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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 29, 2001
                                -----------------

                                       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
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             (Exact name of registrant as specified in its charter)

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

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

 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, 2002 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, 2002 is 31,964,452.

           DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE: None

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ITEM 1.           BUSINESS

         GENERAL

         Founded in 1871, Simmons Company (the "Company" or "Simmons") is a
leading manufacturer and distributor of premium branded bedding products in the
United States of America and the world leader in Pocketed Coil(R) 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) and Olympic(R) Queen.
Sales of conventional bedding, which includes fully assembled mattresses and
foundations, accounted for substantially all of our 2001 net sales.

         We sell to a diversified nationwide base of approximately 3,100
customers, representing more than 7,700 retail outlets. We support our sales to
furniture stores, specialty sleep shops, department stores, rental 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 of
America and in Puerto Rico through our wholly-owned subsidiaries, The Simmons
Manufacturing Co., LLC and Simmons Caribbean Bedding, Inc. 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.

         We also sell bedding products to certain institutional customers, such
as schools and government entities, and to the hospitality industry through the
Company's wholly-owned subsidiary, Simmons Contract Sales, LLC, and license our
trademarks, patents, and other intellectual property to various domestic and
foreign manufacturers through the Company's wholly-owned subsidiary, Dreamwell,
Ltd.

         Additionally, the Company operates 22 retail outlet stores located
throughout the United States of America through the Company's wholly-owned
subsidiary, World of Sleep Outlets, LLC, and 36 retail mattress stores located
in Southern California through the Company's wholly-owned subsidiary, Gallery
Corp.

         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.



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         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 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. The ESOP retained shares of common 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
affiliates of Fenway, affiliates of Investcorp, management and certain other
investors of Holdings.

         As a result of the Recapitalization and related transactions, Simmons
Holdings, LLC, an entity controlled by funds affiliated with 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
Recapitalization 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.



                                       3
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         MANAGEMENT CHANGES

         In January 2001, Robert W. Hellyer was promoted from Executive Vice
President - Sales and Marketing to President of the Company. In July 2001, Mark
A. Parrish was hired as Executive Vice President and Chief Operations Officer.
In November 2001, Rhonda Rousch was hired as Senior Vice President - Human
Resources. Effective January 1, 2002, Robert K. Barton, Executive Vice
President - Human Resources, retired from the Company.

          INDUSTRY OVERVIEW

         The domestic wholesale bedding industry generated sales of over $4.4
billion in 2001 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; this population category is also
         one which may consider the purchase of a second home, requiring
         additional bedding purchases;

-        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, rental stores, membership clubs and contract customers.

         COMPETITION

         While there are approximately 700 bedding manufacturers in the United
States, four companies, Simmons, Sealy Corporation ("Sealy"), Serta, Inc.
("Serta"), and The Spring Air Company account for more than half of the
industry's wholesale revenues. We believe we principally compete against these
three 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 ($299 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



                                       4
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from the majority of the industry in our employment of differentiated product
constructions, research-based sleep quality claims and marketing programs that
promote better sleep benefits, instead of the traditional comfort and price
feature selling.

         All of our mattress products are built from one of two spring unit
construction techniques: Pocketed Coil(R) (Marshall Coil) springs or open coil
constructions. The Beautyrest(R) line of products utilize our patented Pocketed
Coil(R) 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 independently of the adjacent coils, resulting in better conformability
to the sleeping body and the reduction of motion transferred across the bed from
one partner to the other. Competitive attempts to copy this product benefit must
affix their coils at the top and bottom, which technique is not capable of
offering the unique Beautyrest(R) Do Not Disturb(R) 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,
providing additional firmness in the lower back and thigh for better support. We
also use other open coil units in our Deep Sleep(R) line targeted at the under
$500 queen price category. The coil units used in these products are also unique
to our products.

         In 2000, we introduced the first full line of mattresses that consumers
never need to flip. This patented design offers enhanced sleep benefits and
product durability, along with the consumer convenience of never having to flip
their mattress. This innovative never-needs-to-be-flipped design was introduced
into the Beautyrest(R) line in early 2000 and the BackCare(R) and Deep Sleep(R)
lines in 2001.

         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(TM) label that allows
consumers to compare the Beautyrest(R) Do Not Disturb(R) benefit to
competitive constructions and other Beautyrest(R) models. The Beautyrest(R)
product line was further redesigned and enhanced in 2001 and we began shipping
the new product line to some dealers in December 2001.

         Beautyrest(R) World Class(TM) 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(R)-on-Pocketed Coil(R) 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 in 2001 with improved benefits and a
never-needs-to-be-flipped design. BackCare(R) is designed with five distinct
comfort and support zones that mirror the natural s-shape of the spine. This
five-zoned construction is built into every component of the mattress. A Lumbar
Support Index(TM) label at retail sites helps consumers choose between 10%, 20%
or 30% incremental support in the lumbar region of the bed. The National
Foundation for Spinal Health has certified and now lists BackCare(R) products as
certified to promote back care support and comfort.

         Deep Sleep(R). In 2001, we introduced the Deep Sleep(R) product line,
targeted at the traditional under $500 queen price points. This product line
utilizes a unique product construction in comparison to competitive open coil
units, offering better-sleep-benefits not available from traditional open coil
mattresses.




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<PAGE>

         Olympic(R) Queen. In 2001, we started manufacturing and distributing
the Olympic(R) Queen, the first new size in mattresses distributed on a national
basis since Simmons began distributing king and queen sizes on a national basis
in 1958. The Olympic(R) Queen offers consumers 10% more sleeping surface than a
traditional queen, without requiring the replacement of the traditional queen
frame with a wider frame. This patent pending new size, which is available in
Beautyrest(R), BackCare(R) and Deep Sleep(R), is targeted at queen mattress
owners who would prefer a wider mattress, but are unwilling to purchase a larger
bed because of their existing queen bed frame or the size of their bedroom. We
are importing specially designed Egyptian cotton Olympic(R) Queen sheets for
sale by our retailers. 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 7,700 retail outlets, representing approximately
3,100 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 sales 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 & Resorts Worldwide, Inc. ("Starwood
Hotels"), La Quinta Inns, Inc., Best Western International, Inc., and The Walt
Disney Company. In 1999, Starwood Hotels selected Beautyrest(R) as the bed for
their "Heavenly Bed" program, a luxury hotel room program targeted at their
preferred customer club members.

         Our five largest customers accounted for approximately 17% of 2001 net
sales. No one customer represented more than 10% of net sales in 2001.

         SALES, MARKETING AND ADVERTISING

         Our products are sold by approximately 180 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.
Additionally, the Company utilizes approximately 20 independent sales
representatives, principally in the area of contract sales.

         Our sales support focuses on two areas:

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

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

         We develop advertising and retail sales incentive programs specifically
for individual retailers. Point-of-sale materials, including mattresses and
foundation displays that we design and supply, highlight the differentiating
features of our products. In addition, we offer training for retail sales
personnel



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through an internally-developed sales representative training program. We
believe that our sales training and consumer education programs are the most
effective in the industry. We have designed these programs, delivered on-site at
our retailers' facilities or at our research and education center, Simmons
Institute of Technology and Education ("SITE"), to teach retail floor
salespeople product knowledge and sales skills. We seek to improve our
retailers' unit sales, as well as increase sales of bedding in the higher price
category. 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 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 2001, we bought approximately 72%
of our raw material needs from 10 suppliers. We believe that supplier
concentration is common in the bedding industry.

         We have long-term supply agreements with Leggett & Platt, Incorporated
("Leggett & Platt"), Foamex L.P. and Amoco Fabrics and Fiber Company. With the
exception of Leggett & Platt, we believe that we can readily replace our
suppliers as we have already 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 2001, we bought approximately 27% of our raw materials from Leggett
& Platt. We expect that in 2002 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 usually experience a seasonal fluctuation in profitability, with our gross
profit percentage during the first quarter of each year usually 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 and can negatively impact sales as
retailers reduce orders in anticipation of the new product line. However, we did
not close out our Beautyrest(R) 2000 line at the beginning of the year, and
consequently did not experience a lower profit margin in the first quarter of
2001. We believe the close out of the Beautyrest(R) 2000 product line in the
fourth quarter of 2001 had a negative effect on fourth quarter 2001 sales.

         Most of our sales are by short term purchase orders. Because the level
of production 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).




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         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 customers' needs and to minimize their inventory carrying
costs. Most bedding orders are scheduled, produced and shipped within three to
four 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 well as through participation in the Better Sleep
Council, an industry association that promotes awareness of sleep issues, and
ISPA. Our marketing and manufacturing departments work closely with the
engineering staff to develop and test new products for marketability and
durability.

         We also seek to reduce costs and improve productivity by continually
developing more efficient manufacturing and distribution processes at SITE, a
state-of-the-art 38,000 square foot research and education center in Atlanta,
Georgia. Approximately 14 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 resources.

         WARRANTIES AND PRODUCT RETURNS

         Our conventional bedding products generally offer 10 year limited
warranties against manufacturing defects. We believe that our warranty terms are
generally consistent with those of our primary national competitors. The
historical costs to us of honoring warranty claims have been 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 the 22 Simmons World of Sleep
outlet stores.

         PATENTS AND TRADEMARKS

         We own many trademarks, including Simmons(R), Beautyrest(R),
BackCare(R), DreamScapes(TM), Deep Sleep(R), and Pocketed Coil(R), 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(R) innersprings. We do not consider our overall success to be dependent
upon any particular intellectual property rights and we cannot assure that the
degree of protection offered by the various patents will be sufficient, that
patents will be issued in respect of pending patent applications, 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.

         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 internationally the Simmons(R) name and many of our trademarks,
processes and patents generally on an exclusive long-term basis to third-party
manufacturers which produce and distribute conventional bedding products within
their designated




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 territories. These licensing agreements allow the Company to reduce exposure to
political and economic risk abroad by minimizing investments in those markets.
We have twenty foreign licensees and nine foreign sub-licensees with operations
in Argentina, Australia, Brazil, Canada, Chile, Colombia, Dominican Republic,
Ecuador, El Salvador, France, Hong Kong, Israel, Italy, Japan, Korea, Mexico,
Morocco, New Zealand, Oman, Panama, Singapore, South Africa, Sweden, Taiwan,
United Kingdom, Venezuela, and the West Indies. These foreign licensees and
sub-licensees have rights to sell Simmons-branded products in over 100
countries.

         Additionally, we have 12 domestic third-party licensees. Some of these
licensees manufacture and distribute juvenile bedding, healthcare-related
bedding and furniture, and non-bedding upholstered furniture, primarily on
long-term or automatically renewable terms. Additionally, we have licensed the
Simmons(R) name and other trademarks, generally for limited terms, to
manufacturers of down comforters, synthetic comforter sets, pillows, bed pads,
blankets, futons, office chairs, specialty sleep items, massage recliners and
pet beds.

         In 2001, 2000 and 1999 our licensing agreements as a whole generated
royalties of approximately $8.6 million, $8.0 million and $7.1 million,
respectively, which are accounted for as a reduction of selling, general and
administrative expenses in the accompanying Consolidated Statements of
Operations.

         EMPLOYEES

         As of February 28, 2002, we had approximately 2,800 full-time
employees. Approximately 1,200 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 three to four-year terms.
During 2001 and early 2002, new collective bargaining contracts were negotiated
for the majority of our manufacturing facilities represented by labor unions.
The new contracts will not have a material impact to our future results from
operations. The locations where new contracts were negotiated and the contract
expiration date are as follows:

          Facility                  Labor Union            Expiration Date
          --------                  -----------            ---------------
         Atlanta        United Steel Workers of America      October 2005
         Columbus       United Steel Workers of America      October 2004
         Dallas         United Steel Workers of America      October 2004
         Honolulu       International Longshoremen and       January 2005
                            Warehousemen's Union
         Jacksonville   United Steel Workers of America      October 2005
         Los Angeles    United Steel Workers of America      October 2005
         Piscataway     United Steel Workers of America      October 2004

         Other labor unions represented at certain manufacturing facilities are
the International Brotherhood of Teamsters, United Furniture Workers, and
International Association of Machinists and Aerospace Workers. Our collective
bargaining contracts with (i) the United Furniture Workers for our San Leandro,
California manufacturing facility; and (ii) the United Steel Workers of America
for our Kansas City, Kansas manufacturing facility expire in April 2002. We
consider overall relations with our workforce to be satisfactory. We have had no
labor-related work stoppages in over 20 years. However, if a work stoppage were
to occur at one of our manufacturing facilities, we believe it would not have a
material adverse impact to our operating results as we believe we would be able
to shift production to other manufacturing facilities. Since 1980, we have
opened nine new plants, none of which are unionized.

         Approximately 2,400 of our current and former employees are
participants in the ESOP.



                                       9
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         REGULATORY MATTERS

         As a manufacturer of bedding and related products, we use and dispose
of a number of substances, such as glue, lubricating oil, solvents, and other
petroleum products, that may subject us to regulation under numerous federal and
state statutes governing the environment. Among other statutes, we are subject
to the Federal Water Pollution Control Act, the Comprehensive Environmental
Response, Compensation and Liability Act, the Resource Conservation and Recovery
Act, the Clean Air Act and related state statutes and regulations. We have made
and will continue to make capital and other expenditures to comply with
environmental requirements. As is the case with manufacturers in general, if a
release of hazardous substances occurs on or from our properties or any
associated offsite disposal location, or if contamination from prior activities
is discovered at any of our properties, we may be held liable, the amount of
such liability could be material and our financial condition or results of
operations could be materially adversely affected. We are currently evaluating
our potential liability with respect to the cleanup of environmental
contamination at and in the vicinity of our leased manufacturing facility in San
Leandro, California and our former facility in Linden/Elizabeth, 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. When used in this Annual Report on Form 10-K, the words "believes,"
"anticipates," "expects," "intends," "projects" and similar expressions are used
to identify forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements relate
to future financial and operating results, including expected benefits from our
Better Sleep Through Science(R) philosophy. Any forward-looking statements
contained in this report represent management's current expectations, based on
present information and current assumptions, and are thus prospective and
subject to risks and uncertainties which could cause actual results to differ
materially from those expressed in such forward-looking statements. Actual
results could differ materially from those anticipated or projected due to a
number of factors. These factors include, but are not limited to, anticipated
sales growth, success of new products, increased market share, reduction of
manufacturing costs, generation of free cash flow and reduction of debt, changes
in consumer confidence or demand, and other risks and factors identified from
time to time in the Company's reports filed with the Securities and Exchange
Commission, including the Form 10-K for 2000 and the Form 10-Qs for the first,
second, and third quarters of 2001. The Company undertakes no obligation to
update or revise any forward-looking statements, either to reflect new
developments, or for any other reason.



