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

                                    FORM 10-K
(Mark One)

[ X ]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the fiscal year ended December 30, 2000
                                   -----------------

                                       OR

[    ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

         For the transition period from                 to
                                       --------------        ----------

         Commission file number   333-76723
                               ------------

                                 SIMMONS COMPANY
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                                                <C>
                   Delaware                                                        06-1007444
------------------------------------------------                     ----------------------------------------
 (State or other jurisdiction of incorporation                        (I.R.S. Employer Identification No.)
               or organization)

One Concourse Parkway, Suite 800
               Atlanta, Georgia                                                    30328-6188
------------------------------------------------                     ----------------------------------------
   (Address of principal executive offices)                                        (Zip Code)
</TABLE>

         Registrant's telephone number, including are code      (770) 512-7700
                                                          ----------------------

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

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

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]

The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 29, 2001 was $    0   .
                                    ---------

         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 the 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]

The number of shares of the registrant's common stock outstanding as of March
29, 2001 is 31,964,452.
            -----------

           DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE: None

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ITEM 1.           BUSINESS

         GENERAL

         Founded in 1871, the Simmons Company (the "Company" or "Simmons") is a
leading manufacturer and distributor of premium branded bedding products in the
United States and the world leader in Pocketed Coil(TM) innerspring technology.
We manufacture and license a broad range of mattresses and related sleep
products under well-recognized brand names including Simmons(R), Beautyrest(R),
BackCare(R), DreamScapes(TM), Deep Sleep(R), BackGuard(R) and Maxipedic(R).
Sales of conventional bedding, which includes fully assembled mattresses and box
springs, accounted for substantially all of our 2000 net sales.

         We sell to a diversified nationwide base of approximately 3,000
customers, representing more than 6,100 retail outlets. We support our sales to
furniture stores, specialty sleep shops, department stores and warehouse
showrooms with significant local and national brand advertising and promotional
spending as well as extensive customer support services. We operate 18
strategically located manufacturing facilities across the United States and in
Puerto Rico. Unlike most of our competitors, which operate as associations of
independent licensees, we are one of two national industry participants that
operates each of its manufacturing facilities, allowing us greater quality
control and standardization of best manufacturing practices.

         RECENT HISTORY OF THE COMPANY

         Prior Ownership

         On March 22, 1996, Simmons Holdings, Inc. ("Holdings"), a company
organized on behalf of INVESTCORP S.A. ("Investcorp"), management and certain
other investors, acquired 100% of the outstanding common stock of the Company
from affiliates of Merrill Lynch Capital Partners, Inc., the Simmons Company
Employee Stock Ownership Plan (together with a trust forming a part thereof, the
"ESOP") and certain management stockholders (collectively, the "Sellers") for a
purchase price of $253.2 million (the "Investcorp Acquisition"). Financing for
the Investcorp Acquisition was provided by (i) $85.0 million of capital provided
by affiliates of Investcorp, management and certain other investors, (ii) $80.4
million of borrowings under a $115.0 million senior credit facility and (iii)
$100.0 million of borrowings under a Subordinated Loan Facility. The
Subordinated Loan Facility was repaid on April 18, 1996 with the net proceeds of
the issuance of Senior Subordinated Notes which, in turn, were replaced with
Series A Senior Subordinated Notes due 2006 in a registered exchange offer
completed in September 1996.

         Recapitalization

         On July 16, 1998, Holdings entered into a recapitalization agreement
with the Company and REM Acquisition, Inc., a transitory Delaware merger
corporation ("REM"), sponsored by Fenway Partners, Inc., ("Fenway"). Pursuant to
the agreement, on October 29, 1998 REM merged with and into Holdings (the
"Recapitalization"), with Holdings being the surviving corporation. The
Recapitalization resulted in certain stockholders of Holdings who are affiliates
of or investors arranged by Investcorp receiving an aggregate amount of cash
equal to approximately $193.4 million, and certain stockholders of Holdings who
are or were members of management of the Company receiving an aggregate amount
of cash equal to approximately $14.0 million. Investcorp retained shares of
common stock of Holdings with a then estimated fair value of $9.0 million and
management retained shares of stock and options to purchase stock of Holdings
with a then estimated fair value of $16.5 million. As part of the
Recapitalization, REM purchased all of the shares of Series A Preferred Stock of
the Company (the "Series A Preferred Stock") owned by the ESOP that had been
allocated to its participants for an



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aggregate purchase price of $15.4 million, and the ESOP exchanged its remaining
unallocated shares of Series A Preferred Stock for shares of common stock of
Holdings. The Series A Preferred Stock purchased by REM was cancelled in
connection with the Transactions, as defined below. The ESOP retained shares of
stock of Holdings with a then estimated fair value of $23.4 million.

         Financing for the Recapitalization, the related transactions, and the
fees and expenses incurred therewith, was provided by (i) the Company's
borrowings under a new $270.0 million senior credit facility (the "Senior Credit
Facility") which refinanced the majority of the Company's existing senior and
subordinated obligations, (ii) the Company's borrowings of $75.0 million under
Senior Subordinated Bridge Loans (the "Senior Bridge Loans"), (iii) the
Company's borrowings of $30.0 million under the Junior Subordinated Notes (the
"Junior Simmons Notes") issued to an affiliate of Fenway, (iv) Holdings'
borrowings of $10.0 million under Junior PIK Notes (the "Junior PIK Notes")
issued to an affiliate of Fenway, and (v) $177.0 million of capital provided by
Fenway, affiliates of Investcorp, management and certain other investors of
Holdings.

         The Recapitalization, the refinancing under the Senior Credit Facility,
the Senior Bridge Loans financing, the Junior Simmons Notes and the Junior PIK
Notes financing are collectively referred to herein as the "Transactions". As a
result of the Recapitalization and related transactions, Simmons Holdings, LLC,
an entity controlled by funds managed by Fenway, acquired 75.1% of the
outstanding voting shares of Holdings, and management, the ESOP and Investcorp
retained approximately 5.9%, 13.7% and 5.3%, respectively, of the outstanding
shares of Holdings. The Company has accounted for the Transactions as a
leveraged recapitalization, whereby the historical bases of the assets and
liabilities of the Company have been maintained.

         On March 16, 1999, we completed a refinancing (the "March 1999
Refinancing"), which consisted of the sale of $150.0 million of 10.25% Senior
Subordinated Notes due 2009 (the "Notes") pursuant to a private offering. We
used the net proceeds from this offering to:

         -        repay the indebtedness and related accrued interest under the
                  Senior Bridge Loans and the Junior Simmons Notes issued by us;

         -        repay the amounts outstanding and related accrued interest
                  under our revolving credit facility; and

         -        prepay a portion of the amounts outstanding and related
                  accrued interest under our term loan facility.

         On September 9, 1999, we issued 10.25% Series B Senior Subordinated
Notes due 2009 (the "New Notes") in exchange for all Notes, pursuant to an
exchange offer whereby holders of the Notes received New Notes which have been
registered under the Securities Act of 1933, as amended, but are otherwise
identical to the Notes.

         MANAGEMENT CHANGES

         On January 4, 2000, Mr. Zenon Nie resigned as our Chairman of the Board
of Directors, Chief Executive Officer and President, and Charles R. Eitel was
hired as Chairman of the Board of Directors and Chief Executive Officer. During
January 2000, Mr. Eitel completed an assessment of the effectiveness of our
organizational structure, and in early February, 2000, we undertook an
enterprise-wide management reorganization to reflect a new management structure
going forward. The management reorganization resulted in the termination of 14
management employees. In connection with that reorganization, the following
executive officer changes occurred:



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         -        Peter Brink was hired as Executive Vice President and Chief
                  Operations Officer in February 2000. Mr. Brink resigned from
                  the Company in January 2001.

         -        Robert W. Hellyer was promoted to Executive Vice
                  President--Sales in March 2000. In July 2000, Mr. Hellyer was
                  promoted to Executive Vice President--Sales and Marketing and
                  in January 2001 he became President of the Company.

         -        William S. Creekmuir was hired as Executive Vice President and
                  Chief Financial Officer in April 2000.

          INDUSTRY OVERVIEW

         The domestic wholesale bedding industry generated sales of over $4.5
billion in 2000 according to industry sales data compiled by the International
Sleep Products Association ("ISPA"). Although fragmented with approximately 700
manufacturers, the industry is mature and stable. The stability of the bedding
market is supported by the fact that over 70% of bedding sales result from
replacement purchases. We believe that key demographic trends are driving growth
in the demand for larger sized, premium bedding products including;

-        the rapidly growing 45-64 year old population category, a group with
         higher levels of disposable income and which historically has been more
         likely to purchase premium bedding;

-        the increasing consumer awareness of the health-related benefits of
         proper rest; and

-        the increasing number and size of bedrooms in homes.

         Most conventional bedding is sold to furniture stores and specialty
sleep shops. The remaining channels of distribution include department stores,
national mass merchants, membership clubs and contract customers.

         COMPETITION

         While there are approximately 700 bedding manufacturers in the United
States, three companies, Simmons, Sealy Corporation ("Sealy"), and Serta, Inc.
("Serta") account for more than half of the industry's wholesale revenues. We
believe we principally compete against these two primary competitors on the
basis of brand recognition, product selection and quality and the quality of
customer support programs, which include 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 United States' conventional bedding market consists of
approximately seven smaller national manufacturers and nearly 700 independent
local and regional manufacturers. These local and regional manufacturers
generally focus on the sale of lower price point products. While we primarily
manufacture high margin, differentiated bedding products, we also offer a full
line of bedding products to our retailer base in order for these retailers to
maintain their competitive positioning.

PRODUCTS

         We provide our retail customers with a full range of mattress products
that cover the breadth of marketplace price points ($499 to $5,000 queen set
price) and offer consumers better sleep quality solutions to common causes of
poor sleep. Our focus on the sleep quality benefits of our products differs from
the rest of the industry in our employment of differentiated product
constructions, research-based





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sleep quality claims and marketing programs that promote better sleep benefits
instead of the traditional comfort and price feature selling.

         All of our products are built from one of two spring unit construction
techniques: Pocketed Coil(TM) (Marshall Coil) springs or open coil
constructions. The Beautyrest(R) line of products utilize our patented Pocketed
Coil(TM) springs, whose rows are joined at the center third of the coils instead
of the top. This patented way of attaching rows of coils allows for each coil to
depress independent 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. Competitive attempts to copy this product benefit must
affix their coils at the top and bottom, which is not capable of offering the
unique Beautyrest(R) "Do Not Disturb" benefit.

         Our open coil products differ from traditional open coil mattresses in
the design of our coil unit. Our BackCare(R) open coil units are zoned into five
distinct comfort and support zones that mirror the natural s-shape of the spine.
We use other open coil units in our promotional product lines targeted at the
under $500 queen price segment. 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-needs-to-flip. This innovative design offers enhanced sleep benefits and
product durability, along with the consumer convenience of never having to flip
their mattress. This innovative never-need-to-be-flipped design was introduced
into the Beautyrest(R) line in early 2000, the BackCare(R) line in late 2000 and
is being incorporated into most other of our mattresses as their designs are
updated and introduced.

         Beautyrest(R). 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. The Beautyrest(R) product was redesigned
in 2000 with improved partner motion separation benefits and the convenience of
never needing to be flipped. Beautyrest(R) is sold primarily through furniture
stores, mattress specialty stores and department stores. All Beautyrest(R)
retail floor samples display a Motion Separation Index label that allows
consumers to compare the Beautyrest(R) Do Not Disturb benefit to competitive
constructions and other Beautyrest(R) models.

         Beautyrest(R) World Class Exceptionale and DreamScapes(TM).
Exceptionale and DreamScapes(TM) are the luxury price point extensions of the
Beautyrest(R) line. Unlike other mattress brands, which build their luxury line
by adding foam, fiber and non-sleep-related accessories, Exceptionale and
DreamScapes(TM) are the only luxury product lines that offer our exclusive
Pocketed Coil(TM)-on-Pocketed Coil(TM) construction. This unique construction
offers a different comfort level from the non-luxury price point Beautyrest(R)
models and the combined benefits of comfort and reduced motion transfer.

         BackCare(R). BackCare(R), our second flagship brand, was introduced in
1995 and redesigned with improved benefits and a never-needs-to-be-flipped
design in late 2000. BackCare(R) is designed with five distinct comfort and
support zones that mirror the natural s-shape of the human spine. This five
zoned construction is built into every component of the mattress. A Lumbar
Support Index label at retail helps consumers choose between 10%, 20% or 30%
incremental support in the lumbar region of the bed. BackCare(R) is endorsed by
the National Foundation for Spinal Health.

         Deep Sleep(R), BackGuard(R) and Maxipedic(R). Our three other lines of
open coil products targeted at the traditional under $500 queen price points.
These products each utilize a unique product construction from competitive open
coil units, offering better sleep benefits not available from traditional open
coil mattresses.

         Olympic(R) Queen. In October 2000, we introduced Olympic(R) Queen, the
first new size in mattresses since Simmons introduced the king and queen sizes
in 1958. The Olympic(R) Queen offers consumers 10% more sleeping surface than a
traditional queen without requiring they replace their





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traditional queen frame with a wider bed. This new size, which is available in
both Beautyrest(R) and BackCare(R) models, is targeted at queen mattress owners
who would prefer a wider mattress but will not buy one because of their existing
queen bed frame or the size of their bedroom. We are importing specially
designed Egyptian Cotton Olympic(R) Queen sheets that our retailers can sell. We
have also worked with most of the major linen manufacturers in the development
of their own Olympic(R) Queen sheets.

         CUSTOMERS

         Our strong brand name 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 warehouse showrooms. We manufacture and supply
conventional bedding to over 6,100 retail outlets, representing approximately
3,000 customers. Furthermore, our sales to specialty sleep shops, the fastest
growing channel of retail bedding distribution, has been increasing.

         We also distribute branded products on a contract sale basis directly
to institutional users of bedding products such as hotels, motels, hospitals,
dormitories and certain agencies of the United States government. Major
commercial accounts include Starwood Hotels, Cendant Corp., Best Western
International Inc., and The Walt Disney Company. In 1999, Starwood Hotels
selected Beautyrest(R) as the bed for their "Heavenly Bed" program. Starwood's
Heavenly Bed program is a luxury hotel room program targeted at their Preferred
Customer Club members.

         Our 10 largest customers accounted for approximately 32% of 2000 net
sales. No one customer represented more than 10% of net sales in 2000.

SALES, MARKETING AND ADVERTISING

         Our products are sold by approximately 175 local field sales
representatives, backed by sales management at each of our 18 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 that is tailored to the competitive environments of the local market.

         Our sales support focuses on two areas:

                  -        cooperative promotional advertising and other retail
                           support programs designed to complement individual
                           retailers' 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 each individual retailer. Point-of-sale materials including mattresses and
foundation displays that we design and supply highlight the differentiating
features of our products. In addition, we offer training for retail sales people
through a internal 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, delivered on-site at our retailers' facilities
or at our research and education center, to teach retail floor salespeople
product knowledge and sales skills. We seek to improve our retailers' unit sales
as well as increase sales of bedding in the higher price segment. We also
establish individual incentive programs for our customers and their sales
personnel. Our sales force is trained extensively in advertising, merchandising
and salesmanship which increases the value of the marketing support they provide
to retailers. We





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believe that our focus on the training of sales representatives and our
customers' retail salespeople differentiates us from most of our largest
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,
cotton, insulator pads, innersprings, fabrics and roll goods consisting of foam,
fiber, ticking and non-wovens. We obtain a large percentage of our required raw
materials from a small number of suppliers. In 2000, we bought approximately 83%
of our raw material needs from 10 suppliers. Supplier concentration is common in
the bedding industry.

         We have long-term supply agreements with Leggett & Platt, Incorporated,
Foamex International Inc. and Amoco Fabrics and Fiber Company. With the
exception of Leggett & Platt, we believe that we can readily replace our other
suppliers because we have identified and used alternative sources. Leggett &
Platt supplies the majority of several components, including spring components,
insulator pads, wire, fiber, quilt backing and flange material, to the bedding
industry. In 2000, we bought approximately 28% of our raw materials from Leggett
& Platt. We expect that in 2001 we will buy a comparable portion of our raw
materials from Leggett & Platt. To ensure a long-term adequate supply of various
components, we have entered into agreements with Leggett & Platt, generally
expiring in the year 2010, for the supply of grid tops, innersprings and wire.
Among other things, these agreements generally require us to purchase a majority
of our requirements of several components from Leggett & Platt.

         SEASONALITY/OTHER

         Our sales volume is somewhat seasonal, with sales generally lower
during the first quarter of each year than in the remaining three quarters of
the year. Historically, our working capital borrowings have increased during the
first half of each year and have decreased in the second half of each year. We
also experience a seasonal fluctuation in profitability, with our gross profit
percentage during the first quarter of each year slightly lower than those
obtained in the remaining part of the year. We believe that seasonality of
profitability is a factor that generally affects the conventional bedding
industry and that it is primarily due to retailers' emphasis in the first
quarter on price reductions and promotional bedding and manufacturers' emphasis
on close-outs of the prior year's product lines. These two factors together
result in lower profit margins.

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

         MANUFACTURING AND FACILITIES

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

         We operate 18 bedding manufacturing facilities in 16 states and Puerto
Rico. We invest substantially in new product development, enhancement of
existing products and improved operating processes. We believe new product
development and product enhancements are crucial to maintaining our strong
industry position. We maintain close contact with bedding industry developments
through sleep research conducted by industry groups and by our own marketing and
engineering departments, as





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well as through participation in the Better Sleep Council, an industry
association that promotes awareness of sleep issues, and the International Sleep
Products Association. 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 the
Simmons Institute of Technology and Education ("SITE"), a state-of-the-art
38,000 square foot research and education center in Atlanta, Georgia.
Approximately 25 engineers and technicians are 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 some of our competitors who do not
have significant in-house engineering departments.

         WARRANTIES AND PRODUCT RETURNS

         Our conventional bedding products generally offer 10 year limited
warranties against manufacturing defects, while some promotional products carry
one year warranties. 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 immaterial. 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 or Simmons outlet stores.

         PATENTS, TRADEMARKS AND LICENSES

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

         INTERNATIONAL AND LICENSING

         During the late 1980's and early 1990's, we disposed of most of our
foreign operations and secondary domestic lines of business. As a result, we now
license the Simmons(R) name and many of our trademarks, processes and patents on
an exclusive basis to third-party manufacturers to produce and distribute
conventional bedding products within their designated territories. These
licensing agreements allow the Company to reduce exposure to political and
economic risk abroad by minimizing investments in those markets. We have
seventeen foreign licensees located in Argentina, Asia, Australia, Brazil,
Canada, Chile, Dominican Republic, El Salvador, Israel, Mexico, Morocco, Oman,
Panama, South Africa, Venezuela, Western Europe, and the West Indies who sell
Simmons branded products in over 100 countries.

         Additionally, we have 8 domestic third-party licensees. These licensees
manufacture and distribute juvenile bedding and non-bedding upholstered
furniture, primarily on perpetual or automatically renewable terms.
Additionally, we have licensed the Simmons(R) name and other trademarks,
generally for limited terms, to manufacturers of adjustable beds, down
comforters, pillows, bed pads, blankets, futons, airbeds and waterbeds.




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         In 2000, 1999 and 1998 our licensing agreements as a whole generated
royalties of approximately $8.3 million, $7.7 million and $7.8 million,
respectively, which are accounted for as a reduction of selling, general and
administrative expenses in the consolidated statements of operations included
herein.

         EMPLOYEES

         As of February 28, 2001, we had approximately 3,300 full-time
employees. Approximately 1,300 of these were represented by labor unions.
Employees at nine of our 18 manufacturing facilities are represented by various
labor unions with separate collective bargaining agreements. Collective
bargaining agreements typically are negotiated for four-year terms. A majority
of our current agreements expire in 2001. Manufacturing employees of the
unionized plants have negotiated various contracts with the Upholstery Division
of the United Steelworkers, the International Brotherhood of Teamsters, United
Furniture Workers, International Longshoremen's and Warehousemen's Union and
International Association of Machinists and Aerospace Workers. We consider
overall relations with our workforce to be satisfactory. We have had no
labor-related work stoppages in over 20 years. However, any work stoppage could
result in a material adverse effect on our financial condition or results of
operations. Since 1980, we have opened nine new plants, none of which are
unionized. Approximately 1,900 of our current and former employees are
participants in the ESOP.

         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 and 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 leased manufacturing facilities in
San Leandro, California and Piscataway, New Jersey.

         We have recorded a reserve to reflect our potential liability for
environmental matters. Because of the uncertainties associated with
environmental remediation, we cannot assure you that the costs incurred with
respect to the potential liabilities will not exceed the 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.

