.9 million for Successor '03, Predecessor '03, 2002
and 2001, respectively.

The following is a schedule of the future minimum rental payments required
under operating leases that have initial or remaining non-cancelable lease terms
in excess of one year as of December 27, 2003 (amounts in thousands):

The Company has the option to renew certain manufacturing facility leases,
with the longest renewal period extending through 2023. Most of the operating
leases provide for increased rent through increases in general price levels.

52

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's wholesale segment has various purchase commitments with
certain suppliers in which the Company is committed to purchase approximately
$55 million of raw materials from these vendors in 2003. If the Company does not
reach the committed level of purchases, various additional payments could be
required to be paid to these suppliers.

NOTE N -- STOCK OPTION PLANS

In 1996, the board of directors established a management stock incentive
plan (the "1996 Plan"), which provided for the granting of non-qualified options
for Class C common stock of the Company to members of management and certain key
employees. The options outstanding under the 1996 Plan were granted at prices
which were equal to or above the market value of the Class C stock on the date
of grant. As a result of the Recapitalization, the vesting of the issued and
outstanding stock options under the 1996 plan was accelerated.

During 1999, the Company established the 1999 Stock Option Plan ("1999
Plan"), which provided for the granting of up to 4,902,878 options for shares of
common stock to directors (including those who are not employees), all executive
officers and other employees, consultants and advisors. Under the terms of the
1999 Plan, options could be either incentive or non-qualified. Generally, the
options outstanding under the 1999 Plan were granted at prices which equate to
or are above the market value of the common stock on the date of grant, expired
after ten years, and vested ratably over a four or five year period based upon
the achievement of an annual Adjusted EBITDA target, as defined in the 1999
Plan, or as otherwise established by the Compensation Committee of the board of
directors. The incentive plan provided for issuance of regular options ("Regular
Options") and superincentive options ("Superincentive Options"). Regular Options
were subject to certain time and performance vesting restrictions and
Superincentive Options vested only in connection with the consummation of a
change of control or initial public offering of the Company and the attainment
by stockholders affiliated with Fenway of certain internal rate of return
objectives.

In 2000, Sleep Country adopted the 2000 Stock Option Plan ("2000 Plan").
The 2000 Plan provided for the granting of 26,304 options for shares of Sleep
Country common stock. Since inception of the 2000 Plan, 11,833 incentive based
options were issued, net of cancellations, with specific performance targets. As
of December 27, 2003, no performance targets had been met, and thus, none of the
options had vested or became exercisable. Since the 2000 Plan inception, no
compensation expense has been recorded for the 2000 Plan.

In 2002, the Company established the 2002 Stock Option Plan ("2002 Plan"),
which provided for the granting of up to 1,053,122 options for shares of common
stock to directors (including those who are not employees), all executive
officers and other employees, consultants and advisors. Under the terms of the
2002 Plan, options could be either incentive or non-qualified. Generally, the
options outstanding under the 2002 Plan were granted at prices which were equal
to the market value of the common stock on the date of grant, expired after ten
years, and vested based upon conditions specified by the Company. This plan
provided for the issuance of Regular Options and Superincentive Options. Regular
Options were subject to certain time and performance vesting restrictions and
Superincentive Options vested only in connection with the consummation of a
change of control or initial public offering of the Company and the attainment
by stockholders affiliated with Fenway of certain internal rate of return
objectives.

Under APB 25, 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, the ultimate number of vested
shares, and therefore the measurement date, was not currently determinable.
Accordingly, pursuant to APB 25, the Company recorded estimated compensation
expense as variable stock compensation expense over the service period based
upon the intrinsic value of the options as they were earned by the employees.

53

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Additionally, the 2002, 1999 and 1996 Plans provided that the option
holders could, under certain circumstances, require the Company to repurchase
the shares underlying vested options. Therefore, pursuant to APB 25 and its
interpretations, the Company recorded additional adjustments to variable stock
compensation expense for changes in the intrinsic value of vested Regular
Options under the 1996, 1999 and 2002 Plans in a manner similar to a stock
appreciation right. The accounting for awards of stock-based compensation where
an employee can compel the entity to settle the award by transferring cash or
other assets to employees rather than by issuing equity instruments is
substantially the same under SFAS 123 and APB 25. Accordingly, SFAS 123
pro-forma disclosures were not presented.

As a result of the Acquisitions, the vesting of the issued and outstanding
Regular and Superincentive stock options under the 2002, 1999 and 1996 plans was
accelerated. On December 19, 2003, the Company repurchased the vested options
for $95.4 million which satisfied the accrued stock compensation liability of
the Company. The Company recorded variable stock compensation expense of
approximately $68.4 million, $15.6 million and $14.8 million during Predecessor
'03, 2002 and 2001, respectively. In conjunction with the Acquisitions, all
stock option plans were terminated.

Activity for Regular and Superincentive Options (all non-qualified stock
options) during 2003, 2002 and 2001 follows:

In connection with the Transactions, the shares outstanding at December 19,
2003 were cancelled.

54

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE O -- INCOME TAXES

The components of the provision for income taxes are as follows (amounts in
thousands):

The reconciliation of the statutory federal income tax rate to the
effective income tax rate for Successor '03, Predecessor '03, 2002 and 2001
provision for income taxes is as follows (amounts in thousands):

55

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Components of the Company's net deferred income tax liability as of
December 27, 2003 and net deferred income tax asset as of December 28, 2002 are
as follows (amounts in thousands):

At December 27, 2003, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $94.1 million, including
approximately $14.6 million of loss carryforwards generated by Sleep Country.
The Sleep Country carryforward losses are subject to use limitations imposed by
the Internal Revenue Code. The net operating loss carryforwards expire on
various dates through 2022. As of December 27, 2003, the Company had
approximately $1.7 million of general business tax credits and $1.8 million of
foreign tax credits available to offset future payments of federal income taxes.
These credits will expire in varying amounts between 2004 and 2022.

Realization of net deferred tax assets is dependent upon future profitable
operations and future reversals of existing temporary differences. Although
realization is not assured, the Company believes 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 for the years ended December 27, 2003 and
December 28, 2002, the Company recorded valuation allowances of $10.0 million
and $11.4 million, respectively, against Sleep Country's net deferred tax
assets, which consist primarily of net operating loss carryforwards.

Cumulative undistributed earnings of the Company's international
subsidiaries totaled approximately $2.7 million at December 27, 2003. No United
States income taxes have been provided on these earnings. Foreign tax credits
are available to reduce all or a portion of the tax liability that would arise
if these earnings were remitted; any residual tax due should not be material.

56

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE P -- RETIREMENT PLANS

SIMMONS 401(K) PLAN

The Company has a defined contribution 401(k) plan for substantially all
employees other than employees subject to collective bargaining agreements.
Employees with 12 weeks of employment who have reached age 18 are permitted to
participate in the plan. Generally, employees covered by collective bargaining
agreements are not permitted to participate in the plan, unless the collective
bargaining agreement expressly provides for participation. Eligible participants
may make salary deferral contributions up to 17% of eligible compensation,
subject to applicable tax limitations. The Company makes employer non-elective
contributions, currently 3% of an employee's eligible compensation, once an
employee completes one year of service. All employer non-elective contributions
are immediately vested and not subject to forfeiture.

In 2002, the Company amended the plan to provide for an additional employer
matching contribution of 50 cents on each employee dollar contributed up to 6%
of the employee's pay (subject to current tax limitations). The additional
matching contribution is provided to participants who complete 1,000 hours of
service and are employed on the last day of each plan year. The additional
matching contribution will vest 20% per year over five years.

In Successor '03, Predecessor '03, 2002 and 2001, the Company made
contributions to the plan of $0.1 million, $3.9 million, $3.0 million and
$2.0 million, respectively, in the aggregate.

SLEEP COUNTRY 401(K) PLAN AND PROFIT SHARING PLAN

The Company sponsors a 401(k) savings plan and profit sharing plan for all
full-time employees of Sleep Country with three months of service. Annually, the
Company may contribute a discretionary match based on a percentage of the
employee's 401(k) deferral. The Company's contributions to these plans for
Combined '03, 2002 and 2001 were not material.

OTHER PLANS

Certain union employees participate in multi-employer pension plans
sponsored by their respective unions. Amounts charged to pension cost,
representing the Company's required contributions to these plans for Successor
'03, Predecessor '03, 2002 and 2001 were not material, $2.1 million, $2.0
million and $2.1 million, respectively.

The Company had accrued $3.0 million at December 27, 2003 and $2.5 million
at December 28, 2002 for a supplemental executive retirement plan for a former
executive. Such amounts are included in other non-current liabilities in the
accompanying consolidated balance sheets.