                                       10
<PAGE>


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, 2002:

<TABLE>
<CAPTION>

                                                                             Year of
                                                                 Date         Lease        Square
                             Location                          Occupied    Expiration     Footage
                             --------                          --------    ----------     -------
<S>                                                              <C>          <C>            <C>
       Manufacturing Facilities:
            Mableton, Georgia (Atlanta)                          1992         2007           148,300
            Charlotte, North Carolina                            1993         2003           144,280
            Grove City, Ohio (Columbus)                          1988         2004           190,000
            Coppell, Texas (Dallas)                              1998         2008           140,981
            Aurora, Colorado (Denver)                            1998         2008           129,000
            Fredericksburg, Virginia                             1994         2009           128,500
            Honolulu, Hawaii                                     1993         2003            58,530
            Jacksonville, Florida                                1973         2003           205,729
            Janesville, Wisconsin                                1982         Owned          288,700
            Shawnee Mission, Kansas (Kansas City)                1997         Owned          130,000
            Compton, California (Los Angeles)                    1974         2005           223,382
            Tolleson, Arizona (Phoenix)                          1997         2007           103,408
            Piscataway, New Jersey                               1988         2003           264,908
            Salt Lake City, Utah                                 1998         2008            77,500
            San Leandro, California                              1964         2007           260,500
            Auburn, Washington (Seattle)                         1992         2002           133,610
            Agawam, Massachusetts (Springfield)                  1988         2006           129,000
            Trujillo Alto, Puerto Rico                           1998         Owned           50,000
                                                                                        -------------
                   Subtotal                                                                2,806,328

       Other Facilities in Atlanta, Georgia:
            Corporate Headquarters                               1992         2011            49,045
            SITE                                                 1995         2005            38,000
            Warren Drive                                         1977         2002            30,960
                                                                                        -------------
                   Total Square Footage                                                    2,924,333
                                                                                        =============
</TABLE>

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

         In addition, we operate 22 retail outlet stores with approximately
177,000 square feet, in the aggregate, through our World of Sleep Outlets, LLC
subsidiary and 36 retail mattress stores with approximately 144,000 square feet,
in the aggregate, through our Gallery Corp. subsidiary.




                                       11
<PAGE>

ITEM 3.           LEGAL PROCEEDINGS


         On April 3, 1998, Serta filed a complaint against Simmons in the United
States District Court alleging that some Simmons products 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 and
injunctive relief. 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. We denied the material allegations of the complaint and
amended complaint and asserted affirmative defenses and/or counterclaims against
Serta. 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,
which was expensed in 2000, 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.

         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 2001.




                                       12
<PAGE>

                                     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 29, 2001, 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 is our selected historical consolidated financial data.
We derived our historical Statement of Operations and Balance Sheet Data for
2001, 2000, 1999, 1998, and 1997 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.

         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 Senior Credit Facility and the Indenture. EBITDA and
         Adjusted EBITDA are not measurements of operating performance
         calculated in accordance with accounting principles generally accepted
         in the United States of America ("US GAAP") 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 US GAAP, or as measures of
         profitability 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 and have been calculated as defined by our Senior Credit
         Facility.

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



                                       13
<PAGE>

<TABLE>
<CAPTION>

                                           Year ended    Year ended    Year ended     Year ended    Year ended
                                            Dec. 29,      Dec. 30,      Dec. 25,       Dec. 26,      Dec. 27,
                                              2001          2000          1999           1998          1997
                                           ------------  ------------  ------------   ------------  ------------
                                           (52 weeks)    (53 weeks)    (52 weeks)     (52 weeks)    (52 weeks)
<S>                                          <C>           <C>           <C>            <C>           <C>
STATEMENT OF OPERATIONS DATA:
Net sales                                    $679,518      $720,767      $616,412       $598,397      $550,085
Cost of products sold                         366,244       405,507       350,721        348,842       319,074
                                           ------------  ------------  ------------   ------------  ------------
Gross margin                                  313,274       315,260       265,691        249,555       231,011
Operating expenses:
   Selling, general and
        administrative expenses               248,726       273,516       216,810        199,837       183,556
   Non-cash variable stock compensation        14,847           574             -              -             -
   ESOP expense                                 2,816         7,117         7,169          6,453         6,230
   Management compensation --
        severance related                       2,065         3,777         6,600              -             -
   Management compensation --
        transaction related                         -             -             -         14,223             -
   Amortization of intangibles                 16,309         8,367         7,628          7,629         7,679
                                           ------------  ------------  ------------   ------------  ------------
                                              284,763       293,351       238,207        228,142       197,465
                                           ------------  ------------  ------------   ------------  ------------
Operating income                               28,511        21,909        27,484         21,413        33,546

Interest expense, net (1)                      32,371        34,957        32,918         23,369        19,650
Other expense, net                              3,038         1,778         1,627          2,406         1,009
                                           ------------  ------------  ------------   ------------  ------------
Income (loss) before income taxes
     and extraordinary item                $   (6,898)     $(14,826)   $   (7,061)    $   (4,362)   $   12,887
                                           ============  ============  ============   ============  ============
Net income (loss)                             $(1,132)     $(10,943)   $   (9,129)      $(19,019)   $    6,362
                                           ============  ============  ============   ============  ============

OTHER DATA:
Adjusted EBITDA (2)                           $78,337    $   61,649    $   66,740     $   62,264    $   58,420
Capital expenditures                            5,099        13,290         9,659         15,553        15,701
Depreciation and amortization                  25,479        22,090        22,612         18,120        13,549

BALANCE SHEET DATA (END OF
    PERIOD):
Working capital                              $ 39,936    $   55,457    $   53,897     $   46,567    $   37,133
Total assets                                  385,666       416,861       406,100        400,061       375,125
Total debt, including current
      maturities                              295,914       325,274       333,983        313,469       184,443
Total common stockholder's
      equity (deficit)                        (58,318)      (36,402)      (23,332)       (12,301)       92,614


(1)   Interest expense                        $30,339       $33,505       $31,686        $22,776        $19,293
       Amortization of deferred debt
           issuance costs                       2,429         1,801         1,433            777            613
        Interest income                          (397)         (349)         (201)          (184)          (256)
                                           ------------  ------------  ------------   ------------  ------------
        Interest expense, net                 $32,371       $34,957       $32,918        $23,369        $19,650
                                           ============  ============  ============   ============  ============

         Interest expense, net for the years ended 2001, 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 the Consolidated Financial
         Statements."
</TABLE>




                                       14
<PAGE>

(2)      Items added back to EBITDA to arrive at Adjusted EBITDA are as follows:

<TABLE>
<CAPTION>

                                            Year Ended    Year Ended     Year Ended    Year Ended    Year Ended
                                             Dec. 29,      Dec. 30,       Dec. 25,      Dec. 26,      Dec. 27,
                                               2001          2000           1999          1998          1997
                                            ------------  ------------  -------------  ------------  ------------
                                             (52 weeks)    (53 weeks)    (52 weeks)     (52 weeks)    (52 weeks)
                                                                            weeks)
<S>                                            <C>           <C>           <C>            <C>           <C>
EBITDA                                         $63,093       $50,669       $52,612        $44,459       $53,325
Management compensation --
   severance related                                 -         3,777         6,600              -             -
Management compensation --
   transaction related                               -             -             -         14,223             -
Interest income                                    397           349           201            184           256
Serta settlement and legal fees                      -         6,250             -              -             -
Non-cash variable stock option
   compensation                                 14,847           574             -              -             -
Manufacturing process
   improvements expense                              -             -             -          2,208         2,347
Management strategic initiatives                     -             -           444            418         1,693
Receivable write-off                                 -             -         6,883              -             -
Discontinued product line                            -             -             -            772           799
                                            ------------  ------------  -------------  ------------  ------------
    Adjusted EBITDA                            $78,337       $61,649       $66,740        $62,264       $58,420
                                            ============  ============  =============  ============  ============
</TABLE>




                                       15
<PAGE>


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.

CRITICAL ACCOUNTING POLICIES

         Our critical accounting policies are as follows:

         Warranty accrual and allowance for doubtful accounts. The preparation
of financial statements requires our management to make estimates and
assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Specifically, our management must make estimates of potential future product
returns related to current period product revenue. Management analyzes
historical returns when evaluating the adequacy of the warranty accrual.
Significant management judgments and estimates must be made and used in
connection with establishing the warranty accrual in any accounting period. The
Company's warranty policy provides a 10-year non-prorated warranty service
period on all first quality products currently manufactured, except for certain
products for the hospitality industry which have varying non-prorated warranty
periods generally ranging from five to ten years. The Company's policy is to
accrue the estimated cost of warranty coverage at the time the sale is recorded.
As of December 29, 2001, the Company had a warranty accrual of $4.9 million.

         Similarly, our management must make estimates of the uncollectibility
of our accounts receivable. Management specifically analyzes accounts receivable
and analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts. Our
accounts receivable balance was $73.8 million, net of allowance for doubtful
accounts of $1.8 million, as of December 29, 2001.

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

         The Company has net operating loss carryforwards for federal income tax
purposes which are limited under various sections of the Internal Revenue Code.
Such net operating loss carryforwards expire through 2020. Our management must
make estimates regarding the future realization of these net operating losses.
Realization of the net operating loss carryforwards is dependent upon future
profitable operations and reversals of existing temporary differences. Although
realization is not assured, the Company believes it is more likely than not that
the net recorded benefits will be realized through the reduction of future
taxable income.

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




                                       16
<PAGE>

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
                                                               -------------------------------------------
                                                                   2001           2000           1999
                                                               -------------  -------------  -------------
                                                                (52 weeks)      (53 weeks)     (52 weeks)
<S>                                                                <C>            <C>            <C>
Net sales                                                          100.0%         100.0%         100.0%
Cost of products sold                                               53.9%          56.3%          56.9%
                                                               -------------  -------------  -------------
     Gross margin                                                   46.1%          43.7%          43.1%
Selling, general and administrative expenses                        36.6%          37.9%          35.2%
Non-cash variable stock compensation expense                         2.2%           0.1%           -
ESOP expense                                                         0.4%           1.0%           1.1%
Management compensation -- severance related                         0.3%           0.5%           1.1%
Amortization of intangibles                                          2.4%           1.2%           1.2%
                                                               -------------  -------------  -------------
     Operating income                                                4.2%           3.0%           4.5%
Interest expense, net                                                4.8%           4.8%           5.3%
Other expense, net                                                   0.5%           0.2%           0.3%
                                                               -------------  -------------  -------------
     Loss before income taxes
          and extraordinary item                                    (1.0%)         (2.0)%         (1.1)%
Income tax benefit                                                  (0.9%)         (0.5)%          -
                                                               -------------  -------------  -------------
     Loss before extraordinary item                                 (0.1%)         (1.5)%         (1.1)%
Extraordinary loss from early extinguishment of
     debt, net of income tax benefit                                (0.1%)          -             (0.4%)
                                                               -------------  -------------  -------------
     Net loss                                                       (0.2%)         (1.5)%         (1.5)%
                                                               =============  =============  =============
</TABLE>

FISCAL 2001 (52 WEEKS) AS COMPARED TO FISCAL 2000 (53 WEEKS)

         Net Sales. Net sales for the year ended December 29, 2001 decreased
5.7%, or $41.2 million, to $679.5 million in 2001 from $720.8 million in 2000.
The fiscal year ended December 30, 2000 included an additional week. Adjusting
for the extra week, net sales decreased 3.9% versus the comparable period in
2000. The decrease was due primarily to an 11.5%, or approximately $84.2
million, decrease in bedding unit sales volume offset in part by a 5.5%, or
approximately $39.8 million, increase in bedding average unit selling price. The
net sales decrease for the year resulted primarily from an overall economic
slowdown, which resulted in a reduction of sales beginning in the second quarter
of 2001, and the loss of business as a result of bankruptcy and subsequent
liquidation of several major customers during the last eighteen months,
including The Heilig-Meyers Company ("Heilig-Meyers") (filed Chapter 11 in
August 2000), Montgomery Ward, LLC (filed Chapter 11 in December 2000), and
Homelife Corporation ("Homelife") (filed Chapter 11 in July 2001). In 2000,
these three customers in the aggregate accounted for 10.6% of our net sales. The
aggregate sales decline with these three customers for fiscal year 2001 versus
2000 totaled $66.4 million. The bedding average unit selling price increase was
due principally to a price increase of approximately 5% for our Beautyrest(R)
product line in April 2001 and a shift in sales mix to higher priced products.

         Cost of Products Sold. As a percentage of net sales, cost of products
sold for the year ended December 29, 2001 decreased 2.4 percentage points to
53.9% from 56.3% in 2000. Our gross margin improvement for 2001 versus 2000 of
2.4 percentage points to 46.1% resulted principally from (i) the increase in the
bedding average unit selling price; (ii) the introduction of our 2001
BackCare(R) product line; (iii) lower material costs as a percentage of sales
following introduction of our "Zero Waste" cost reduction initiative at the
beginning of 2001; and (iv) lower labor costs as a percentage of net sales due
to improved management of headcount and labor hours. At year end 2001, our
factory worker headcount was 12.0% lower than at the beginning of the year.




                                       17
<PAGE>

         Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the year ended December
29, 2001 decreased 1.3 percentage points to 36.6% from 37.9% in 2000. This
decrease is primarily attributable to the following:

        -         non-recurring expenses in 2000 of $6.25 million (0.9% of 2000
                  net sales), in the aggregate, to settle the Serta litigation
                  and legal fees associated with the litigation;

        -         non-recurring expenses in 2000 totaling approximately $3.5
                  million (0.5% of 2000 net sales) to write-off transaction fees
                  and to adjust the receivable of a former customer, which the
                  Company was contemplating acquiring, to net realizable value
                  following management's decision that a distribution strategy
                  of further investment into retail operations through
                  acquisition of certain customers was not in the best interest
                  of the Company;

        -         non-recurring expenses in 2000 totaling approximately $4.3
                  million (0.6% of 2000 net sales) to write-off the receivable
                  of a customer, which at one time represented our potential
                  direct entry into retail operations, and to provide for lease
                  termination fees relating to certain lease obligations of the
                  customer which were guaranteed by the Company;

        -         measures implemented in July and August that provided salary
                  and fringe benefit decreases, net of severances paid, of
                  approximately $1.7 million in 2001; we expect those measures
                  to provide savings of approximately $5.2 million in fiscal
                  2002;

        -         a $1.5 million (0.2% of net sales) gain in 2001 related to the
                  partial settlement of an obligation under our retiree health
                  care plan; and

        -         a reduction of bad debt expense of $0.5 million. In 2000, bad
                  debt expense was negatively impacted by charges of $3.3
                  million (0.5% of 2000 net sales), in the aggregate, to reserve
                  for accounts receivable from Heilig-Meyers and Montgomery
                  Ward.

         Non-Cash Variable Stock Compensation Expense. Non-cash variable stock
compensation expense increased $14.3 million for the year ended December 29,
2001 to $14.8 million from $0.6 million in 2000 due to a 79.0% increase in the
underlying value of Holdings' common stock during 2001.