         FORWARD-LOOKING STATEMENTS

         "Safe Harbor" statement under the Private Securities Litigation Reform
Act of 1995. A number of the matters and subject areas discussed in the
foregoing "Business" section and in Part II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" that are not
historical or current facts deal with potential future circumstances and
developments. The discussion of such matters and subject areas is qualified by
the inherent risks and uncertainties surrounding future expectations generally,
and such discussion also may materially differ from our actual future experience
involving any one or more of such matters and subject areas. We have attempted
to identify, in context,





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certain of the factors that it currently believes may cause actual future
experience and results to differ from the our current expectations regarding the
relevant matter or subject area. The operation and results of our bedding
manufacturing business may also be subject to the effect of other risks and
uncertainties in addition to the relevant qualifying factors identified
elsewhere in the foregoing "Business" section and in Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," including, but not limited to, general economic conditions in the
geographic areas and market segments in which we operate, the ability to achieve
further market penetration, additional customers and distribution channels,
aggressive promotional and discounting tactics by certain of our national
competitors, and other risks and uncertainties described from time to time in
our reports filed with the Securities and Exchange Commission (the "SEC").







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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 February 28, 2001:
<TABLE>
<CAPTION>

                                                                         Year of
                                                              Date       Lease           Square
                            Location                        Occupied   Expiration        Footage
                            --------                        --------   ----------        -------
<S>                                                           <C>         <C>            <C>
       Manufacturing Facilities:
            Atlanta, Georgia                                  1992        2007           148,300
            Charlotte, North Carolina                         1993        2003           174,960
            Columbus, Ohio                                    1988        2004           190,000
            Dallas, Texas                                     1998        2008           140,981
            Denver, Colorado                                  1998        2008           129,000
            Fredericksburg, Virginia                          1995        2010           128,500
            Honolulu, Hawaii                                  1993        2003            58,530
            Jacksonville, Florida                             1973        2003           205,729
            Janesville, Wisconsin                             1982        Owned          288,700
            Shawnee, Kansas                                   1997        Owned          130,000
            Los Angeles, California                           1982        2005           223,382
            Phoenix, Arizona                                  1997        2007           103,408
            Piscataway, New Jersey                            1988        2003           264,908
            Salt Lake City, Utah                              1998        2008            77,500
            San Leandro, California                           1964        2007           260,500
            Seattle, Washington                               1992        2002           133,610
            Springfield, Massachusetts                        1988        2006           129,000
            Trujillo Alto, Puerto Rico                        1998        Owned           50,000
                                                                                    -------------
                   Subtotal                                                            2,837,008

       Other Facilities in Atlanta, Georgia:
            Corporate Headquarters                            1992        2010            49,045
            SITE Research and Development Center              1994        2005            38,000
            Consumer Service Center                           1977        2003            30,960
                                                                                    -------------
                   Total Square Footage                                                2,955,013
                                                                                    =============
</TABLE>

         Our manufacturing facilities yield a combined practical capacity of
over 25,000 units per day, assuming two eight-hour shifts daily. Management
believes that our facilities, taken as a whole, have adequate productive
capacity and sufficient manufacturing equipment to conduct business at levels
meeting current demand.

         In addition, we operate 20 retail outlet stores with approximately
160,000 square feet, in the aggregate; and 37 retail stores with approximately
143,000 square feet, in the aggregate, through our Gallery Corp. subsidiary.





                                       11
<PAGE>   12


ITEM 3.      LEGAL PROCEEDINGS

         On April 3, 1998, Serta filed a complaint against Simmons in the United
States District Court for the Northern District of Illinois, Eastern Division,
alleging that some Simmons products--including those sold in connection with the
trademarks Connoisseur Collection(R), Crescendo(TM), and some World Class
Beautyrest(R) and BackCare(R) Ultimate models--infringed one of their U.S.
patents and that our use of the term "Crescendo" infringed their alleged
common-law trademark, "Crescendo". Serta sought compensatory damages in an
unspecified amount, interest, an accounting and disgorgement of profits derived
from allegedly infringing acts, treble damages, an order enjoining further
alleged infringement and requiring destruction of allegedly infringing items,
costs, expenses and attorney's fees. We have denied the material allegations of
the complaint. We also asserted affirmative defenses and/or counterclaims
against Serta alleging non-infringement, invalidity and unenforceability of the
patent-in-suit, and alleging infringement by Serta of our rights in the term
"Crescendo" in various geographic areas to the extent usage of the term by both
Serta and us would be confusingly similar. Serta requested the Patent and
Trademark Office (the "PTO") to reexamine the patent-in-suit. Pending the
outcome of the reexamination, and by agreement of the parties, the pending
lawsuit was stayed. In April 1999, the PTO reinstated Serta's patent and the
stay in the action was lifted.

         In October 1999, Serta amended its Complaint to join 14 U.S.
licensee/shareholders as plaintiffs and to add a claim for false advertising
under the Lanham Act as well as seek damages and injunctive relief in connection
with that claim. We denied the material allegations of the amended Complaint and
asserted additional affirmative defenses and an additional counterclaim seeking
a declaratory judgment for unenforceability of the patent-in-suit due to fraud
on the PTO.

         On December 28, 2000, we reached a settlement of this lawsuit with
Serta and its licensees/shareholders. While we maintain that we did not infringe
on any of Serta's patents or trademarks, in order to conclude the matter and
avoid additional cost of protracted litigation, we agreed to pay Serta $4.25
million, payable $2.125 million at the time of the execution of the Settlement
Agreement with the balance payable in installments of $531,250 at the end of
each calendar quarter during the year 2001. While not acknowledging the validity
of the patent, we also agreed not to challenge the patent's validity and further
agreed during the life of the patent not to manufacture or sell mattresses in
the United States containing certain specific configurations.

         From time to time, we have been involved in various legal proceedings.
We believe that all other litigation is routine in nature and incidental to the
conduct of our business, and that none of this other 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 2000.



                                       12
<PAGE>   13


                                     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 30, 2000 there is 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. Pursuant to the restrictions
contained in the Senior Credit Facility and the Indenture governing the New
Notes (the "Indenture"), the Company is not expected to be able to pay dividends
on its common stock for the foreseeable future, other than certain limited
dividends permitted by the Senior Credit Facility and the Indenture.

ITEM 6.      SELECTED FINANCIAL DATA

                 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
                             (dollars in thousands)

         Set forth below are our selected historical consolidated financial
data. We derived our historical Statements of Operations and Balance Sheet Data
for 2000, 1999, 1998, 1997, the period from March 22, 1996 through December 28,
1996 and the period from December 31, 1995 through March 21, 1996 from our
consolidated financial statements. You should read the information presented
below along with Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and accompanying notes and other financial information appearing in
Item 8.

         As a result of the Investcorp Acquisition, our assets and liabilities
were adjusted to reflect their estimated fair values as of March 22, 1996. In
addition, we entered into new financing arrangements and changed our capital
structure in October 1998. Accordingly, the results for the periods subsequent
to the Investcorp acquisition are not comparable to the prior historical periods
presented.

         You should note the following when reading the table below:

-        EBITDA represents earnings before interest expense, income tax expense,
         depreciation and amortization. We believe that EBITDA is a widely
         accepted financial indicator of a company's ability to service or incur
         debt and a similar measure is utilized for purposes of the covenants
         contained in the Indenture. EBITDA and adjusted EBITDA are not
         measurements of operating performance calculated in accordance with
         generally accepted accounting principles and should not be considered
         substitutes for operating income, net income, cash flows from operating
         activities, or other statements of operations or cash flow data
         prepared in accordance with generally accepted accounting principles,
         or as measures of profitably or liquidity. EBITDA and adjusted EBITDA
         may not be indicative of our historical operating results, nor are they
         meant to be predictive of potential future results. Our calculation of
         EBITDA and adjusted EBITDA may not be comparable to those recorded by
         other companies.

-        Working capital represents total currents assets, excluding cash and
         equivalents, less total current liabilities, excluding current
         maturities of long-term debt and capital lease obligations.



                                       13
<PAGE>   14

<TABLE>
<CAPTION>



                                                                 Successor                                   Predecessor
                                     -------------------------------------------------------------------    --------------
                                                                                             Period from     Period from
                                                                                              March 22,       Dec. 31,
                                      Year ended    Year ended    Year ended    Year ended       1996        1995 through
                                       Dec. 30,      Dec. 25,      Dec. 26,      Dec. 27,    through Dec.      March 21,
                                          2000         1999           1998         1997        28, 1996          1996
                                       ---------     ---------     ---------     ---------   -----------     ------------
                                       (53 weeks)   (52 weeks)     (52 weeks)    (52 weeks)
<S>                                    <C>           <C>           <C>           <C>           <C>           <C>
STATEMENT OF OPERATIONS DATA:
Net sales                              $ 727,087     $ 619,526     $ 600,773     $ 550,085     $ 423,870     $ 106,431
Cost of products sold                    405,507       350,721       348,842       319,074       254,127        66,630
                                       ---------     ---------     ---------     ---------     ---------     ---------
Gross margin                             321,580       268,805       251,931       231,011       169,743        39,801
Operating expenses:
   Selling, general and
        administrative expenses          280,410       219,924       202,213       183,556       135,762        35,846
   ESOP expense                            7,117         7,169         6,453         6,230         3,797         1,203
   Management compensation--
        severance related                  3,777         6,600          --            --            --            --
   Management compensation--
        transaction related                 --            --          14,223          --           4,085          --
   Amortization of intangibles             8,367         7,628         7,629         7,679         5,650         1,324
                                       ---------     ---------     ---------     ---------     ---------     ---------
                                         299,671       241,321       230,518       197,465       149,294        38,373
                                       ---------     ---------     ---------     ---------     ---------     ---------
Operating income                          21,909        27,484        21,413        33,546        20,449         1,428

Interest expense, net (1)                 34,957        32,918        23,369        19,650        15,601         1,585
Other expense (income), net                1,778         1,627         2,406         1,009        (2,852)         --
                                       ---------     ---------     ---------     ---------     ---------     ---------
Income (loss) before income taxes
     and extraordinary item            $ (14,826)    $  (7,061)    $  (4,362)    $  12,887     $   7,700     $    (157)
                                       =========     =========     =========     =========     =========     =========
Net income (loss)                      $ (10,963)    $  (9,129)    $ (19,019)    $   6,362     $   1,312     $    (439)
                                       =========     =========     =========     =========     =========     =========

OTHER DATA:
Adjusted EBITDA (2)                    $  72,328     $  66,740     $  62,264        58,420     $  42,737     $   5,739
Adjusted capital expenditures (3)         13,290         9,659         8,989         7,616         4,203           523
Depreciation and amortization             19,558        17,959        16,593        13,549         9,118         2,198


BALANCE SHEET DATA (END OF
    PERIOD):
Working capital                        $  55,457     $  53,897     $  46,567     $  37,133     $  42,414     $    --
Total assets                             416,861       406,100       400,061       375,125       367,849          --
Total debt, including current
      maturities                         325,274       333,983       313,469       184,443       196,815          --
Total common stockholders'
      equity (deficit)                   (36,402)      (23,332)      (12,301)       92,614        86,291          --


(1)    Interest expense                $  33,505     $  31,686     $  22,776     $  19,293     $  15,199     $   1,537
       Amortization of deferred debt
           issuance costs                  1,801         1,433           777           613           521            84
        Interest income                     (349)         (201)         (184)         (256)         (119)          (36)
                                       ---------     ---------     ---------     ---------     ---------     ---------
        Interest expense, net          $  34,957     $  32,918     $  23,369     $  19,650     $  15,601     $   1,585

</TABLE>
         Interest expense, net for the years ended 2000, 1999 and 1998 reflects
         the increase in senior and subordinated loan indebtedness associated
         with the leveraged recapitalization effective October 29, 1998. See
         Note 1 of the "Notes to Consolidated Financial Statements."




                                       14
<PAGE>   15

(2)      Items added back to EBITDA to arrive at adjusted EBITDA are as follows:
<TABLE>
<CAPTION>

                                                                    Successor                                 Predecessor
                                      ----------------------------------------------------------------------  ------------
                                                                                                Period          Period
                                                                                                  from            from
                                                                                                March 22,       Dec. 31,
                                                                                                  1996           1995
                                       Year Ended    Year Ended    Year Ended    Year Ended     through         through
                                         Dec. 30,      Dec. 25,      Dec. 26,      Dec. 27,     Dec. 28,       March 21,
                                           2000          1999          1998          1997          1996           1996
                                        ---------     ---------     ---------     ---------     ---------      ---------
                                       (53 weeks)     (52 weeks)    (52 weeks)    (52 weeks)

<S>                                     <C>           <C>           <C>           <C>           <C>           <C>
EBITDA                                  $  48,584     $  52,612     $  44,459     $  53,325     $  33,364     $   4,829
Management compensation--
     severance related                      3,777         6,600          --            --            --            --
Management compensation--
     transaction related                     --            --          14,223          --           4,085          --
Interest income                               349           201           184           256           119            36
Charges related to change in
     retail investment strategy             7,801          --            --            --            --            --
Serta settlement                            4,250          --            --            --            --            --
Serta legal fees                            2,000          --            --            --            --            --
Heilig-Meyers bad debt charge               1,820          --            --            --            --            --
Montgomery Ward bad debt charge             1,500          --            --            --            --            --
Gallery Corp. operating loss                1,673          --            --            --            --            --
Non-cash variable stock option
   compensation                               574          --            --            --            --            --
SWIFT/UNITE expense                          --            --           2,208         2,347         3,467           640
Management strategic initiatives             --             444           418         1,693          --            --
Receivable write-off (a)                     --           6,883          --            --            --            --
Inventory written-up to fair
    market value (b)                         --            --            --            --           1,000          --
Discontinued product line                    --            --             772           799           702           234
                                        ---------     ---------     ---------     ---------     ---------     ---------
    Adjusted EBITDA                     $  72,328     $  66,740     $  62,264     $  58,420     $  42,737     $   5,739
                                        =========     =========     =========     =========     =========     =========
</TABLE>

         (a)      For specific information related to this write-off, see Item
                  7. "Management's Discussion and Analysis of Financial
                  Condition and Results of Operations."

         (b)      Reflects non-recurring write-up to fair market value in
                  connection with the Investcorp Acquisition.

(3)      Adjusted capital expenditures are exclusive of expenditures related to:
<TABLE>
<CAPTION>





                                                                 Successor                                Predecessor
                                     -------------------------------------------------------------------  --------------
                                                                                                Period          Period
                                                                                                  from            from
                                                                                                March 22,       Dec. 31,
                                                                                                  1996           1995
                                       Year Ended    Year Ended    Year Ended    Year Ended     through         through
                                         Dec. 30,      Dec. 25,      Dec. 26,      Dec. 27,     Dec. 28,       March 21,
                                           2000          1999          1998          1997          1996           1996
                                        ---------     ---------     ---------     ---------     ---------      ---------
<S>                                    <C>           <C>              <C>           <C>          <C>              <C>
SWIFT/UNITE                            $      -      $       -        $2,808        $3,786       $6,531           $1,044
New plant facilities                          -              -         3,756         4,299        2,612                -
</TABLE>






                                       15
<PAGE>   16



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

You should read the following discussion along with the "Selected Consolidated
Financial and Other Data" and our consolidated financial statements and the
accompanying notes included elsewhere herein.

RESULTS OF OPERATIONS

         The following table sets forth some components of our consolidated
statement of operations data expressed as a percentage of net sales:
<TABLE>
<CAPTION>

                                                                              Fiscal Year
                                                               -------------------------------------------
                                                                   2000           1999           1998
                                                               -------------  -------------  -------------
                                                                (53 weeks)      (52 weeks)     (52 weeks)
<S>                                                                <C>            <C>            <C>
Net sales                                                          100.0%         100.0%         100.0%
Cost of products sold                                               55.8%          56.6%          58.1%
                                                               -------------  -------------  -------------
     Gross margin                                                   44.2%          43.4%          41.9%
Selling, general and administrative expenses                        38.6%          35.5%          33.7%
ESOP expense                                                         0.9%           1.1%           1.1%
Management compensation--severance related                           0.5%           1.1%           --
Management compensation--transaction related                          --             --            2.4%
Amortization of intangibles                                          1.2%           1.2%           1.2%
                                                               -------------  -------------  -------------
     Operating income                                                3.0%           4.5%           3.5%
Interest expense, net                                                4.8%           5.3%           3.9%
Other expense, net                                                   0.2%           0.3%           0.4%
                                                               -------------  -------------  -------------
     Loss before income taxes
          and extraordinary item                                    (2.0)%         (1.1)%         (0.8)%
Income tax benefit                                                  (0.5)%           --           (0.1)%
                                                               -------------  -------------  -------------
     Loss before extraordinary item                                 (1.5)%         (1.1)%         (0.7)%
Extraordinary loss from early extinguishment of
     debt, net of income tax benefit                                  --            0.4%           2.5%
                                                               -------------  -------------  -------------
Net loss                                                            (1.5)%         (1.5)%         (3.2)%
                                                               =============  =============  =============
</TABLE>

FISCAL 2000 AS COMPARED TO FISCAL 1999

         Net Sales. Net sales for the year ended December 30, 2000 increased
17.4%, or $107.6 million, to $727.1 million in 2000 from $619.5 million in 1999.
The increase was due primarily to a 11.0%, or $67.5 million, increase in bedding
unit sales volume and a 6.4%, or $43.8 million, increase in bedding average unit
selling price. Sales of non-conventional items such as bunkies/boards, heaters
and other accessories declined approximately $3.7 million. The successful launch
of the Beautyrest(R) 2000 product line was the primary reason for the
year-over-year growth. The year-to-date sales increase occurred despite a
decline in sales to The Heilig-Meyers Company ("Heilig-Meyers"), our largest
customer, of $21.5 million.

         Cost of Products Sold. As a percentage of net sales, cost of products
sold for the year ended December 30, 2000 decreased 0.8 percentage point to
55.8% from 56.6% in 1999. Our gross margin improvement versus 1999 of 0.8
percentage point to 44.2% for the year reflects the increased absorption of
fixed costs through higher sales volume and improved product mix of
Beautyrest(R) 2000 products.

         Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the year ended December
30, 2000 increased 3.1 percentage points to 38.6% from 35.5% in 1999. This
increase is primarily attributable to the following:





                                       16
<PAGE>   17
                        Simmons Company and Subsidiaries
         Management's Discussion and Analysis of Financial Condition and
                       Results of Operations - Continued
--------------------------------------------------------------------------------

         -        a charge of $7.8 million (1.1% of net sales), in the
                  aggregate, to write-off transaction fees and to adjust the
                  receivable balances for two former customers to estimated net
                  realizable value relating to the change in our retail
                  investment strategy;

         -        a charge of $6.25 million (0.9% of net sales) to settle the
                  Serta litigation and legal fees associated with litigation;

         -        charges of $3.3 million, in the aggregate, (0.5% of net sales)
                  to reserve for amounts that may ultimately prove uncollectible
                  from Heilig-Meyers and Montgomery Ward;

         -        operating losses of $1.7 million (0.2% of net sales) related
                  to Gallery Corp.;

         -        an increase in cooperative advertising and promotion costs
                  related to the Beautyrest(R)2000 product line;

         -        increased distribution expenses resulting from higher fuel
                  costs, increased trailer rentals, and the increase in sales;

         -        increased national advertising expenses;

         -        an increase in the bonus expense in 2000; and

         -        increased employee training expenses.

Offsetting these increases, in part, were operating costs being spread over a
larger revenue base.

         ESOP Expense. ESOP expense remained stable at approximately $7.0
million for the year ended December 30, 2000 compared to the year ended December
25, 1999.

         Management Compensation--Severance Related. In connection with the
termination of certain senior executives, we incurred costs in 2000 of $3.8
million consisting of:

         -        $2.4 million related to the severance provisions contained in
                  certain executive employment agreements and other severance
                  agreements; and

         -        $1.4 million related to the cancellation of vested
                  compensatory stock options.

         Amortization of Intangibles. Amortization of intangibles for the year
ended December 30, 2000 increased $0.7 million to $8.3 million from $7.6 million
for the year ended December 25, 1999 due to amortization of goodwill related to
our retail operations.

         Interest Expense, Net. Interest expense, net increased $2.1 million to
approximately $35.0 million for the year ended December 30, 2000 from $32.9
million for the year ended December 25, 1999 due primarily to (i) higher
interest rates on our Senior Credit Facility obligations; (ii) increased average
outstanding borrowings; (iii) an extra week of interest on senior indebtedness
during the year (fiscal 2000 was a 53-week year); and (iv) increased
amortization of deferred financing costs.

         Other Expense, Net. Other expense, net increased approximately $0.2
million to $1.8 million for the year ended December 30, 2000 compared to $1.6
million for the year ended December 25, 1999 due to higher management advisory
fees.

         Income Tax Benefit. Our effective income tax rates of 26.2% and 11.6%
for the years ended December 30, 2000 and December 25, 1999, respectively,
differ from the federal statutory rate primarily due to non-tax deductible
amortization of goodwill.

         Net Income. For the reasons set forth above, we incurred a net loss of
$10.9 million for the year ended December 30, 2000 compared to a net loss of
$9.1 million for the year ended December 25, 1999.