RETIREE HEALTH AND LIFE INSURANCE COVERAGE

The Company accrues the cost of providing postretirement benefits,
including medical and life insurance coverage, during the active service period
of the employee. Such amounts are included in other non-current liabilities in
the accompanying consolidated balance sheets.

In 2000, the Company limited eligibility for retiree health care benefits
to employees who had become or did become eligible (by reaching age 55 with 15
years of service) by December 31, 2001. The effect of this change was a decrease
in the benefit obligation of approximately $1.1 million. In 2001, the Company
made benefit payments of approximately $2.5 million to settle a portion of this
obligation. As a result of the settlement, the Company recorded a gain of
approximately $2.1 million during 2001 related to the reduction of the
accumulated post-retirement benefit obligation. Approximately $0.5 million and
$1.6 million of this gain is reflected in cost of products sold and selling,
general and administrative expenses, respectively, in the accompanying 2001
Consolidated Statement of Operations.

57

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company currently allows former non-union employees who obtained age 55
and had 15 years of service as of December 31, 2001, and their spouses, to
continue to receive health insurance coverage under our self-insured medical
plan through age 65. The premiums for such coverage are paid by the former
non-union employees. There is no current retiree health coverage for
participants age 65 and over. This plan is unfunded.

The Company also provides for the continuance of term life insurance under
our group life insurance for a grandfathered group of former employees. The
aggregate annual premiums for this coverage is not significant and are paid by
the Company. This liability is unfunded.

The Company had an accrued postretirement benefit obligation of $0.7
million and $0.5 million as of December 27, 2003 and December 28, 2002,
respectively. In connection with the Acquisitions, the accrued postretirement
benefit obligation was adjusted to the difference between the projected benefit
obligation and the fair value of the plan assets as of December 19, 2003. The
Company had postretirement benefit income of $0.3 million for both Predecessor
'03 and 2002.

NOTE Q -- CONTINGENCIES

From time to time, the Company has been involved in various legal
proceedings. The Company believes that all other litigation is routine in nature
and incidental to the conduct of the Company's business, and that none of this
other litigation, if determined adversely to the Company, would have a material
adverse effect on the Company's financial condition or results of its
operations.

NOTE R -- RELATED PARTY TRANSACTIONS

In connection with the Transactions, the Company entered into a management
agreement ("THL management agreement") with an affiliate of THL pursuant to
which THL renders certain advisory and consulting services to the Company and
each of its subsidiaries. In consideration of those services, the Company agreed
to pay THL management fees equal to the greater of $1.5 million or an amount
equal to 1.0% of the consolidated earnings before interest, taxes, depreciation
and amortization of Simmons for such fiscal year, but before deduction of any
such fee. The fees are paid semi-annually.

The Company and Fenway had entered into a management agreement (the "Fenway
Advisory Agreement") pursuant to which Fenway provided strategic advisory
services to the Company. The Fenway Advisory Agreement was amended on October
21, 2002 to change the calculation of the annual management fee. In exchange for
advisory services, the Company had agreed to pay Fenway (i) annual management
fees of the greater of 0.25% of net sales for the prior fiscal year or 2.5% of
Adjusted EBITDA for the prior fiscal year, not to exceed $3.0 million; (ii) fees
in connection with the consummation of any acquisition transactions for Fenway's
assistance in negotiating such transactions; and (iii) certain fees and
expenses,

58

SIMMONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

including legal and accounting fees and any out-of-pocket expenses, incurred by
Fenway in connection with providing services to the Company. Prior to October
21, 2002, the annual management fee to Fenway was calculated as 0.25% of net
sales for the prior year. In conjunction with the Acquisitions, the Fenway
Advisory Agreement was terminated.

Sleep Country, Fenway and Boston Gardens Advisors, LLC ("Boston Gardens")
entered into a management agreement (the "Sleep Country Advisory Agreement")
pursuant to which Fenway and Boston Gardens provided strategic advisory services
to Sleep Country. In conjunction with the merger of Simmons Company and Sleep
Country on February 28, 2003, the Sleep Country Advisory Agreement was
terminated.

Included in other expense in the accompanying Consolidated Statements of
Operations for Successor '03, Predecessor '03, 2002 and 2001 is $0.1 million,
$2.8 million, $2.4 million and $2.8 million, respectively, related to the
management fees for services provided by THL and Fenway to the Company and its
subsidiaries.

In connection with the Transactions, the Company agreed to pay an affiliate
of THL a transaction fee equal to $20,000,000 plus all out-of-pocket expenses
incurred by THL relating to the Transactions and the related financing.

Mr. Eitel owns a motor yacht, which as of November 1, 2003, he has agreed
to make available to the Company for 30 days each year for use as a venue for
corporate and other functions. As compensation for the use of Mr. Eitel's motor
yacht, commencing November 1, 2003, we have agreed to pay compensation to the
captain of Mr. Eitel's motor yacht in the amount of $80 thousand per year, plus
benefits. In fiscal year 2003, the total amount of salary and benefits paid
under this agreement was approximately $15 thousand. We estimate that payments
in 2004 for the services of the captain of Mr. Eitel's motor yacht will total
approximately $93 thousand.

During fiscal 2003, Rousch Consulting Group, Inc. provided consulting
services to Simmons for aggregate payments of approximately $160 thousand,
inclusive of out-of-pocket expenses of approximately $45 thousand. Rousch
Consulting Group, Inc. is wholly owned by our Executive Vice President -- Human
Resources and Assistant Secretary, Rhonda C. Rousch, and her husband, Edward L.
Rousch.

NOTE S -- SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)

Although not required, following is a condensed summary of consolidated
quarterly results for 2003. The results of operations for the Combined Fourth
Quarter represent the mathematical addition of the historical amounts for the
Predecessor period (September 28, 2003 through December 19, 2003) and the
Successor period (December 20, 2003 through December 27, 2003) and are not
indicative of the results that would have actually been obtained if the
Acquisitions had occurred on September 28, 2003.

59

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

There has been no occurrence requiring a response to this item.

ITEM 9A. CONTROLS AND PROCEDURES.

(a) The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
filings under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Company's management, including its principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure. The Company's management, including the
principal executive officer and the principal financial officer, recognizes that
any set of controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control
objectives.

Within 90 days prior to the filing date of this annual report on Form
10-K, the Company has carried out an evaluation, under the supervision and the
participation of the Company's management, including the Company's principal
executive officer and the Company's principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on such evaluation, the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective.

(b) As required by Exchange Act Rule 13a-15(d), our management, including
our principal executive officer and principal financial officer, also conducted
an evaluation of the our internal controls over financial reporting to determine
whether any changes occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting. Based on that evaluation, there has been no
such change during the period presented by this report.

(c) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

60

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

MANAGEMENT AND DIRECTORS

The directors and principal officers of Simmons, and their positions and
ages as of March 1, 2004, are as follows:

The present principal occupations and recent employment history of each of
our executive officers and directors listed above is as follows:

Charles R. Eitel joined Simmons in January 2000 as Chairman of the Board of
Directors and Chief Executive Officer of Simmons and Simmons Holdings, Inc.
Prior to joining Simmons, Mr. Eitel served as President and Chief Operating
Officer of Interface, Inc., a leading global manufacturer and marketer of floor
coverings, interior fabrics and architectural raised floors. Prior to serving as
Chief Operating Officer, he held the positions of Executive Vice President of
Interface, President and Chief Executive Officer of the Floor Coverings Group,
and President of Interface Flooring Systems, Inc. Mr. Eitel is a director of
Duke Realty Corporation, an industrial real estate company (REIT) based in
Indianapolis, Indiana and American Fidelity Assurance Company in Oklahoma City,
Oklahoma.

Robert W. Hellyer joined Simmons in 1995 and has served as President and
director of Simmons and Simmons Holdings, Inc. since January 2001. Prior to
assuming his current position, Mr. Hellyer served as Executive Vice President --
Sales and Marketing, Executive Vice President -- Sales, General Manager --
Janesville and Vice President of Sales -- Janesville. Prior to joining Simmons,
Mr. Hellyer held various sales positions with Stearns & Foster. Mr. Hellyer is a
member of the Board of Trustees of ISPA.

William S. Creekmuir joined Simmons in April 2000 and serves as Executive
Vice President, Chief Financial Officer, Assistant Treasurer, Assistant
Secretary and director of both Simmons and Simmons Holdings, Inc. Prior to
joining Simmons, Mr. Creekmuir served as Executive Vice President, Chief
Financial Officer, Secretary and Treasurer of LADD Furniture, Inc., a publicly
traded furniture manufacturer. Prior to joining LADD in 1992, he worked 15 years
with KPMG in their audit practice, the last five years of which he was a
partner, including partner in charge of their national furniture manufacturing
practice. Mr. Creekmuir is Chairman of the Statistics Committee for ISPA. Mr.
Creekmuir is also a member of the Business Advisory

61

Council to the Walker College of Business at Appalachian State University. Mr.
Creekmuir is a Certified Public Accountant.