         ESOP Expense. ESOP expense declined $4.3 million to approximately $2.8
million for the year ended December 29, 2001 from $7.1 million in 2000. This
decrease is due to a reduction in the number shares allocable for 2001, offset
in part by a 79.0% increase in the underlying value of Holdings' common stock
during 2001.

         Management Compensation--Severance Related. Severance expense decreased
$1.7 million to approximately $2.1 million for the year ended December 29, 2001
from $3.8 million in 2000. We incurred severance costs in 2001 associated with
the termination of certain management and the downsizing of our workforce in
July and August. The severance costs in 2000 related primarily to the
reorganization of senior management of the Company.

         Amortization of Intangibles. Amortization of intangibles for the year
ended December 29, 2001 increased $7.9 million to $16.3 million from $8.4
million for 2000. This increase is due to a non-cash impairment charge in the
fourth quarter of 2001 of $7.9 million to write-down the goodwill to market
value of the Company's wholly-owned subsidiary Gallery Corp., a retail mattress
business operating in Southern California acquired in 2000.




                                       18
<PAGE>


         Interest Expense, Net. Interest expense, net decreased $2.6 million, or
7.4%, to approximately $32.4 million for the year ended December 29, 2001 from
$35.0 million for 2000 due primarily to (i) lower Prime and LIBOR base rates on
our Senior Credit Facility obligations; (ii) decreased average outstanding
borrowings; and (iii) one less week of interest on senior indebtedness during
the year (fiscal 2000 was a 53-week year), partially offset by an increase in
our interest rate margin in January 2001 following amendment to our Senior
Credit Facility and interest rate protection agreements on a portion of our
floating rate debt which have the effect of reducing the benefit of declining
interest rates.

         Other Expense, Net. Other expense, net increased approximately $1.2
million to $3.0 million for the year ended December 29, 2001 compared to $1.8
million for the year ended December 30, 2000. This increase is principally due
to the write-off of $0.8 million in acquisition costs related to a transaction
that was not consummated and higher management advisory fees.

         Income Tax Benefit. Our effective income tax rate of 90.9% for the year
ended December 29, 2001 differs from the federal statutory rate primarily due to
the reversal of a valuation allowance and the amortization of goodwill not being
tax deductible. The valuation allowance was reversed due to the likelihood of
realizing the future tax benefit of certain tax loss carryforwards. Our
effective income tax rate of 26.2% for the year ended December 30, 2000 differs
from the federal statutory rate primarily due to the non-tax deductible
amortization of goodwill.

         Net Loss. For the reasons set forth above, we incurred a net loss of
$1.1 million for the year ended December 29, 2001 compared to a net loss of
$10.9 million for the year ended December 30, 2000, a decrease of $9.8 million.

         EBITDA. For the reasons set forth above, we had an EBITDA of $63.1
million, or 9.3% of net sales, for 2001 compared to $50.7 million, or 7.0% of
net sales, for 2000. Excluding for 2001, $14.8 million non-cash variable stock
option compensation expense, and excluding for 2000, (i) charges of $3.8 million
relating to severance recorded in the first quarter; (ii) $6.25 million in Serta
litigation settlement and related legal fees; and (iii) $0.6 million non-cash
variable stock option compensation expense, our Adjusted EBITDA was $78.3
million, or 11.5% of net sales, for 2001 and $61.6 million, or 8.6% of net
sales, for 2000.

FISCAL 2000 AS COMPARED TO FISCAL 1999

         Net Sales. Net sales for the year ended December 30, 2000 increased
16.9%, or $104.4 million, to $720.8 million in 2000 from $616.4 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. The successful launch of our Beautyrest(R) 2000 product line was
the primary reason for the year-over-year growth. The 2000 sales increase
occurred despite a decline in sales to 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 0.6 percentage point to
56.3% from 56.9% in 1999. Our gross margin improvement versus 1999 of 0.6
percentage point to 43.7% for the year resulted primarily from 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 2.7 percentage points to 37.9% from 35.2% in 1999. This
increase was primarily attributable to the following:




                                       19
<PAGE>

         -        a charge of $7.8 million (1.1% of 2000 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 related to the change in our retail
                  investment strategy;

         -        a charge of $6.25 million (0.9% of 2000 net sales) to settle
                  the Serta litigation and legal fees associated with the
                  litigation;

         -        charges of $3.3 million, in the aggregate, (0.5% of net sales)
                  to reserve for accounts receivable 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 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 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) one 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 1999 due to higher management advisory fees.



                                       20
<PAGE>


         Income Tax Benefit. Our effective income tax rates of 26.2% and 1.5%
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.

         EBITDA. For the reasons set forth above, we had an EBITDA of $50.7
million, or 7.0% of net sales, for 2000 compared to $52.6 million, or 8.5% of
net sales, for 1999. Excluding for 2000, (i) $3.8 million related to severance;
(ii) $6.25 million associated with the settlement of the Serta litigation and
associated legal fees; and (iii) $0.6 million non-cash variable stock option
compensation expense; and for 1999, (i) $6.6 million related to severance; (ii)
bad debts of $6.9 million; and (iii) strategic initiative expense of $0.4
million, our Adjusted EBITDA was $61.6 million, or 8.6% of net sales, for 2000
and $66.7 million, or 10.8% of net sales, for 1999.

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 related to increases in
working capital, payments of principal and interest for our debt and capital
expenditures.

         Our operating activities provided cash of $38.8 million for the year
ended December 29, 2001 compared to $20.6 million for
2000.

         Trade accounts receivable decreased $17.2 million during 2001 due
principally to the decrease in sales and more conservative credit and collection
management. Homelife, one of the Company's top ten customers in terms of net
sales in fiscal 2000, filed for federal bankruptcy protection in 2001. The
Company had $15.6 million of net sales with Homelife in 2000 and $4.6 million of
net sales in 2001 prior to the bankruptcy filing. The outstanding receivables of
$2.5 million due from Homelife were written off to bad debt expense in 2001.
Inventories increased $0.6 million during 2001. In addition, our trade accounts
payable and accrued expenses also decreased during the year by $7.6 million, in
total, due to decreased purchases resulting from the decrease in sales.

         Our capital expenditures totaled $5.1 million for the 2001 fiscal year.
These capital expenditures consisted primarily of normal recurring capital
expenditures. We believe that annual capital expenditure limitations in our
Senior Credit Facility and the Indenture will not significantly inhibit us from
meeting our ongoing capital needs.

         The New Notes bear interest at the rate of 10.25% per annum, payable
semi-annually on March 15 and September 15, and are guaranteed by all of our
active domestic subsidiaries. As of December 29, 2001, the aggregate principal
amount outstanding of the New Notes was $150.0 million.

         The Senior Credit Facility, as amended, provided for loans of up to
$250.0 million, consisting of a Term Loan Facility of $190.0 million and a
Revolving Loan Facility of $60.0 million. Following the prepayments made in
fiscal 1999 from the proceeds of a private offering the Notes due in 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 all of our active domestic subsidiaries, and is
collateralized by substantially all of our assets. During fiscal 2001, we
voluntarily prepaid from excess cash flow $28.0 million of term loan obligations
under our Senior Credit Facility.

         The Senior Credit Facility was amended effective January 4, 2001 to
(among other amendments) increase the interest rate margin. Following the
amendment and a subsequent decrease in our interest rate margin in the third
quarter following a decline in our leverage ratio, borrowings under the Senior
Credit


                                       21
<PAGE>


Facility as of December 29, 2001 accrue interest at our choice of LIBOR or Prime
plus the following applicable interest rate margins as follows:

                                               LIBOR              Prime
                                         ------------------  -----------------
          Tranche A Term Loan                   2.75%               1.75%
          Tranche B Term Loan                   3.25%               2.25%
          Tranche C Term Loan                   3.50%               2.50%

         The weighted average interest rates per annum in effect at December 29,
2001 for the Tranche A term, Tranche B term and Tranche C term loans were 7.69%,
8.00% and 8.13%, respectively. As a result of our trailing four quarters
operating performance (Adjusted EBITDA) and debt balances as of December 29,
2001, our interest rate margin on LIBOR and Prime loans for the Tranche A term
loan and Revolving Loan Facility will decline by 25 basis points effective
April 3, 2002.

         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. As of December 29, 2001, 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 29, 2001                    ($ millions)             LIBOR Rate                  Period
------------------------------------------    --------------------    --------------------    -----------------------
<S>                                               <C>                 <C>                     <C>
Interest rate collar                                 $30.0               4.59% - 6.0%           1/20/99 - 1/20/02
Interest rate swap                                   $20.0                   5.17%              1/29/01 - 1/31/02
Interest rate collar                                 $30.0                3.0% - 6.0%            2/2/99 - 2/2/02
</TABLE>

         As of December 29, 2001, we had no borrowings and $56.0 million
available under the Revolving Credit Facility after giving effect to $4.0
million that was reserved for the Company's reimbursement obligations with
respect to outstanding letters of credit. As of December 29, 2001, we were in
compliance with our financial covenants under our Senior Credit Facility.

         Additionally, to minimize the impact of near term LIBOR base rate
increases, on November 29, 2001 the Company elected to set its interest rate at
the six-month LIBOR rate for approximately $99.6 million of its bank term loan
debt, which fixed the LIBOR base rate at rates ranging from 2.1875% to 2.25%
through May 29, 2002 for approximately 73% of 2001 year end floating rate debt.

         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. As of December 29,
2001, we were in compliance with our financial covenants.

         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). For the year ended December 29, 2001, a payment of $11.6 million is
required under this Consolidated Excess Cash Flow provision and accordingly is
included in our current maturities of long-term debt.

         Future principal debt payments are expected to be paid out of cash
flows from operations, borrowings on our current Revolving Credit Facility, and
future refinancing of our debt.



                                       22
<PAGE>


         The Company's contractual obligations and other commercial commitments
as of December 29, 2001 are summarized below:

<TABLE>
<CAPTION>

Contractual
obligations:                                                                                             Total
------------                    2002        2003        2004       2005        2006     Thereafter     Obligations
                                ----        ----        ----       ----        ----     ----------     -----------
<S>                          <C>        <C>         <C>         <C>        <C>         <C>           <C>
Long-term debt(1)              $12,147    $10,743     $33,425     $44,367    $30,674     $164,558      $ 295,914
Noncancellable
   operating leases             19,815     15,787      11,577      11,205      6,610       10,492         75,486
Distributions to
   Holdings(2)                   2,714      2,500       1,643         715          -            -          7,572
                               -------    -------     -------     -------    -------     --------      ---------

     Total                     $34,676    $29,030     $46,645     $56,287    $37,284     $175,050      $ 378,972
                               =======    =======     =======     ========   =======     ========      =========

Other commercial                                                                                          Total
commitments:                    2002        2003        2004       2005        2006     Thereafter     Commitments
------------                    ----        ----        ----       ----        ----     ----------     -----------
Standby letters of
  credit                       $ 3,995    $     -     $     -     $     -    $     -     $      -      $   3,995
                               =======    =======     =======     =======    =======     ========      =========
</TABLE>


(1)                    2002 includes payments required under the Consolidated
                       Excess Cash Flow provisions of the Senior Credit
                       Facility. Future years could result in additional
                       required payments under the Consolidated Excess Cash Flow
                       provisions of the Senior Credit Facility.

(2)                    Holdings has certain notes payable to former stockholders
                       for stock redemptions. The Company will be required to
                       distribute certain amounts to Holdings to pay such
                       obligations.

         The Company's customers include furniture stores, national mass
merchandisers, specialty sleep shops, department stores, rental stores, contract
customers and other stores. In the future, these retailers may consolidate,
undergo restructurings or reorganizations, or realign their affiliations, any of
which occurrences could decrease the number of stores that carry the Company's
products. These retailers are also subject to changes in consumer spending and
the overall state of the economy. Bankruptcies of our customers may have and
have had a material adverse impact on sales and financial condition. During
fiscal 2001, several of these retailers reported lower than expected sales and
profits. Any of these factors could have a material adverse effect on our
business, financial condition or results of operations.

         The Company's ability to make scheduled payments of principal, or to
pay the interest on our indebtedness, or to fund planned capital expenditures
will depend on the Company's future performance, which, to a certain extent, is
subject to general economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control. Based upon the current level of
operations and certain anticipated improvements, the Company believes that cash
flow from operations and available cash, together with available borrowings
under the Senior Credit Facility, will be adequate to meet our future liquidity
needs for the next several years. There can be no assurance that our business
will generate sufficient cash flow from operations, that anticipated revenue
growth and operating improvements will be realized or that future borrowings
will be available under the Senior Credit Facility in an amount sufficient to
enable us to service our indebtedness, including the New Notes, or to fund our
liquidity needs.



                                       23
<PAGE>


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 usually experience a seasonal fluctuation in profitability, with our gross
profit percentage during the first quarter of each year usually 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 and can negatively impact sales as
retailers reduce orders in anticipation of the new product line. However, we did
not close out our Beautyrest(R) 2000 line at the beginning of the year, and
consequently we did not experience a lower profit margin in the first quarter of
2001. We believe the close out of the Beautyrest(R) 2000 product line in the
fourth quarter of 2001 had a negative effect on fourth quarter sales.

ACCOUNTING PRONOUNCEMENTS

         In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, Business Combinations
("SFAS 141"), and Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets ("SFAS 142"). SFAS 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting and broadens the criteria for recording intangible
assets separate from goodwill. Recorded goodwill and intangibles will be
evaluated against this new criteria. SFAS 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. These items will not be amortized into results of operations, but
instead will be reviewed for impairment and written down through charges to
results of operations in the periods in which their recorded value of goodwill
is more than their fair value. The provisions of each statement, which also
apply to goodwill and intangible assets acquired prior to June 30, 2001, were
adopted by the Company on December 30, 2001. Amortization expense of $8.4
million, excluding the Gallery goodwill impairment, would have been $2.8
million under SFAS 142 for the year ended December 29, 2001. SFAS 142 requires
the Company to perform a transitional test of goodwill for impairment within
six months of adoption. While we have not yet completed our testing, we do not
expect any impairment charge as a result of the test.

         In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143"), effective for the Company in January 2002.
SFAS 143 addresses financial accounting and reporting of obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
with a corresponding increase in the carrying value of the related asset.
Entities should subsequently charge the retirement cost to expense using a
systematic and rational method over the related asset's useful life and adjust
the fair value of the liability resulting from the passage of time through
charges to interest expense. The Company does not expect the adoption of SFAS
143 to have a material impact on the Company's financial position or results of
operations.

         SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets ("SFAS 144"), supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"), and
the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions as it relates to the disposal of a segment of a business. SFAS 144
establishes a single accounting model for long-lived assets to be disposed of
based upon the framework of SFAS 121, and resolves significant implementation
issues of SFAS 121. SFAS 144 is effective for the Company as of January 2002.
The Company does not



                                       24
<PAGE>

expect the adoption of SFAS 144 to have a material impact on the Company's
financial position or results of operations.