                                       17
<PAGE>   18
                        Simmons Company and Subsidiaries
         Management's Discussion and Analysis of Financial Condition and
                       Results of Operations - Continued
--------------------------------------------------------------------------------

         EBITDA. For the reasons set forth above, we had an EBITDA of $48.6
million, or 6.7% of net sales, for the year ended December 30, 2000 compared to
$52.6 million, or 8.5% of net sales, for the year ended December 25, 1999.
Excluding (i) charges of $3.8 million relating to severance recorded in the
first quarter; (ii) charges of $7.8 million, in the aggregate, to write-off
transaction fees and to adjust the receivable balances of two former customers
recorded in the second and third quarters relating to the change in retail
investment strategy; (iii) an increase of $3.3 million to further reserve for
amounts that may ultimately prove uncollectible from Heilig-Meyers and
Montgomery Ward; (iv) charges of $6.25 million associated with the settlement of
the Serta litigation and associated legal fees; (v) a $0.6 million non-cash
charge for variable stock option compensation; and (vi) an operating loss of
$1.7 million related to Gallery Corp, our EBITDA would have been $72.3 million
(adjusted EBITDA), or 9.9% of net sales, for the year ended December 30, 2000.

FISCAL 1999 AS COMPARED TO FISCAL 1998

         Net Sales. Net sales increased 3.1%, or $18.7 million, from $600.8
million in 1998 to $619.5 million in 1999. We attribute $26.7 million of this
increase to a 4.4% increase in our bedding average unit selling price, offset,
in part, by a $8.0 million or 1.3% decline in our bedding unit sales volume. The
bedding average unit selling price increase is attributable to sales of higher
priced products, particularly in the BackCare(R) line and a higher product mix
concentration of BackCare(R) and Beautyrest(R) products. The movement in product
mix is the result of our brand positioning of Better Sleep Through Science(TM).
The decline in bedding unit sales volume is attributable to the shift in product
mix toward higher price point products occurring primarily in the second half of
1999.

         Cost of Products Sold. As a percentage of net sales, cost of products
sold for 1999 improved 1.5 percentage points from 58.1% in 1998 to 56.6% in
1999. Our gross margin improvement reflects the shift in product mix toward
higher price point products, raw material cost efficiencies and increased
productivity in certain of our manufacturing facilities.

         Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses increased from 33.7% in 1998
to 35.5% in 1999. We attribute this increase to the following:

         -        the non-recurring write-off of $6.9 million related to the
                  assumption of certain assets, leases and liabilities of two
                  customers in exchange for amounts owed to us, See Note 17 to
                  "Notes to Consolidated Financial Statements.";

         -        an increase in cooperative advertising and promotion costs as
                  we move our mix toward higher price point products which carry
                  higher promotional rates; and

         -        higher legal and consulting fees.

Offsetting these increases, in part, were lower:

         -        distribution costs; and
         -        various other selling and marketing expenses.

         ESOP Expense. ESOP expense increased $0.7 million from $6.5 million in
1998 to $7.2 million in 1999. We attribute this increase to an increase in the
appraised value of the shares subject to the ESOP in 1999.

         Amortization of Intangibles. Amortization of intangibles for 1999
remained stable at approximately $7.6 million.




                                       18
<PAGE>   19
                        Simmons Company and Subsidiaries
             Management's Discussion and Analysis of Financial
                Condition and Results of Operations - Continued
--------------------------------------------------------------------------------

         Interest Expense, Net. Interest expense, net increased $9.8 million
from $22.5 million in 1998 to $32.2 million in 1999 due primarily to increased
indebtedness as a result of the Recapitalization and the March 1999 Refinancing
and higher amortization of deferred debt issuance costs in 1999. See Note 1 of
the "Notes to Consolidated Financial Statements."

         Other Expense, Net. Other expense, net decreased $1.0 million from $3.3
million in 1998 to $2.3 million in 1999. An increase in management advisory
services paid to Fenway was offset by non-recurring charges incurred in 1998
related to the Recapitalization.

         Management Compensation--Transaction Related. In 1998, in connection
with the Recapitalization, we incurred non-recurring costs of $14.2 million
consisting of:

         -        $6.3 million related to the election by management to cancel a
                  portion of their compensatory incentive stock options which
                  were immediately vested; and

         -        $7.9 million of management bonuses.

         Management Compensation--Severance Related. In connection with the
termination of and decision to terminate certain senior executives, we incurred
costs in 1999 of $6.6 million consisting of:

         -        $3.2 million related to the severance provisions contained in
                  certain executive employment agreements; and

         -        $3.4 million related to the cancellation of vested
                  compensatory incentive stock options.

         Provision for Income Taxes. Our effective tax rates for 1999 and 1998
differ from the federal statutory rate primarily because of non tax-deductible
amortization of goodwill.

         Extraordinary Item. In 1999, we recorded a $2.2 million extraordinary
charge, net of $1.1 million of related income taxes, representing the remaining
unamortized debt issuance costs related to certain long-term obligations repaid
in connection with the March 1999 Refinancing. In 1998, we recorded a $15.0
million extraordinary charge representing the remaining unamortized debt
issuance costs related to the repayment of some long-term obligations repaid and
the redemption of the old senior subordinated notes in connection with the
Recapitalization.

         Net Income. For the reasons set forth above, we incurred a net loss of
$9.1 million as compared to net loss of $19.0 million for 1998.

LIQUIDITY AND CAPITAL RESOURCES

         Our principal source of cash to fund liquidity needs is net cash
provided by operating activities and availability under our Senior Credit
Facility. Our primary use of funds consists of payments of principal and
interest, capital expenditures, severance and equity related repurchases.

         Our operating activities provided cash of $20.6 million for the year
ended December 30, 2000 compared to $0.9 million for the year ended December 25,
1999. Trade accounts receivable increased $20.8 million during 2000. Also,
during 2000, inventories increased $4.7 million due to higher production
demands. In addition, our trade accounts payable and accrued expenses also
increased during the year by $24.4 million, in total, due to improved cash
management. During fiscal year 2000 we prepaid $7.9 million of term loan
obligations under our Senior Credit Facility.

         Our capital expenditures totaled $13.3 million for the 2000 fiscal
year. These capital expenditures consisted primarily of normal recurring capital
expenditures. We believe that annual capital





                                       19
<PAGE>   20
                        Simmons Company and Subsidiaries
         Management's Discussion and Analysis of Financial Condition and
                       Results of Operations - Continued
--------------------------------------------------------------------------------

expenditure limitations in our Senior Credit Facility and the Indenture will not
significantly inhibit us from meeting our ongoing capital needs.

         As of December 30, 2000, we had no borrowings and $58.9 million
available under the revolver under the Senior Credit Facility after giving
effect to $1.1 million that was reserved for the Company's reimbursement
obligations with respect to outstanding letters of credit and after effect of
the 2001 amendment set forth below. At December 30, 2000, we were in compliance
with our financial covenants under our Senior Credit Facility, as amended.

Effective January 4, 2001, the Company amended its Senior Credit Facility:

         -        to waive provision in the Senior Credit Facility that limits
                  the amount of the Serta litigation to $1.5 million and permit
                  the settlement, which totaled $4.25 million. For purposes of
                  calculating adjusted EBITDA for fiscal year 2000 financial
                  covenant calculations, to permit the add-back of $4.25 million
                  for the settlement and $2.0 million in associated legal fees;

         -        to revise the interest rate margin matrix;

         -        to permit the Company to enter into an option to sell up to
                  $3.0 million of Heilig-Meyers accounts receivables;

         -        to permanently reduce the aggregate amount of the revolver by
                  $20.0 million from $80.0 million to $60.0 million;

         -        to expand our sale/leaseback limitation by $7.0 million;

         -        to modify certain key covenant ratios; and

         -        to increase the capital expenditures limitation.

         The terms of the Senior Credit Facility require an additional payment
on the Company's outstanding term loans on an annual basis based upon the
Company's Consolidated Excess Cash Flows (as defined in the Senior Credit
Facility). Based upon the Company's cash flows for the year ended December 30,
2000, no payment is required under the Consolidated Excess Cash Flow provision.

SEASONALITY

         Our sales volume is somewhat seasonal, with sales generally lower
during the first quarter of each year than in the remaining three quarters of
the year. Historically, our working capital borrowings have increased during the
first half of each year and have decreased in the second half of each year. We
also experience a seasonal fluctuation in profitability, with our gross profit
percentage during the first quarter of each year slightly lower than that
obtained in the remaining part of the year. We believe that seasonality of
profitability is a factor that affects the conventional bedding industry
generally and that it is primarily due to retailers' emphasis in the first
quarter on price reductions and promotional bedding and manufacturers' emphasis
on close-outs of the prior year's product lines. These two factors together
result in lower profit margins.

ACCOUNTING PRONOUNCEMENTS

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement, as amended by SFAS No. 137
and SFAS No. 138 (hereafter referred to as "SFAS 133"), is effective for fiscal
2001 for the Company. SFAS 133 standardizes 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






                                       20
<PAGE>   21
                        Simmons Company and Subsidiaries
         Management's Discussion and Analysis of Financial Condition and
                       Results of Operations - Continued
--------------------------------------------------------------------------------

relationship and, if it is, depending on the type of the hedging relationship.
For fair-value hedges in which the Company is hedging changes in an asset's, a
liability's, or a firm commitment's fair value, changes in fair value of the
derivative instrument will generally be offset in the income statement by
changes in the hedged item's fair value. For cash flow hedges in which the
Company is hedging the variability of cash flows related to a variable-rate
asset, variable-rate liability, or a forecasted transaction, the effective
portion of the gain or loss on the derivative instrument will be reported in
other comprehensive income. The gain or loss on the derivative instrument that
is reported in other comprehensive income will be reclassified as earnings in
the periods during which earnings are impacted by the variability of the cash
flows of the hedged item. The ineffective portion of all hedges will be
recognized in current-period earnings.

         The Company's SFAS 133 implementation project was completed by December
30, 2000. While SFAS 133 provides a significant change in accounting guidance
related to derivative instruments and hedging activities, the Company has
determined that the more stringent accounting and documentation requirements
under SFAS 133 will not cause any significant changes in our overall hedging
activities.

         Based on the Company's derivative positions at December 30, 2000, the
Company has determined that the initial adoption of SFAS 133 will result in an
immaterial amount being recorded as a net-of-tax cumulative-effect-type
adjustment in accumulated other comprehensive income to recognize at fair value
all derivative instruments (interest rate collars) that had previously been
designated in a hedging relationship of the variable cash flow exposure of
variable-rate loans.

         On December 3, 1999, the staff of the SEC issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB
101 summarizes some of the staff's interpretations of the application of
generally accepted accounting principles to revenue recognition. SAB 101, as
amended, was required to be adopted no later than the fourth quarter of the
fiscal year beginning after December 15, 1999 (fiscal 2000). The adoption of SAB
101 did not have a material impact on our financial position and results of
operations.

SIGNIFICANT DEVELOPMENTS

Organizational Changes - Severance Arrangements

         On January 4, 2000, we announced that Charles R. Eitel had been
appointed as our new Chairman and Chief Executive Officer. During January 2000,
Mr. Eitel completed an assessment of the effectiveness of the organizational
structure and in early February 2000, we undertook an enterprise-wide management
reorganization to reflect a new management structure going forward. The
management reorganization resulted in the termination of 14 management
employees. During February 2000, we recorded non-recurring severance expense of
$3.8 million, including compensation expense related to vested stock option
cancellations. In addition, we have accrued $2.7 million in distributions
payable to Holdings in connection with Holding's repurchase of Holdings common
stock.

Customers

         On December 28, 2000, Montgomery Ward, one of our larger customers
filed a voluntary petition for relief under Chapter 11 of the Federal Bankruptcy
Code. In addition, Montgomery Ward suspended further unpaid vendor deliveries
and announced that over the next several months, their 250 stores and 10
distribution centers in 30 states would close. As a result of the Montgomery
Ward bankruptcy, we recorded a charge of $1.5 million to reserve for amounts
that may ultimately prove uncollectible. There can be no assurance, however,
that amounts reserved will be adequate with respect to receivables from
Montgomery Ward.




                                       21
<PAGE>   22
                        Simmons Company and Subsidiaries
         Management's Discussion and Analysis of Financial Condition and
                       Results of Operations - Continued
--------------------------------------------------------------------------------

         On August 16, 2000, Heilig-Meyers and certain subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the Federal
Bankruptcy Code. Following the filing, Heilig-Meyers received a commitment from
a group of lenders for $215 million in debtor-in-possession (DIP) financing to
provide funding for its post-petition trade and employee obligations, as well as
its ongoing operating needs during the restructuring process. On September 12,
2000, Heilig-Meyers received approval from the Bankruptcy Court of its new
credit program and its plan for closing over 300 stores. Due to the
Heilig-Meyers bankruptcy, we recorded a charge of $1.8 million during the third
quarter to reserve for amounts that may ultimately prove uncollectible. There
can be no assurance, however, that amounts reserved will be adequate, nor can
there be any assurance as to future sales levels with respect to Heilig-Meyers.

         In 2000, management decided that a distribution strategy of further
investment into retail operations through acquisition of certain customers is
not in the best interests of the Company. We had been pursuing an acquisition of
a customer at an amount equal to the fair market value of the business less
obligations owed to us. Consistent with management's decision, acquisition
discussions were terminated. We believe that collectability of the full amounts
owed to us by this former customer is remote. The total amount recorded to
write-off transaction fees incurred and to adjust the receivable (net of an
allowance for doubtful accounts) to our current estimate of its net realizable
value was approximately $3.5 million.

         Additionally, during 2000, a customer, which at one time represented
our potential direct entry into retail operations, was liquidated. We recorded
$4.3 million in charges in 2000 to write-off the receivable and provide for
lease termination fees relating to certain lease obligations of the customer
which were guaranteed by the Company.

         On January 21, 2000, one of our wholly-owned subsidiaries, Gallery
Corp. ("Gallery") acquired substantially all of the retail store locations and
other assets of H&H Sleep Centers, Inc. ("H&H") and CBMC Corp. ("CBMC"). H&H and
CBMC had previously operated retail stores in the Los Angeles, Orange County and
San Diego, California areas, selling primarily mattresses and related bedding
products. Through Gallery, we acquired the H&H and CBMC assets in resolution of
those companies' outstanding debt obligations to us, and our assumption of
certain other liabilities of H&H and CBMC for a purchase price of $15.5 million.
As a result of these transactions, Gallery is currently operating 37 retail
locations in Southern California previously owned by H&H and CBMC.

         The cash pre-tax loss from operations of Gallery for the period from
the acquisition date to December 30, 2000 of Gallery totaled approximately $1.7
million. Such loss is included in operating income in the consolidated statement
of operations for 2000. Pro forma results had Gallery been acquired at the
beginning of the year do not differ significantly from actual results. Pro forma
results had the business been acquired at the beginning of 1999 are not
determinable. Management has announced its intention to ultimately dispose of
Gallery. While we believe that the eventual recovery of our investment in this
business is dependent upon the ability of the operations to achieve improvements
sufficient to generate profitable operations and positive cash flows, there can
be no assurance this business will achieve such improvements.




                                       22
<PAGE>   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 statement.
See the preceding note for additional information regarding the Private
Securities Litigation Reform Act.

         We are exposed to market risk from changes in interest rates. In order
to address this risk and meet the requirements of the Senior Credit Facility, we
have developed and implemented a policy to maintain the percentage of fixed and
variable debt within certain parameters through the use of interest rate
protection agreements. The estimated fair values of the interest rate collars
are derived from valuation models based upon recognized financial principles and
estimates about relevant future market conditions. The interest rate protection
agreements reduced our interest expense by $0.3 million in 2000. Our interest
expense in 1999 was not impacted by the agreements. The amounts exchanged are
based upon the notional amounts of the interest rate collars, as well as on the
other terms of the collars, which relate to interest payments and exchange
rates.

         As of December 30, 2000, we had the following interest rate instruments
in effect that provide protection on the three month LIBOR rate (actual rate
paid is LIBOR plus the applicable margin):
<TABLE>
<CAPTION>

                                                Notional
               As of                             Amount                 Range for
         December 30, 2000                    ($ millions)             LIBOR Rate                  Period
---------------------------------------    --------------------    --------------------    -----------------------
<S>                                               <C>                 <C>      <C>            <C>  <C>  <C>  <C>
Interest Rate Collar                              $35.0               4.405% - 6.0%           1/29/99 - 1/29/01
Interest Rate Collar                              $30.0                4.59% - 6.0%           1/20/99 - 1/20/02
Interest Rate Collar                              $30.0                 5.0% - 6.0%            2/2/99 - 2/2/02
</TABLE>

         This analysis presents the hypothetical increase in interest expense of
those financial instruments and derivative instruments held by us at December
30, 2000, which are sensitive to changes in interest rates. All other factors
remaining unchanged, a hypothetical 10 percent increase or decrease in interest
rates for one year on our variable rate financial instruments and derivative
instruments would not have a material impact on earnings during the next fiscal
year.






                                       23
<PAGE>   24



ITEM 8.  FINANCIAL STATEMENTS

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
Simmons Company

         In our opinion, the accompanying consolidated financial statements
listed in the index appearing under Item 14(a)(1) present fairly, in all
material respects, the financial position of Simmons Company (the "Company") at
December 30, 2000 and December 25, 1999, and the results of its operations and
its cash flows for each of the three years in the period ended December 30,
2000, in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14(a)(2) presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. The 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 the opinion expressed above.


/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Atlanta, Georgia
February 22, 2001




                                       24
<PAGE>   25


                        Simmons Company and Subsidiaries
                      Consolidated Statements of Operations
                                 (in thousands)
<TABLE>
<CAPTION>

                                                           Year ended         Year ended          Year ended
                                                           December 30,       December 25,        December 26,
                                                              2000                1999                1998
                                                           ---------           ---------           ---------
                                                           (53 weeks)         (52 weeks)          (52 weeks)

<S>                                                        <C>                 <C>                 <C>
Net sales                                                  $ 727,087           $ 619,526           $ 600,773
Cost of products sold                                        405,507             350,721             348,842
                                                           ---------           ---------           ---------
         Gross margin                                        321,580             268,805             251,931

Operating expenses:
     Selling, general and administrative                     280,410             219,924             202,213
     ESOP expense                                              7,117               7,169               6,453
     Management compensation--severance related                3,777               6,600                --
     Management compensation--transaction related               --                  --                14,223
     Amortization of intangibles                               8,367               7,628               7,629
                                                           ---------           ---------           ---------
                                                             299,671             241,321             230,518
                                                           ---------           ---------           ---------
          Operating income                                    21,909              27,484              21,413

     Interest expense, net                                    34,957              32,918              23,369
     Other expense, net                                        1,778               1,627               2,406
                                                           ---------           ---------           ---------
          Loss before income taxes and
              extraordinary item                             (14,826)             (7,061)             (4,362)
Income tax benefit                                            (3,883)               (105)               (345)
                                                           ---------           ---------           ---------
          Loss before extraordinary item                     (10,943)             (6,956)             (4,017)
Extraordinary loss from early extinguishment
      of debt, net of income tax benefit of $1,095
      and $7,079                                                --                 2,173              15,002
                                                           ---------           ---------           ---------
           Net loss                                          (10,943)             (9,129)            (19,019)
                                                           ---------           ---------           ---------

Other comprehensive income (loss):
     Foreign currency translation adjustment                     (20)                 42                 (31)
                                                           ---------           ---------           ---------
           Comprehensive loss                              $ (10,963)          $  (9,087)          $ (19,050)
                                                           =========           =========           =========
</TABLE>














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



                                       25
<PAGE>   26

                        Simmons Company and Subsidiaries
                           Consolidated Balance Sheets
                      (in thousands, except share amounts)
<TABLE>
<CAPTION>

                                                                                     December 30,         December 25,
                                                                                         2000                1999
                                                                                     ------------        -------------
                                      ASSETS
                                      ------
<S>                                                                                  <C>                   <C>
Current assets:
     Cash and cash equivalents                                                       $   3,061             $   4,533
     Accounts receivable, less allowances for doubtful
           receivables, discounts, returns and allowances
           of $9,426 and $6,857, respectively                                           88,116                74,326
     Inventories                                                                        23,838                19,164
     Deferred income taxes                                                              12,245                 8,713
     Other current assets                                                               14,890                10,394
                                                                                     ---------             ---------
          Total current assets                                                         142,150               117,130
                                                                                     ---------             ---------

Property, plant and equipment, net                                                      52,057                52,863
Patents, net                                                                             3,775                 6,570
Goodwill, net                                                                          185,702               175,185
Deferred income taxes                                                                   19,565                18,778
Long-term receivables                                                                    2,200                22,220
Other assets                                                                            11,412                13,354
                                                                                     ---------             ---------
                                                                                     $ 416,861             $ 406,100
                                                                                     =========             =========

                       LIABILITIES AND STOCKHOLDERS' DEFICIT
                       -------------------------------------
Current liabilities:
     Current maturities of long-term debt                                            $   1,343             $     799
     Accounts payable                                                                   35,832                15,984
     Accrued liabilities                                                                47,800                42,716
                                                                                     ---------             ---------
          Total current liabilities                                                     84,975                59,499
                                                                                     ---------             ---------