Rhonda C. Rousch joined Simmons in November 2001 and has served as
Executive Vice President -- Human Resources and Assistant Secretary since
October 2002. Prior to assuming her current position, Ms. Rousch served as
Senior Vice President -- Human Resources and Assistant Secretary. Prior to
joining Simmons, from September 2000 to November 2001, Ms. Rousch was Vice
President of Human Resources for MW Manufacturers, Inc. Prior to September 2000,
Ms. Rousch was the Director of Organizational Readiness for Harley-Davidson,
Inc.

Robert M. Carstens joined Simmons in February 1994 and serves as Senior
Vice President of Manufacturing. Mr. Carstens previously held a variety of
positions at Simmons including Vice President of Operations, and Operations
Manager in both the Piscataway, New Jersey and Atlanta, Georgia facilities. Mr.
Carstens began his bedding manufacturing career in 1983 at Sealy, Inc., where he
held various positions including Operations Manager.

Kevin Damewood joined Simmons in January 2000 and has served as Senior Vice
President -- Sales and Marketing since January 2004. Prior to assuming his
current position, Mr. Damewood served as Senior Vice President -- Sales since
July 2001 and prior to that he served as Vice President -- National Accounts.
Mr. Damewood also worked for Simmons from July 1996 to April 1999 as Vice
President -- Sales for the Seattle and Salt Lake City plants. Between April 1999
and December 2000, Mr. Damewood was employed with Premier Bedding Group as Vice
President of National Sales.

Kristen K. McGuffey joined Simmons in November 2001 and has served as
Senior Vice President -- General Counsel and Secretary since August 2002. Prior
to assuming her current position, Ms. McGuffey served as Vice
President -- General Counsel and Assistant Secretary. Prior to joining Simmons,
from March 2000 to October 2001, Ms. McGuffey was employed by Viewlocity, Inc.,
with the most recent position of Executive Vice President and General Counsel.
From March 1997 to February 2000, Ms. McGuffey was a partner of and, prior to
that, an associate at Morris, Manning & Martin LLP. Prior to March 1997, Ms.
McGuffey was an associate at Paul, Hastings, Janofsky & Walker, LLP.

Allen N. Podratsky joined Simmons in May 2000 as Senior Vice
President -- Product Development and Supply Chain Management. Prior to joining
Simmons, from February 1999 to May 2000, Mr. Podratsky was Vice President of
World-Wide Supply Chain Management for Xerox Engineering Systems, a division of
Xerox Corporation. From 1992 to February 1999, Mr. Podratsky held various
positions at Mattel, Inc. (Fisher-Price, Inc.), including Director Product
Development and Director Commodity Management -- Plastics. Mr. Podratsky is the
President of the Sleep Products Safety Council, an organization affiliated with
ISPA.

W. Wade Vann joined Simmons in October 2000 and has served as Senior Vice
President of Information Technology and Chief Information Officer since January
2004. Prior to assuming his current position, Mr. Vann served as the Vice
President of Information Technology and Chief Information Officer. Prior to
joining Simmons, Mr. Vann held the position of Director of Information
Technology with Broyhill Furniture Industries from October 1992 to October 2000.

Brian P. Breen joined Simmons in July 1996 and has served as Vice President
and Treasurer since January 2002. Prior to assuming his current position, Mr.
Breen served as Vice President and Assistant Treasurer since September 2000 and
prior to that served as Director of Financial Reporting of the Outlet Division.
Prior to joining Simmons Mr. Breen held various financial reporting positions
most recently serving as Controller for Six Flags Theme Parks. Mr. Breen is a
Certified Treasury Professional.

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Earl C. Brewer joined Simmons in February 2001 and has served as Vice
President of Taxation and Assistant Secretary since then. Prior to joining
Simmons, Mr. Brewer held similar positions at Oakwood Homes Corporation from
March 2000 to February 2001 and at LADD Furniture, Inc. from October 1993 to
February 2000. Mr. Brewer is a Certified Public Accountant.

Mark F. Chambless joined Simmons in May 1995 and has served as Vice
President and Corporate Controller since February 2000. Mr. Chambless is the
Principal Accounting Officer for the Company. Prior to assuming his current
position, Mr. Chambless was the Corporate Controller from November 1995 through
February 2000 and prior to that served as a Divisional Controller. Prior to
joining Simmons, Mr. Chambless worked nine years at Sealy, Inc. where he held
various positions including Plant Controller, Operations Manager and Divisional
Controller. Mr. Chambless is a Certified Public Accountant.

Donald J. Hofmann joined Simmons in 1995 and has served as Vice President
of New Business Development and Domestic Licensing since January 2004. Prior to
assuming his current position, Mr. Hofmann has held various positions within the
Company, including Senior Vice President of Marketing and Vice President of
Advertising. Prior to joining Simmons, Mr. Hofmann held various marketing and
advertising positions, including President of Earle Palmer Brown Advertising and
Executive Vice President of Marketing at Tupperware, Inc. Mr. Hofmann is a
director of the Better Sleep Council, an organization affiliated with ISPA.

Timothy F. Oakhill joined Simmons in January 1997 and has served as Vice
President -- International since January 2004. Prior to assuming his current
position, Mr. Oakhill managed various Simmons brands, including BackCare(R) and
Deep Sleep(R) from January 1997 to August 2003 and Beautyrest(R) from August
2003 to January 2004. Prior to joining Simmons, Mr. Oakhill served as Marketing
Manager for Eastman-Kodak Company and as an account supervisor for Bates
Worldwide.

Todd M. Abbrecht has been a director of Simmons since December 2003,
following the consummation of the Transactions. Mr. Abbrecht is a Managing
Director of Thomas H. Lee Partners, which he joined in 1992. Prior to joining
the firm, Mr. Abbrecht was in the mergers and acquisitions department of Credit
Suisse First Boston. Mr. Abbrecht is a director of Affordable Residential
Communities, Inc., Michael Foods, Inc., and National Waterworks, Inc.

David A. Jones has been a director of Simmons since December 2003,
following the consummation of the Transactions. Mr. Jones has served as the
Chairman of the Board of Directors and Chief Executive Officer of Rayovac
Corporation since September 1996. From 1996 to April 1998, he also served as
President. From 1995 to 1996, Mr. Jones was President, Chief Executive Officer
and Chairman of the Board of Directors of Thermoscan, Inc. Mr. Jones currently
serves on the Board of Directors of Tyson Foods, Inc. and Pentair, Inc. and
previously served on the Board of Directors for United Industries Corporation.

Albert L. Prillaman has been a director of Simmons since December 2003,
following the consummation of the Transactions. Mr. Prillaman is Chairman of the
Board of Stanley Furniture Company, Inc., where he previously served as both
President and Chief Executive Officer. Mr. Prillaman currently serves on the
Board of Trustees of Roanoke College. Mr. Prillaman was a director of Culp, Inc.
in High Point, North Carolina, and past Chairman of the Board of the American
Furniture Manufacturers Association in High Point, North Carolina.

Scott A. Schoen has been a director of Simmons since December 2003,
following the consummation of the Transactions. Mr. Schoen is a Managing
Director of Thomas H. Lee Partners, which he joined in 1986. Prior to joining
the firm, Mr. Schoen was in the Private Finance Department of Goldman, Sachs &
Co. Mr. Schoen is a director of AXIS Capital Holdings Limited, Affordable
Residential Communities, Inc., Syratech Corporation, TransWestern Publishing,
L.P., United Industries Corporation and Wyndham International. Mr. Schoen is a
Vice Chairman of the Board and a member of the Executive Committee of the United
Way of Massachusetts Bay. He is also a member of the Advisory Board of the Yale
School of Management.

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George R. Taylor has been a director of Simmons since December 2003,
following the consummation of the Transactions. Mr. Taylor is a Vice President
at Thomas H. Lee Partners, which he joined in 1996. Prior to joining the firm,
Mr. Taylor was at ABS Capital Partners. Mr. Taylor is a director of Syratech
Corporation.

Each of our directors will hold office until his successor has been elected
and qualified. Our executive officers are elected by and serve at the discretion
of our Board of Directors. There are no family relationships between any of our
directors or executive officers.