         In April 2001, the Emerging Issues Task Force ("EITF") of the FASB
reached consensus on Issue No. 00-25, Vendor Income Statement Characterization
of Consideration to a Purchaser of the Vendors Products or Services ("EITF
00-25"). This issue provides guidance primarily on income statement

         classification of consideration from a vendor to a purchaser of the
vendor's products, including both customers and consumers. Generally, cash
consideration is to be classified as a reduction of revenue, unless specific
criteria are met regarding goods or services that the vendor may receive in
return for this consideration. The Company has historically classified certain
costs such as co-operative advertising, promotional money, and amortization of
supply agreements covered by the provisions of EITF 00-25 as selling expenses
which are recorded in selling, general and administrative expenses in the
accompanying Consolidated Statements of Operations. This consensus is effective
for the first quarter of fiscal year 2002 and the Company has adopted EITF 00-25
effective December 30, 2001. Upon adoption, both net sales and selling, general
and administrative expenses will be adjusted to decrease by $65.7 million and
$61.4 million for the years ended December 29, 2001 and December 30, 2000,
respectively. Additionally, net sales and selling, general and administrative
expenses will be adjusted to decrease by $17.2 million, $16.6 million, $16.7
million, and $15.2 million for the first, second, third and fourth quarters of
2001, respectively. As reclassifications, these changes will not affect the
Company's financial position or results of operations.

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 Item 1 "Business - Forward-Looking Statements" for additional information.

         We are exposed to market risk from changes in interest rates. In order
to address this risk 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 swap and
collars are derived from valuation models based upon recognized financial
principles and estimates about relevant future market conditions. As of December
29, 2001, the fair market value of the Company's interest rate swap and collars
was $0.4 million based upon quotes from the counterparties. The interest rate
protection agreements increased our interest expense by $0.4 million in 2001,
but 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 swap and collars, as well as on the
other terms of the swap and collars, which relate to interest payments and
exchange rates.

         As of December 29, 2001, 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 29, 2001                    ($ millions)             LIBOR Rate                  Period
------------------------------------------    --------------------    --------------------    -----------------------
<S>                                               <C>                 <C>                     <C>
Interest rate collar                                 $30.0               4.59% - 6.0%           1/20/99 - 1/20/02
Interest rate swap                                   $20.0                   5.17%              1/29/01 - 1/31/02
Interest rate collar                                 $30.0                3.0% - 6.0%            2/2/99 - 2/2/02
</TABLE>

         All other factors remaining unchanged, a hypothetical 10% 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 current or next fiscal year.



                                       25
<PAGE>

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 29, 2001 and December 30, 2000, and the results of its operations and
its cash flows for each of the three years in the period ended December 29,
2001, 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.




PricewaterhouseCoopers LLP

Atlanta, Georgia
March 6, 2002



                                       26
<PAGE>

<TABLE>
<CAPTION>

                        Simmons Company and Subsidiaries
                      Consolidated Statements of Operations
                                  (in thousands)

                                                                   Year ended       Year ended           Year ended
                                                                  December 29,      December 30,        December 25,
                                                                     2001              2000                 1999
                                                               ------------------ ------------------  -----------------
                                                                  (52 weeks)         (53 weeks)          (52 weeks)
<S>                                                               <C>                <C>                 <C>
Net sales                                                           $679,518           $720,767            $616,412
Cost of products sold                                                366,244            405,507             350,721
                                                                    --------           --------            --------
         Gross margin                                                313,274            315,260             265,691

Operating expenses:
     Selling, general and administrative expenses                    248,726            273,516             216,810
     Non-cash variable stock compensation expense                     14,847                574                   -
     ESOP expense                                                      2,816              7,117               7,169
     Management compensation - severance related                       2,065              3,777               6,600
     Amortization of intangibles                                      16,309              8,367               7,628
                                                                    --------           --------            --------
                                                                     284,763            293,351             238,207
                                                                    --------           --------            --------
         Operating income                                             28,511             21,909              27,484

     Interest expense, net                                            32,371             34,957              32,918
     Other expense, net                                                3,038              1,778               1,627
                                                                    --------           --------            --------
          Loss before income taxes and
              extraordinary item                                      (6,898)           (14,826)             (7,061)
Income tax benefit                                                    (6,273)            (3,883)               (105)
                                                                    --------           --------            --------
          Loss before extraordinary item                                (625)           (10,943)             (6,956)
Extraordinary loss from early extinguishment
      of debt, net of income tax benefit of $367
      and $1,095                                                        (507)                 -              (2,173)
                                                                    --------           --------            --------
           Net loss                                                   (1,132)           (10,943)             (9,129)
                                                                    --------           --------            --------

Other comprehensive income (loss):
     Foreign currency translation adjustment                            (125)               (20)                 42
                                                                    --------           --------            --------
          Comprehensive loss                                        $ (1,257)         $ (10,963)          $  (9,087)
                                                                    ========          =========           =========
</TABLE>




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



                                       27
<PAGE>

<TABLE>
<CAPTION>

                        Simmons Company and Subsidiaries
                           Consolidated Balance Sheets
                      (in thousands, except share amounts)

                                                                                      December 29,       December 30,
                                                                                          2001               2000
                                                                                    -----------------  ------------------
<S>                                                                                       <C>                <C>
                                      ASSETS
                                      ------

Current assets:
     Cash and cash equivalents                                                            $   1,209          $   3,061
     Accounts receivable, less allowances for doubtful
           receivables, discounts, returns and allowances
           of $4,695 and $9,426, respectively                                                70,896             88,116
     Inventories                                                                             24,400             23,838
     Deferred income taxes                                                                    5,296             12,245
     Other current assets                                                                    15,415             14,890
                                                                                          ---------          ---------
          Total current assets                                                              117,216            142,150
                                                                                          ---------          ---------

Property, plant and equipment, net                                                           45,276             52,057
Intangible assets, net                                                                      176,443            189,477
Deferred income taxes                                                                        34,706             19,565
Other assets                                                                                 12,025             13,612
                                                                                          ---------          ---------
                                                                                           $385,666           $416,861
                                                                                          =========          =========

                       LIABILITIES AND STOCKHOLDER'S DEFICIT
                       -------------------------------------

Current liabilities:
     Current maturities of long-term debt                                                $   12,147          $   1,343
     Accounts payable                                                                        29,306             35,832
     Accrued liabilities                                                                     46,765             47,800
                                                                                          ---------          ---------
          Total current liabilities                                                          88,218             84,975
                                                                                          ---------          ---------

Non-current liabilities:
     Long-term debt                                                                         283,767            323,931
     Postretirement benefit obligations other than pensions                                   4,221              8,579
     Accrued stock compensation                                                              12,324                325
     Other                                                                                   11,375             11,629
                                                                                          ---------          ---------
          Total liabilities                                                                 399,905            429,439
                                                                                          ---------          ---------

Commitments and contingencies
Redemption obligation -- ESOP, net of related unearned
     compensation of $0 and $1,073, respectively                                             44,079             23,824
Stockholder's deficit:
     Common stock, $.01 par value; 50,000,000 shares authorized,
          31,964,452 shares issued and outstanding                                              320                320
     Accumulated deficit                                                                    (58,513)           (36,658)
     Accumulated other comprehensive loss                                                      (125)               (64)
                                                                                          ---------          ---------
          Total stockholder's deficit                                                       (58,318)           (36,402)
                                                                                          ---------          ---------
                                                                                          $ 385,666          $ 416,861
                                                                                          =========          =========
</TABLE>


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



                                       28
<PAGE>
<TABLE>
<CAPTION>

                        Simmons Company and Subsidiaries
           Consolidated Statements of Changes in Stockholder's Deficit
                       (in thousands, except share amounts)


                                                                                              Accumulated
                                                              Additional                         Other
                                      Common       Common       Paid-In      Accumulated     Comprehensive          Total
                                      Shares        Stock       Capital        Deficit       (Loss) Income      Stockholder's
                                                                                                                   Deficit
                                   -------------  ----------  ------------  ---------------  ---------------    ---------------
<S>                             <C>             <C>          <C>            <C>             <C>                 <C>
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
                                                                            -----------      ----------         -----------
   Comprehensive income                                                          (9,129)             42              (9,087)
   Excess of ESOP expense at fair
        market value over cost               -           -         1,949              -              -                1,949
   Distributions 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)
                                                                            -----------      ----------         -----------
   Comprehensive loss                                                           (10,943)            (64)            (10,963)
   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)
   Distributions to Holdings                 -           -          (981)        (1,723)              -              (2,704)
                                    ----------    --------    -----------   -----------      ----------         -----------
December 30, 2000                   31,964,452         320             -        (36,658)            (64)            (36,402)
   Net loss                                  -           -             -         (1,132)              -              (1,132)
   Other comprehensive loss:
        Change in foreign currency
             translation                     -           -             -              -             (61)                (61)
                                                                            -----------           -----            --------
   Comprehensive loss                                                            (1,132)            (61)             (1,193)
   Excess of ESOP expense at fair
        market value over cost               -           -         1,743              -               -               1,743
   Increase in redemption
        obligation - ESOP based on
        fair market value                    -           -        (1,456)       (17,726)              -             (19,182)
   Distributions to Holdings                 -           -          (287)        (2,997)              -              (3,284)
                                    ----------    --------    -----------   -----------      ----------         -----------
December 29, 2001                   31,964,452        $320    $         -      $(58,513)          $(125)           $(58,318)
                                    ==========    ========    ===========   ===========      ==========         ===========
</TABLE>




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



                                       29
<PAGE>

<TABLE>
<CAPTION>

                        Simmons Company and Subsidiaries
                      Consolidated Statements of Cash Flows
                                  (in thousands)

                                                                   Year ended        Year ended          Year ended
                                                                  December 29,    December 30, 2000     December 25,
                                                                      2001                                  1999
                                                                 ---------------- ------------------  -----------------
<S>                                                                  <C>                <C>                  <C>
Cash flows from operating activities:
Net loss                                                             $  (1,132)         $ (10,943)           $ (9,129)
Adjustments to reconcile net loss to
     net cash provided by operating activities:
       Depreciation and amortization                                    25,479             22,090              22,612
       Non-cash variable stock compensation expense                     14,847                574                   -
       Goodwill impairment charge                                        7,882                  -                   -
       ESOP expense                                                      2,816              7,117               7,169
       Provision for doubtful accounts                                   6,006             12,616               7,597
       Provision for deferred income taxes                              (8,192)            (4,319)             (1,252)
       Non-cash interest expense                                         2,763              1,801               1,864
       Gain on settlement of postretirement benefits                    (2,137)                 -                   -
       Non-cash portion of extraordinary loss                              507                  -               2,173
       Other, net                                                         (754)              (478)               (375)
Net changes in operating assets and liabilities:
       Accounts receivable                                               8,526            (20,822)            (23,085)
       Inventories                                                         445             (4,674)              1,298
       Other current assets                                             (4,729)            (7,028)                381
       Accounts payable                                                 (6,926)            19,848             (13,966)
       Accrued liabilities                                              (4,285)             4,510               5,185
       Settlement of retiree health care obligation                     (2,250)                 -                   -
       Other, net                                                          (96)               332                 452
                                                                       -------           --------           ---------
Cash provided by operating activities                                   38,770             20,624                 924
                                                                       -------           --------           ---------

Cash flows from investing activities:
       Purchases of property, plant and equipment                       (5,099)           (13,160)             (9,041)
       Purchase of intangible assets                                    (2,499)                 -                   -
       Proceeds from disposals of property, plant and equipment            395                  -                   -
       Issuance of notes receivable, net                                     -                  -              (4,000)
                                                                       -------            -------              ------
Net cash used in investing activities                                   (7,203)           (13,160)            (13,041)
                                                                       -------            -------             -------

Cash flows from financing activities:
       Distributions to Holdings                                        (3,284)            (2,704)             (3,893)
       Payments of Senior Credit Facility, net                         (28,796)            (8,165)            (23,972)
       Payments on Senior Bridge Loans                                       -                  -             (75,000)
       Payments on Junior Simmons Notes                                      -                  -             (30,391)
       Proceeds of 10.25% Senior Sub Notes due 2009                          -                  -             150,000
       Payments on other long-term borrowings                             (564)              (544)               (514)
       Proceeds of sale/leaseback transaction                                -              2,909                   -
       Payments of financing costs                                        (714)              (412)             (5,626)
                                                                     ---------           --------             -------
Net cash provided by (used in) financing activities                    (33,358)            (8,916)             10,604
                                                                     ---------           --------             -------
Net effect of exchange rate changes on cash                                (61)               (20)                 42
                                                                     ---------           --------             -------
Decrease in cash and cash equivalents                                   (1,852)            (1,472)             (1,471)
Cash and cash equivalents, beginning of period                           3,061              4,533               6,004
                                                                     ---------           --------            --------
Cash and cash equivalents, end of period                             $   1,209           $  3,061            $  4,533
                                                                     =========           ========            ========

Supplemental cash flow information:
       Cash paid for interest                                        $  27,022           $ 34,996            $ 24,985
                                                                     =========           ========            ========
       Cash paid for income taxes                                    $   1,647           $    147            $  4,985
                                                                     =========           ========            ========
       Acquisition of business in exchange for receivables           $       -           $ 15,449            $      -
                                                                     =========           ========            ========
</TABLE>

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



                                       30
<PAGE>


                        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 of America. The Company manufactures
mattresses, foundations, bedding frames and sleep accessories through its
wholly-owned subsidiaries, The Simmons Manufacturing Co., LLC and Simmons
Caribbean Bedding, Inc. Simmons and its subsidiaries sell through all major
distribution channels, including furniture stores, specialty sleep shops,
department stores, rental stores and warehouse showrooms. The Company and its
subsidiaries manufacture and supply conventional bedding to over 7,700 retail
outlets, representing approximately 3,100 customers.

         Simmons also sells bedding products to certain institutional customers,
such as schools and government entities, and to the hospitality industry through
its wholly-owned subsidiary, Simmons Contract Sales, LLC, and licenses its
trademark, patents and other intellectual property to various domestic and
foreign manufacturers through its wholly-owned subsidiary, Dreamwell, Ltd.

         Additionally, the Company operates 22 retail outlet stores located
throughout the United States of America through the Company's wholly-owned
subsidiary, World of Sleep Outlets, LLC, and 36 retail mattress stores located
in Southern California through the Company's wholly-owned subsidiary, Gallery
Corp.

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. As a result of the Recapitalization, Simmons
Holdings, LLC, an entity controlled by funds affiliated with Fenway, acquired
75.1% of the outstanding voting shares of Holdings, and management, the ESOP and
Investcorp retained approximately 5.9%, 13.7% and 5.3%, respectively, of the
outstanding shares of Holdings.