Non-current liabilities:
     Long-term debt                                                                    323,931               333,184
     Postretirement benefit obligations other than pensions                              8,579                 8,863
     Other                                                                              11,954                10,582
                                                                                     ---------             ---------
          Total liabilities                                                            429,439               412,128
                                                                                     ---------             ---------

Commitments and contingencies
Redemption obligation--ESOP, net of related unearned
     compensation of $1,073 and $6,180                                                  23,824                17,304
Stockholders' deficit:
     Common stock, $.01 par value; 50,000,000 shares authorized,
          31,964,452 shares issued and outstanding                                         320                   320
     Accumulated deficit                                                               (36,658)              (23,608)
     Accumulated other comprehensive loss                                                  (64)                  (44)
                                                                                     ---------             ---------
          Total stockholders' deficit                                                  (36,402)              (23,332)
                                                                                     ---------             ---------
                                                                                     $ 416,861             $ 406,100
                                                                                     =========             =========
</TABLE>





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





                                       26
<PAGE>   27



                        Simmons Company and Subsidiaries
      Consolidated Statements of Changes in Stockholders' Equity (Deficit)
                      (in thousands, except share amounts)
<TABLE>
<CAPTION>


                                                                               Retained       Accumulated                   Total
                                                                 Additional     Earnings          Other                Stockholders'
                                        Common        Common       Paid-In    (Accumulated    Comprehensive  Treasury      Equity
                                        Shares        Stock        Capital      Deficit)      (Loss) Income   Stock       (Deficit)
                                      ----------      -----      ----------    ----------    --------------   -------    ----------

<S>                                   <C>             <C>        <C>           <C>              <C>           <C>        <C>
December 27, 1997                     31,964,452      $ 320      $   84,680    $    7,674       $ (55)        $  (5)     $   92,614
   Net loss                                 --         --              --         (19,019)       --            --           (19,019)
   Other comprehensive loss:
        Change in foreign currency
             translation                    --         --              --            --           (31)         --               (31)
   Purchase of treasury stock               --         --              --            --          --             (55)            (55)
   Excess of ESOP expense at fair
        market value over cost              --         --               731          --          --            --               731
   Increase in Redemption
        obligation--ESOP based on
        fair market value                   --         --           (10,582)         --          --            --           (10,582)
   Distribution to Holdings                 --         --           (74,829)       (1,190)       --              60         (75,959)
                                      ----------      -----      ----------    ----------       -----         -----      ----------
December 26, 1998                     31,964,452        320            --         (12,535)        (86)         --           (12,301)
   Net loss                                 --         --              --          (9,129)       --            --            (9,129)
   Other comprehensive income:
        Change in foreign currency
             translation                    --         --              --            --            42          --                42
   Excess of ESOP expense at fair
        market value over cost              --         --             1,949          --          --            --             1,949
   Distribution to Holdings                 --         --            (1,949)       (1,944)       --            --            (3,893)
                                      ----------      -----      ----------    ----------       -----         -----      ----------
December 25, 1999                     31,964,452        320            --         (23,608)        (44)         --           (23,332)
   Net loss                                 --         --              --         (10,943)       --            --           (10,943)
   Other comprehensive loss:
        Change in foreign currency
             translation                    --         --              --            --           (20)         --               (20)
   Excess of ESOP expense at fair
        market value over cost              --         --             2,010          --          --            --             2,010
   Increase in Redemption
        obligation--ESOP based on
        fair market value                   --         --            (1,029)         (384)       --            --            (1,413)
   Distribution to Holdings                 --         --              (981)       (1,723)       --            --            (2,704)
                                      ----------      -----      ----------    ----------       -----         -----      ----------
December 30, 2000                     31,964,452      $ 320      $     --      $  (36,658)      $ (64)        $--        $  (36,402)
                                      ==========      =====      ==========    ==========       =====         =====      ==========

</TABLE>














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



                                       27
<PAGE>   28


                        Simmons Company and Subsidiaries
                      Consolidated Statements of Cash Flows
                                 (in thousands)
<TABLE>
<CAPTION>

                                                                       Year ended          Year ended         Year ended
                                                                       December 30,        December 25,       December 26,
                                                                           2000               1999               1998
                                                                       ------------        -----------        -----------
<S>                                                                     <C>                <C>                <C>
Cash flows from operating activities:
Net loss                                                                $ (10,943)         $  (9,129)         $ (19,019)
Adjustments to reconcile net loss to
     net cash provided by (used in) operating activities:
       Depreciation and amortization                                       19,558             17,959             16,593
       ESOP expense                                                         7,117              7,169              6,453
       Non-cash portion of extraordinary loss                                --                2,173               (921)
       Provision for doubtful accounts                                     12,616              7,597                 75
       Provision for deferred income taxes                                 (4,319)            (1,252)            (1,902)
       Non-cash interest expense                                            1,801              1,864              1,072
       Non-cash variable stock option expense                                 574               --                 --
       Other, net                                                            (134)              --                 --
Net changes in operating assets and liabilities:
       Accounts receivable                                                (20,822)           (23,085)           (10,335)
       Inventories                                                         (4,674)             1,298               (492)
       Other current assets                                                (4,496)             5,034             (5,208)
       Accounts payable                                                    19,848            (13,966)             2,103
       Accrued liabilities                                                  4,510              5,185             (2,427)
       Other, net                                                             (12)                77               --
                                                                        ---------          ---------          ---------
Cash provided by (used in) operating activities                            20,624                924            (14,008)
                                                                        ---------          ---------          ---------

Cash flows from investing activities:
       Purchases of property, plant and equipment, net                    (13,160)            (9,041)           (15,553)
       Issuance of notes receivable                                          --               (4,100)              --
       Proceeds from notes receivable                                        --                  100               --
                                                                        ---------          ---------          ---------
Net cash used in investing activities                                     (13,160)           (13,041)           (15,553)
                                                                        ---------          ---------          ---------

Cash flows from financing activities:
       Distribution to Holdings                                            (2,704)            (3,893)           (75,959)
       Distribution to Holdings for purchase of ESOP shares                  --                 --              (15,450)
       Proceeds (payments) of Senior Credit Facility, net                  (8,165)           (23,972)           190,000
       Proceeds of Senior Bridge Loans                                       --                 --               75,000
       Payments on Senior Bridge Loans                                       --              (75,000)              --
       Proceeds of Junior Simmons Notes                                      --                 --               30,000
       Payments on Junior Simmons Notes                                      --              (30,391)              --
       Proceeds of 10.25% Senior Sub Notes due 2009                          --              150,000               --
       Payment on 10.75% Senior Sub Notes due 2006                           --                 --             (100,000)
       Proceeds of other long-term borrowings                                --                 --               33,871
       Payments on other long-term borrowings                                (544)              (514)           (99,845)
       Proceeds of sale/leaseback transaction                               2,909               --                 --
       Payments of financing costs                                           (412)            (5,626)           (11,074)
       Treasury stock purchases                                              --                 --                  (55)
                                                                        ---------          ---------          ---------
Net cash provided by (used in) financing activities                        (8,916)            10,604             26,488
                                                                        ---------          ---------          ---------
Net effect of exchange rate changes on cash                                   (20)                42                (31)
                                                                        ---------          ---------          ---------
Decrease in cash and cash equivalents                                      (1,472)            (1,471)            (3,104)
Cash and cash equivalents, beginning of period                              4,533              6,004              9,108
                                                                        ---------          ---------          ---------
Cash and cash equivalents, end of period                                $   3,061          $   4,533          $   6,004
                                                                        =========          =========          =========

Supplemental cash flow information:
       Cash paid for interest                                           $  34,996          $  24,985          $  19,517
                                                                        =========          =========          =========
       Cash paid for income taxes                                       $     147          $   4,985          $     322
                                                                        =========          =========          =========
       Acquisition of business in exchange for receivables              $  15,449          $    --            $    --
                                                                        =========          =========          =========
</TABLE>
        The accompanying notes are an integral part of these consolidated
                             financial statements.



                                       28
<PAGE>   29


                        Simmons Company and Subsidiaries
                   Notes to Consolidated Financial Statements
                      (in thousands, except share amounts)

1.       THE COMPANY

         Simmons Company ("Simmons" or "the Company") is one of the largest
bedding manufacturers in the United States. The Company manufactures and
distributes mattresses, box springs, bedding frames and sleep accessories.
Simmons sells through all major distribution channels, including furniture
stores, specialty sleep shops, department stores and warehouse showrooms. The
Company manufactures and supplies conventional bedding to over 6,100 retail
outlets, representing approximately 3,000 customers.

         Simmons also sells bedding products to certain institutional customers,
such as schools and government entities, and to the lodging industry and
licenses its patents and trademarks to various domestic and foreign
manufacturers.

The Recapitalization

         On July 16, 1998, the Company's parent, Simmons Holdings, Inc.
("Holdings") entered into a recapitalization agreement with the Company and REM
Acquisition, Inc., a transitory Delaware merger corporation ("REM"), sponsored
by Fenway Partners, Inc., ("Fenway"). Pursuant to the agreement, on October 29,
1998 REM merged with and into Holdings (the "Recapitalization"), with Holdings
being the surviving corporation. The Recapitalization resulted in certain
stockholders of Holdings who are affiliates of or investors arranged by
INVESTCORP S.A. ("Investcorp") receiving an aggregate amount of cash equal to
approximately $193.4 million, and certain stockholders of Holdings who are
members of management of the Company receiving an aggregate amount of cash equal
to approximately $14.0 million. Investcorp retained shares of common stock of
Holdings with a then estimated fair value of $9.0 million and management
retained shares of stock and options to purchase stock of Holdings with a then
estimated fair value of $16.5 million. As part of the Recapitalization, REM
purchased the outstanding shares of Series A Preferred Stock of the Company (the
"Series A Preferred Stock") owned by the Simmons Employee Stock Ownership Plan
(the "ESOP") that had been allocated to its participants for an aggregate
purchase price of $15.4 million, and the ESOP exchanged its remaining
outstanding shares of Series A Preferred Stock for shares of common stock of
Holdings. The Series A Preferred Stock purchased by REM was cancelled in
connection with the Transactions, as defined below. The ESOP retained shares of
stock of Holdings with a then estimated fair value of $23.4 million.

         Financing for the Recapitalization, the related transactions, and the
fees and expenses incurred therewith, was provided by (i) the Company's
borrowings under a new $270.0 million senior credit facility (the "Senior Credit
Facility") which refinanced the majority of the Company's existing senior and
subordinated obligations, (ii) the Company's borrowings of $75.0 million under
Senior Subordinated Bridge Loans (the "Senior Bridge Loans"), (iii) the
Company's borrowings of $30.0 million under the Junior Subordinated Notes (the
"Junior Simmons Notes") issued to an affiliate of Fenway, (iv) Holdings'
borrowings of $10.0 million under Junior PIK Notes (the "Junior PIK Notes")
issued to an affiliate of Fenway, and (v) $177.0 million of capital provided by
Fenway, affiliates of Investcorp, management and certain other investors of
Holdings.

         The Recapitalization, the refinancing under the Senior Credit Facility,
the Senior Bridge Loans financing, the Junior Simmons Notes and the Junior PIK
Notes financing are collectively referred to herein as the "Transactions". As a
result of the Transactions, Simmons Holdings, LLC, an entity controlled by funds
managed by Fenway, acquired 75.1% of the outstanding voting shares of Holdings,
and management, the ESOP and Investcorp retained approximately 5.9%, 13.7% and
5.3%,




                                       29
<PAGE>   30

                        Simmons Company and Subsidiaries
             Notes to Consolidated Financial Statements - Continued
--------------------------------------------------------------------------------

respectively, of the outstanding shares of Holdings. The Company has accounted
for the Transactions as a leveraged recapitalization, whereby the historical
bases of the assets and liabilities of the Company have been maintained.

2.       PRINCIPAL ACCOUNTING POLICIES

Principles of Consolidation

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

Use of Estimates and Reclassifications

         The consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles. 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 1999 and 1998 financial statements 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 year 2000 comprised 53 weeks and fiscal years 1999
and 1998 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.

Inventories

         Inventories are stated at the lower of cost (first-in, first-out
method) or net realizable value.

Property, Plant and Equipment

         Property, plant and equipment are carried at cost. 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                  10 - 25 years
                  Machinery and equipment                      5 - 15 years
                  Computers and software                        3 - 7 years

         Whenever events or changes in circumstances indicate that the carrying
value may not be recoverable, management assesses whether there has been a
permanent impairment in the value of long-lived assets by comparing anticipated
undiscounted future cash flows from operating activities with the






                                       30
<PAGE>   31

                        Simmons Company and Subsidiaries
             Notes to Consolidated Financial Statements - Continued
--------------------------------------------------------------------------------

carrying value of the long-lived 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 a
permanent 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.

Patents and Goodwill

         The costs of patents acquired are being amortized using the
straight-line method over the estimated remaining economic lives of the
respective patents, principally seven years.

         Goodwill represents the excess purchase price over the fair value of
acquired companies and is being amortized on a straight-line basis over forty
years for the goodwill associated with the 1996 Investcorp transaction, and over
twenty years for the goodwill resulting from the acquisition of assets at
Gallery Corp. in 2000 (see note 6).

         Whenever events or changes in circumstances indicate that the carrying
value may not be recoverable, management assesses whether there has been a
permanent impairment in the value of intangible assets by comparing anticipated
undiscounted future cash flows from operating activities with the carrying value
of the intangible 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 a permanent
impairment is deemed to exist, management would record an impairment change
equal to the excess of the carrying value over discounted cash flows associated
with the goodwill.

Revenue Recognition

         The Company recognizes revenue at the time the risks of ownership of
the products sold have transferred to the customer.

Shipping and Handling

         Shipping and handling costs are billed to our customers as a component
of net sales. The costs of shipping and handling are included in selling,
general and administrative expenses and totaled approximately $30.4 million,
$23.7 million, and $24.3 million for 2000, 1999 and 1998, respectively.

ESOP Expense

         The Company follows the provisions of Statement of Position No. 93-6 of
the American Institute of Certified Public Accountants, "Employers' Accounting
for Employee Stock Ownership Plans," whereby ESOP expense is recognized as an
amount equal to the fair market value of the shares committed to be released to
participants' accounts. The unearned compensation balance continues to be
amortized using the shares allocated method (i.e., at cost). The difference in
these two amounts, if any, is recorded as an adjustment to additional paid-in
capital.

Other Comprehensive Income

         Comprehensive income equals net income plus other comprehensive income.
Other comprehensive income refers to revenue, expenses, gains and losses which
are reflected in stockholders' equity (deficit) but excluded from net income.
The component comprising other comprehensive income is foreign currency
translation adjustment.




                                       31
<PAGE>   32

                        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 $987, $491 and $1,112 for 2000, 1999 and 1998, respectively.

Advertising Costs

         The Company records the cost of advertising as an expense when
incurred. Advertising expense was $83,757, $65,773 and $61,869 for 2000, 1999
and 1998, respectively, and is included as a component of selling, general and
administrative expenses in the accompanying consolidated statements of
operations.

Significant Concentrations of Risk

         The Company manufactures and markets sleep products, including
mattresses and box springs to retail establishments primarily in the United
States. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Sales to the
Company's three largest customers aggregated approximately 13%, 18% and 21% of
total sales for each of 2000, 1999 and 1998, respectively. Accounts receivable
from one customer was approximately 4.5% of total accounts receivable at
December 30, 2000. No one customer accounted for 10.0% of net sales in 2000.
Sales to Heilig-Meyers entities represented approximately 11.0% and 11.8% of net
sales for 1999 and 1998, respectively.

         Purchases of raw materials from one vendor represented approximately
18%, 22% and 23% of cost of products sold for 2000, 1999 and 1998, respectively.

         The Company maintains cash balances in excess of FDIC insurance limits
at certain large financial institutions. The Company monitors the financial
condition of such institutions and considers the risk of loss to be remote.

Accounting Pronouncements

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement, as amended by SFAS No. 137
and SFAS No. 138 (hereafter referred to as "SFAS 133"), is effective for fiscal
2001 for the Company. SFAS 133 standardizes 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. For fair-value hedges in which the Company is hedging changes in
an asset's, a liability's, or a firm commitment's fair value, changes in fair
value of the derivative instrument will generally be offset in the income
statement by changes in the hedged item's fair value. For cash flow hedges in
which the Company is hedging the variability of cash flows related to a
variable-rate asset, variable-rate liability, or a forecasted transaction, the
effective portion of the gain or loss on the derivative instrument will be
reported in other comprehensive income. The gain or loss on the derivative
instrument that is reported in other comprehensive income will be reclassified
as earnings in the periods during which earnings are impacted by the variability
of the cash flows of the hedged item. The ineffective portion of all hedges will
be recognized in current-period earnings.




                                       32
<PAGE>   33

                        Simmons Company and Subsidiaries
             Notes to Consolidated Financial Statements - Continued
--------------------------------------------------------------------------------

         The Company's SFAS 133 implementation project was completed by December
30, 2000. While SFAS 133 provides a significant change in accounting guidance
related to derivative instruments and hedging activities, the Company has
determined that the more stringent accounting and documentation requirements
under SFAS 133 will not cause any significant changes in our overall hedging
activities.

         Based on the Company's derivative positions at December 30, 2000, the
Company has determined that the initial adoption of SFAS 133 will result in an
immaterial amount being recorded as a net-of-tax cumulative-effect-type
adjustment in accumulated other comprehensive income to recognize at fair value
all derivative instruments (interest rate collars) that had previously been
designated in a hedging relationship of the variable cash flow exposure of
variable-rate loans.

         On December 3, 1999, the staff of the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements." SAB 101 summarizes some of the staff's
interpretations of the application of generally accepted accounting principles
to revenue recognition. SAB 101, as amended, was required to be adopted no later
than the fourth quarter of the fiscal year beginning after December 15, 1999
(fiscal 2000). The adoption of SAB 101 did not have a material impact on our
financial position and results of operations.

3.       EMPLOYEE STOCK OWNERSHIP PLAN

         The Company is structured so that the employees of the Company have a
beneficial ownership of the stock of Holdings or, prior to the Transactions, of
the Company through their participation in the ESOP. The Company makes annual
contributions to the ESOP in an amount up to 25% of eligible participant
compensation, subject to certain limitations and conditions. The ESOP then uses
all such contributions to repay the ESOP loan. As a result, there is no cash
cost associated with the contributions to the ESOP.

         On October 29, 1998, REM purchased 2,295,110 shares of the Company's
Series A Preferred Stock from the ESOP, representing all the shares held by the
ESOP that had been allocated to plan participants as of such date for a then
aggregate purchase price of approximately $15.4 million, which amount was
reinvested, at the direction of the participants, into diversified investments
in the respective accounts of such participants in the ESOP. The Series A
Preferred Stock purchased by REM was cancelled in connection with the
Transactions. Immediately prior to the Recapitalization, the ESOP exchanged its
remaining unallocated shares of Series A Preferred Stock for 3,482,036 shares of
common stock of Holdings.

         The ESOP pledged all of its shares of Holdings common stock as
collateral for the ESOP loans from the Company. These shares are held by State
Street Bank and Trust Company, the ESOP trustee, in a suspense account and are
released to the ESOP participants' accounts based on debt service. In 1998,
1,160,734 shares were released to participant's accounts for the 1997 ESOP
allocation. In 1999, 1,133,737 shares were released to participant's accounts
for the 1998 ESOP allocation. In 2000, 1,071,944 shares were released to
participant's accounts for the 1999 ESOP allocation. As of December 30, 2000,
981,088 shares of Holdings common stock have been committed to be released. The
remaining unallocated shares of Holdings common stock held in the ESOP had an
estimated fair value of approximately $2,066 ($7.15 per share) at December 30,
2000.

         Under the ESOP, employees are eligible to participate in the ESOP
following the date when the employee has completed at least one year of service
and has reached age 21. All employees of the Company, except employees who are
covered by a negotiated collective bargaining agreement (unless the collective
bargaining agreement provides for participation in the ESOP) or who are
nonresident aliens, are covered by the ESOP. Approximately 28% of the Company's
full-time employees are participants in the





                                       33
<PAGE>   34

                        Simmons Company and Subsidiaries
             Notes to Consolidated Financial Statements - Continued
--------------------------------------------------------------------------------

ESOP. The participants and beneficiaries of the ESOP are not subject to income
tax with respect to contributions made on their behalf until they receive
distributions from the ESOP.

         Under the provisions of the ESOP, the Company or Holdings is obligated
to repurchase participant shares which have been distributed under the terms of
the ESOP, as long as the shares are not publicly traded or if the shares are
subject to trading limitations. The Company repurchased approximately 9,116
shares and 2,886 shares from ESOP participants in 2000 and 1999, respectively,
at a price of $6.7315 per share.