COMMITTEES OF THE BOARD OF DIRECTORS

Our board of directors for our indirect parent company, THL Holding, has
established an audit committee, a compensation committee, a nominating and
governance committee and a corporate benefits committee for itself and the
Company. The members of the audit committee are Messrs. Prillaman, Taylor and
Jones. The members of the compensation committee are Messrs. Schoen, Abbrecht
and Eitel. The members of the nominating and governance committee are Messrs.
Schoen, Abbrecht and Eitel. The members of the corporate benefits committee are
Messrs. Creekmuir, Eitel and Hellyer. The audit committee recommends the annual
appointment and reviews independence of auditors for the Company and reviews the
scope of audit and non-audit assignments and related fees, the results of the
annual audit, accounting principles used in financial reporting, internal
auditing procedures, the adequacy of our internal control procedures, related
party transactions, and investigations into matters related to audit functions.
The compensation committee reviews and approves the compensation and benefits
for our senior employees and directors, authorizes and ratifies equity and other
incentive arrangements, and authorizes employment and related agreements. The
purpose of the nominating and governance committee is to recommend up to three
directors who are not affiliates of Simmons or its stockholders to serve on the
board of directors of the Company, its parent and indirect parent. The corporate
benefits committee has the responsibility to determine all corporate benefits
for employees of the Company and to administer our employee benefit plans in
accordance with the Company by-laws. From time to time, the board of directors
of THL Holding or the Company may contemplate establishing other committees.

DIRECTOR COMPENSATION

All members of our board of directors are reimbursed for their usual and
customary expenses incurred in connection with attending all board and other
committee meetings. Non-employee directors, Messrs. Prillaman and Jones, receive
director fees of $25,000 per year. Each of the non-employee directors also own
2,500 shares of Class B common stock of THL Holding, which stock is subject to
time and performance-based vesting.

AUDIT COMMITTEE FINANCIAL EXPERT

We have no financial expert. Our board intends to seek and consider
retaining such an expert in fiscal 2004.

CODE OF ETHICS

We have a code of ethics (the "Code of Ethics"), within the meaning of 17
CFR Section 229.406, that applies to the Company's Chief Executive Officer,
Chief Financial Officer, Corporate Controller and Vice President - Audit
Services. If the Company makes an amendment to the Code of Ethics, or grants a
waiver from a provision of the Code of Ethics to the Chief Executive Officer,
Chief Financial Officer, Corporate Controller, or Vice President - Audit
Services, then the Company will make any required disclosure of such amendment
or waiver on the Company's website (www.simmons.com) or in a current report on
Form 8-K filed with the SEC.

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ITEM 11. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

The following table sets forth all cash compensation earned in the previous
three years by our Chief Executive Officer and each of our other five most
highly compensated executive officers during the past year (the "Named Executive
Officers"). The compensation arrangements for each of these officers that are
currently in effect are described under the caption "Employment Arrangements"
below. The bonuses set forth below include amounts earned in the year shown but
paid in the subsequent year.

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(1) Such amounts principally include (i) exercise of stock options held in
predecessor company that were held by The Charles R. Eitel Revocable Trust,
of which Mr. Eitel is trustee, of $29,177,145 in 2003; (ii) a car allowance
of $12,000 in 2003, 2002 and 2001; and (iii) club initiation and membership
fees of $11,080, $6,800 and $93,093 in 2003, 2002 and 2001, respectively.
These items were taxable to Mr. Eitel. The personal income tax impact of a
2001 club initiation and membership fee was assumed by Simmons which
resulted in additional compensation of $40,009.

(2) Restricted stock shares are held by The Charles R. Eitel Revocable Trust, of
which Mr. Eitel is the trustee.

(3) Such amounts principally include (i) exercise of stock options held in
predecessor company of $11,254,286 in 2003; (ii) a car allowance of $9,000
in 2003, 2002 and 2001; and (iii) moving expenses of $55,502 in 2001. These
items were taxable to Mr. Hellyer. The personal income tax impact of the
2001 moving expenses was assumed by Simmons which resulted in additional
compensation of $10,315.

(4) Such amounts principally include (i) exercise of stock options held in
predecessor company of $10,806,350 in 2003; (ii) a car allowance of $9,000
in 2003, 2002 and 2001; (iii) commute and temporary housing expenses of
$16,852 and $70,910 in 2002 and 2001, respectively; (iv) moving expenses of
$120,000 in 2002; and (v) reimbursement of mortgage costs of $80,409 and
$29,187 in 2003 and 2002, respectively. These items were taxable to Mr.
Creekmuir. The personal income tax impact of certain commute and temporary
housing expenses and moving expenses was assumed by Simmons which resulted
in additional compensation of $59,310, $38,674 and $34,562 in 2003, 2002 and
2001, respectively.

(5) Such amount represents the exercise of stock options held in predecessor
company.

(6) Mr. Parrish is no longer employed by Simmons.

(7) Such amounts principally include (i) exercise of stock options held in
predecessor company of $2,067,000 in 2003; (ii) severance payments of
$116,653 in 2003; (iii) a car allowance of $5,109, $9,000 and $4,875 in
2003, 2002 and 2001, respectively; and (iv) forgiveness of a loan of
$112,692 in 2003. The personal income tax impact of the forgiveness of a
loan was assumed by Simmons which resulted in additional compensation of
$83,215 in 2003.

(8) Such amount represents the exercise of stock options held in predecessor
company.

(9) All other compensation amounts include:

(a)contributions to our ESOP in 2002 and 2001, respectively, in the amounts
of $16,170 and $0 for Mr. Eitel; $17,147 and $21,911 for Mr. Hellyer;
$14,229 and $0 for Mr. Creekmuir; $14,193 and $13,545 for Mr. Damewood;
and $14,877 and $21,837 for Mr. Hofmann, respectively;

(b)contributions to our 401(k) plan in 2003, 2002 and 2001, respectively,
in the amounts of $12,000, $11,058 and $14,500 for Mr. Eitel; $12,000,
$10,875 and $14,812 for Mr. Hellyer; $12,000, $9,750 and $6,750 for Mr.
Creekmuir; $12,000, $10,696, and $5,100 for Mr. Damewood; $7,232, $4,550
and $0 for Mr. Parrish; and $12,000, $11,057 and $5,100 for Mr. Hofmann,
respectively; and

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(c)premiums for term life insurance and long-term disability insurance in
2003, 2002 and 2001, respectively, in the amounts of $22,268, $21,724
and $12,636 for Mr. Eitel; $7,845, $5,591 and $3,552 for Mr. Hellyer;
$10,899, $8,340 and $5,543 for Mr. Creekmuir; $1,700, $1,323 and $480
for Mr. Damewood; $1,269, $1,798, and $0 for Mr. Parrish; and $1,571,
$1,304 and $443 for Mr. Hofmann, respectively. These premiums were
taxable to Messrs. Eitel, Hellyer, Creekmuir, Damewood, Parrish, and
Hofmann. The personal income tax impact of these items were assumed by
Simmons for Messrs. Eitel, Hellyer and Creekmuir, which resulted in
additional compensation in 2003, 2002 and 2001, respectively, in the
amounts of $10,266, $9,994 and $5,756 for Mr. Eitel; $3,617, $2,543 and
$2,452 for Mr. Hellyer; and $5,025, $3,845 and $2,548 for Mr. Creekmuir.

There were no options granted in fiscal year 2003. In connection with
the transactions, all option plans were terminated.

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EMPLOYMENT ARRANGEMENTS, TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE IN
CONTROL ARRANGEMENTS

Executive Employment Agreements. Four of our senior executives, Charles
Eitel, William Creekmuir, Robert Hellyer and Rhonda Rousch entered into
executive employment agreements with THL Bedding Holding Company and Simmons on
substantially similar terms to their previous existing arrangements. The
agreements have two-year terms with evergreen renewal provisions and contain
usual and customary restrictive covenants, including two-year non-competition
provisions, non-disclosure of proprietary information provisions, provisions
relating to non-solicitation/no hire of employees or customers and
non-disparagement provisions. In the event of a termination without "cause" or
departure for "good reason," the terminated senior executives are entitled to
severance equal to two years salary plus an amount equal to their pro-rated
bonus for the year of termination.

Put/Call Arrangements. Under THL Bedding Holding Company's
Securityholders' Agreement, THL Bedding Holding Company has the right to
purchase for fair market value a management stockholder's Class A common stock
upon termination of such management stockholder's employment for any reason;
provided that, if such employee is terminated for "cause" or voluntarily quits,
Simmons may repurchase such shares at the lower of fair market value and cost.
In addition, upon termination of Charles Eitel, William Creekmuir, Robert
Hellyer or Rhonda Rousch by Simmons without "cause" or by the employee for "good
reason," such employee may require Simmons to repurchase shares of Class A
common stock held by them for fair market value. With respect to other employee
holders of Class A Common Stock, if such employee is terminated without "cause,"
then such employee may require Simmons to repurchase shares of Class A Common
Stock held by such employee for the lower of fair market value and cost. Fair
market value will be initially determined by the Board of Directors of THL
Bedding Holding Company. Under restricted stock agreements, upon termination of
employment for any reason, Simmons has the right to repurchase such terminated
employee's Class B common stock.