2.       PRINCIPAL ACCOUNTING POLICIES

Critical Accounting Policies

         From the Company's principal accounting policies, the following have
been identified as critical accounting policies:

        -         estimating valuation allowances and accrued liabilities,
                  specifically the warranty accrual and the allowance for
                  doubtful accounts;

        -         income taxes; and

        -         impairment of long-lived assets.



                                       31
<PAGE>

Principles of Consolidation

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

Use of Estimates and Reclassifications

         The consolidated financial statements of the Company have been prepared
in accordance with accounting principles generally accepted in the United States
of America. 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. During 2001, the Company began to classify
certain revenues from its retail operations in the revenue category on the
Consolidated Statement of Operations. In prior periods, such revenues had been
classified as a reduction of selling, general and administrative expense. Such
amounts were insignificant in prior periods and do not affect operating income
in any period. Certain amounts in the 2000 and 1999 financial statements and
related footnotes have been reclassified to conform with the current
presentation.

Fiscal Year

         The Company operates on a 52/53 week fiscal year ending on the last
Saturday in December. Fiscal years 2001 and 1999 comprised 52 weeks and fiscal
year 2000 comprised 53 weeks.

Cash and Cash Equivalents

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

Inventories

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

Supply Agreements

         The Company from time to time enters into long-term supply agreements
with its customers. Any initial cash outlay by the Company is capitalized and
amortized to selling, general and administrative expenses over the life of the
contract and is ratably recoverable upon contract termination. Such capitalized
amounts are included in "Other current assets" and "Other assets" in the
Company's balance sheet. Amortization expense related to these contracts was
$4.2 million, $2.5 million, and $4.7 million in 2001, 2000, and 1999,
respectively.

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



                                       32
<PAGE>

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

Amortization of Intangibles

         The costs of patents acquired are amortized using the straight-line
method over the estimated economic lives of the respective patents, which are
generally 17 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 of
Gallery Corp. in 2000.

Impairment of Long-Lived Assets

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

         As discussed in note 6 to the consolidated financial statements, the
Company recognized an impairment charge of $7.9 million in 2001. The Company
believes that no additional impairment of goodwill existed as of December 29,
2001 or December 30, 2000.

Revenue Recognition

         The Company recognizes revenue, net of estimated returns, when title
and risk of ownership passes, which is generally upon delivery of shipments.
Sales are presented net of cash discounts and rebates. The Company provides an
allowance for bad debts for estimated uncollectible accounts receivable, which
is included in selling, general and administrative expenses in the accompanying
Consolidated Statements of Operations.

Product Delivery Costs

         Product delivery costs are billed to our customers and are included as
a component of net sales. The Company incurred $30.9 million, $30.4 million, and
$23.7 million in shipping and handling costs associated with the delivery of
finished mattress products to its customers in 2001, 2000 and 1999,
respectively. These costs are included in selling, general and administrative
expenses in the accompanying Consolidated Statements of Operations.




                                       33
<PAGE>

Employee Stock Ownership Plan

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

         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 - ESOP as of December 29,
2001 and December 30, 2000, respectively. In 2001, this obligation increased
$19.2 million as a result of the increase in the underlying fair value of
Holdings common stock. For 2000, the Company has classified a proportional
amount of unearned compensation under ESOP in the same manner.

Stock Option Plans

         The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principle Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25") and related interpretations including Financial
Accounting Standards Board Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation (an interpretation of APB No. 25)
issued in March 2000, to account for its employee stock option plans. Under this
method, compensation expense is recorded over the service period based upon the
intrinsic value of the options as they are earned by the employees. Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation ("SFAS 123") established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS 123, the Company has adopted the
disclosure-only provisions and continues to apply the intrinsic value-based
method of accounting as described above. The accounting for awards of
stock-based compensation where an employee can compel the entity to settle the
award by transferring cash or other assets to employees rather than by issuing
equity instruments is substantially the same under SFAS 123 and APB 25.
Accordingly, SFAS 123 pro-forma disclosures are not presented.

Foreign Currency

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

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 $1.5 million, $1.0 million, and $0.5 million for 2001, 2000, and
1999, respectively.

Rebates

         The Company provides volume rebates to certain customers for the
achievement of various purchase volume levels. The Company recognizes a
liability for the rebate at the point of revenue



                                       34
<PAGE>

recognition for the underlying revenue transactions that result in progress by
the customer toward earning the rebate. Measurement of the liability is based on
the estimated number of customers that will ultimately earn and claim the
rebates or refunds under the offer. Rebates were $10.6 million, $6.3 million and
$3.1 million in 2001, 2000 and 1999, respectively, and are included as a
reduction of sales in the accompanying Consolidated Statements of Operations.

Advertising Costs

         The Company records the cost of advertising, including co-op
advertising, as an expense when incurred or no later than when the advertisement
appears or the event is run. Advertising expense was $72.5 million, $83.8
million, and $65.8 million for 2001, 2000, and 1999, respectively, and is
included as a component of selling, general and administrative expenses in the
accompanying Consolidated Statements of Operations.

Income Taxes

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

Warranties

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

Environmental Costs

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

Derivative Instruments

         Effective January 2001, the Company adopted SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities ("SFAS 133"). This statement,
as amended, 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. The cumulative effect
upon prior years of adopting SFAS 133 was immaterial.



                                       35
<PAGE>


Significant Concentrations of Risk

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

         The Company manufactures and markets sleep products, including
mattresses and box springs to retail establishments primarily in the United
States of America. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not, in most cases, require
collateral. Sales to the Company's five largest customers aggregated
approximately 17%, 21%, and 23% of total sales for each of 2001, 2000, and 1999,
respectively, and for 2001 and 2000 no single customer accounted for over 10% of
the Company's net sales. In 1999, the Company's largest customer accounted for
11% of net sales.

         Purchases of raw materials from one vendor represented approximately
20%, 20%, and 22% of cost of products sold for 2001, 2000, and 1999,
respectively. Additionally, the Company purchases substantially all of its foam
from one supplier. Such purchases represented approximately 14%, 13%, and 13% of
cost of products sold for 2001, 2000, and 1999, respectively. The Company also
primarily utilizes two third party logistics providers which, in the aggregate,
accounted for 63%, 60%, and 69% of outbound shipments in 2001, 2000 and 1999,
respectively.

Accounting Pronouncements

         In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, Business Combinations
("SFAS 141"), and Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets ("SFAS 142"). SFAS 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles
will be evaluated against this new criteria. SFAS 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. These items will not be amortized into results of operations, but
instead will be reviewed for impairment and written down through charges to
results of operations in the periods in which their recorded value of goodwill
is more than their fair value. The provisions of each statement, which also
apply to goodwill and intangible assets acquired prior to June 30, 2001, were
adopted by the Company on December 30, 2001. Amortization expense of $8.4
million, excluding the Gallery Corp. goodwill impairment, would have been $2.8
million under SFAS 142 for the year ended December 29, 2001. SFAS 142 requires
the Company to perform a transitional test of goodwill for impairment within
six months of adoption. While we have not yet completed our testing, we do not
expect any impairment charge as a result of the test.

         In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143"), effective for the Company in January 2002.
SFAS 143 addresses financial accounting and reporting of obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
with a corresponding increase in the carrying value of the related asset.
Entities should subsequently charge the retirement cost to expense using a
systematic and rational method over the related asset's useful life and adjust
the fair value of the liability resulting from the passage of time through
charges to interest expense. The Company does not expect the adoption of SFAS
143 to have a material impact on the Company's financial position or results of
operations.




                                       36
<PAGE>


         SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets ("SFAS 144"), supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"), and
the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions as it relates to the disposal of a segment of a business. SFAS 144
establishes a single accounting model for long-lived assets to be disposed of
based upon the framework of SFAS 121, and resolves significant implementation
issues of SFAS 121. SFAS 144 is effective for the Company January 2002. The
Company does not expect the adoption of SFAS 144 to have a material impact on
the Company's financial position or results of operations.

         In April 2001, the Emerging Issues Task Force ("EITF") of the FASB
reached consensus on Issue No. 00-25, Vendor Income Statement Characterization
of Consideration to a Purchaser of the Vendors Products or Services ("EITF
00-25"). This issue provides guidance primarily on income statement
classification of consideration from a vendor to a purchaser of the vendor's
products, including both customers and consumers. Generally, cash consideration
is to be classified as a reduction of revenue, unless specific criteria are met
regarding goods or services that the vendor may receive in return for this
consideration. The Company has historically classified certain costs such as
co-operative advertising, promotional money, and amortization of supply
agreements covered by the provisions of EITF 00-25 as selling expenses which are
recorded in selling, general and administrative expenses in the accompanying
Consolidated Statements of Operations. This consensus is effective for the first
quarter of fiscal year 2002 and the Company has adopted EITF 00-25 effective
December 30, 2001. Upon adoption, both net sales and selling, general and
administrative expenses will be adjusted to decrease by $65.7 million and $61.4
million for 2001 and 2000, respectively. Additionally, net sales and selling,
general and administrative expenses will be adjusted to decrease by $17.2
million, $16.6 million, $16.7 million, and $15.2 million for the first, second,
third and fourth quarters of 2001, respectively. As reclassifications, these
changes will not affect the Company's financial position or 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 Recapitalization,
of the Company through their participation in the ESOP. Through 2002, the
Company will make 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.

         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, the ESOP trustee, in a suspense account and are released
to the ESOP participants' accounts based on debt service. 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. In 2001, 988,124 shares were released to participant's accounts for
the 2000 ESOP allocation. As of December 29, 2001, 298,006 shares of Holdings
common stock have been committed to be released in 2002. There are no remaining
unallocated shares of Holdings common stock in the ESOP. As a result, there
will not be any new participants in the ESOP after the 2001 ESOP allocation.

         Through 2001, employees were eligible to participate in the ESOP
following the date when the employee had completed at least one year of service
and had reached age 21. All employees of the Company, except employees who are
covered by a negotiated collective bargaining agreement (unless the



                                       37
<PAGE>

collective bargaining agreement provides for participation in the ESOP) or who
are nonresident aliens, are covered by the ESOP. Approximately 48% of the
Company's full-time employees are participants in the 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. Holdings repurchased approximately 25,972 shares
and 9,116 shares from ESOP participants in 2001 and 2000, respectively, at an
average price of $8.2457 and $6.7315 per share, respectively. The ESOP held
3,443,645 and 3,469,617 shares as of December 29, 2001 and December 30, 2000,
respectively.

4.       INVENTORIES

         Inventories consisted of the following as of December 29, 2001 and
December 30, 2000:

<TABLE>
<CAPTION>

                                                                        2001                2000
                                                                  ------------------  -----------------
<S>                                                                    <C>            <C>
     Raw materials                                                     $13,263        $14,900
     Work-in-progress                                                    1,029          1,626
     Finished goods                                                     10,108          7,312
                                                                       -------        -------
                                                                       $24,400        $23,838
                                                                        ======         ======
</TABLE>

5.       PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consisted of the following as of December
29, 2001 and December 30, 2000:

<TABLE>
<CAPTION>

                                                                        2001                2000
                                                                  ------------------  -----------------
<S>                                                                <C>                <C>
     Land, buildings and improvements                                 $20,714            $18,989
     Machinery and equipment                                           68,106             61,864
     Construction in progress                                             820              2,198
                                                                      -------            -------
                                                                       89,640             83,051
     Less accumulated depreciation                                    (44,364)           (30,994)
                                                                      -------            -------
                                                                      $45,276            $52,057
                                                                      =======            =======
</TABLE>

         Depreciation expense for 2001, 2000, and 1999 was $12.8 million, $11.2
million, and $10.3 million, respectively.

6.       INTANGIBLE ASSETS

         Intangible assets consisted of the following as of December 29, 2001
and December 30, 2000:

<TABLE>
<CAPTION>

                                                                        2001                2000
                                                                  ------------------  -----------------
<S>                                                                   <C>             <C>
     Goodwill and trademarks                                          $211,785        $209,396
     Patents                                                            17,455          17,029
                                                                      --------        --------
                                                                       229,240         226,425
     Less accumulated amortization                                     (52,797)        (36,948)
                                                                      --------        --------
                                                                      $176,443        $189,477
                                                                      ========        ========
</TABLE>

         In connection with the acquisition of substantially all of the retail
store locations and other assets of H&H Sleep Centers, Inc. ("H&H") and CBMC
Corp. ("CBMC") by Gallery Corp. ("Gallery") in




                                       38
<PAGE>

2000, we recorded $16.1 million of goodwill. This represented the excess of the
purchase price over the fair value of assets acquired and is being amortized on
a straight line basis over a twenty year period. Due to various Gallery
operating factors in the fourth quarter of 2001, the Company reviewed the
carrying value of Gallery's goodwill in accordance with our accounting policies
and recorded an impairment charge of $7.9 million to write down the Gallery
goodwill to the estimated market value. The impairment charge is included in
amortization of goodwill in the accompanying Consolidated Statements of
Operations.

         Amortization expense for goodwill and patents, including the Gallery
impairment charge, was $16.3 million, $8.4 million, and $7.6 million for 2001,
2000, and 1999, respectively.

7.       OTHER ASSETS

         Other assets consisted of the following as of December 29, 2001 and
December 30, 2000:

<TABLE>
<CAPTION>

                                                                        2001                2000
                                                                  ------------------  -----------------
<S>                                                                     <C>             <C>
     Debt issuance costs, net of accumulated
          amortization of $6,135 and $3,283, respectively              $8,380         $10,971
     Long-term receivables                                              2,200           2,200
     Other                                                              1,445             441
                                                                     --------         -------
                                                                      $12,025         $13,612
                                                                     ========         =======
</TABLE>

         Amortization expense, calculated using the effective interest rate, of
$2.8 million, $1.8 million, and $1.4 million for 2001, 2000, and 1999,
respectively, is included as a non-cash component of interest expense in the
accompanying Consolidated Statements of Operations. As a result of prepaying
amounts due under our Senior Credit Facility from excess cash flow generated
from operations, we wrote off the debt issuance costs associated with this
portion of the debt as an extraordinary item of $0.5 million (net of income tax
benefit of $0.4 million). See note 13 to the consolidated financial statements
for further information.