         Because of the Company's or Holdings' 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 under ESOP as of December
30, 2000 and December 25, 1999, respectively. In 2000, this obligation increased
$1.4 million as a result of the increase in the underlying fair value of
Holdings common stock. Additionally, pursuant to generally accepted accounting
principles, the Company has classified a proportional amount of unearned
compensation under ESOP in the same manner.

4.       INVENTORIES

         Inventories consisted of the following at December 30, 2000 and
December 25, 1999:

                                                 2000                1999
                                               -------             -------
     Raw materials                             $14,900             $11,664
     Work-in-progress                            1,626               1,357
     Finished goods                              7,312               6,143
                                               -------             -------
                                               $23,838             $19,164
                                                ======              ======

5.       PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consisted of the following at December
30, 2000 and December 25, 1999:

                                                 2000                1999
                                               -------             -------
     Land, buildings and improvements          $18,989             $17,575
     Machinery and equipment                    61,864              52,807
     Construction in progress                    2,198               2,934
                                               -------             -------
                                                83,051              73,316
     Less accumulated depreciation             (30,994)            (20,453)
                                               -------             -------
                                               $52,057             $52,863
                                               =======             =======

         Depreciation expense for 2000, 1999 and 1998 was $11,191, $10,331 and
$8,964, respectively.




                                       34
<PAGE>   35

                        Simmons Company and Subsidiaries
             Notes to Consolidated Financial Statements - Continued
--------------------------------------------------------------------------------

6.       INTANGIBLE ASSETS

         Intangible assets consisted of the following at December 30, 2000 and
December 25, 1999:

                                                   2000                1999
                                                 -------             -------
     Goodwill                                    $209,396            $193,307
     Patents                                       17,029              17,029
                                                 --------            --------
                                                  226,425             210,336
     Less accumulated amortization                (36,948)            (28,581)
                                                 --------            --------
                                                 $189,477            $181,755
                                                 ========            ========

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") we recorded an additional $16,089 to
goodwill in 2000. This amount represents the excess of the purchase price over
the fair value of assets acquired and is being amortized on a straightline basis
over a twenty year period.

         Amortization expense for goodwill and patents, in the aggregate, was
$8,367, $7,628 and $7,629 for 2000, 1999 and 1998, respectively.

7.       OTHER ASSETS

Other assets consisted of the following at December 30, 2000 and December 25,
1999:
<TABLE>
<CAPTION>

                                                                   2000                1999
                                                                  -------             -------
<S>                                                               <C>                 <C>
     Debt issuance costs, net of accumulated
          amortization of $3,283 and $1,482, respectively         $ 10,971             $12,360
     Other                                                             441                 994
                                                                  --------             -------
                                                                  $ 11,412             $13,354
                                                                  ========             =======
</TABLE>

         Debt issuance costs are amortized using the effective interest method.
Amortization expense of $1,801, $1,433 and $777 for 2000, 1999 and 1998,
respectively, is included as a component of interest expense in the accompanying
consolidated statements of operations.

8.       CURRENT LIABILITIES

Current liabilities consisted of the following at December 30, 2000 and December
25, 1999:
<TABLE>
<CAPTION>

                                                                    2000                1999
                                                                  -------             -------
<S>                                                               <C>                 <C>
     Accrued wages and benefits                                   $10,597             $ 8,449
     Accrued advertising and incentives                            21,469              15,413
     Accrued interest                                               5,284               7,098
     Other accrued expenses                                        10,450              11,756
                                                                  -------             -------
                                                                  $47,800             $42,716
                                                                  =======             =======
</TABLE>






                                       35
<PAGE>   36

                        Simmons Company and Subsidiaries
             Notes to Consolidated Financial Statements - Continued
--------------------------------------------------------------------------------



9.       LONG-TERM DEBT

         Long-term debt consisted of the following at December 30, 2000 and
December 25, 1999:
<TABLE>
<CAPTION>

                                                                     2000                  1999
                                                                  ---------             ---------
<S>                                                               <C>                   <C>
     Senior Credit Facility:
           Tranche A Term Loan                                    $  47,061             $  48,607
           Tranche B Term Loan                                       67,553                68,657
           Tranche C Term Loan                                       43,249                48,764
                                                                  ---------             ---------
                Total Senior Credit Facility                        157,863               166,028
      Industrial Revenue Bonds, 7.00%, due 2017                       9,700                 9,700
      Industrial Revenue Bonds, 4.45%, due 2016                       4,600                 4,800
      Banco Santander loan, 8.75%, due 2013                           2,755                 2,969
      10.25% Series B Senior Subordinated Notes due 2009            150,000               150,000
      Other, including capital lease obligations                        356                   486
                                                                  ---------             ---------
                                                                    325,274               333,983
      Less current portion                                           (1,343)                 (799)
                                                                  ---------             ---------
                                                                  $ 323,931             $ 333,184
                                                                  =========             =========
</TABLE>

         The Senior Credit Facility, as amended, provides for loans of up to
$250.0 million, consisting of the Term Loan Facility of $190.0 million and the
Revolving Loan Facility of $60.0 million. Following the prepayments made in
fiscal 1999 from the proceeds of a private offering of 10.25% Series B Senior
Subordinated Notes due 2009, the Term Loan Facility was reduced to approximately
$166.0 million. Our indebtedness under the Senior Credit Facility bears interest
at a floating rate, is guaranteed by Holdings and one of our current domestic
subsidiaries and is collateralized by substantially all of our assets.

         The Senior Credit Facility was amended effective January 4, 2001 (as
further described below) to (among other things) increase the interest rate
margin. Following the amendment, borrowings under the Senior Credit Facility
currently bear interest rates selected by us based upon LIBOR or Prime plus the
following applicable interest rate margin as follows:
                                                    LIBOR              Prime
                                                --------------    --------------
          Tranche A Term Loan                        3.00%               2.00%
          Tranche B Term Loan                        3.50%               2.50%
          Tranche C Term Loan                        3.75%               2.75%

         The weighted average interest rates per annum in effect at December 30,
2000 for the Tranche A term, Tranche B term and Tranche C term loans were 9.55%,
9.85% and 10.15%, respectively.

         The use of interest rate risk management instruments, such as collars,
is required under the terms of the Senior Credit Facility. The Company has
developed and implemented a policy to maintain the percentage of fixed and
variable debt within certain parameters. Through the use of interest rate
protection agreements the Company limits its exposure to and benefits from
interest rate fluctuations on variable rate debt to within a certain range of
rates. The estimated fair value of these collars at December 30, 2000 was
approximately $0.3 million. Interest rate protection agreements reduced our
interest expense by $0.3 million in 2000. Our interest expense in 1999 was not
impacted by the agreements.

         As of December 30, 2000, we had the following interest rate instruments
in effect that provide protection on the three month LIBOR rate (actual rate
paid is LIBOR plus the applicable margin):





                                       36
<PAGE>   37

                        Simmons Company and Subsidiaries
             Notes to Consolidated Financial Statements - Continued
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>

                                          Notional
              As of                         Amount                 Range for
         December 30, 2000                ($ millions)             LIBOR Rate                  Period
----------------------------------    --------------------    --------------------    -----------------------
<S>                                          <C>                <C>                    <C>
Interest Rate Collar                         $35.0              4.405% - 6.00%          1/29/99 - 1/29/01
Interest Rate Collar                         $30.0               4.59% - 6.00%          1/20/99 - 1/20/02
Interest Rate Collar                         $30.0                6.0% - 5.0%            2/2/99 - 2/2/02
</TABLE>

         As of December 30, 2000, we had no borrowings and $58.9 million
available under our Revolving Credit Facility after giving effect to $1.1
million that was reserved for the Company's reimbursement obligations with
respect to outstanding letters of credit and after effect of the 2001 amendment
set forth below. The remaining availability under the Revolving Credit Facility
may be utilized to meet the Company's current working capital requirements,
including issuance of stand-by and trade letters of credit. The Company also may
utilize the remaining availability under the Revolving Credit Facility to fund
acquisitions and capital expenditures.

         The Senior Credit Facility requires the Company to maintain certain
financial ratios including fixed-charge, cash interest coverage and leverage
ratios. The 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. At December 30, 2000,
we were in compliance with our financial covenants, as amended.

Effective January 4, 2001, the Company amended its Senior Credit Facility:

         -        to waive provision in the Senior Credit Facility that limits
                  the amount of the Serta litigation to $1.5 million and permit
                  the settlement, which totaled $4.25 million. For purposes of
                  calculating adjusted EBITDA for 2000 financial covenant
                  calculations , to permit the add-back of $4.25 million for the
                  settlement and $2.0 million in associated legal fees;

         -        to revise the interest rate margin matrix;

         -        to permit the Company to purchase an option to sell up to $3.0
                  million of Heilig-Meyers accounts receivables;

         -        to permanently reduce the aggregate amount of the Revolving
                  Loan Commitments by $20.0 million from $80.0 million to $60.0
                  million;

         -        to expand our sale/leaseback limitation by $7.0 million;

         -        to modify certain key covenant ratios; and

         -        to increase the capital expenditures limitation.

                  The terms of the Senior Credit Facility require an additional
payment on the Company's outstanding Term Loans on an annual basis based upon
the Company's excess cash flows ("Consolidated Excess Cash Flow," as defined in
the Senior Credit Facility). Based upon the Company's cash flows for the year
ended December 30, 2000, no payment was required under the Consolidated Excess
Cash Flow provision. However, during the fiscal year 2000, we prepaid $7.9
million of term loan obligations under our Senior Credit Agreement from
operating cash flows and proceeds from the sale of equipment.




                                       37
<PAGE>   38

                        Simmons Company and Subsidiaries
             Notes to Consolidated Financial Statements - Continued
--------------------------------------------------------------------------------

Future maturities of long-term debt as of December 30, 2000 are as follows:

                          2001                                   $  1,343
                          2002                                     14,529
                          2003                                     15,792
                          2004                                     20,567
                          2005                                     64,805
                          Thereafter                              208,238
                                                                 --------
                                                                 $325,274
                                                                 ========

         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 except for
the 10.25% Series B Senior Subordinated Notes due 2009 which are at quoted
market values. The fair value of the Company's 10.25% Series B Senior
Subordinated Notes due 2009 was $139,500 at December 30, 2000. All other
long-term debt approximates the carrying value at December 30, 2000.

10.      OTHER EXPENSE, NET

         Other expense, net is comprised of the following:
<TABLE>
<CAPTION>

                                                    2000                1999                1998
                                                   ------              ------              ------
<S>                                                <C>                 <C>                 <C>
     Recapitalization/acquisition related
           expenses                                $ --                $  124              $1,012
      Management advisory fee paid to a
           related party                            1,778               1,505               1,074
      Other non-operating expenses                   --                   702               1,235
                                                   ------              ------              ------
                                                   $1,778              $2,331              $3,321
                                                   ======              ======              ======
</TABLE>

11.      EXTRAORDINARY ITEMS

         In March 1999, we recorded a $2,173 (net of income tax benefit of
$1,095) charge representing the remaining unamortized debt issuance costs
related to certain long-term obligations repaid in connection with the March
1999 Refinancing.

         In October 1998, the Company recorded a $15,002 charge (net of income
tax benefit of $7,079) representing the remaining unamortized debt issuance
costs of $4,184 (net of income tax benefit of $1,974) related to long-term
obligations repaid as a result of the refinancing of certain debt in connection
with the recapitalization and the redemption premium obligation of $10,818 (net
of income tax benefit of $5,105) related to the early redemption of the
Company's then outstanding 10.75% Senior Subordinated Notes due 2006.

12.      LEASES

         The Company leases certain facilities and equipment under operating
leases. Rent expense was $15,732, $14,298 and $12,705 for 2000, 1999 and 1998,
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 30, 2000:



                                       38
<PAGE>   39

                        Simmons Company and Subsidiaries
             Notes to Consolidated Financial Statements - Continued
--------------------------------------------------------------------------------



                          2001                                    $18,277
                          2002                                     17,447
                          2003                                     14,257
                          2004                                     10,046
                          2005                                      8,504
                          Thereafter                               20,605
                                                                  -------
                                                                  $89,136
                                                                  =======

13.      STOCK OPTION PLAN

         The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations in accounting
for its employee stock incentive plans. The Company has adopted the
disclosure-only provisions of FASB No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123").

         During 1999, the board of directors of Holdings established the 1999
Stock Option Plan ("1999 Plan"), which now provides for the granting of up to
5,956,000 options for shares of Holdings common stock to directors (including
those who are not employees), all executive officers of the Company and its
subsidiaries and other employees, consultants and advisors. Under the terms of
the 1999 Plan, options may be either incentive or nonqualified. Generally, the
options outstanding under the 1999 Plan are granted at prices which equate to or
are above the market value of the common stock of Holdings on the date of grant
and vest ratably over a four or five year period based upon the achievement of
an annual Adjusted EBITDA target, as defined in the plan, or as otherwise
established by the Compensation Committee of the Board of Directors. The 1999
Plan permits the Compensation Committee to grant other stock options on terms
and conditions established by the Committee. Under APB 25, because the vesting
of the plan options is 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, is not currently determinable. Accordingly, pursuant to APB 25, we record
estimated compensation expense over the service period based upon the intrinsic
value of the options as they are earned by the employees.

         In 1996, the board of directors established a Management Stock
Incentive Plan (the "1996 Plan"), which provided for the granting of
nonqualified options for Class C common stock of Holdings to members of
management and certain key employees. The options outstanding under the 1996
Plan were granted at prices which equate to or were above the market value of
the Class C stock on the date of grant. As a result of the Transactions, the
vesting of the issued and outstanding stock options under the 1996 plan was
accelerated.

         Additionally, the 1999 and 1996 Plans provide that the option holders
may, under certain circumstances, require Holdings to repurchase the shares
underlying vested options. Therefore, pursuant to APB 25 and its
interpretations, the Company records additional adjustments to compensation
expense for changes in the intrinsic value of vested options under the 1996 and
1999 Plans in a manner similar to a stock appreciation right.

         The Company recorded compensation expense of approximately $0.6 million
related to stock options during 2000.

         In 1996, the Company entered into an agreement with Holdings whereby if
Holdings grants any options to purchase shares of common or Class C Stock of
Holdings to a director, employee or consultant of the Company, the Company will
grant to Holdings corresponding options, exercisable only upon






                                       39
<PAGE>   40

                        Simmons Company and Subsidiaries
             Notes to Consolidated Financial Statements - Continued
--------------------------------------------------------------------------------

exercise of the Holdings options, to purchase the same number of shares of
common stock of the Company at the same per share exercise price and subject to
substantially the same terms and conditions as the Holdings options. All
references to stock options pertain to the Holdings options which have been
attributed to the Company for disclosure purposes.

         Stock option activity (all non-qualified) during 2000 and 1999 follows:
<TABLE>
<CAPTION>

                                                                                       Weighted
                                                                                       Average
                                                                Number                 Exercise
                                                               of Shares                Price
                                                              ----------                -----
<S>                                                           <C>                      <C>
      Shares outstanding at December 26, 1998                  1,639,077                $2.73
      Granted                                                  2,880,000                $6.73
      Forfeited                                                 (100,000)               $6.73
      Cancelled                                                  (41,585)               $2.88
                                                              ----------                -----

      Shares outstanding at December 25, 1999                  4,377,492                $5.27
      Granted                                                  4,820,000                $6.73
      Forfeited                                               (2,061,000)               $6.73
      Cancelled                                               (1,232,196)               $2.79
                                                              ----------                -----

      Shares outstanding at December 30, 2000                  5,904,296                $6.50
                                                              ==========                =====

      Shares exercisable at December 30, 2000                    451,318                $3.65
                                                              ==========                =====
</TABLE>

         The following table summarizes information concerning currently
outstanding and exercisable options:
<TABLE>
<CAPTION>

                              Outstanding Options                                            Exercisable Options
--------------------------------------------------------------------------------    --------------------------------------

    Range of              Number         Weighted-Average                                 Number
    Exercise         Outstanding at         Remaining         Weighted-Average       Exercisable at     Weighted-Average
     Prices           Dec. 30, 2000      Contractual Life       Exercise Price         Dec. 30, 2000      Exercise Price
--------------------------------------------------------------------------------------------------------------------------
<S>       <C>              <C>                  <C>                  <C>                    <C>               <C>
  $2.65 - 3.57             341,296              5.2                  $2.77                  341,296           $2.77
  $5.15 - 6.73           5,563,000              9.3                  $6.72                  110,022           $6.39
                         ---------                                                          -------
                         5,904,296              9.1                  $6.50                  451,318           $3.65
                         =========                                                          =======
</TABLE>

         Pro forma information regarding net income is required by SFAS 123, and
has been determined as if the Company had accounted for the employee stock
options under the fair value method under that Statement. The fair value for
these options was estimated at the date of grant using the minimum present value
method with the following weighted average assumptions for 2000, 1999 and 1998:

                                           2000             1999         1998
                                      -------------      ---------     ---------
     Risk-free interest rate              5.97%            5.71%          5.47%
     Expected life                       6 years          7 years       7 years

         For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' expected life. The effects of
applying SFAS 123 in this pro forma disclosure are not indicative of future
amounts. The Company's pro forma net earnings were as follows:






                                       40
<PAGE>   41

                        Simmons Company and Subsidiaries
             Notes to Consolidated Financial Statements - Continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                         2000           1999                1998
                                                    -------------   -------------      -------------
<S>                                                   <C>            <C>                 <C>
     Net earnings (loss)--as reported                 $(10,943)      $ (9,915)           $ (19,019)
     Net earnings (loss)--pro forma                    (11,617)       (10,032)             (20,309)
     Weighted average fair value of options
          granted during the year                     $  1.98        $   2.17            $    1.60
</TABLE>

14.      INCOME TAXES

         The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>

                                                 2000                   1999                   1998
                                               -------                -------                -------
<S>                                            <C>                    <C>                    <C>
      Current tax provision:
           Federal                             $  --                  $  --                  $   657
           State                                  --                      600                    600
           Foreign                                 422                    547                    300
                                               -------                -------                -------
                                                   422                  1,147                  1,557
                                               -------                -------                -------
      Deferred tax provision:
           Federal                              (3,625)                (1,007)                (1,530)
           State                                  (680)                  (245)                  (372)
                                               -------                -------                -------
                                                (4,305)                (1,252)                (1,902)
                                               -------                -------                -------
      Income tax benefit                       $(3,883)               $  (105)               $  (345)
                                               =======                =======                =======
</TABLE>

         The reconciliation of the statutory federal income tax rate to the
effective income tax rate for 2000, 1999 and 1998 provision for income taxes is
as follows:
<TABLE>
<CAPTION>

                                                        2000                1999                1998
                                                      -------             -------             -------
<S>                                                   <C>                 <C>                 <C>
      Income taxes at federal statutory rate          $(5,040)            $(2,401)            $(1,483)
      State income taxes, net of federal
           benefit                                       (442)                438                (218)
      Goodwill amortization                             1,643               1,643               1,643
      Other, net                                          (44)                215                (287)
                                                      -------             -------             -------
                                                      $(3,883)            $  (105)            $  (345)
                                                      =======             =======             =======
</TABLE>

         In addition, the Company recorded a deferred tax benefit of $1,095 for
1999 associated with the extraordinary item.






                                       41
<PAGE>   42

                        Simmons Company and Subsidiaries
             Notes to Consolidated Financial Statements - Continued
--------------------------------------------------------------------------------

         Components of the net deferred income tax asset at December 30, 2000
and December 25, 1999 are as follows:
<TABLE>
<CAPTION>
                                                                   2000                  1999
                                                                 --------              --------
<S>                                                              <C>                   <C>
     Current deferred income taxes:
           Accounts receivable and inventory reserves            $  4,527              $  3,886
           Accrued liabilities not currently deductible            10,517                 8,556
           Prepaids and other assets                               (2,799)               (3,729)
                                                                 --------              --------
                                                                   12,245                 8,713
      Noncurrent deferred income taxes:
           Property bases differences                              (6,843)               (6,554)
           Patents bases differences                               (1,239)               (2,230)
           ESOP liability bases differences                           916                 3,604
           Net operating loss carryforwards                        24,284                21,321
           Valuation allowance                                     (3,999)               (3,999)
           Other noncurrent accrued liabilities, not
                currently deductible                                6,446                 6,636
                                                                 --------              --------
                                                                   19,565                18,778
                                                                 --------              --------
           Net deferred income tax asset                         $ 31,810              $ 27,491
                                                                 ========              ========
</TABLE>

         At December 30, 2000, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $59.0 million, a portion of
which are limited to utilization under the Internal Revenue Code. Due to such
limitations, the Company believes it is more likely than not that it will not
realize the full benefit of the loss carryforwards and has provided a valuation
allowance of approximately $4.0 million to reserve such amounts as of December
30, 2000. These carryforwards expire through 2020.

         Undistributed earnings to be permanently reinvested by the
international subsidiaries totaled approximately $4.3 million at December 30,
2000. Because these earnings are to be permanently reinvested, no U.S. deferred
income tax has been recorded for them.