EMPLOYEE BENEFIT PLANS

The THL Bedding Holding Company Equity Incentive Plan was adopted in
connection with the Transactions and is used to attract and retain the best
available personnel, to provide additional incentive to persons who provide
services to us, and to promote the success of our business. The Plan is
administered by the board of directors of THL Bedding Holding Company or, at its
election, by one or more committees consisting of one or more members who have
been appointed by that board of directors. The board of directors of THL Bedding
Holding Company is authorized to grant options, restricted stock or other awards
to our employees, directors, and consultants or any direct or indirect corporate
or other subsidiary in which we own at least 50% of the outstanding equity
interests. Restricted shares of Class B common stock representing up to fifteen
percent (15%) of the capital stock of THL Bedding Holding Company (on a fully
diluted basis) may be issued pursuant to

67

awards under the Plan. Awards of restricted stock shall be made pursuant to
restricted stock agreements and may be subject to vesting and other restrictions
as determined by the board of directors of THL Bedding Holding Company, or a
committee of the board. Among other things, the restricted stock agreements
provide, under certain conditions, for acceleration in vesting of the stock upon
a change in control and all restricted stock vests on the eight anniversary of
the issuance of the restricted stock. See "Certain Relationships and Related
Party Transactions -- Restricted Stock Agreement."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Following the Acquisitions, compensation decisions regarding the Company's
executive officers are made by the Compensation Committee (the "Committee") of
the Board of Directors of THL Bedding Holding Company. The members of the
Committee as of December 27, 2003 are Messrs. Abbrecht, Eitel, and Schoen. Mr.
Eitel is the Chairman of the Board and Chief Executive Officer of the Company.
Mr. Eitel cannot vote on his own compensation.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Committee is responsible for the general compensation policies of the
Company, and in particular is responsible for setting and administering the
policies that govern executive compensation. The Committee evaluates the
performance of management and determines the compensation levels for the Chief
Executive Officer (the "CEO") and the executive officers of the Company. The CEO
determines compensation levels for all other executive officers subject to the
informal approval of the Committee.

The objective of the Committee is to establish policies and programs to
attract and retain key executives, and to reward performance by these executives
which benefit the Company. The primary elements of executive compensation are
base salary, annual cash bonus and restricted stock awards. The salary is based
on factors such as the individual executive officer's level of responsibility,
and comparison to similar positions in the Company and in comparable companies.
The annual cash bonuses are currently based on the Company's performance
measured against attainment of financial objectives. Restricted stock awards are
intended to align the executive officer's interests with those of the Company
and its stockholders in promoting the long-term growth of the Company, and are
determined based on the executive officer's level of responsibility, number of
stock options previously granted, and contributions toward achieving the
objectives of the Company. Further information on each of these compensation
elements follows.

SALARIES

Base salaries are adjusted annually, following a review by either the CEO,
President, or Executive Vice President & Chief Financial Officer. In the course
of the review, performance of the individual with respect to specific objectives
is evaluated, as are any increases in responsibility, and salaries for similar
positions. The specific objectives for each executive officer are set by either
the CEO, President, or Executive Vice President & Chief Financial Officer, and
will vary for each executive position and for each year. Because the focus of
the review is individual achievement, performance of the Company does not weigh
heavily in the result. When all reviews are completed, the CEO makes a
recommendation to the Committee for their review and final approval.

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With respect to the CEO, the Committee reviews and fixes his base
salary primarily on the Committee's assessment of his performance and its
expectations as to his future contributions. Competitive compensation data is
also a major factor in establishing the CEO's salary, but no precise formula is
applied in considering this data. The Committee's review takes place annually.

ANNUAL CASH BONUSES

Certain of our employees are eligible, pursuant to their employment
agreements, to receive annual cash bonuses based upon the financial performance
of the Company.

RESTRICTED STOCK AWARDS

THL Holding has adopted a management equity incentive plan to provide
incentives to our employees and directors and the employees and directors of THL
Holding by granting them restricted stock awards of Class B common stock of THL
Holding. These restricted stock awards are intended to provide an incentive to
continue as employees over a long term, and to align their interests with the
Company by providing a stake in THL Holding. In making grants, THL Holding's
compensation committee takes into account the total number of shares available
for grant, prior grants outstanding, and estimated requirements for future
grants. Individual awards take into account the executive officer's
contributions to the Company, scope of responsibilities, strategies and
operational goals, salary and previous stock option awards under the former
management stock incentive plan. In determining a restricted stock award for the
CEO, THL Holding's compensation committee weighs all of the above factors, but
also recognizes the CEO's critical role in developing strategies for the
long-term benefit of the Company. Restricted stock awards are an important
element in attracting and retaining capable executives at all levels, and this
is particularly so in the case of the CEO.

OTHER BENEFITS

Periodically, the Compensation Committee assesses the other benefits
provided to Executive Officers of the Company.

The Committee continually reviews the Company's compensation programs
to ensure the overall package is competitive, balanced, and that proper
incentives and rewards are provided.

Compensation Committee:

Todd M. Abbrecht
Charles R. Eitel
Scott A. Schoen

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Simmons is an indirect wholly owned subsidiary of THL Bedding Holding
Company.

The following table sets forth certain information regarding beneficial
ownership of THL Bedding Holding Company by: (1) each person or entity owning
any class of THL Bedding Holding Company's outstanding securities and (2) each
member of the board of directors of THL Bedding Holding Company (which is
identical to the board of directors of Simmons), each of our named executive
officers, each member of our management committee and our executive officers as
a group. THL Bedding Holding Company's outstanding securities consisted of
3,680,308.49 shares of Class A Common Stock as of March 8, 2004. We have also
authorized 688,235 shares of Class B Common Stock, of which 657,139 shares were
outstanding as of March 8, 2004 for issuance pursuant to the restricted stock
agreement under our equity incentive plan. See "Certain Relationships and
Related Party Transactions -- Amended and Restated Certificate of Incorporation
of THL Bedding Holding Company." The Class A common stock and Class B common
stock generally have identical voting rights. To our knowledge, each such
stockholder has sole voting and investment power as to the common stock shown
unless otherwise noted. Beneficial ownership of the common stock listed in the
table has been determined in accordance with the applicable rules and
regulations promulgated under the Securities Exchange Act of 1934, as amended.

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* less than 1%

(1) Includes interests owned by each of Thomas H. Lee Equity Fund V, L.P.,
Thomas H. Lee Parallel Fund V, L.P., Thomas H. Lee Equity (Cayman) Fund V.
L.P., Thomas H. Lee Investors Limited Partnership, 1997 Thomas H. Lee
Nominee Trust, Putnam Investments Holdings, LLC, Putnam Investments
Employees' Securities Company I, LLC, and Putnam Investments Employees'
Securities Company II, LLC., Thomas H. Lee Equity Fund V, L.P. and Thomas H.
Lee Parallel Fund V, L.P. are Delaware limited partnerships, whose general
partner is THL Equity Advisors V, LLC, a Delaware limited liability company.
Thomas H. Lee Equity (Cayman) Fund V, L.P. is an exempted limited
partnership formed under the laws of the Cayman Islands, whose general
partner is THL Equity Advisors V, LLC, a Delaware limited liability company
registered in the Cayman Islands as a foreign company. Thomas H. Lee

70

Advisors, LLC, a Delaware limited liability company, is the general partner
of Thomas H. Lee Partners, a Delaware limited partnership, which is the
sole member of THL Equity Advisors V, LLC. Thomas H. Lee Investors Limited
Partnership (f/k/a THL-CCI Limited Partnership) is a Massachusetts limited
partnership, whose general partner is THL Investment Management Corp., a
Massachusetts corporation. The 1997 Thomas H. Lee Nominee Trust is a trust
with US Bank, N.A. serving as Trustee. Thomas H. Lee, a Managing Director
of Thomas H. Lee Advisors, LLC, has voting and investment control over
common shares owned of record by the 1997 Thomas H. Lee Nominee Trust.

Each of Scott A. Schoen and Todd M. Abbrecht are Managing Directors of
Thomas H. Lee Advisors, LLC. George R. Taylor is a Vice President of Thomas
H. Lee Advisors, LLC. Each of Messrs. Schoen, Abbrecht and Taylor may be
deemed to beneficially own Class A Common Stock held of record by Thomas H.
Lee Equity Fund V, L.P., Thomas H. Lee Parallel Fund V, L.P. and Thomas H.
Lee Equity (Cayman) Fund V. L.P. Each of these individuals disclaims
beneficial ownership of such units except to the extent of their pecuniary
interest therein.