8.       ACCRUED LIABILITIES

         Accrued liabilities consisted of the following as of December 29, 2001
and December 30, 2000:

                                                2001                 2000
                                               -------             -------
     Accrued wages and benefits                $13,410             $10,597
     Accrued advertising and incentives         16,783              21,469
     Accrued interest                            5,785               5,284
     Other accrued expenses                     10,787              10,450
                                               --------            --------
                                               $46,765             $47,800
                                                ======              ======




                                       39
<PAGE>


9.       LONG-TERM DEBT

         Long-term debt consisted of the following as of December 29, 2001 and
December 30, 2000:

<TABLE>
<CAPTION>

                                                                        2001                2000
                                                                  ------------------  -----------------
<S>                                                              <C>                 <C>
    Senior Credit Facility:
          Tranche A Term Loan                                           $  30,061           $  47,061
          Tranche B Term Loan                                              65,762              67,553
          Tranche C Term Loan                                              33,249              43,249
                                                                         ---------           --------
               Total Senior Credit Facility                               129,072             157,863
     Industrial Revenue Bonds, 7.00%, due 2017                              9,700               9,700
     Industrial Revenue Bonds, 4.45%, due 2016                              4,400               4,600
     Banco Santander loan, 4.11%, due 2013                                  2,524               2,755
     10.25% Series B Senior Subordinated Notes due 2009                   150,000             150,000
     Other, including capital lease obligations                               218                 356
                                                                       ----------          ----------
                                                                          295,914             325,274
     Less current portion                                                 (12,147)             (1,343)
                                                                        ---------            --------
                                                                         $283,767            $323,931
                                                                          =======             =======
</TABLE>

         The 10.25% Series B Senior Subordinated Notes ("New Notes") bear
interest at the rate of 10.25% per annum and are payable semi-annually in cash
in arrears on March 15 and September 15. The New Notes are subordinated in right
of payment to all existing and future senior indebtedness of the Company.

         The New Notes are redeemable at the option of the Company on and after
March 15, 2004 at prices decreasing from 105.125% of the principal amount
thereof to par on March 15, 2007 and thereafter. The Company is required to
redeem the outstanding notes based upon certain events as described in the
indenture for the New Notes.

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

         The New Notes are fully and unconditionally guaranteed on an unsecured,
senior subordinated basis by all of our active domestic subsidiaries. Exclusive
of allocation of the debt and related interest of the Company, the total sales,
total assets, cash flow from operations, net income from continuing operations
before income taxes, and stockholder's equity of the two active non-guarantor
international subsidiaries was $11.2 million, $7.9 million, $2.3 million, $1.3
million, and $6.1 million, respectively, as of and for the year ended December
29, 2001.

         The Senior Credit Facility, as amended, provided for loans of up to
$250.0 million, consisting of a Term Loan Facility of $190.0 million and a
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 in 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 all of our
domestic active subsidiaries and is collateralized by substantially all of our
assets.

         The Senior Credit Facility was amended effective January 4, 2001 to
(among other amendments) increase the interest rate margin. Following the
amendment and subsequent decrease in our margin in the third quarter following a
decline in our leverage ratio, borrowings under the Senior Credit Facility



                                       40
<PAGE>

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                   2.75%               1.75%
          Tranche B Term Loan                   3.25%               2.25%
          Tranche C Term Loan                   3.50%               2.50%

         The weighted average interest rates per annum in effect at December 29,
2001 for the Tranche A term, Tranche B term, and Tranche C term loans were
7.69%, 8.00% and 8.13%, respectively. As a result of trailing four quarters
operating performance (EBITDA) and debt balances at December 29, 2001, our
interest rate margin on LIBOR and Prime loans for the Tranche A term loan will
decline by 25 basis points effective April 3, 2002.

         The use of interest rate risk management instruments, such as collars
and swaps, is required under the terms of the Senior Credit Facility. Interest
rate protection agreements increased our interest expense by $0.4 million in
2001 and reduced our interest expense by $0.3 million in 2000. Our interest
expense in 1999 was not impacted by the agreements.

         As of December 29, 2001, 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 29, 2001                    ($ millions)             LIBOR Rate                  Period
------------------------------------------    --------------------    --------------------    -----------------------
<S>                                                  <C>               <C>                    <C>
Interest rate collar                                 $30.0               4.59% - 6.00%          1/20/99 - 1/20/02
Interest rate swap                                   $20.0                   5.17%              1/29/01 - 1/31/02
Interest rate collar                                 $30.0               3.00% - 6.00%           2/2/99 - 2/2/02
</TABLE>

         Additionally, to minimize the impact of near term LIBOR base rate
increases, on November 29, 2001 the Company elected to set its interest rate at
the six-month LIBOR rate for approximately $99.6 million of its bank term loan
debt which fixed the LIBOR base rate at rates ranging from 2.1875% to 2.25%
through May 29, 2002 for approximately 73% of 2001 year end floating rate debt.

         As of December 29, 2001, we had no borrowings and $56.0 million
available under our Revolving Credit Facility after giving effect to $4.0
million that was reserved for the Company's reimbursement obligations with
respect to outstanding letters of credit. 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. As of December 29,
2001, we were in compliance with our financial covenants.



                                       41
<PAGE>
         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 29, 2001, an $11.6 million payment will be required under the
Consolidated Excess Cash Flow provision by March 30, 2002 and, accordingly, is
included in current maturities of long-term debt. During the fiscal year 2001,
we prepaid $28.0 million of term loan obligations under our Senior Credit
Agreement from operating cash flows.

Future maturities of long-term debt as of December 29, 2001 are as follows:

                          2002                                   $ 12,147
                          2003                                     10,743
                          2004                                     33,425
                          2005                                     44,367
                          2006                                     30,674
                          Thereafter                              164,558
                                                                  -------
                                                                 $295,914
                                                                  =======

         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 $151.5 million as of December 29, 2001. All
other long-term debt approximates fair value as of December 29, 2001.

10.      DERIVATIVE INSTRUMENTS

         The Company has periodically used certain interest rate swaps and
collars to manage our interest rate risk. 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 swaps and collars as of December 29, 2001 was
approximately $0.4 million based upon quotes from counterparties. The swaps and
collars do not qualify for hedge accounting, therefore, the Company recorded a
$0.1 million loss to write these derivative instruments to market value. This
loss is included in other, net in the accompanying 2001 Consolidated Statement
of Operations. The cumulative effect upon prior years of adopting SFAS 133 was
immaterial.

11.      LICENSING

         The Company licenses internationally the Simmons(R) name and many of
our other trademarks, processes and patents generally on an exclusive long-term
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 twenty foreign licensees and
nine foreign sub-licensees with operations in Argentina, Australia, Brazil,
Canada, Chile, Colombia, Dominican Republic, Ecuador, El Salvador, France, Hong
Kong, Israel, Italy, Japan, Korea, Mexico, Morocco, New Zealand, Oman, Panama,
Singapore, South Africa, Sweden, Taiwan, United Kingdom, Venezuela, and the West
Indies. These foreign licensees and sub-licensees have rights to sell Simmons
branded products in over 100 countries.

         Additionally, we have 12 domestic third-party licensees. Some of these
licensees manufacture and distribute juvenile bedding, healthcare related
bedding and furniture, and non-bedding upholstered


                                       42
<PAGE>
furniture, primarily on long-term or automatically renewable terms.
Additionally, we have licensed the Simmons(R) name and other trademarks,
generally for limited terms, to manufacturers of down comforters, synthetic
comforter sets, pillows, bed pads, blankets, futons, office chairs, specialty
sleep items, massage recliners and pet beds.

         In 2001, 2000 and 1999 our licensing agreements as a whole generated
royalties of approximately $8.6 million, $8.0 million and $7.1 million,
respectively, which are accounted for as a reduction of selling, general and
administrative expenses in the accompanying Consolidated Statements of
Operations.

12.      OTHER EXPENSE, NET

<TABLE>
<CAPTION>

         Other expense, net is comprised of the following:

                                                         2001               2000               1999
                                                   -----------------  ------------------ ------------------
<S>                                                   <C>                <C>               <C>
     Management advisory fee paid to a                   $2,160             $1,778            $1,505
          related party
     Other non-operating expenses                           878                  -               122
                                                         ------             ------            ------
                                                         $3,038             $1,778            $1,627
                                                         ======             ======            ======
</TABLE>


13.      EXTRAORDINARY ITEMS

         In the fourth quarter of 2001, we recorded a $0.5 million (net of
income tax benefit of $0.4 million) charge representing a portion of the
unamortized debt issuance costs related to certain long-term obligations that
were partially prepaid from excess cash flow generated from operations.

         In the first quarter of 1999, we recorded a $2.2 million (net of income
tax benefit of $1.1 million) charge representing the remaining unamortized debt
issuance costs related to certain long-term obligations repaid in connection
with the March 1999 Refinancing.

14.      LEASES

         The Company leases certain facilities and equipment under operating
leases. Our commitments under capital leases are not material for separate
disclosure. Rent expense was $21.2 million, $15.7 million, and $14.3 million for
2001, 2000, and 1999, 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 29, 2001:

                          2002                                    $19,815
                          2003                                     15,787
                          2004                                     11,577
                          2005                                     11,205
                          2006                                      6,610
                          Thereafter                               10,492
                                                                   ------
                                                                  $75,486
                                                                  =======

         The Company has the option to renew certain plant operating leases,
with the longest renewal period extending through 2018. Most of the operating
leases provide for increased rent through increases in general price levels.

                                       43
<PAGE>

15.      STOCK OPTION PLANS

         In 1996, the board of directors established a management stock
incentive plan (the "1996 Plan"), which provided for the granting of
non-qualified options for Class C common stock of 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 Recapitalization, the
vesting of the issued and outstanding stock options under the 1996 plan was
accelerated.

         In 1996, the Company also 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
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.

         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 non-qualified. 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,
expire after ten years, and vest ratably over a four or five year period based
upon the achievement of an annual Adjusted EBITDA target, as defined in the 1999
Plan, or as otherwise established by the Compensation Committee of the Board of
Directors. The 1999 Plan permits the Compensation Committee to grant other stock
options on terms and conditions established by the Committee. The incentive plan
provides for issuance of regular options ("Regular Options") and superincentive
options ("Superincentive Options"). Regular Options are subject to certain time
and performance vesting restrictions and Superincentive Options vest only in
connection with the consummation of a change of control or initial public
offering of Holdings and the attainment by shareholders affiliated with Fenway
of certain internal rate of return objectives. 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.

         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 non-cash variable
stock compensation expense for changes in the intrinsic value of vested Regular
Options under the 1996 and 1999 Plans in a manner similar to a stock
appreciation right. The accounting for awards of stock-based compensation where
an employee can compel the entity to settle the award by transferring cash or
other assets to employees rather than by issuing equity instruments is
substantially the same under SFAS 123 and APB 25. Accordingly, SFAS 123
pro-forma disclosures are not presented.

         The Company recorded non-cash variable stock compensation expense of
approximately $14.8 million, $0.6 million and $0 related to Regular Options
during 2001, 2000 and 1999, respectively.



                                       44
<PAGE>


         Stock option activity (all non-qualified) during 2001, 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
     Granted                                                             503,878        $7.67
     Forfeited                                                          (740,861)       $6.73
     Cancelled                                                          (148,371)       $6.16
                                                                       ---------        -----

     Shares outstanding at December 29, 2001                           5,518,942        $6.58
                                                                       =========        =====

     Shares exercisable at December 29, 2001                           1,837,872        $6.06
                                                                       =========        =====
</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 Prices    Outstanding at         Remaining         Weighted-Average       Exercisable at     Weighted-Average
                    Dec. 29, 2001      Contractual Life       Exercise Price         Dec. 29, 2001      Exercise Price
------------------ ----------------- ---------------------- --------------------    ---------------- ---------------------
<S>                    <C>                <C>                  <C>                    <C>               <C>
  $2.65 - 3.57             325,564            4.2                  $2.76                  325,564           $2.76
  $5.15 - 7.15           5,043,378            8.3                  $6.76                1,493,558           $6.74
      $8.95                150,000            9.5                  $8.95                   18,750           $8.95
                        ----------                                                    -----------
                         5,518,942            8.1                  $6.58                1,837,872           $6.06
                         =========                                                      =========
</TABLE>


16.      INCOME TAXES

         The components of the provision for income taxes are as follows:

<TABLE>
<CAPTION>

                                                          2001                  2000                  1999
                                                   --------------------  --------------------  --------------------
<S>                                                  <C>                  <C>                    <C>
     Current tax provision:
          Federal                                    $       -           $        -            $         -
          State                                              -                    -                    600
          Foreign                                          496                  422                    547
                                                     ---------           ----------            -----------
                                                           496                  422                  1,147
                                                     ---------           ----------            -----------
     Deferred tax provision:
          Federal                                      (6,764)               (3,625)                (2,084)
          State                                          (372)                 (680)                  (263)
                                                     --------            ----------            -----------
                                                       (7,136)               (4,305)                (2,347)
                                                     --------            ----------            -----------
     Income tax benefit                              $ (6,640)           $   (3,883)           $    (1,200)
                                                     ========            ==========            ===========
</TABLE>




                                       45
<PAGE>

         The reconciliation of the statutory federal income tax rate to the
effective income tax rate for 2001, 2000, and 1999 provision for income taxes is
as follows:

<TABLE>
<CAPTION>

                                                          2001                  2000                  1999
                                                   --------------------  --------------------  --------------------

<S>                                                         <C>        <C>                   <C>
         Income taxes at federal statutory rate               $(2,720)   $(5,040)              $(3,478)
         State income taxes, net of federal
            benefit                                              (174)      (442)                  438
         Reversal of valuation allowance                       (3,999)         -                     -
         Goodwill amortization                                  1,691      1,643                 1,643
     State net operating loss benefit                            (655)         -                     -
     Foreign tax credits                                         (529)         -                     -
         Other, net                                              (254)       (44)                  197
                                                              -------    --------              -------
                                                              $(6,640)   $(3,883)              $(1,200)
                                                              =======    =======               =======
</TABLE>

         Components of the net deferred income tax asset as of December 29, 2001
and December 30, 2000 are as follows:

<TABLE>
<CAPTION>

                                                                       2001             2000
                                                                       -----            ----
<S>                                                                    <C>              <C>
     Current deferred income taxes:
          Accounts receivable and inventory reserves                  $2,081           $ 4,527
          Accrued liabilities, not currently deductible                6,571            10,517
          Prepaids and other assets, not currently taxable            (3,356)           (2,799)
                                                                      ------           -------
               Current deferred income tax asset                       5,296            12,245
     Noncurrent deferred income taxes:
          Property bases differences                                  (3,207)           (6,843)
          Patents bases differences                                     (248)           (1,239)
          ESOP liability basis difference                                  -               916
          Stock option compensation                                    4,913                 -
          Net operating loss carryforwards                            30,184            24,284
          Valuation allowance                                              -            (3,999)
          Other noncurrent accrued liabilities, not
               currently deductible                                    3,064             6,446
                                                                      ------           -------
                Non-current deferred income tax asset                 34,706            19,565
                                                                      ------           -------
          Net deferred income tax asset                              $40,002           $31,810
                                                                      ======            ======
</TABLE>

         As of December 29, 2001, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $71.7 million.
Approximately $10.0 million of the net operating loss was limited under various
sections of the Internal Revenue Code. The Company now believes it is more
likely than not that such limitations will not restrict the utilization of these
net operating loss carryforwards which expire through 2020. Accordingly, during
the fiscal year 2001, the deferred tax asset valuation allowance decreased by
approximately $4.0 million. Realization of the net deferred tax asset is
dependent upon the profitable operations and future reversals of existing
temporary differences. Although realization is not assured, the Company believes
it is more likely than not that the net recorded benefits will be realized
through the reduction of future taxable income.