15.      RETIREMENT PLANS

         Simmons 401(k) Plan

         The Company has a defined contribution pension plan (a 401(k) plan) for
substantially all employees other than employees subject to collective
bargaining agreements. Eligible participants may make limited contributions to
the defined contribution plan; however, prior to 2000 no employer contributions
were allowed. Subsequent to year 2000, we amended the plan to provide for the
making of employer non-elective contributions, currently 3% of an employee's
compensation (subject to current tax limitations), and to allow participants to
make increased salary deferral contributions. All employer non-elective
contributions are immediately vested and not subject to forfeiture. Employees
are eligible to receive the employer non-elective contribution following one
year of service.

         Nonqualified Employee Stock Ownership Plan

         The Company also has an unfunded nonqualified employee stock ownership
plan to provide benefits to certain employees who were not eligible to
participate in the ESOP. Benefits are to be paid in cash and are computed based
on the value of shares the participants would have received had they
participated in the ESOP.




                                       42
<PAGE>   43

                        Simmons Company and Subsidiaries
             Notes to Consolidated Financial Statements - Continued
--------------------------------------------------------------------------------

         Participants are entitled to receive accrued benefits upon termination
of employment with the Company, retirement, death, or permanent disability.
Benefits vest based on the provisions of the ESOP. The Company charged
approximately $41, $137 and $184 to expense for 2000, 1999 and 1998,
respectively. The Company made distributions to participants in the amount of
$110 and $233 in 2000 and 1999, respectively. The accrued benefits under the
nonqualified plan were $305 and $277 at December 30, 2000 and December 25, 1999,
respectively, and are included in other long-term liabilities in the
accompanying consolidated balance sheets.

         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 2000, 1999
and 1998 were $1,832, $1,725 and $1,633, respectively.

         The Company had accrued $2,493 and $2,573 at December 30, 2000 and
December 25, 1999, respectively, for a supplemental executive retirement plan
for a former executive. Such amounts are included in postretirement benefit
obligations other than pensions in the accompanying consolidated balance sheets.

         Retiree Health Coverage

         The Company currently provides certain health care and life insurance
benefits to eligible retired employees. Eligibility is defined as retirement
from active employment, having reached age 55 with 15 years of service, and
previous coverage as a salaried or nonunion employee. Additionally, dependents
are eligible to receive benefits, provided the dependent was covered prior to
retirement. The medical plan pays a stated percentage of most medical expenses
reduced for any deductible and payments made by government programs and other
group coverage. Additionally, there is a $20,000 lifetime maximum benefit for
participants age 65 and over. The Company also provides life insurance to all
retirees who retired before 1979. These plans are unfunded.

         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 postretirement benefit obligations
other than pensions in the accompanying consolidated balance sheets.

         In 2000, we limited eligibility for retiree health care benefits to
employees who have become or will 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 $1.2 million.




                                       43
<PAGE>   44

                        Simmons Company and Subsidiaries
             Notes to Consolidated Financial Statements - Continued
--------------------------------------------------------------------------------


         The following table presents a reconciliation of the plan's status at
December 30, 2000 and December 25, 1999:
<TABLE>
<CAPTION>

                                                                December 30,           December 25,
                                                                    2000                  1999
                                                                ----------             -----------
<S>                                                               <C>                    <C>
     Change in benefit obligation:
           Benefit obligation, beginning of year                  $ 5,270                $ 5,466
           Service cost                                               160                    230
           Interest cost                                              201                    357
           Plan amendments                                         (1,007)                  --
           Actuarial gain                                          (2,459)                  (686)
           Benefits paid                                             (155)                   (97)
           Curtailments                                              (153)                  --
                                                                  -------                -------
           Benefit obligation, end of year                        $ 1,857                $ 5,270
                                                                  =======                =======

      Change in plan assets:
           Fair value of assets, beginning of year                $  --                  $  --
           Employer contributions                                     155                     97
           Benefits paid                                             (155)                   (97)
                                                                  -------                -------
           Fair value of assets, end of year                      $  --                  $  --
                                                                  =======                =======

      Reconciliation of accrued benefit cost:
           Funded status                                          $(1,857)               $(5,270)
           Unrecognized prior service cost                         (1,160)                  (183)
           Unrecognized net gain                                   (3,784)                (1,537)
                                                                  -------                -------
           Accrued benefit cost, end of year                      $(6,801)               $(6,990)
                                                                  =======                =======

      Weighted-average assumptions:
           Discount rate                                             7.25%                  7.50%

      Components of net periodic benefit cost:
           Service cost                                           $   160                $   230
           Interest cost                                              201                    357
          Amortization of:
                Prior service cost                                    (30)                   (30)
                Gain                                                 (212)                   (16)
                                                                  -------                -------
           Net periodic benefit cost                              $   119                $   541
                                                                  =======                =======
</TABLE>

         A 10.5% annual rate of increase in the cost of health care benefits was
assumed for 2000, decreasing by 0.5% per year to an ultimate rate of 5.0%. A
1.0% change in assumed health care cost trend rates would have the following
effects:
<TABLE>
<CAPTION>

                                                                          1% Increase         1% Decrease
                                                                        -----------------  ------------------
<S>                                                                          <C>                <C>
     Effect on total of service and interest cost components                 $   119            $   (114)
     Effect on benefit obligation                                            $    17            $    (16)
</TABLE>

16.      LEGAL SETTLEMENT AND CONTINGENCIES

         On April 3, 1998, Serta filed a complaint against Simmons in the United
States District Court for the Northern District of Illinois, Eastern Division,
alleging that some Simmons products--including those sold in connection with the
trademarks Connoisseur Collection(R), Crescendo(TM), and some World Class



                                       44
<PAGE>   45

                        Simmons Company and Subsidiaries
             Notes to Consolidated Financial Statements - Continued
--------------------------------------------------------------------------------

Beautyrest(R) and BackCare(R) Ultimate models--infringed one of their U.S.
patents and that our use of the term "Crescendo" infringed their alleged
common-law trademark, "Crescendo". Serta sought compensatory damages in an
unspecified amount, interest, an accounting and disgorgement of profits derived
from allegedly infringing acts, treble damages, an order enjoining further
alleged infringement and requiring destruction of allegedly infringing items,
costs, expenses and attorney's fees. We denied the material allegations of the
complaint. We have asserted affirmative defenses and/or counterclaims against
Serta alleging non-infringement, invalidity and unenforceability of the
patent-in-suit, and alleging infringement by Serta of our rights in the term
"Crescendo" in various geographic areas to the extent usage of the term by both
Serta and us would be confusingly similar. Serta requested the Patent and
Trademark Office (the "PTO") to reexamine the patent-in-suit. Pending the
outcome of the reexamination, and by agreement of the parties, the pending
lawsuit was stayed. In April 1999, the PTO reinstated Serta's patent and the
stay in the action was lifted.

         In October 1999, Serta amended its Complaint to join 14 U.S.
licensee/shareholders as plaintiffs and to add a claim for false advertising
under the Lanham Act as well as seek damages and injunctive relief in connection
with that claim. We denied the material allegations of the amended Complaint and
asserted additional affirmative defenses and an additional counterclaim seeking
a declaratory judgment for unenforceability of the patent-in-suit due to fraud
on the PTO.

         On December 28, 2000, we reached a settlement of this lawsuit with
Serta and its licensees. While we maintain that we did not infringe on any of
Serta's patents or trademarks, in order to conclude the matter and avoid
additional cost of protracted litigation, we agreed to pay Serta $4.25 million,
payable $2.125 million at the time of the execution of the Settlement Agreement
with the balance payable in installments of $531,250 at the end of each calendar
quarter during the year 2001. While not acknowledging the validity of the
patent, we also agreed not to challenge the patent's validity and further agreed
during the life of the patent not to manufacture or sell mattresses in the
United States containing certain specific configurations.

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

17.      RELATED PARTY TRANSACTIONS

         During fiscal 2000 we had sales of approximately $13.1 million of
finished mattress products pursuant to supply contracts to SC Holdings, Inc., an
entity controlled by Fenway. Messrs. Dresdale and Genender are directors of such
entity. We believe that the terms on which mattresses are supplied to such
related party are not materially less favorable than those that might
reasonably be obtained in a comparable transaction at such time in an arm's
length basis from a person that is not an affiliate or related party.

         The Company, Holdings and Fenway have entered into a management
agreement (the "Fenway Advisory Agreement") pursuant to which Fenway provides
strategic advisory services to the Company. In exchange for such services, the
Company has agreed to pay Fenway (i) annual management fees of 0.25% of net
sales for the prior fiscal year, (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, including legal and accounting
fees and any out-of-pocket expenses incurred by Fenway in connection with
providing services to the Company. Included in other expense is $1.8 million,
$1.5 million and $0.3 million for the years 2000, 1999 and 1998, respectively,
related to the management fee.



                                       45
<PAGE>   46

                        Simmons Company and Subsidiaries
             Notes to Consolidated Financial Statements - Continued
--------------------------------------------------------------------------------

         The Company entered into an agreement with Holdings pursuant to which
the Company agreed to reimburse Holdings for certain expenses incident to
Holdings' ownership of the Company's capital stock for as long as Holdings and
the Company file consolidated federal income tax returns. Such expenses include
franchise taxes and other fees required to maintain Holdings' corporate
existence; operating costs incurred by Holdings attributable to its ownership of
the Company's capital stock not to exceed $850 per fiscal year; federal, state
and local taxes paid by Holdings and attributable to income of the Company and
its subsidiaries other than taxes arising from the sale or exchange by Holdings
of the Company's common stock; the purchase price of capital stock or options to
purchase capital stock of Holdings owned by former employees of the Company or
its subsidiaries not to exceed $2.5 million per year permitted under the Senior
Credit Facility, as amended; and registration expenses incurred by Holdings
incident to a registration of any capital stock of Holdings under the Securities
Act.

18.      OTHER EVENTS

Organizational Changes - Severance Arrangements

         On January 4, 2000, we announced that Charles R. Eitel had been
appointed as our new Chairman and Chief Executive Officer. During January 2000,
Mr. Eitel completed an assessment of the effectiveness of the organizational
structure and in early February 2000, we undertook an enterprise-wide management
reorganization to reflect a new management structure going forward. The
management reorganization resulted in the termination of 14 management
employees. During February 2000, we recorded non-recurring severance expense of
$3.8 million, including compensation expense related to vested stock option
cancellations. In addition, we have accrued $2.7 million in distributions
payable to Holdings in connection with Holding's repurchase of Holdings common
stock.

Customers

         On December 28, 2000, Montgomery Ward, one of our larger customers
filed a voluntary petition for relief under Chapter 11 of the Federal Bankruptcy
Code. In addition, Montgomery Ward suspended further unpaid vendor deliveries
and announced that over the next several months, their 250 stores and 10
distribution centers in 30 states would close. As a result of the Montgomery
Ward bankruptcy, we recorded a charge of $1.5 million to reserve for amounts
that may ultimately prove uncollectible. There can be no assurance, however,
that amounts reserved will be adequate with respect to receivables from
Montgomery Ward.

         On August 16, 2000, The Heilig-Meyers Company and certain subsidiaries
("Heilig-Meyers") filed voluntary petitions for reorganization under Chapter 11
of the Federal Bankruptcy Code. Following the filing, Heilig-Meyers received a
commitment from a group of lenders for $215 million in debtor-in-possession
(DIP) financing to provide funding for its post-petition trade and employee
obligations, as well as its ongoing operating needs during the restructuring
process. On September 12, 2000, Heilig-Meyers received approval from the
Bankruptcy Court of its new credit program and its plan for closing over 300
stores. Due to the Heilig-Meyers bankruptcy, we recorded a charge of $1.8
million during the third quarter to reserve for amounts that may ultimately
prove uncollectible. There can be no assurance, however, that amounts reserved
will be adequate, nor can there be any assurance as to future sales levels with
respect to Heilig-Meyers.

         In 2000, management decided that a distribution strategy of further
investment into retail operations through acquisition of certain customers is
not in the best interests of the Company. We had been pursuing an acquisition of
a customer at an amount equal to the fair market value of the business less
obligations owed to us. Consistent with management's decision, acquisition
discussions were terminated. We believe that collectability of the full amounts
owed to us by this former customer is remote. The total







                                       46
<PAGE>   47

                        Simmons Company and Subsidiaries
             Notes to Consolidated Financial Statements - Continued
--------------------------------------------------------------------------------

amount recorded to write-off transaction fees incurred and to adjust the
receivable (net of an allowance for doubtful accounts) to our current estimate
of its net realizable value was approximately $3.5 million.

         Additionally, during 2000, a customer, which at one time represented
our potential direct entry into retail operations, was liquidated. We recorded
$4.3 million in charges in 2000 to write-off the receivable and provide for
lease termination fees relating to certain lease obligations of the customer
which were guaranteed by the Company.

         On January 21, 2000, one of our wholly-owned subsidiaries, Gallery
Corp. ("Gallery") acquired substantially all of the retail store locations and
other assets of H&H Sleep Centers, Inc. ("H&H") and CBMC Corp. ("CBMC"). H&H and
CBMC had previously operated retail stores in the Los Angeles, Orange County and
San Diego, California areas, selling primarily mattresses and related bedding
products. Through Gallery, we acquired the H&H and CBMC assets in resolution of
those companies' outstanding debt obligations to us, and our assumption of
certain other liabilities of H&H and CBMC for a purchase price of $15.5 million.
As a result of these transactions, Gallery is currently operating 37 retail
locations in Southern California previously owned by H&H and CBMC.

         The cash pre-tax loss from operations of Gallery for the period from
the acquisition date to December 30, 2000 of Gallery totaled approximately $1.7
million. Such loss is included in operating income in the consolidated statement
of operations for 2000. Pro forma results had Gallery been acquired at the
beginning of the year do not differ significantly from actual results. Pro forma
results had the business been acquired at the beginning of 1999 are not
determinable. Management has announced its intention to ultimately dispose of
Gallery. While we believe that the eventual recovery of our investment in this
business is dependent upon the ability of the operations to achieve improvements
sufficient to generate profitable operations and positive cash flows, there can
be no assurance this business will achieve such improvements.





                                       47
<PAGE>   48





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

There has been no occurrence requiring a response to item.






                                       48
<PAGE>   49



                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

         The following table sets forth the name, age as of March 1, 2001 and
position of each of our directors and executive officers. Each of our directors
will hold office until the next annual meeting of our shareholders or until his
successor has been elected and qualified. Our executive officers are elected by
our Board of Directors and serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>

Name                         Age       Position
----                         ---       --------
<S>                           <C>      <C>
Charles R. Eitel              51       Chairman of the Board of Directors and
                                            Chief Executive Officer
Robert W. Hellyer             41       President and Director
William S. Creekmuir          45       Executive Vice President, Chief Financial Officer,
                                             Treasurer, Secretary and Director
Peter Lamm                    49       Director
Richard C. Dresdale           45       Vice President, Assistant Treasurer, Assistant Secretary
                                       and Director
Mark R. Genender              36       Vice President, Assistant Treasurer, Assistant Secretary
                                       and Director
Robert K. Barton              60       Executive Vice President--Human Resources
</TABLE>

         Charles R. Eitel joined Simmons in January 2000 as Chairman of the
Board of Directors and Chief Executive Officer. Prior to joining Simmons, Mr.
Eitel served as President and Chief Operating Officer of Interface, Inc., a
leading global manufacturer and marketer of floorcoverings, 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 Floorcoverings Group, and President of Interface
Flooring Systems, Inc. Mr. Eitel is a director of Duke-Weeks 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
since January 2001. Prior to assuming his current position, Mr. Hellyer served
as Executive Vice President--of 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.

         William S. Creekmuir joined Simmons in April 2000 as Executive Vice
President, Chief Financial Officer, Treasurer, Secretary and Director. Prior to
joining Simmons, Mr. Creekmuir served as Executive Vice President, Chief
Financial Officer, Secretary and Treasurer of LADD Furniture, Inc. Mr. Creekmuir
is a director of Brown Jordan International, Inc. and chair of the Business
Advisory Council to the Walker College of Business at Appalachian State
University. Mr. Creekmuir is also a Certified Public Accountant.

         Peter Lamm became a director of Simmons in 1998 in connection with the
Recapitalization. Mr. Lamm is Chairman and Chief Executive Officer and a
founding partner of Fenway, a New York-based direct investment firm for
institutional investors with a primary objective of acquiring leading
middle-market companies. From February 1982 to April 1994, Mr. Lamm was a member
of Butler Capital Corporation, a private investment firm, most recently as
Senior Direct Investment Officer and Managing Director. Mr. Lamm currently
serves as a director of several companies, including Aurora Foods, Inc., Quality
Stores, Inc., Iron Age Corporation, Delimex Holdings, Inc. and Blue Capital
Management.




                                       49
<PAGE>   50
         Richard C. Dresdale became a director of Simmons in 1998 in connection
with the Recapitalization. Mr. Dresdale is also Vice President, Assistant
Treasurer and Assistant Secretary of the Company. Mr. Dresdale is President and
a founding partner of Fenway. From June 1985 until March 1994, Mr. Dresdale was
a member of Clayton, Dubilier & Rice, Inc. a private investment firm, most
recently as a Principal. Mr. Dresdale currently serves as a director of several
companies, including Aurora Foods, Inc., Quality Stores, Inc., Delimex Holdings,
Inc., MW Manufacturers Holdings Corp., Blue Capital Management and SC Holdings,
Inc.

         Mark R. Genender became a director of Simmons in 1999. Mr. Genender has
been a Managing Director of Fenway since 1999. Mr. Genender is also Vice
President, Assistant Treasurer and Assistant Secretary of the Company. From 1996
to 1999, Mr. Genender was a Vice President of Fenway. From 1994 to 1996, Mr.
Genender was a Director of Sales and Marketing for Nabisco International. From
1991 to 1994, Mr. Genender held various senior management positions at Hostess
Frito-Lay, the Canadian snack food division of PepsiCo, Inc. Prior to 1991, Mr.
Genender was employed by Goldman, Sachs & Co. in the Merger and Acquisitions
department. Mr. Genender currently serves as a director of several companies,
including Delimex Holdings, Inc., DCI Holdings, Inc. and SC Holdings, Inc.

         Robert K. Barton joined Simmons in 1982 and has served as Senior Vice
President--Human Resources from 1990 through January 2001, at which time he
became Executive Vice President--Human Resources. Prior to assuming his current
position, Mr. Barton served as Vice President--Human Resources, Vice
President--Administration, Vice President--Dealer Financial Services and
Director of Dealer Financial Services.

DIRECTOR COMPENSATION

         We pay no additional remuneration to our employees or to executives of
Fenway for serving as directors. See "--Executive Compensation". There are no
family relationships among any of the directors or executive officers.





                                       50
<PAGE>   51


ITEM 11. EXECUTIVE COMPENSATION

         The following table sets forth all cash compensation earned in the
previous three years by each person serving as our Chief Executive Officer and
each of our other four 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 paid in connection with the Recapitalization and amounts earned in the
year shown but paid in the subsequent year.

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>


                                                                                    Long-Term
                                                                               Compensation Awards
                                               Annual Compensation            --------------------     All Other
                                      ---------------------------------------  Shares Underlying     Compensation
Name and Principal Position             Year     Salary ($)      Bonus ($)         Options (#)         ($) (1)
---------------------------          ---------  ------------  --------------  --------------------  -------------
<S>                                     <C>      <C>            <C>                <C>              <C>
Zenon S. Nie                            2000     $    4,615     $     --                --          $2,280,000
     Former Chairman, Chief             1999        612,373           --           1,350,000            41,039
     Executive Officer and              1998        579,792      5,116,125              --             285,700
     President

Charles R. Eitel                        2000        496,474        484,447         1,350,000             5,422
     Chairman, Chief Executive
     Officer

Peter Brink (2)                         2000        293,333        237,092           500,000             1,994
     Executive Vice President--
     Chief Operations Officer

Robert W. Hellyer                       2000        217,500        229,500           480,000               461
      President                         1999        163,940         16,160            20,000            21,695
                                        1998        155,381         67,535              --              26,289

William S. Creekmuir                    2000        213,750        207,912           500,000             1,537
     Executive Vice President,
     Chief Financial Officer,
     Treasurer and Secretary

Robert K. Barton                        2000        218,167        158,041            50,000             5,036
     Executive Vice President--         1999        209,000           --              75,000            30,250
     Human Resources                    1998        202,417        276,102              --              43,389
</TABLE>


(1)      These amounts consist of:

         (a)      severance to Mr. Nie of $2,280,000 in 2000;

         (b)      our contributions to our ESOP in 1999 and 1998, respectively,
                  in the amounts of $36,287 and $272,570 for Mr. Nie; $20,673
                  and $33,667 for Mr. Barton; $21,252 and $25,846 for Mr.
                  Hellyer; respectively; the amount of our contribution to our
                  ESOP for 2000 has not been determined; and

         (c)      premiums for term life insurance and long-term disability
                  insurance in 2000, 1999 and 1998, respectively, in the amounts
                  of $4,752, $13,130 and $13,276 for Mr. Nie; $5,422 for Mr.
                  Eitel; $1,994 for Mr. Brink; $461, $443 and $443 for Mr.
                  Hellyer; $1,537 for Mr. Creekmuir; and $5,036, $9,577 and
                  $9,722 for Mr. Barton; respectively.