The address of Thomas H. Lee Equity Fund V, L.P., Thomas H. Lee Parallel
Fund V, L.P., Thomas H. Lee Equity (Cayman) Fund V, L.P., Thomas H. Lee
Investors Limited Partnership, the 1997 Thomas H. Lee Nominee Trust, Scott
A. Schoen, Todd M. Abbrecht and George R. Taylor is 75 State Street,
Boston, MA 02109. Putnam Investments Holdings LLC, Putnam Investments
Employees' Securities Company I, LLC and Putnam Investments Employees'
Securities Company II, LLC are co-investment entities of Thomas H. Lee
Partners and each disclaims beneficial ownership of any securities other
than the securities held directly by such entity. The address for the
Putnam entities is One Post Office Square, Boston, MA 02109.

(2) Includes interest owned by Simmons Holdings, LLC, FPIP, LLC and FPIP Trust,
LLC. The address for Fenway Capital Fund II, L.P. is 152 West 57th Street,
59th Floor, New York, New York 10019.

(3) Excludes investment in Deferred Compensation Plan discussed herein that
tracks the Class A Common Stock even though no actual purchase of Class A
Common Stock is made. The address of Charles Eitel, Robert Hellyer, William
Creekmuir, Donald Hofmann and Kevin Damewood is c/o Simmons Company, One
Concourse Parkway, Suite 800, Atlanta, Georgia 30328.

(4) Mark Parrish is no longer employed by Simmons.

(5) The address for David A. Jones is 7440 Wildercliff Drive, Atlanta, Georgia
30328.

(6) The address for Albert L. Prillaman is c/o Stanley Furniture Company, 1641
Fairystone Park Highway, P.O. Box 30, Stanleytown, Virginia 24168.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

MANAGEMENT AGREEMENT

Pursuant to the management agreement entered into in connection with the
Transactions, THL Managers V, LLC renders certain advisory and consulting
services to Simmons and each of its subsidiaries. In consideration of those
services, Simmons agreed to pay to THL Managers V, LLC, an affiliate of Thomas
H. Lee Partners, semi-annually, an aggregate per annum management fee equal to
the greater of:

- $1,500,000; and

- an amount equal to 1.0% of the consolidated earnings before interest,
taxes, depreciation and amortization of Simmons for such fiscal year, but
before deduction of any such fee.

71

In connection with the Transactions, Simmons agreed to pay THL Managers V,
LLC at the closing of the Transactions a transaction fee equal to $20,000,000
plus all out-of-pocket expenses incurred by Thomas H. Lee Partners prior to the
closing of the transaction for services rendered by it in connection with the
Transactions.

Simmons also agreed to indemnify THL Managers V, LLC and its affiliates
from and against all losses, claims, damages and liabilities arising out of or
related to the performance by Thomas H. Lee Partners Managers V, LLC of the
services pursuant to the management agreement.

AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF THL BEDDING HOLDING
COMPANY

The Amended and Restated Certificate of Incorporation of THL Bedding
Holding Company contains, among other provisions, the following terms:

Description of the Capital Stock of THL Bedding. THL Bedding Holding
Company has two classes of common stock -- Class A common stock and Class B
common stock. The Class A common stock is held by THL, Fenway Partners and those
members of management who elected to acquire such shares in connection with the
Acquisition. The Class A common stock earns a preferred return of 6% per annum.
Each holder of Class A common stock is entitled to one vote (or a fraction
thereof) for each share (or fraction thereof) of Class A common stock owned by
such holder. THL Bedding Holding Company is also authorized to issue Class B
common stock, which has identical rights to the Class A common stock, except
with respect to distributions (as described below). The Class B common stock is
restricted and subject to vesting as described in restricted stock agreements
with the holders. Each holder of Class B common stock is entitled to one vote
(or a fraction thereof) for each share (or fraction thereof) of Class B common
stock issued to such holder.

The Class A common stock and Class B common stock will be entitled to
receive distributions in the following priority:

- holders of Class A common stock will be entitled to receive an amount
equal to a 6% cumulative, compounding quarterly, preferred return on
their invested capital;

- holders of Class A common stock will be entitled to receive a return of
their invested capital; and

- holders of the Class A common stock and Class B common stock will be
entitled to share in all remaining distributions on a pro rata basis
based on the aggregate outstanding shares of Class A common stock and
Class B common stock.

SECURITYHOLDERS' AGREEMENT

Pursuant to the Securityholders' Agreement entered into in connection with
the Acquisition, securities of THL Bedding Holding Company are subject to
certain restrictions on transfer, other than certain exempt transfers as defined
in the Securityholders' Agreement, as well as the other provisions described
below.

The Securityholders' Agreement provides that all parties to the agreement
will vote all their shares to elect and continue in office the board of
directors of THL Bedding Holding Company, consisting of up to nine directors
composed of:

- five persons designated by THL;

- one person who will be the Chief Executive Officer of Simmons Company;
and

- up to three independent persons designated by the nominating and
governance committee.

72

The Securityholders' Agreement also provides:

- holders of Class A Common Stock with customary "tag-along" rights with
respect to transfers of shares of THL Bedding Holding Company
beneficially owned by THL;

- THL Bedding Holding Company and then THL with a "right of first refusal"
with respect to transfers of shares of THL Bedding Holding Company held
by the management stockholders and Fenway Partners;

- holders of Class A Common Stock with customary "preemptive rights";

- THL with "drag-along" rights with respect to all shares of Class A common
stock and Class B common stock in a sale of THL Bedding Holding Company
or its subsidiaries; and

- four Simmons senior managers holding Class A Common Stock with the right
to "put" all or a portion of their shares to THL Bedding Holding Company
at fair market value if terminated without cause or for good reason.

- THL Bedding Holding Company the right to purchase all or a portion of a
terminated management stockholder's shares of THL Bedding Holding
Company; and

- employees, other than the four Simmons senior managers, holding Class A
Common Stock right to "put" all or a portion of their shares to THL
Bedding Holding Company at the lower of fair market value and cost if
terminated without cause.

Upon a public offering, the fair market value of THL Bedding Holding
Company will be determined by its Board of Directors. The shares of Class A
common stock (including those deemed held in our deferred compensation plan)
will be exchanged for shares of Class B common stock (or, with respect to
participants in the deferred compensation plan, a deemed investment in Class B
common stock), with the number of shares of Class B common stock to be based
upon the value of the Class A common stock (including shares deemed held in the
deferred compensation plan) at the time of the offering. To the extent we have
cash available and to the extent not restricted by market conditions related to
the offering, the holders of Class A common stock (and participants in the
deferred compensation plan) will be entitled to receive in cash, unless
otherwise determined by the Board of Directors of THL Bedding Holding Company,
an amount up to their original investment plus the 6% accrued yield. Any amounts
received in cash by the holders of Class A common stock will reduce the value of
the Class A common stock used to compute the number of shares of Class B common
stock to be issued in such exchange.

EQUITY REGISTRATION RIGHTS AGREEMENT

THL is entitled to request up to four registrations of the Class A common
stock of THL Bedding Holding Company under the Securities Act at any time after
the closing of the Acquisition. In connection therewith, each signatory of the
registration rights agreement agrees that it will vote, or cause to be voted,
all common stock over which such person has power to vote to effect any stock
split deemed necessary to facilitate the effectiveness of a requested
registration. All holders of vested common stock are entitled to piggyback
rights on any registration by THL Bedding Holding Company.

DEFERRED COMPENSATION PLAN

Certain members of management who were entitled to receive option proceeds
in connection with the Acquisition have elected to become participants in a
deferred compensation plan whereby deferred compensation accounts will be deemed
to be invested in Class A common stock (although no actual Class A common stock
will be purchased) and will track distributions to be made to the holders of
Class A common stock.

RESTRICTED STOCK AGREEMENT

Certain members of management were entitled to purchase shares of Class B
common stock at a purchase price of $0.01 per share pursuant to a Restricted
Stock Agreement. Twenty-five percent of the shares of Class B common stock
become eligible for vesting at the end of each of 2004, 2005, 2006 and 2007.
Vesting is subject to annual performance targets and includes catch-up
provisions and acceleration upon a change of

73

control. Upon a manager's termination, THL Bedding Holding Company is entitled
to repurchase (1) unvested shares of Class B common stock for the lesser of fair
market value or the original purchase price, and (2) vested shares of Class B
common stock at fair market value.

CONSULTING SERVICES

During fiscal 2003, Rousch Consulting Group, Inc. provided consulting
services to Simmons for aggregate payments of approximately $160 thousand,
inclusive of out-of-pocket expenses of approximately $$45 thousand. Rousch
Consulting Group, Inc. is wholly owned by our Executive Vice President -- Human
Resources and Assistant Secretary, Rhonda C. Rousch, and her husband, Edward L.
Rousch.