         Undistributed earnings to be permanently reinvested by the
international subsidiaries totaled approximately $1.5 million as of December 29,
2001. Because these earnings are to be permanently reinvested, no U.S. deferred
income tax has been recorded for them.




                                       46
<PAGE>

17.      RETIREMENT PLANS

         Simmons 401(k) Plan

         The Company has a defined contribution 401(k) plan for substantially
all employees other than employees subject to collective bargaining agreements.
Employees with 12 weeks of employment who have reached age 18 are permitted to
participate in the plan. Generally, employees covered by collective bargaining
agreements are not permitted to participate in the plan, unless the collective
bargaining agreement expressly provides for participation. Eligible participants
may make contributions to the defined contribution plan; however, prior to 2001,
no employer contributions were allowed. In 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 salary deferral contributions up to 17% of compensation on
a pre-tax basis, subject to various tax limitations. All employer non-elective
contributions are immediately vested and not subject to forfeiture. Employees
are eligible to receive the employer non-elective contribution at the first
entry date following one year of service. We made a $1.9 million contribution to
the plan in 2001.

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

         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 2001, 2000,
and 1999 were $2.1 million, $1.8 million, and $1.7 million, respectively.

         The Company had accrued $2.5 million at both December 29, 2001 and
December 30, 2000 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. There is no current retiree health coverage for participants age
65 and over. The Company also provided 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 $1.1 million. In 2001, we made




                                       47
<PAGE>

benefit payments of approximately $2.5 million to settle a portion of this
obligation. As a result of the settlement, we recorded a gain of approximately
$2.1 million during 2001 related to the reduction of the accumulated
post-retirement benefit obligation. Approximately $0.5 million and $1.6 million
of this gain is reflected in cost of products sold and selling, general and
administrative expenses, respectively, in the accompanying 2001 Consolidated
Statement of Operations. The remaining accrued obligation of approximately $2.1
million consists of approximately $0.9 million of unrecognized prior service
costs and approximately $0.5 million of unrecognized net gains, both of which
will be amortized over the next five years, and approximately $0.7 million in
remaining obligations to retirees.




                                       48
<PAGE>

         The following table presents a reconciliation of the plan's status at
December 29, 2001 and December 30, 2000:

<TABLE>
<CAPTION>

                                                                 December 29,        December 30,
                                                                     2001                2000
                                                               -----------------  -------------------
<S>                                                                  <C>               <C>
     Change in benefit obligation:
          Benefit obligation, beginning of year                      $   1,857         $    5,270
          Service cost                                                       -                160
          Interest cost                                                     81                201
          Plan amendments                                                    -             (1,007)
          Actuarial loss (gain)                                          1,337             (2,459)
          Benefits paid                                                   (298)              (155)
          Settlements                                                   (2,250)                 -
          Curtailments                                                       -               (153)
                                                                     ---------         ----------
          Benefit obligation, end of year                            $     727            $ 1,857
                                                                     =========         ==========

     Change in plan assets:
          Fair value of assets, beginning of year                    $       -         $        -
          Employer contributions                                         2,548                155
          Settlement                                                    (2,250)                 -
          Benefits paid                                                   (298)              (155)
                                                                     ---------         ----------
          Fair value of assets, end of year                          $       -         $        -
                                                                     =========         ==========

     Reconciliation of accrued benefit cost:
          Funded status                                              $    (727)        $   (1,857)
          Unrecognized prior service cost                                 (928)            (1,160)
          Unrecognized net gain                                           (461)            (3,784)
                                                                     ---------         ----------
          Accrued benefit cost, end of year                            $(2,116)           $(6,801)
                                                                     =========         ==========
</TABLE>

<TABLE>
<CAPTION>

                                                                   December 29,      December 30,        December 25,
                                                                     2001                2000                1999
                                                               -----------------  ------------------ -------------------
<S>                                                                <C>                 <C>                <C>
     Weighted-average assumptions:
          Discount rate                                                   6.50%              7.25%              7.50%

     Components of net periodic benefit cost:
          Service cost                                             $         -           $    160               $230
          Interest cost                                                     81                201                357
         Amortization of:
               Prior service cost                                         (232)               (30)               (30)
               Gain                                                       (450)              (212)               (16)
                                                                       -------             ------             -------
          Net periodic benefit cost                                       (601)               119                541
          Settlements gain                                              (1,536)                 -                  -
          Curtailment gain                                                   -               (153)                 -
                                                                     ---------             -------         ---------
          Postretirement benefit (income)/expense                      $(2,137)          $    (34)          $    541
                                                                        ======            =======            =======
</TABLE>

         A 10.0% annual rate of increase in the cost of health care benefits was
assumed for 2001, 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 an immaterial
effect.




                                       49
<PAGE>



18.      LEGAL SETTLEMENT AND CONTINGENCIES

         On April 3, 1998, Serta filed a complaint against Simmons in the United
States District Court alleging that some Simmons products 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 and
injunctive relief. 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. We denied the material allegations of the complaint and
amended complaint and asserted affirmative defenses and/or counterclaims against
Serta. 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,
which was expensed in 2000, 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.

         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.

19.      RELATED PARTY TRANSACTIONS

         For both fiscal 2001 and 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. Two directors of the Company 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 in the
accompanying Consolidated Statements of Operations is $2.2 million, $1.8
million, and $1.5 million for the years 2001, 2000, and 1999, respectively,
related to the management fee.

         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 $0.9 million 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, including interest expense on related notes payable
to the former employees for any unpaid purchase price, generally 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.



                                       50
<PAGE>
The Company anticipates additional distributions to Holdings in 2002, 2003,
2004 and 2005 of $2.7 million, $2.5 million, $1.6 million, and $0.7 million,
respectively.

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

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

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

         The following table sets forth the name, age as of March 1, 2002 and
position of each of our directors and executive officers.

<TABLE>
<CAPTION>

<S>                                         <C>      <C>
Charles R. Eitel                              52       Chairman of the Board of Directors and
                                                            Chief Executive Officer
Robert W. Hellyer                             42       President and Director
William S. Creekmuir                          46       Executive Vice President, Chief Financial Officer,
                                                             Assistant Treasurer, Secretary and Director
Mark A. Parrish                               36       Executive Vice President and Chief Operations Officer
Rhonda Rousch                                 47       Senior Vice President - Human Resources and
                                                            Assistant Secretary
Kevin Damewood                                45       Senior Vice President - Sales
Donald J. Hofmann                             49       Senior Vice President - Marketing
Allen N. Podratsky                            46       Senior Vice President - Product Development and
                                                            Supply Chain Management
Kristen K. McGuffey                           36       Vice President - General Counsel and Assistant
                                                            Secretary
Marco A. Roca                                 41       Vice President - Global Licensing Contract Sales and
                                                            International
Peter Lamm                                    50       Director
Richard C. Dresdale                           45       Vice President, Assistant Treasurer,
                                                            Assistant Secretary and Director
Mark R. Genender                              37       Vice President, Assistant Treasurer, Assistant
                                                            Secretary and Director
Robert K. Barton(1)                           61       Executive Vice President - Human Resources
</TABLE>

(1)      Mr. Barton retired from the Company effective January 1, 2002.

         Charles R. Eitel joined Simmons in January 2000 as Chairman of the
Board of Directors and Chief Executive Officer of the Company and Holdings.
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 Realty Corporation, an industrial real estate
company (REIT) based in Indianapolis, Indiana and American Fidelity Assurance
Company in Oklahoma City, Oklahoma.


                                       51
<PAGE>
         Robert W. Hellyer joined Simmons in 1995 and has served as President
and director of the Company and Holdings since January 2001. Prior to assuming
his current position, Mr. Hellyer served as Executive Vice President - Sales and
Marketing, Executive Vice President - Sales, General Manager - Janesville and
Vice President of Sales - Janesville. Prior to joining Simmons, Mr. Hellyer held
various sales positions with Stearns & Foster.

         William S. Creekmuir joined Simmons in April 2000 and serves as
Executive Vice President, Chief Financial Officer, Assistant Treasurer,
Secretary and director of the Company and Executive Vice President, Assistant
Treasurer, Secretary and director of Holdings. 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 member of the Business
Advisory Council to the Walker College of Business at Appalachian State
University. Mr. Creekmuir is also a Certified Public Accountant.

         Mark A. Parrish joined Simmons in July 2001 as Executive Vice President
and Chief Operations Officer of the Company and Holdings. Prior to joining
Simmons, from May 2000 to July 2001, Mr. Parrish was the Chief Operating Officer
of MW Manufacturers, Inc. From March 1999 to April 2000, Mr. Parrish held
various senior management positions with Interface, Inc. Prior to 1999, Mr.
Parrish was employed by Harley-Davidson, Inc.

         Rhonda Rousch joined Simmons in November 2001 as Senior Vice President
- Human Resources and Assistant Secretary. Prior to joining Simmons, from
September 2000 to November 2001, Ms. Rousch was Vice President of Human
Resources for MW Manufacturers, Inc. Prior to September 2000, Ms. Rousch was the
Director of Organizational Readiness for Harley-Davidson, Inc.

         Kevin Damewood joined Simmons in January 2000 and has served as Senior
Vice President - Sales since July 2001. Prior to assuming his current position,
Mr. Damewood served as Vice President - National Accounts. Mr. Damewood also
worked for Simmons from July 1996 to April 1999 as the Vice President - Sales
for the Company's Seattle and Salt Lake City Plants. Between April 1999 and
December 2000, Mr. Damewood was employed with Premier Bedding Group as Vice
President of National Sales. Prior to July 1996, Mr. Damewood worked for Sealy
for fourteen years.

         Donald J. Hofmann joined Simmons in 1995 and has served as Senior Vice
President - Marketing since February 2000. Mr. Hofmann served as Vice President
- Marketing and Vice President - Advertising prior to assuming his current
position. Prior to joining Simmons, Mr. Hofmann held various marketing and
advertising positions, including President of Earle Palmer Brown Advertising and
Executive Vice President of Marketing at Tupperware, Inc.

         Allen N. Podratsky joined Simmons in May 2000 as Senior Vice President
- Product Development and Supply Chain Management. Prior to joining Simmons,
from February 1999 to May 2000, Mr. Podratsky was Vice President of World-Wide
Supply Chain Management for Xerox Engineering Systems, a $700 million division
of Xerox Corporation. From 1992 to May 2000, Mr. Podratsky held various
positions at Mattel, Inc. (Fisher-Price, Inc.) including Director Product
Development and Director Commodity Management - Plastics.

         Kristen K. McGuffey joined Simmons in November 2001 as Vice President
- General Counsel and Assistant Secretary. Prior to joining Simmons, from March
2000 to October 2001, Ms. McGuffey was employed by Viewlocity, Inc., with the
most recent position of Executive Vice President and General Counsel. From March
1997 to February 2000, Ms. McGuffey was a partner of and, prior to that,

                                       52
<PAGE>

an associate at Morris, Manning & Martin LLP. Prior to March 1997, Ms. McGuffey
was an associate at Paul, Hastings, Janofsky & Walker, LLP.

         Marco A. Roca joined Simmons in December 1999 and has served as Vice
President - Global Licensing, Contract Sales and International since May 2001.
Prior to assuming his current position, Mr. Roca served as Vice President -
International Licensing, Contract and Export Sales and as Vice President -
International Licensing and Export. Prior to joining Simmons, from May 1997 to
November 1999, Mr. Roca was employed by Starwood Hotels & Resorts and served as
Vice President of Development for Latin America, the Caribbean, and Southeastern
United States. From November 1995 to 1997, Mr. Roca was employed by U.S.
Franchise Systems as Vice President of Development.

         Peter Lamm became a director of Simmons and Holdings 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., Iron Age
Corporation, Harry Winston, Inc., and Blue Capital Management.

         Richard C. Dresdale became a director of Simmons and Holdings in 1998
in connection with the Recapitalization. Mr. Dresdale is also Vice President,
Assistant Treasurer and Assistant Secretary of the Company and Holdings. 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., MW
Manufacturers Holdings Corp., Blue Capital Management and SC Holdings, Inc.

         Mark R. Genender became a director of Simmons and Holdings in 1999. Mr.
Genender is also Vice President, Assistant Treasurer and Assistant Secretary of
the Company and Holdings. Mr. Genender has been a Managing Director of Fenway
since 1999. 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 Harry Winston, Inc., and SC Holdings, Inc.

         Robert K. Barton joined Simmons in 1982 and 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 this
position, Mr. Barton served as Vice President - Human Resources, Vice President
- Administration, Vice President - Dealer Financial Services and Director of
Dealer Financial Services. Mr. Barton retired from the Company effective
January 1, 2002.

         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 and serve at the discretion of our Board of
Directors. There are no family relationships between any of our directors or
executive officers. As of December 29, 2001, the members of the Audit Committee
of the Board of Directors are Messrs. Dresdale and Genender and the members of
the Compensation Committee of the Board of Directors are Messrs. Eitel, Lamm and
Dresdale.


                                       53
<PAGE>

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 earned in the year shown but paid in the subsequent year.

<TABLE>
<CAPTION>

                           SUMMARY COMPENSATION TABLE

                                                                                       Long-Term
                                                                                  Compensation Awards          All Other
                                                                              ----------------------------
                                               Annual Compensation                 Shares Underlying          Compensation
                                      --------------------------------------
Name and Principal Position            Year     Salary ($)      Bonus ($)             Options (#)               ($) (1)
---------------------------           --------  ------------  --------------  ----------------------------  -----------------
<S>                                  <C>          <C>           <C>                    <C>                         <C>
Charles R. Eitel                       2001        $528,847      $275,249                        -                 $93,963
     Chairman, Chief Executive         2000         496,474       484,447                1,350,000                   5,422
     Officer

Robert K. Barton (2)                   2001         234,038        51,781                        -                   4,294
     Executive Vice President -        2000         218,167       158,041                   50,000                  32,461
     Human Resources                   1999         209,000             -                   75,000                  30,250


William S. Creekmuir                   2001         298,750       103,715                        -                   1,666
     Executive Vice President &        2000         213,750       207,912                  500,000                   1,537
     Chief Financial Officer

Robert W. Hellyer                      2001         293,750       111,754                        -                   1,126
      President                        2000         217,500       229,500                  480,000                  22,372
                                       1999         163,940        16,160                   20,000                  21,695

Donald J. Hoffmann                     2001         189,167        41,853                        -                       -
       Senior Vice President -         2000         177,500        30,000                   50,000                  21,619
       Marketing                       1999         155,800        27,968                   50,000                  22,247

</TABLE>


(1)      These amounts include:

         (a)      our contributions to our ESOP in 2000 and 1999, respectively,
                  in the amounts of $21,911 and $21,252 for Mr. Hellyer; $27,425
                  and $20,673 for Mr. Barton; $21,155 and $21,783 for Mr.
                  Hofmann, respectively; the amount of our contribution to our
                  ESOP for 2001 has not yet been determined;
         (b)      premiums for term life insurance and long-term disability
                  insurance in 2001, 2000, and 1999, respectively, in the
                  amounts of $3,953, $5,422 and $0 for Mr. Eitel; $4,294,
                  $5,036, and $9,577 for Mr. Barton; $1,666, $1,537 and $0 for
                  Mr. Creekmuir; $1,126, $461, and $443 for Mr. Hellyer; and
                  $952, $464 and $464 for Mr. Hofmann, respectively; and
         (c)      club membership fees paid on the behalf of Mr. Eitel of
                  $90,010 in 2001.