(2)      Mr. Brink resigned subsequent to the end of the year.




                                       51
<PAGE>   52
<TABLE>
<CAPTION>

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

                                               Individual Grants
                          -----------------------------------------------------------
                                             Percent of
                                                Total                                       Potential Realizable Value
                              Number of       Options /                                                 of
                             Securities     SARs Granted     Exercise                         Assumed Annual Rates of
                             Underlying     to Employees        or                           Stock Price Appreciation
                            Option/ SARs      in Fiscal    Base Price      Expiration             For Option Terms
          Name               Granted (#)        Year         ($ / Sh)          Date            5% ($)          10% ($)
          ----            --------------  --------------   ----------      ----------      ------------     ------------
<S>                           <C>                <C>        <C>               <C>            <C>              <C>
Zenon S. Nie                       --              --          --              --                --                --
Charles R. Eitel              1,350,000          28.0%      $ 6.7315          2010           5,708,475        14,483,475
Peter Brink                     500,000          10.4%      $ 6.7315          2010           2,114,250         5,364,250
Robert W. Hellyer               480,000          10.0%      $ 6.7315          2010           2,029,680         5,149,680
William S. Creekmuir            500,000          10.4%      $ 6.7315          2010           2,114,250         5,364,250
Robert K. Barton                 50,000           1.0%      $ 6.7315          2010             211,425           536,425
</TABLE>

         The table below sets forth information concerning the value of
unexercised stock options at the end of 2000 for the Named Executive Officers.
No options were exercised by the Named Executive Officers in 2000. There was no
public trading market for our common stock as of December 30, 2000. Therefore,
the values in the table below have been calculated on the basis of the per share
amount as determined by an independent third-party appraisal less the applicable
exercise price.
<TABLE>
<CAPTION>

                          FISCAL YEAR END OPTION VALUES

                                      Number of Shares                    Value of Unexercised
                                   Underlying Unexercised                     In-The-Money
                                         Options at                            Options at
                                    Fiscal Year End (#)                   Fiscal Year End ($)
          Name                Exercisable        Unexercisable       Exercisable    Unexercisable
--------------------------  -----------------  ------------------  --------------  --------------
<S>                               <C>               <C>                 <C>               <C>
Zenon S. Nie                        --                   --               --                --
Charles R. Eitel                    --              1,350,000             --             564,975
Peter Brink                         --                500,000             --             209,250
Robert W. Hellyer                 30,481              492,519          125,536           206,119
William S. Creekmuir                --                500,000             --             209,250
Robert K. Barton                  65,593              108,424          235,918            45,376
</TABLE>

RETIREMENT PLANS

         We maintain several single employer retirement plans including a single
employer defined benefit plan and two single employer defined contribution
plans, the ESOP and a 401(k) Plan, which are intended to be qualified under
Section 401(a) of the Internal Revenue Code of 1986. We also participate in a
number of multi-employer pension plans, from which we have no present intention
to withdraw. In the aggregate, these plans cover substantially all permanent
employees.

         Simmons 401(k) Plan. The Simmons 401(k) Plan, as amended, contains a
cash or deferred arrangement under Section 401(k) of the Internal Revenue Code.
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.




                                       52
<PAGE>   53

         Presently, approximately 979 employees participate in this plan.
Participants direct the investment of their account balances. Effective January
1, 2001, eligible employees may defer the receipt of up to 17% (previously 6%)
of compensation on a pre-tax basis, subject to various tax limitations.
Participants are fully vested in their contributions at all times. Other than
the pre-tax deferrals mentioned above, we did not make any contributions to the
401(k) plan during the 2000 plan year.

         Effective January 1, 2001, we amended the plan to provide for the
making of employer non-elective contributions, currently 3% of an employee's
compensation (subject to current tax limitations), and to allow participants to
make increased salary deferral contributions. All employer non-elective
contributions are immediately vested and not subject to forfeiture. Employees
are eligible to receive the employer non-elective contribution following one
year of service.

         ESOP. The ESOP, as amended, is a defined contribution pension benefit
plan that is designed to qualify as a leveraged employee stock ownership plan
within the meaning of Section 4975(e)(7) of the Internal Revenue Code. Assets of
the ESOP are held in a trust for which State Street Bank & Trust Company serves
as trustee. The ESOP covers otherwise eligible employees of Simmons who are 21
or older and who have completed at least one year of service for Simmons.
Generally, employees covered by collective bargaining agreements are not
permitted to participate, unless the collective bargaining agreement expressly
provides for participation. As of December 30, 2000, approximately 1,900 of our
current and former employees were participants in the ESOP.

         The ESOP provides benefits to each participating employee based on the
value of the stock allocated to such participant's account over the period of
such participant's participation in the plan. In general, benefits become
payable to participants only following retirement or other separation from
employment.

         The ESOP is a leveraged ESOP. Leveraged ESOPs differ from other defined
contribution employee pension benefit plans in that they can borrow funds from
the employer sponsoring the plan or from other parties in order to acquire
company stock for allocation to participants' accounts as such indebtedness is
repaid. Pending such allocation, as described below, Simmons' stock acquired by
the ESOP is held by the ESOP trustee in a suspense account. In connection with
the establishment of the ESOP in 1989, the ESOP borrowed funds from us for the
purpose of acquiring Simmons' stock. As of December 30, 2000, the borrowed
amount outstanding was approximately $15.4 million. As of December 25, 1999, the
ESOP was indebted to us in the approximate principal amount of $27.4 million.
Prior to March 22, 1996, the date of the Investcorp acquisition, the ESOP held
11,671,663 shares of our common stock. On the closing of the Investcorp
acquisition, the ESOP sold 6,001,257 shares, representing all shares previously
allocated to participants' ESOP accounts, to Holdings for approximately $31.2
million in the aggregate, the net proceeds of which were reinvested in
diversified investments in the respective accounts of such participants in the
ESOP. Pursuant to the Investcorp acquisition, the remaining 5,670,406 shares,
representing all unallocated shares held in the suspense account, were converted
into our Series A preferred stock. Prior to the Recapitalization, if converted
into common stock of Simmons or capital stock of Holdings, this Series A
preferred stock would have represented direct or indirect ownership of 15.1% of
our common stock, after giving effect to such conversion, exclusive of
outstanding stock options.

         On July 22, 1998, we entered into the ESOP Stock Sale and Exchange
Agreement with Holdings, the ESOP trustee and REM Acquisition, Inc., a
transitory merger corporation set up for the Recapitalization. Pursuant to this
agreement, immediately prior to the Recapitalization, REM purchased all of our
Series A preferred shares held by the ESOP that had been allocated to plan
participants as of such date for an aggregate purchase price of approximately
$15.4 million. These shares were cancelled in connection with the
Recapitalization. In addition, immediately prior to the Recapitalization, the
ESOP





                                       53
<PAGE>   54

exchanged its remaining unallocated shares of our Series A preferred stock
for 3,482,036 shares of common stock of Holdings. The ESOP received a fairness
opinion from its financial advisor to the effect that the $15.4 million
consideration received for our shares under the ESOP agreement was fair to the
ESOP from a financial point of view.

         We make annual cash contributions to the ESOP in an amount up to 25% of
eligible participant compensation, subject to limitations and conditions. The
ESOP will then use this cash to repay the loan to us. As a result, there is no
cash cost to us associated with the contributions to the ESOP. As the loan is
repaid, a portion of, the shares of Holdings held by the ESOP will be allocated
to participant accounts and non-cash compensation expense equal to the fair
value of the allocated shares will be charged to non-cash ESOP expense. When the
loan is repaid in full in the next year, all shares of Holdings held by the ESOP
immediately after the Recapitalization will have been allocated to plan
participants.

         With limited exceptions, such as an exception required by law
permitting retirement age individuals with at least 10 years of plan
participation to liquidate over a six-year period those shares allocated to
their accounts, shares allocated to a participant's account under the ESOP
cannot be sold or otherwise transferred by the participant. The ESOP provides
for distributions to be made to participants following termination of
employment. With respect to participants whose termination of employment occurs
after becoming eligible for retirement at age 65, early retirement at age 55
with at least 10 years of service, or on account of permanent disability or
death, distribution generally is made during the plan year following the plan
year in which such termination occurs. In all other cases, distribution
generally is made or commences to be made after the expiration of a five plan
year period following the plan year in which termination occurs. Distributions
are made in cash, based on the fair market value, as determined pursuant to an
annual appraisal, of the shares allocated to the participant's account. A
participant entitled to a distribution is entitled under law to have our shares
allocated to his or her account distributed in kind. A participant electing to
have a distribution of shares has a limited right to require us to purchase such
shares at fair market value over an approximately two year period.

         Defined Benefit Plan. We also sponsor a single employer defined benefit
pension plan for eligible employees called the Retirement Plan for Simmons
U.S.A. Employees. This plan currently benefits only employees covered by
specific collective bargaining agreements, and has approximately 120
participants. The monthly benefit for these participants upon normal retirement
is generally determined as the sum of:

         (1)      0.75% of monthly earnings as of January 1, 1963 multiplied by
                  specified credited service as of May 1, 1963;

         (2)      1.0% of the first $400 of monthly earnings plus 1.75% of
                  monthly earnings in excess of $400 for the time period from
                  May 1, 1963 through April 30, 1967; and

         (3)      1.25% of the first $550 of monthly earnings plus 1.75% of
                  monthly earnings in excess of $550 for each year and completed
                  month of credited service, beginning May 1, 1967.

         There is a reduction for benefits accrued under the Retirement Plan for
Simmons Employees, a predecessor plan that was terminated in 1987. A somewhat
different formula applies to employees who are represented by IAM Local 315 in
New Jersey and UFWA Local 262 in California. This plan is fully funded and will
incur no additional liability. None of the named executive officers benefit
under the plan.

         Nonqualified Employee Stock Ownership Plan. In 1989, we instituted a
nonqualified plan to provide benefits to eligible employees similar to those
benefits provided under the ESOP, described above. This plan covers employees
who are not eligible to participate in the ESOP because of restrictions





                                       54
<PAGE>   55

imposed by the ESOP on employees who elected favorable income tax treatment
under Code Section 1042 with respect to the sale of employer securities to the
ESOP. Benefits are to be paid in cash and are computed based on the value of
shares the participants would have received had they participated in the ESOP.
Participants are entitled to receive accrued benefits upon termination of
employment with us, retirement, death or permanent disability. The nonqualified
plan provides for bookkeeping entries to be provided on account of each
designated employee, to be credited with the shares of stock which would have
been allocated to the designated employee's accounts under the ESOP but for the
fact that the ESOP terms restricted such an allocation. The same vesting
schedule and distribution provisions apply as are described in the ESOP. We
charged to non-qualified ESOP expense an amount of approximately $41,000,
$137,000 and $184,000 in 2000, 1999 and 1998, respectively. We made
distributions from the plan to participants in the amount of $0 and $233,000 in
2000 and 1999, respectively. The accrued benefits under the nonqualified plan
were $302,000 at December 30, 2000 and $277,000 December 25, 1999 and are
included in other long term liabilities in the accompanying balance sheets. We
have continued the nonqualified plan after the consummation of the
Recapitalization.

         Retiree Health Coverage. We currently provide health care and life
insurance benefits to eligible retired employees. Eligibility is defined as
retirement from active employment, having reached age 55 with 15 years of
service as of December 31, 2000 and previous coverage as a salaried or non-union
employee. Additionally, dependents are eligible to receive benefits, provided
the dependent was covered prior to retirement. The medical plan pays a stated
percentage of most medical expenses reduced for any deductible and payments made
by government programs and other group coverage. Additionally, there is a
$20,000 lifetime maximum benefit for participants age 65 and over. We also
provide life insurance to all retirees who retired before 1979. These plans are
unfunded.

EMPLOYMENT ARRANGEMENTS

         Charles R. Eitel, Chairman of the Board of Directors and Chief
Executive Officer, Holdings and the Company have entered into an employment
agreement effective as of January 4, 2000. Pursuant to his employment agreement,
Mr. Eitel is entitled to receive (i) a base salary, currently $500,000 per year,
or such other amount as approved by our Board of Directors, (ii) an annual cash
bonus based upon the achievement of specified levels of operating performance by
us, and (iii) specified fringe benefits, including country club dues and an
automobile allowance. In addition, on the commencement of his employment, Mr.
Eitel was granted, under our 1999 Stock Option Plan, stock options to purchase
1,350,000 shares of common stock of Holdings at an exercise price of $6.7315 per
share. If Mr. Eitel's employment is terminated other than for death, incapacity
or cause, Mr. Eitel will be entitled to (i) payment of his base salary then in
effect for two years following the date of termination, (ii) a lump sum
pro-rated bonus amount, and (iii) payment of health and dental premiums for two
years and participation in such programs for as long as applicable law and such
plans require or permit.

         Robert W. Hellyer, President, and we entered into an employment
agreement which commenced on June 16, 2000. Pursuant to his employment
agreement, Mr. Hellyer is entitled to receive (i) a base salary, currently
$300,000 per year, or such other amount as approved by our Board of Directors,
(ii) an annual cash bonus based upon the achievement of specified levels of
operating performance by us, and (iii) specified fringe benefits, including
country club dues and an automobile allowance. In addition, Mr. Hellyer was
granted under our 1999 Stock Option Plan stock options to purchase shares of
common stock of Holdings at an exercise price of $6.7315 per share (currently
500,000). If Mr. Hellyer's employment is terminated other than for death,
incapacity or cause, Mr. Hellyer will be entitled to (i) payment of his base
salary then in effect for one year following the date of termination, subject to
reduction if he commences other employment, (ii) a lump sum pro-rata bonus
amount, and (iii) payment of health and dental premiums for one year and
participation in such benefit programs for as long as applicable law and such
plans require or permit.




                                       55
<PAGE>   56

         William S. Creekmuir, Executive Vice President, Chief Financial
Officer, Treasurer and Secretary and we have entered into an employment
agreement on April 1, 2000. Pursuant to his employment agreement, Mr. Creekmuir
is entitled to receive (i) a base salary, currently $300,000 per year, or such
other amount as approved by our Board of Directors, (ii) an annual cash bonus
based upon the achievement of specified levels of operating performance by us,
(iii) fringe benefit arrangements generally available to our executive officers,
(iv) relocation assistance, (v) until his relocation, housing and commute
assistance, and (vi) an automobile allowance. In addition, on commencement of
his employment, Mr. Creekmuir was granted under our 1999 Stock Option Plan stock
options to purchase 500,000 shares of common stock of Holdings at an exercise
price of $6.7315 per share. If Mr. Creekmuir's employment is terminated other
than for death, incapacity or cause, Mr. Creekmuir will be entitled to (i)
payment of his base salary then in effect for two years following the date of
termination, subject to reduction if he commences other employment, (ii) a lump
sum pro-rata bonus amount, and (iii) payments of health and dental premiums for
two years and participation in such benefit programs for as long as applicable
law and such plans require or permit.

         Robert K. Barton, Executive Vice President--Human Resources, and we
entered into an employment agreement which commenced on June 29, 1998. This
employment agreement initially runs for two years and automatically extends one
year on a daily basis beginning on the first anniversary of the commencement of
employment term, subject to termination upon one year's notice. This agreement
currently provides a base annual salary, subject to further increases approved
by our Board of Directors, of $235,000. If Mr. Barton's employment is terminated
without cause, he shall be entitled to receive payment of his base salary, an
annualized bonus equal to 42.5% of his base salary then in effect and
participation in health and welfare benefit programs for the longer of the
remainder of the initial two year employment term or one year.

SEVERANCE ARRANGEMENTS

         On January 10, 2001, Mr. Brink resigned from the Company. Pursuant to
Mr. Brink's employment agreement, he will receive amounts owed to him under his
contract.

         On February 22, 2000, Holdings, Zenon Nie and we entered into a
separation agreement. The terms of Mr. Nie's separation agreement provided for a
lump sum separation amount of $2,280,000. Holdings also agreed to (i) repurchase
280,000 shares of Holdings common stock held by Mr. Nie for a total purchase
price of $1,884,820, of which $1,250,000 was paid initially and the balance of
$634,820 paid on January 16, 2001, and (ii) pay deferred compensation over a
three year period in an amount of $3,035,146. Mr. Nie also received coverage and
benefits under our employee benefit plans and programs for three years,
outplacement assistance up to $90,000, and reimbursements of legal expenses
incurred in the negotiation of the separation agreement up to $20,000.

         The employment of Jonathan C. Daiker, Executive Vice President--Finance
and Administration, Chief Financial Officer and Director; Martin R. Passaglia,
Senior Executive Vice President, Secretary and Director; William L. Ayers, IV,
Executive Vice President--Sales; Joseph Ulicny, Executive Vice President--Market
Development; James P. Maher, Divisional President; and Cleve B. Murphy,
Divisional President, has been terminated. Pursuant to their employment
agreements, these former officers received the following separation payments:



                                       56
<PAGE>   57



Executive                                      Separation Payment
----------                                  -------------------------
Mr. Daiker                                          $336,300
Mr. Passaglia                                       $381,188
Mr. Ayers                                           $243,594
Mr. Ulicny                                          $280,725
Mr. Maher                                           $269,325
Mr. Murphy                                          $263,625

         Pursuant to their employment agreements, each of these former officers
also received continuation of health and welfare benefits and outplacement
assistance up to $20,000.

         We have also entered into separation agreements with 10 other former
officers and managers. These separation agreements provide for an aggregate
separation payment of $524,750, the continuation of health and welfare benefits
and outplacement assistance.

MANAGEMENT STOCK INCENTIVE PLAN

         Holdings has also adopted a management stock incentive plan to provide
incentives to our employees and directors and to the employees and directors of
Holdings by granting them awards tied to the common stock of Holdings. This
incentive plan is administered by the compensation committee of the Board of
Directors of Holdings, which has broad authority in administering and
interpreting the incentive plan. Awards to employees are not restricted to any
specified form or structure and may include, without limitation, restricted
stock, stock options, deferred stock or stock appreciation rights. Options
granted under the incentive plan may be options intended to qualify as incentive
stock options under Section 422 of the Internal Revenue Code or options not
intended to so qualify. An award granted under the incentive plan to an employee
may include a provision terminating the award upon termination of employment
under some circumstances or accelerating the receipt of benefits upon the
occurrence of specified events, including, at the discretion of the compensation
committee of the Board of Directors of Holdings, any change of control of
Simmons.

         In connection with the Recapitalization, management received cash for
shares of stock owned by them and also received with respect to outstanding
options, an amount equal to the difference between the per share merger
consideration and the exercise price per share.

             COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

         The Compensation Committee (the "Committee") of the Board of Directors
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 stock option 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 based on the Company's performance measured against
attainment of financial and other objectives. Stock option awards are intended
to align the executive officer's interests with those of the Company and its




                                       57
<PAGE>   58

stockholders in promoting the long-term growth of the Company, and are
determined based on the executive officer's level of responsibility, number of
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 the CEO. 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 the CEO, and will vary for each executive position and for each year.
Since this is a base salary review, 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.

         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, and less so on individual performance.

STOCK OPTION AWARDS

         Holdings has adopted a management stock incentive plan to provide
incentives to our employees and directors and the employees and directors of
Holdings by granting them awards tied to the common stock of Holdings. These
stock options are intended to provide an incentive to continue as these
employees over a long term, and to align their interest with the Company by
providing a stake in Holdings. In making grants the Holdings' 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
number of unvested options. In determining an option grant for the CEO, the
Holdings' 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. Stock options are an important element in attracting and
retaining capable executives at all levels, and this is particularly so in the
case of the CEO.

         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:

Charles R. Eitel
Peter Lamm
Richard C. Dresdale






                                       58
<PAGE>   59


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         After the consummation of the Recapitalization on October 29, 1998, we
had one class of issued and outstanding common stock and Holdings owned all of
it.

         After the consummation of the Recapitalization, Holdings had
25,343,075.80 shares of issued and outstanding common stock, excluding its Class
B common stock. The following table describes the beneficial ownership of each
class of issued and outstanding equity securities of Holdings by each of our
directors and executive officers, our directors and executive officers as a
group and each person who beneficially owns more than 5% of the outstanding
shares of any class of equity securities of Holdings as of December 30, 2000. As
used in this table, beneficial ownership has the meaning set forth in Rule
13d-3(d)(1) of the Exchange Act.