TRANSACTIONS WITH MR. EITEL

Mr. Eitel owns a motor yacht, which as of November 1, 2003, he has agreed
to make available to the Company for 30 days each year for use as a venue for
corporate and other functions. As compensation for the use of Mr. Eitel's motor
yacht, commencing November 1, 2003, we have agreed to pay compensation to the
captain of Mr. Eitel's motor yacht in the amount of $80 thousand per year, plus
benefits, and to pay up to $25 thousand annually, including benefits, as
compensation of any first mate which Mr. Eitel may hire. In fiscal year 2003,
the total amount of salary and benefits paid under this agreement was
approximately $15 thousand. We estimate that payments in 2004 for the services
of the captain of Mr. Eitel's motor yacht will total approximately $93 thousand.

During fiscal 2003, Mr. Eitel paid Simmons approximately $10 thousand as
reimbursement of the costs associated with his personal use of our corporate
aircraft. Beginning in fiscal 2004, we have agreed not to require Mr. Eitel to
reimburse use for his use of the corporate aircraft.

PURCHASE OF SLEEP COUNTRY

On February 28, 2003, we acquired the stock of SC Holdings, Inc. ("Sleep
Country"), a mattress retailer with 47 stores in the Pacific Northwest, from a
fund affiliated with Fenway Partners for approximately $18.4 million, plus
additional contingent consideration based upon future performance. This
acquisition was financed from borrowings under our existing senior credit
facility. Sleep Country used the proceeds received to repay bank debt of $17.8
million and debt to an affiliate of $0.6 million. In connection with the
acquisitions, we paid a fund affiliated with Fenway Partners and a former
shareholder of Sleep Country approximately $14.8 million additional final
consideration.

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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Aggregate fees were billed to us by our principal accountants,
PricewaterhouseCoopers LLP, for audit services related to the two most recent
fiscal years and for other professional services billed in the most recent two
fiscal years were as follows:

2002 2003
--------- --------

Audit Fees $258,378 $160,591
Audit-Related Fees 8,052 55,338
Tax Fees 139,804 450,217
All Other Fees 109,700 328,674
-------- --------
Total $515,934 $994,820
======== ========

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)(1) The following consolidated financial statements of Simmons Company and
its subsidiaries are included in Part II, Item 8:

Report of Independent Accountants

Consolidated Statements of Operations for the period from
December 20, 2003 through December 27, 2003, period from
December 29, 2002 through December 19, 2003, and for the years
ended December 28, 2002 and December 29, 2001

Consolidated Balance Sheets at December 27, 2003 and December
28, 2002

Consolidated Statement of Changes in Stockholders' Equity
(Deficit) for the period from December 20, 2003 through
December 27, 2003, period from December 29, 2002 through
December 19, 2003, and for the years ended December 28, 2002
and December 29, 2001

Consolidated Statements of Cash Flows for the period from
December 20, 2003 through December 27, 2003, period from
December 29, 2002 through December 19, 2003, and for the years
ended December 28, 2002 and December 29, 2001

Notes to the consolidated financial statements

(a)(2) Financial Statement Schedule

Schedule II - Valuation Accounts

(a)(3) The exhibits to this report are listed in section (c) of Item 14 below.

(b) Reports on Form 8-K filed during the fourth quarter:

A report on Form 8-K was filed on November 12, 2003, reporting our
results of operations for the quarter and nine months ended September
27, 2003.

A report on Form 8-K was filed on November 17, 2003, reporting our
Fifth Amendment to the Credit Guaranty Agreement dated as of October
29, 1998 and announcing the sale of the Company to an affiliate of
Thomas H. Lee Partners.

A report on Form 8-K was filed on November 19, 2003, reporting THL
Bedding Company commenced a cash tender offer and consent solicitation
for any and all of the $150,000,000 aggregate principal amount of
10.25% Senior Subordinated Notes due 2009 of the Company.

A report on Form 8-K was filed on November 25, 2003, reporting the
Company, has entered into an ESOP Stock Sale Agreement (the "ESOP Stock
Sale Agreement") by and among THL Bedding Company , Holdings and State
Street Bank and Trust Company, solely in its capacity as trustee of the
Simmons Company Employee Stock Ownership Trust (the "Trust") dated as
of November 21, 2003.

A report on Form 8-K was filed on December 2, 2003, reporting our
results of operations for the ten months and last twelve months ended
November 1, 2003.

A report on Form 8-K was filed on December 5, 2003, announcing THL
Bedding Company received the requisite consents to amend the indenture
relating to the Company's Senior Subordinated Notes.

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(c) Exhibits:

The following exhibits are filed with or incorporated by reference into this
Form 10-K. For the purposes of this exhibit index, references to "the
Registrant" include Simmons Company, both prior to and following the
transactions that occurred on December 19, 2003. For a description of these
transactions, see "Recent History of the Company." The exhibits which are
denominated by an asterisk (*) were previously filed as a part of, and are
hereby incorporated by reference from either the (i) Registration Statement on
Form S-4 under the Securities Act of 1933 for the Registrant, File No. 333-76723
(referred to as "S-4"), (ii) Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 (referred to as "9/30/00 10-Q"), (iii) Annual Report on Form
10-K for the year ended December 29, 2001 (referred to as "2001 10-K"), (iv)
Quarterly Report on Form 10-Q for the quarter ended March 30, 2002 (referred to
as "3/30/02 10-Q"), (v) Quarterly Report on Form 10-Q for the quarter ended June
29, 2002 (referred to as "6/29/02 10-Q"), (vi) Quarterly Report on Form 10-Q for
the quarter ended September 28, 2002 (referred to as "9/28/02 10-Q"), or (vii)
Annual Report on Form 10-K for the year ended December 28, 2002 (referred to as
"2002 10-K"). Exhibits filed herewith have been denominated by a pound sign (#).

77

EXHIBIT INDEX

Number Description

#2.1 Agreement and Plan of Merger dated as of December 19, 2003, by and between THL
Bedding Company and Simmons Holdings, Inc.

#2.2 Agreement and Plan of Merger dated as of December 19, 2003, by and between Simmons
Company and Simmons Holdings, Inc.

#3.1 Amended and Restated Certificate of Incorporation of Simmons Company.

#3.2 Certificate of Ownership and Merger of Simmons Company with and into Simmons
Holdings, Inc.

#3.3 By-laws of Simmons Company.

#4.1 Indenture dated as of December 19, 2003, among Simmons Company (f/k/a THL Bedding
Company), the Guarantors party thereto and Wells Fargo Bank Minnesota, National
Association, as trustee.

#4.2 Exchange and Registration Rights Agreement dated as of December 19, 2003, Simmons
Company (f/k/a THL Bedding Company), Goldman, Sachs & Co., Deutsche Bank
Securities, UBS Securities LLC, and the Guarantors party thereto.

*4.3 Indenture dated as of March 19, 1999, between Simmons Company and SunTrust Bank,
as trustee (S-4).

#4.3.1 Supplemental Indenture dated as of December 2, 2003 by and among Simmons Company
and SunTrust Bank, as trustee.

*10.1 Labor Agreement between the Company and The United Furniture Workers of America,
Local No. 262 for all employees at the San Leandro, California plant of the
Company excluding executives, sales employees, office workers, supervisors,
foremen, timekeepers, watchmen, Teamsters or persons in any way identified with
management for the period from April 1, 2002 to April 1, 2004 (6/29/02 10-Q).

*10.2 Labor Agreement between the Company and The United Steel Workers of America, Local
No. 13-02, for all employees at the Shawnee, Kansas plant of the Company excluding
executives, sales employees, office employees, supervisors, timekeepers, and
mechanics, for the period from April 22, 2002 to April 19, 2004 (9/28/02).

78

*10.4 Labor Agreement between the Company and The United Steel Workers, Local No. 422
for all production and maintenance employees at the Dallas, Texas plant of the
Company excluding supervisors, foremen, factory clerks, office employees, time
keepers, watchmen or persons in any way identified with management for the period
from October 16, 2001 to October 15, 2004 (2001 10-K).

*10.5 Labor Agreement between the Company and The United Steel Workers, Local No. 2401
for all production at the Atlanta, Georgia plant of the Company excluding office
workers, supervisors, foremen, inspectors, watchmen, plant guards, departmental
coordinators, carload checkers or persons in any way identified with management
for the period from October 16, 2001 to October 15, 2005 (2001 10-K).

*10.6 Labor Agreement between the Company and The United Steel Workers, Local No. 515U
for all employees at the Los Angeles, California plant of the Company excluding
executives, sales employees, office workers, and supervisors for the period from
October 16, 2001 to October 15, 2005 (2001 10-K).

*10.7 Labor Agreement between the Company and The United Steel Workers, Local No. 420
for employees at the Piscataway, New Jersey plant of the Company excluding
watchmen, office janitors, maintenance department employees, truck drivers, tool
makers, machinists, supervisors, porters, matrons, main office, clerical, and
maintenance helpers for the period of October 16, 2001 to October 15, 2005 (2001
10-K).