         Fenway Partners Capital Fund, L.P. ("Fenway Partners Capital Fund") and
Fenway Partners Capital Fund II, L.P. ("Fenway Partners Capital Fund II" and
collectively with Fenway Partners Capital Fund, the "Fenway Funds") together
hold substantially all of the voting interests of Simmons Holdings, LLC, and may
therefore be deemed to have the power to vote or dispose of the shares of common
stock held directly by Simmons Holdings, LLC. Additionally, the general partners
of Fenway Partners Capital Fund and Fenway Partners Capital Fund II, Fenway
Partners, L.P. and Fenway Partners II, LLC, respectively, may also be deemed to
own beneficially these Fenway Funds' holdings. Fenway Partners Management, Inc.
is the general partner of Fenway Partners, L.P. and may also be deemed to own
beneficially the holdings of Fenway Partners Capital Fund. Fenway provides
investment advisory services to the Fenway Funds and may be deemed to
beneficially own the shares held by the Fenway Funds. Messrs. Dresdale and Lamm
control Fenway Partners, L.P., Fenway Partners II, LLC, Fenway Partners, Inc.
and Fenway Partners Management, Inc., and therefore may be deemed to own
beneficially our shares of common stock held by Simmons Holdings, LLC. Mr.
Genender is a managing director of Fenway, and Fenway Partners Management, Inc.,
and Messrs. Dresdale, Genender and Lamm are each a limited partner of Fenway
Partners, L.P., and a member of Fenway Partners II, LLC. Accordingly, each may
be deemed to own beneficially our shares of common stock held by Simmons
Holdings, LLC. All of such persons and entities disclaim beneficial ownership of
any shares in which they do not have pecuniary interests.

         The discussion above and the table below do not include 379,119.069
shares of Class B common stock, representing all of the issued and outstanding
shares of Class B common stock, issued by Holdings and held by FPIP, LLC, of
which Messrs. Dresdale, Genender and Lamm may be deemed to have beneficial
ownership. Messrs. Dresdale, Genender and Lamm disclaim beneficial ownership of
any such shares of common stock or Class B common stock, in which they do not
have pecuniary interests. Class B common stock has the same rights and
privileges as Holdings' other common stock except that currently, each share of
Class B common stock:

         (1)      has 16% of the amount of voting power of a share of common
                  stock; and
         (2)      entitles its holder to 16% of the amount of any distributions
                  by Holdings to which a holder of a share of Holdings' common
                  stock is entitled.

         The voting power and rights to distributions of the Class B common
stock shall be increased to equal that of Holdings' common stock upon a
determination of the board of directors that the value of a share of common
stock, taking into account prior distributions, is equal to $6.7315 plus an
amount sufficient to generate an internal rate of return of 7.5% per year,
compounded annually.



                                       59
<PAGE>   60


<TABLE>
<CAPTION>


                                                                                Number of
                                                                                 Shares
                                                                               Underlying
                                                        Number of Shares       Exercisable                             Total
                                                      (excluding Options/        Options/                            Ownership
                        Name                               Warrants)            Warrants       Total Shares         Percentage
                        ----                         ---------------------  ----------------  ---------------      ------------
<S>                                                          <C>                <C>             <C>                   <C>
Simmons Holdings, LLC                                        19,030,131.18      1,653,703.24    20,683,834.42         76.62%
   c/o Fenway Partners, Inc
   152 West 57th Street
   New York, NY 10019
ESOP shares                                                   3,482,036.00                --     3,482,036.00         13.74%
   c/o State Street Bank & Trust Company
   225 Franklin Street
   Boston, MA 02110
SH Investment Limited, a Cayman Islands                       1,336,997.70                --     1,336,997.70          5.28%
    corporation
    P.O. Box 1111, West Wind Building,
   George Town, Grand Cayman, Cayman Islands(a)
Charles R. Eitel                                                        --                --               --            *
Peter Brink                                                             --                --               -- (b)        *
Robert K. Barton                                                140,181.00         65,593.00       205,774.00            *
Robert W. Hellyer                                                13,629.00         30,481.00        44,110.00            *
William S. Creekmuir                                                    --                --               --            *
Peter Lamm                                                   19,030,131.18      1,653,703.24    20,683,834.42         76.62%
Richard C. Dresdale                                          19,030,131.18      1,653,703.24    20,683,834.42         76.62%
Mark R. Genender                                             19,030,131.18      1,653,703.24    20,683,834.42         76.62%
All directors and executive officers as a group
   (8 persons)                                               19,183,941.18      1,749,777.24    20,933,718.42         77.27%
</TABLE>

*     Less than 1%.

         (a)      SH Investment Limited is an indirect wholly owned subsidiary
                  of Investcorp S.A., a global investment firm whose address is
                  37 rue Notre-Dame, Luxumbourg. SIPCO Limited may be deemed to
                  control Investcorp S.A. through its ownership of a majority of
                  a company's stock that indirectly owns a majority of
                  Investcorp S.A.'s shares. SIPCO Limited's address is P.O. Box
                  1111, West Wind Building, George Town, Grand Cayman, Cayman
                  Islands.

         (b)      Subsequent to December 30, 2000, the employment of this
                  executive officer has been terminated, and the shares of
                  Holdings common stock and options to purchase such common
                  stock that were held by such officer have been repurchased or
                  otherwise terminated.





                                       60
<PAGE>   61


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

SUBSCRIPTION AGREEMENTS

         Pursuant to the subscription agreements entered into in connection with
the Recapitalization, Simmons Holdings, LLC purchased 19,030,131.18 shares of
common stock of Holdings for $128.1 million. Under the subscription agreement
with Simmons Holdings, LLC, Holdings agreed to indemnify and pay various
expenses of Simmons Holdings, LLC and its affiliates and their advisors and
consultants.

STOCKHOLDERS AGREEMENT

         In connection with the Recapitalization, we entered into a stockholders
agreement with Holdings, Simmons Holdings, LLC, the ESOP, and the Investcorp
group. In addition, we entered into a stockholders agreement with Simmons
Holdings, LLC, Holdings and members of management. The stockholders agreements
provide, among other things, that in the event that Simmons Holdings, LLC
transfers to a non-affiliate sufficient common stock of Holdings that reduces
its ownership percentage below 75% of the shares it acquired in the
Recapitalization, the ESOP, the Investcorp group and the members of management
may participate in the transfer in proportion to their holdings, referred to as
tag-along rights. If Simmons Holdings, LLC sells at least 80% of the shares it
acquired in the Recapitalization, it may require the ESOP, the Investcorp group
and the members of management to participate in the transfer in proportion to
their holdings, referred to as a drag-along right. In addition, the stockholders
agreement with management provides, among other things, that:

         (1)      except under specific conditions, members of management may
                  not transfer their shares of common stock of Holdings; and

         (2)      upon termination of employment of a member of management,
                  Holdings and Simmons Holdings, LLC may purchase the shares of
                  common stock owned by such employee and such employee may
                  require Holdings to purchase such shares.

FENWAY

         During fiscal 2000 we had sales of approximately $13.1 million of
finished mattress products pursuant to supply contracts to SC Holdings, Inc., an
entity controlled by Fenway. Messrs. Dresdale and Genender are directors of such
entity. We believe that the terms on which mattresses are supplied to such
related party are not materially less favorable than those that might reasonably
be obtained in a comparable transaction at such time in an arms's length basis
from a person that is not an affiliate or related party.

         For a description of the relationship between Fenway and the Company,
see "Security Ownership of Certain Beneficial Owners and Management."

         We, Holdings and Fenway entered into an advisory agreement effective
upon consummation of the Recapitalization pursuant to which Fenway agreed to
provide strategic advisory services to Holdings and us. In exchange for such
services, Holdings and we agreed to pay Fenway the following:

         (1)      annual management fees of 0.25% of net sales for the prior
                  fiscal year;

         (2)      fees in connection with the consummation of any acquisition
                  transactions for Fenway's assistance in negotiating such
                  transactions; and






                                       61
<PAGE>   62
         (3)      fees and expenses, including legal and accounting fees and any
                  out-of-pocket expenses incurred by Fenway in connection with
                  providing services to Holdings and us.

         The annual management fees are subject to increase in the event of
acquisitions. Holdings and we also agreed to indemnify Fenway under specific
circumstances. In addition, pursuant to the advisory agreement, upon the
consummation of the merger, Fenway received $5.1 million and approximately
379,000 shares of Holdings' Class B common stock. For a description of the Class
B common stock, see "Principal Stockholders".





                                       62
<PAGE>   63


                                     PART IV

ITEM 14. 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 years ended December
                  30, 2000, December 25, 1999 and December 26, 1998

                  Consolidated Balance Sheets at December 30, 2000 and December
                  25, 1999

                  Consolidated Statement of Changes in Stockholders' Equity for
                  the years ended December 30, 2000, December 25, 1999 and
                  December 26, 1998

                  Consolidated Statements of Cash Flows for the years ended
                  December 30, 2000, December 25, 1999 and December 26, 1998

         Notes to consolidated financial statements

(a)(2)   Financial Statement Schedule

                  Schedule V - Valuation Account

(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 7, 2000, issuing a press
         release reporting our 2000 third quarter results of operations.

         A report on Form 8-K was filed on December 28, 2000, issuing a press
         release reporting the Company had reached a settlement in our dispute
         with Serta, Inc. and their licensees regarding certain alleged patent
         and trademark infringement.

(c)      Exhibits:

         The following exhibits are filed with or incorporated by reference into
this report. The exhibits which are denominated by an asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference from
either (i) a 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) the Annual
Report on Form 10-K for the year ended December 25, 1999 for the Registrant
(referred to as "1999 10-K" ), (iii) the Quarterly Report on Form 10-Q for the
quarter ended September 25, 1999 for the Registrant (referred to as "9/25/99
10-Q"), (iv) the Quarterly Report on Form 10-Q for the quarter ended June 24,
2000 (referred to as "6/24/00 10-Q"), (v) the Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000 (referred to as "9/30/00 10-Q"), or (vi)
the Current Report on Form 8-K dated January 19, 2001 for the Registrant
(referred to as "1/19/01 8-K"). Exhibits filed herewith have been denominated by
a pound sign (#).


                                       63
<PAGE>   64

Exhibit
Number             Exhibit Description
------             -------------------

   *2.1            Agreement and Plan of Merger (the "Merger Agreement") dated
                   July 16, 1998 by and among Simmons Company (the "Company"),
                   Simmons Holdings, Inc. ("Simmons Holdings") and REM (S-4).

   *2.1.1          Amendment No. 1 to Merger Agreement dated as of September
                   22, 1998 (S-4).

   *2.1.2          Amendment No. 2 to Merger Agreement dated as of October 26,
                   1998 (S-4).

   *3(i)           Certificate of Incorporation of the Company (S-4).

   *3(ii)          By-laws of the Company (S-4).

   *4.1            Indenture between the Company and SunTrust Bank, Atlanta, as
                   Trustee, dated as of March 16, 1999 (S-4).

  *10.1            ESOP Stock Sale and Exchange Agreement (the "ESOP Purchase
                   Agreement") dated as of July 22, 1998 by and among Simmons
                   Holdings, the Company, State Street Bank & Trust Company
                   ("State Street"), solely in its capacity as trustee of the
                   ESOP and REM (S-4).

  *10.1.1          Amendment No. 1 to ESOP Purchase Agreement dated as of
                   September 25, 1998 (S-4).

  *10.2            1999 Stockholders' Agreement (9/25/99 10-Q).

  *10.3            1998 Stockholders' Agreement (the "1998 Stockholders'
                   Agreement") dated as of October 29, 1998 among Simmons
                   Holdings, the Company, Simmons Holdings, LLC ("Simmons
                   Holdings, LLC"), Investcorp, and State Street, solely as
                   trustee of the ESOP (S-4).

  *10.4            Joinder to 1998 Stockholders' Agreement dated as of October
                   29, 1998 by SH Investment Limited (S-4).

  *10.5            1998 Stockholders' Agreement dated as of October 29, 1998 by
                   and among Simmons Holdings, Simmons Holdings, LLC and the
                   Management Investors listed therein (S-4).

  *10.6            Credit and Guaranty Agreement (the "Credit and Guaranty
                   Agreement") dated as of October 29, 1998, among the Company,
                   Simmons Holdings and Certain Subsidiaries of the Company, as
                   Guarantors, the financial institutions listed therein, as
                   Lenders, Goldman Sachs Credit Partners L.P., as a Joint Lead
                   Arranger and as Syndication Agent, Warburg Dillon Read LLC as
                   a Joint Lead Arranger, and UBS A.G., Stamford Branch, as
                   Administrative Agent (S-4).

  *10.6.1          First Amendment to Credit and Guaranty Agreement dated as of
                   March 1, 1999 (S-4).

  *10.6.2          Second Amendment to Credit and Guaranty Agreement dated as of
                   March 22, 2000 (1999 10-K).

  *10.6.3          Third Amendment to Credit and Guaranty Agreement dated as of
                   March 22, 2000 (1/19/01 8-K).




                                       64
<PAGE>   65
Exhibit
Number             Exhibit Description
------             -------------------

  #10.7            Labor Agreement between the Company and The United Steel
                   Workers of America, A.F.L., C.I.O., C.L.C., on behalf of its
                   members in Local No. 173, in the Shawnee, Kansas plant of
                   the Company excluding executives, sales employees, office
                   workers, supervisors, foremen, time keepers, mechanics or
                   machinist for the period from April 23, 1999 to April 22,
                   2002.

  *10.8            Advisory Agreement dated as of October 29, 1998 by and
                   between Simmons Holdings, the Company and Fenway Partners,
                   Inc. (S-4)

  *10.9            Simmons 1996 Management Stock Incentive Plan (S-4).

  *10.10           Form of Stock Option Agreement (S-4).

  *10.11           Form of Management Bonus Agreement (S-4).

  *10.12           Labor Agreement between the Company and The United Steel
                   Workers, Local No. 425 for all employees at the Jacksonville,
                   Florida plant of the Company excluding executives, sales
                   employees, office workers, supervisors, inspectors,
                   departmental coordinators or persons in any way identified
                   with management for the period from October 16, 1997 to
                   October 15, 2001 (S-4).

  *10.13           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, 1997 to October
                   15, 2001 (S-4).

  *10.14           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, 1997 to October 15, 2001 (S-4).

  *10.15           1999 Stock Option Plan (9/25/99 10-Q).

  #10.15.1         Amendment No. 1 dated March 22, 2000 to the 1999 Stock Option
                   Plan.

  #10.15.2         Amendment No. 2 dated November 17, 2000 to the 1999 Stock
                   Option Plan.

  *10.16           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, 1997 to October 15, 2001 (S-4).




                                       65
<PAGE>   66
Exhibit
Number             Exhibit Description
------             -------------------

  *10.17           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, 1997 to October 15, 2001 (S-4).

  *10.18           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, 1997 to October 15, 2001
                   (S-4).

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

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

  *10.21           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).

  *10.22           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 December 1, 1996 relating to
                   $5,000,000 Private Activity Revenue Bonds, Series 1996 (S-4).

  *10.23           Loan Agreement dated December 12, 1997 between Simmons
                   Caribbean Bedding, Inc. and Banco Santander Puerto Rico
                   (S-4).

  *10.23.1         English Language Summary of Appendix to Exhibit 10.23.1
                   (S-4).

  *10.24           Securities Purchase Agreement, dated as of October 29, 1998
                   among the Company, Simmons Holdings and the Purchasers listed
                   on Schedule I attached thereto (S-4).

  *10.25           Warrant to purchase 601,346.63 shares of common stock of
                   Simmons Holdings (S-4).

  *10.26           Warrant to purchase 2,104,713.22 shares of common stock of
                   Simmons Holdings dated October 29, 1998 (S-4).

  #10.27           Simmons Retirement Savings Plan adopted February 1, 1987, as
                   amended and restated.

  *10.28           Separation Agreement dated as of February 22, 2000 by and
                   among Simmons Holdings, Inc., the Company and Zenon S. Nie
                   (1999 10-K).




                                       66
<PAGE>   67
Exhibit
Number             Exhibit Description
------             -------------------

  *10.29           Separation Agreement and General Release dated as of
                   January 7, 2000 by and between the Company and Martin R.
                   Passaglia (1999 10-K).

  *10.30           Employment Agreement between Simmons Holdings, Inc., the
                   Company and Charles R. Eitel, dated as of January 4, 2000,
                   as amended (1999 10-K).

  *10.31           Employment Agreement between the Company and Robert K.
                   Barton, dated as of June 29, 1998, as amended (S-4).

  *10.32           Employment Agreement between the Company and William S.
                   Creekmuir, dated as of April 1, 2000, as amended
                   (6/24/00 10-Q).

  *10.33           Employment Agreement between the Company and Robert Hellyer,
                   dated as of June 16, 2000 (6/24/00 10-Q).

  *21              Subsidiaries of the Company (1999 10-K).







                                       67
<PAGE>   68



                                  EXHIBIT INDEX
                                  -------------

Exhibit
Number.         Exhibit Description
-------         -------------------
10.7              Labor Agreement between the Company and The United Steel
                  Workers of America, A.F.L., C.I.O., C.L.C., on behalf of its
                  members in Local No. 173, in the Shawnee, Kansas plant of the
                  Company excluding executives, sales employees, office workers,
                  supervisors, foremen, time keepers, mechanics or machinist for
                  the period from April 23, 1999 to April 22, 2002.

10.15.1           Amendment No. 1 dated March 22, 2000 to the 1999 Stock Option
                  Plan.

10.15.2           Amendment No. 2 dated November 17, 2000 to the 1999 Stock
                  Option Plan.

10.27             Simmons Retirement Savings Plan adopted February 1, 1987, as
                  amended and restated.






                                       68
<PAGE>   69


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, Simmons Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S>                              <C>                                                      <C>
                                 SIMMONS COMPANY
                 Signature              Title
By        /s/ Charles R. Eitel          Chairman of the Board of Directors, Chief         March 29, 2001
       -----------------------------      Executive Officer and Director
              Charles R. Eitel              (Principal Executive Officer)

        PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
SIMMONS COMPANY AND IN THE CAPACITIES AND ON THE DATES INDICATED.

By        /s/ Charles R. Eitel          Chairman of the Board of Directors, Chief         March 29, 2001
      -----------------------------       Executive Officer and Director
              Charles R. Eitel              (Principal Executive Officer)


          /s/ Robert W. Hellyer         President and Director                            March 29, 2001
      -----------------------------
              Robert W. Hellyer

          /s/ William S. Creekmuir      Executive Vice President and Chief                March 29, 2001
      -----------------------------       Financial Officer, Treasurer,
              William S. Creekmuir          Secretary and Director
                                               (Principal Financial Officer)


          /s/ Peter Lamm                Director                                          March 29, 2001
      -----------------------------
              Peter Lamm

          /s/ Richard C. Dresdale       Director                                          March 29, 2001
      -----------------------------
              Richard C. Dresdale

          /s/ Mark R. Genender          Director                                          March 29, 2001
      -----------------------------
              Mark R. Genender

          /s/ Mark F. Chambless         Vice President--Corporate Controller              March 29, 2001
      -----------------------------            (Principal Accounting Officer)
              Mark F. Chambless


</TABLE>











                                       69
<PAGE>   70


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    SCHEDULE

         YEAR ENDED DECEMBER 30, 2000, YEAR ENDED DECEMBER 25, 1999, AND
                          YEAR ENDED DECEMBER 26, 1998

                   FORMING A PART OF ANNUAL REPORT PURSUANT TO
                     THE SECURITIES AND EXCHANGE ACT OF 1934

                                    FORM 10-K

                                       OF

                                 SIMMONS COMPANY








                                       70
<PAGE>   71

<TABLE>
<CAPTION>


                                 SIMMONS COMPANY

                         SCHEDULE V - VALUATION ACCOUNT

                   Col. A                           Col. B             Col. C              Col. D             Col. E
---------------------------------------------  ------------------ ------------------  -----------------  ------------------
                                                  Balance at                                                Balance at
                                                 Beginning of                                                 End of
                Description                         Period            Additions          Deductions           Period
---------------------------------------------  ------------------ ------------------  -----------------  ------------------
                                                                             (in thousands)
<S>                                                  <C>                <C>                 <C>                 <C>
Fiscal year ended December 30, 2000
     Allowance for doubtful accounts                 $  3,449           $ 12,929            $ 11,952            $  4,426
     Discounts                                          2,178                266                --                 2,444
     Returns and allowances                             1,230              1,326                --                 2,556
                                                     --------           --------            --------            --------
                                                     $  6,857           $ 14,521            $ 11,952            $  9,426
                                                     ========           ========            ========            ========

Fiscal year ended December 25, 1999
     Allowance for doubtful accounts                 $  4,177           $  7,597            $  8,325            $  3,449
     Discounts                                          2,394               (216)               --                 2,178
     Returns and allowances                               930                300                --                 1,230
                                                     --------           --------            --------            --------
                                                     $  7,501           $  7,681            $  8,325            $  6,857
                                                     ========           ========            ========            ========

Fiscal year ended December 26, 1998
     Allowance for doubtful accounts                 $  3,827           $    865            $   (515)           $  4,177
     Discounts                                          1,497                897                --                 2,394
     Returns and allowances                             1,173               (243)               --                   930
                                                     --------           --------            --------            --------
                                                     $  6,497           $  1,519            $   (515)           $  7,501
                                                     ========           ========            ========            ========
</TABLE>



                                       71