*10.8 Labor Agreement between the Company and The United Steel Workers, Local No. 424
for all production employees at the Columbus, Ohio plant of the Company excluding
executives, sales employees, office workers, timekeepers, watchmen, office
janitors, maintenance department employees, truck drivers, foremen, supervisors,
private chauffeurs, main office, clerical, and engine room and power plant
employees for the period from October 16, 2001 to October 15, 2004 (2001 10-K).

*10.9 Lease Agreement at Concourse between Concourse I, Ltd., as Landlord, and the
Company, as Tenant, dated as of April 20, 2000, as amended (9/30/00 10-Q).

*10.10 Lease between Beaver Ruin Business Center-Phase V between St. Paul Properties,
Inc., as Landlord, and the Company, as Tenant, dated as of October 19, 1994, as
amended by Addendum to Lease, dated as of September 1, 1995 (S-4).

*10.11 Loan Agreement, dated as of November 1, 1982, between the City of Janesville,
Wisconsin and the Company, as successor by merger to Simmons Manufacturing
Company, Inc., relating to $9,700,000 City of Janesville, Wisconsin
Industrial Development Revenue Bond, Series A (S-4).

*10.12 Loan Agreement between the City of Shawnee and the Company relating to the
Indenture of Trust between City of Shawnee, Kansas and State Street Bank and Trust
Company of Missouri, N.A., as Trustee, dated as of December 1, 1996 relating to
$5,000,000 Private Activity Revenue Bonds, Series 1996 (S-4).

*10.13 Loan Agreement dated as of December 12, 1997 between Simmons Caribbean Bedding,
Inc. and Banco Santander Puerto Rico (S-4). *10.13.1 English Language Summary of
Appendix to Exhibit 10.23.1 (S-4).

*10.14 Simmons Retirement Savings Plan adopted February 1, 1987, as amended and
restated January 1, 2002 (3/30/02 10-Q).

*10.14.1 First Amendment to the Simmons Retirement Savings Plan effective for years
beginning after December 31, 2001 (3/30/02 10-Q).

*10.16 Retirement Plan for Simmons Company Employees adopted October 31, 1987, as amended
and restated May 1, 1997 (3/30/02 10-Q).

*10.16.1 First Amendment to the Retirement Plan for Simmons Company Employees effective for

79

years ending after December 31, 2001 (3/30/02 10-Q).

#10.17 Stock Purchase Agreement dated as of November 17, 2003, by and among Simmons
Holdings, Inc., THL Bedding Company and the sellers named therein.

#10.18 ESOP Stock Sale Agreement dated as of November 21, 2003, by and among Simmons
Holdings, Inc., State Street Bank and Trust Company, solely in its capacity as
trustee, of the Simmons Company Employee Stock Ownership Trust, and THL Bedding
Company.

#10.19 Amendment to Employee Stock Ownership Plan Trust Agreement dated as of December
16, 2003, between Simmons Company and State Street Bank and Trust Company, as
trustee under the Trust Agreement.

#10.20 Management Agreement dated as of December 19, 2003, by and between Simmons Company
and THL Managers V, LLC.

#10.21 Senior Manager Restricted Stock Agreement dated as of December 19, 2003, between
THL Bedding Company and Charles R. Eitel.

#10.22 Senior Manager Restricted Stock
Agreement dated as of December 19, 2003, between THL Bedding Company and Robert W.
Hellyer.

#10.23 Senior Manager Restricted Stock Agreement dated as of December 19, 2003, between
THL Bedding Company and William S. Creekmuir.

#10.24 Senior Manager Restricted Stock Agreement dated as of December 19, 2003, between
THL Bedding Company and Rhonda C. Rousch.

#10.25 Restricted Stock Agreement dated as of December 19, 2003, between THL Bedding
Holding Company and the Persons named therein.

#10.26 THL Bedding Holding Company Equity Incentive Plan.

#10.27 THL Bedding Holding Company Deferred Compensation Plan.

#10.28 Employment Agreement dated as of December 19, 2003, among THL Bedding Holding
Company, Simmons Company and Charles R. Eitel.

#10.29 Employment Agreement dated as of December 19, 2003, among THL Bedding Holding
Company, Simmons Company and Robert W. Hellyer.

#10.30 Employment Agreement dated as of December 19, 2003, among THL Bedding Holding
Company, Simmons Company and William S. Creekmuir.

#10.31 Employment Agreement dated as of December 19, 2003, among THL Bedding Holding
Company, Simmons Company and Rhonda C. Rousch.

#10.32 Management Subscription and Stock Purchase Agreement dated as of December 19,
2003, by and among THL Bedding Holding Company and the Persons named therein.

#10.33 Credit and Guaranty Agreement, dated as of December 19, 2003, among THL Bedding
Company, as Company, THL-SC Bedding Company and certain subsidiaries of the Company,
as Guarantors, the financial institutions listed therein, as Lenders, UBS Securities
LLC, as Joint Lead Arranger and as Co-Syndication Agent, Deutsche Bank AG, New York
Branch, as Administrative Agent, General Electric Capital Corporation, as
Co-Documentation Agent, CIT Lending Services Corporation, as Co-Documentation Agent
and Goldman Sachs Credit Partners L.P., as Sole Bookrunner, a Joint Lead Arranger and
as Co-Syndication Agent.

#10.34 Senior Unsecured Term Loan and Guaranty Agreement, dated December 19, 2003, among
THL Bedding Company, as Company, THL-SC Bedding Company and certain subsidiaries
of the Company, as Guarantors, the financial institutions listed therein, as Lenders,
Goldman Sachs Credit Partners L.P., as Sole Bookrunner, a Joint Lead Arranger
and as Co-Syndication Agent, UBS Securities LLC, as Joint Lead Arranger and as
Co-Syndication Agent, and Deutsche Bank AG, New York Branch, as Administrative
Agent.

#10.35 Assumption Agreement, dated December 19, 2003, made by Simmons Holdings, Inc.,
Simmons Company and certain subsidiaries of Simmons, as Guarantors, in favor of
Deutsche Bank, AG, New York Branch, as Administrative Agent for banks and other
financial institutions or entities, the Lenders, parties to the Credit
Agreement and Term Loan Agreement.

#10.36 Pledge and Security Agreement dated December 19, 2003, between each of the grantors
party thereto and Deutsche Bank AG, New York Branch, as the Collateral Agent.

*10.37 2002 Stock Option Plan (2002 10-K)

*10.38 Simmons Company Employee Stock Ownership Plan adopted January 31, 1998, as amended
and restated December 29, 2001 (3/30/02 10-Q).

*10.38.1 First Amendment to the Simmons Company Employee Stock Ownership Plan effective for
years ending after December 31, 2001 (3/30/02 10-Q)

#12.1 Computation of ratio of earnings to fixed charges

#21.1 Subsidiaries of Simmons Company

#24.1 Power of Attorney (included on the signature pages hereto)

#31.1 Chief Executive Officer Certification of the Type Described in Rule 13a-14(a)
and Rule 15d-14(a)

#31.2 Chief Financial Officer Certification of the Type Described in Rule 13a-14(a)
and Rule 15d-14(a)

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith)

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith)

80

SIMMONS COMPANY

SCHEDULE II -- VALUATION ACCOUNTS

VALUATION ACCOUNTS

81

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

SIMMONS COMPANY

(Registrant)

March 23, 2004 By: /S/ William S. Creekmuir
-----------------------------------------------
William S. Creekmuir, Executive Vice President,
Chief Financial Officer, & Director
(Principal Financial Officer)

KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William S. Creekmuir, jointly and
severally, his attorneys-in-fact, each with full power of substitution, for him
in any and all capacities, to sign any and all amendments to this Form 10-K, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each said attorneys-in-fact or his substitutes, may do or
cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

/S/ Charles R. Eitel March 23, 2004
- -----------------------------------------------------
Charles R. Eitel, Chairman of the Board of Directors;
Director; and Chief Executive Officer
(Principal Executive Officer)

/S/ Todd M. Abbrecht March 23, 2004
- -----------------------------------------------------
Todd M. Abbrecht, Director

/S/ Robert W. Hellyer March 23, 2004
- -----------------------------------------------------
Robert W. Hellyer, Director

/S/ David A. Jones March 23, 2004
- -----------------------------------------------------
David A. Jones, Director

/S/ Albert L. Prillaman March 23, 2004
- -----------------------------------------------------
Albert L. Prillaman, Director

82

/S/ Scott A. Schoen March 23, 2004
- -----------------------------------------------------
Scott A. Schoen, Director

/S/ George R. Taylor March 23, 2004
- -----------------------------------------------------
George R. Taylor, Director

/S/ Mark F. Chambless March 23, 2004
- -----------------------------------------------------
Mark F. Chambless, Vice President &
Corporate Controller;
(Principal Accounting Officer)

83