(2)      Mr. Barton retired effective January 1, 2002.




                                       54
<PAGE>
<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>
Charles R. Eitel                        -               -              -         -                     -               -
Robert K. Barton                        -               -              -         -                     -               -
William S. Creekmuir                    -               -              -         -                     -               -
Robert W. Hellyer                       -               -              -         -                     -               -
Donald J. Hofmann                       -               -              -         -                     -               -
</TABLE>

         The table below sets forth information concerning the value of
unexercised stock options at the end of 2001 for the Named Executive Officers.
No options were exercised by the Named Executive Officers in 2001. There was no
public trading market for our common stock as of December 29, 2001. 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>
Charles R. Eitel
     Regular                         250,000             750,000          1,517,125          4,551,375
     Superincentive                        -             350,000                  -          2,123,975
Robert K. Barton
     Regular                          76,731              72,286            386,368            167,595
     Superincentive                        -              55,000                  -            127,518
William S. Creekmuir
     Regular                          62,500             187,500            379,281          1,137,844
     Superincentive                        -             250,000                  -          1,517,125
Robert W. Hellyer
     Regular                          99,653             215,847            717,524          1,309,868
     Superincentive                        -             212,500                  -          1,289,556
Donald J. Hofmann
     Regular                          18,541              56,798            113,590            344,676
     Superincentive                        -              25,000                  -            151,713
</TABLE>

         Effective April 1, 2002, the following Regular Options become
exercisable as follows- Mr. Eitel, 250,000 shares; Mr. Barton, 15,647 shares;
Mr. Creekmuir, 62,500 shares; Mr. Hellyer, 70,139 shares; and Mr. Hofmann,
14,468 shares.


                                       55
<PAGE>
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.

         Presently, approximately 2000 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. The plan
provides for the making of employer non-elective contributions, currently 3% of
an employee's compensation (subject to current tax limitations). Participants
are fully vested in their contributions at all times and the Company's matching
contribution following one year of service. The Company made 3% matching
contributions of $1.9 million to the 401(k) plan during the 2001 plan year.
Effective February 1, 2002, we further amended the plan to provide for an
additional employer matching contribution of 50 cents on each employee dollar
contributed up to 6% of the employee's pay (subject to current tax limitations).
The matching contribution will be provided to participants who complete 1,000
hours of service and are employed on the last day of each plan year. The
matching contribution will vest 20% annually over five years.

         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 and 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 29, 2001, approximately 2,400 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.

         Since the plan is a leveraged ESOP, it differs from other defined
contribution employee benefit plans because the ESOP can borrow funds from the
employer sponsoring the plan or from other parties in order to acquire Holdings'
stock for allocation to participants' accounts as such indebtedness is repaid.
Pending such allocation, as described below, Holdings' 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 29, 2001, the ESOP was
indebted to Holdings in the approximate principal amount of $3.4 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,



                                       56
<PAGE>
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 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 then uses 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 approximately a 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 100
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;



                                       57
<PAGE>

      (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 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 $115,000,
$41,000, and $137,000 in 2001, 2000, and 1999, respectively. We made
distributions from the plan to participants in the amount of $250,000 and $0 in
2001 and 2000, respectively. The accrued benefits under the nonqualified plan
were $168,000 at December 29, 2001 and $302,000 at December 30, 2000 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. This plan is
unfunded.

         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 $1.1 million. In 2001, we
made benefit payments of approximately $2.5 million to settle a portion of this
obligation. As a result of the settlement, we recorded a gain of approximately
$2.1 million during 2001 related to the reduction of the accumulated
post-retirement benefit obligation. Approximately $0.5 million and $1.6 million
of this gain is reflected in cost of products sold and selling, general and
administrative expenses, respectively, in the accompanying 2001 Consolidated
Statement of Operations. The remaining accrued obligation of approximately $2.1
million consists of approximately $0.9 million of unrecognized prior service
costs and approximately $0.5 million of unrecognized net gains, both of which
will be amortized over the next five years, and approximately $0.7 million in
remaining obligations to retirees.



                                       58
<PAGE>

MANAGEMENT STOCK INCENTIVE PLAN

         Holdings has 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.

         The incentive plan provides for issuance of regular options ("Regular
Options") and superincentive options ("Superincentive Options"). Regular Options
are subject to certain time and performance vesting restrictions and
Superincentive Options vest only in connection with the consummation of a change
of control or initial public offering of Holdings and the attainment by
shareholders affiliated with Fenway of certain internal rate of return
objectives. The incentive plan provides for the issuance of up to 5,956,000
options for shares of common stock of Holdings which may be designated Regular
Options or Superincentive Options at the discretion of the compensation
committee of the Board of Directors.

DIRECTOR COMPENSATION

         We pay no additional remuneration to our employees or to executives of
Fenway for serving as directors. See "Executive Compensation."

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 $565,000 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 the Company 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 $312,000 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


                                       59
<PAGE>
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.

         William S. Creekmuir, Executive Vice President, Chief Financial
Officer, Assistant Treasurer and Secretary and the Company 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.

         Mark A. Parrish, Executive Vice President & Chief Operations Officer,
and the Company entered into an employment agreement which commenced on July 15,
2001. Pursuant to his employment agreement, Mr. Parrish is entitled to receive
(i) a base salary, currently $260,000 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) a forgivable
loan of $109,810, and (v) an automobile allowance. In addition, on the
commencement of his employment, Mr. Parrish was granted, under our 1999 Stock
Option Plan, stock options to purchase 275,000 shares of common stock of
Holdings at an exercise price of $7.15 per share. Upon achieving specific
performance based targets and after the release of the audited financial
statements for fiscal year 2001, Mr. Parrish was granted additional stock
options to purchase 25,000 shares of common stock of Holdings at an exercise
price of $7.15. If Mr. Parrish's employment is terminated other than for death,
incapacity or cause, Mr. Parrish will be entitled to (i) payment of his base
salary then in effect for one year following the date of termination, (ii) a
lump sum pro-rata bonus amount, and (iii) payments 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.

SEVERANCE ARRANGEMENTS

         Robert K. Barton, former Executive Vice President - Human Resources, is
entitled to certain severance benefits as a result of his retirement from the
Company effective January 1, 2002. Pursuant to an agreement dated October 11,
2001, in consideration for a full release of all causes of action, rights or
claims that Mr. Barton may have related to his employment, or separation from
the Company, or the ownership of any securities of the Company or Holdings,
Mr. Barton will receive a severance payment equal to one year of his base
salary ($235,000), plus an amount equal to 42.5% of his base salary in effect
before the separation. Mr. Barton also received a bonus for the 2001 fiscal
year. In addition, the Company will continue to make contributions to the cost
of Mr. Barton's participation in the Company's medical and dental plans.
Finally, Holdings has repurchased all of the common  stock of Holdings held by
Mr. Barton and has agreed to repurchase Mr. Barton's exercisable stock options.




                                       60
<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         Compensation decisions regarding the Company's executive officers are
made by the Compensation Committee (the "Committee") of the Board of Directors.
The members of the Committee as of December 29, 2001 are Messrs. Eitel, Lamm and
Dresdale. Mr. Eitel is the Chairman of the Board and Chief Executive Officer of
the Company.

             COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

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

         The objective of the Committee is to establish policies and programs to
attract and retain key executives, and to reward performance by these executives
which benefit the Company. The primary elements of executive compensation are
base salary, annual cash bonus and 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
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.
Because the focus of the review is individual achievement, performance of the
Company does not weigh heavily in the result. When all reviews are completed,
the CEO makes a recommendation to the Committee for their review and final
approval.

         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. The annual bonus plans  prior to 2001 provided for bonuses
based upon the financial performance of the Company and an individual's
performance.




                                       61
<PAGE>

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 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





                                       62
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          We have one class of issued and outstanding common stock, all of which
is owned by Holdings. As of March 29, 2002, Holdings had 24,242,119.58 shares
of issued and outstanding common stock, par value $.01 per share, and
379,119.069 shares of Class B common stock, par value $.01 per share.

         The following table describes the beneficial ownership as of
March 29, 2002 of each class of issued and outstanding equity securities of
Holdings by each of our directors and Named 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 used in this table, beneficial ownership has the meaning set forth in Rule
13d-3(d)(1) of the Exchange Act.

<TABLE>
<CAPTION>

                                                                                  Number of
                                           Number of                           Class B Common
                                         Common Stock         Percentage of     Stock Shares      Percentage of
                          Name              Shares                class              (1)              class
                          ----        ------------------     ---------------  ----------------  -----------------
<S>                                  <C>                      <C>               <C>             <C>
Simmons Holdings, LLC (2)                  22,020,832.12 (3)      85.04%                    --          --
   c/o Fenway Partners, Inc
   152 West 57th Street
   New York, NY 10019
FPIP, LLC                                             --            --             379,119.069         100%
   c/o Fenway Partners, Inc
   152 West 57th Street
   New York, NY 10019
ESOP shares                                3,443,644.702          13.30%                    --          --
   c/o State Street Bank & Trust
   225 Franklin Street
   Boston, MA 02110
Charles R. Eitel                              500,000.00 (4)      1.89%                     --          --
Robert W. Hellyer                             183,421.00 (4)        *                       --          --
William S. Creekmuir                          125,000.00 (4)        *                       --          --
Donald J. Hofmann                              33,009.00 (4)        *                       --          --
Peter Lamm (5)                             22,020,832.12 (3)      85.04%           379,119.069         100%
Richard C. Dresdale (5)                    22,020,832.12 (3)      85.04%           379,119.069         100%
Mark R. Genender (5)                       22,020,832.12 (3)      85.04%           379,119.069         100%
All directors and executive officers
   as a group  (8 persons)                 22,865,624.12          85.56%           379,119.069         100%
</TABLE>

*     Less than 1%.

              (1) Class B common stock has the same rights and privileges as
                  Holdings' common stock except that each share of Class B
                  common stock (a) has 16% of the amount of voting power of a
                  share of common stock and (b) entitles its holder to 16% of
                  the amount of any distributions by Holdings to which a share
                  of common stock is entitled. The voting and distribution
                  rights of the Class B common stock shall be increased to equal
                  that of the 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.





                                       63
<PAGE>
         (2)      Substantially all of the voting interests of Simmons Holdings,
                  LLC are held by (a) Fenway Partners Capital Fund, L.P.
                  ("Fenway Fund"), whose general partner is Fenway Partners,
                  L.P., whose general partner is Fenway Management, Inc., and
                  (b) Fenway Partners Capital Fund II, L.P. ("Fenway Fund II"
                  and collectively with Fenway Fund, the "Fenway Funds"), whose
                  general partner is Fenway Partners II, LLC. The remainder of
                  the voting interests of Simmons Holdings, LLC are held by
                  FPIP, LLC and FPIP Trust, LLC, affiliates of Fenway. Fenway
                  provides investment advisory services to the Fenway Funds.
                  Accordingly, such entities may be deemed to beneficially own
                  the shares of common stock held by Simmons Holdings, LLC. Each
                  of such entities disclaims beneficial ownership of such shares
                  except to the extent of its pecuniary interest therein.

         (3)      Includes warrants for the purchase of 1,653,703.24 shares of
                  common stock. Includes 1,336,997.70 shares of common stock
                  acquired from SH Investment Limited as of January 25, 2002.

         (4)      Includes the following shares of common stock that may be
                  acquired upon the exercise of outstanding options:

                  Mr. Eitel                           500,000 shares
                  Mr. Hellyer                         169,792 shares
                  Mr. Creekmuir                       125,000 shares
                  Mr. Parrish                          50,000 shares

         (5)      Messrs. Dresdale, Lamm and Genender are limited partners of
                  Fenway Partners, L.P. and members of Fenway Partners II, LLC,
                  FPIP, LLC and FPIP Trust, LLC. Accordingly, Messrs. Dresdale,
                  Lamm and Genender may be deemed to beneficially own the shares
                  of common stock held by Simmons Holdings, LLC and FPIP, LLC.
                  Messrs. Dresdale, Lamm and Genender disclaim beneficial
                  ownership of such shares except to the extent of their
                  pecuniary interests therein. The business address of each of
                  the foregoing is c/o Fenway Partners, Inc., 152 West 57th
                  Street, New York, NY 10019.

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





                                       64
<PAGE>
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 2001, 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. Two directors of the Company 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.

         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

         (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 Simmons also agreed to indemnify Fenway under
specific circumstances. In addition, pursuant to the advisory agreement, upon
the consummation of the Recapitalization, Fenway and its affiliates 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 "Security Ownership of
Certain Beneficial Owners and Management".



                                       65
<PAGE>


                                     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
                  29, 2001, December 30, 2000 and December 25, 1999

                  Consolidated Balance Sheets at December 29, 2001 and December
                  30, 2000

                  Consolidated Statement of Changes in Stockholder's Deficit for
                  the years ended December 29, 2001, December 30, 2000 and
                  December 25, 1999

                  Consolidated Statements of Cash Flows for the years ended
                  December 29, 2001, December 30, 2000 and December 25, 1999

                  Notes to the consolidated financial statements

(a)(2) Financial Statement Schedule

                  Schedule V - Valuation Accounts

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

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

         A report on Form 8-K was filed on November 8, 2001, issuing a press
         release reporting our 2001 third quarter and nine months results of
         operations.

(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"), (vi) the
Annual Report on Form 10-K for the year ended December 30, 2000 for the
Registrant (referred to as "2000 10-K"), or (vii) 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 (#).



                                       66
<PAGE>
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).




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

  *10.6.3         Third Amendment to Credit and Guaranty Agreement dated as of
                  January 5, 2001 (1/19/01 8-K).

  *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 machinists
                  for the period from April 23, 1999 to April 22, 2002 (2000
                  10-K).

  *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).

  #10.11.1        Form of 2001 Management Bonus Agreement.

  #10.11.2        Form of 2002 Management Bonus Agreement.

  #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, 2001 to
                  October 15, 2005.

  #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, 2001 to October 15,
                  2004.

  #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,
                  2001 to October 15, 2005.

  *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 (2000 10-K).

  *10.15.2        Amendment No. 2 dated November 17, 2000 to the 1999 Stock
                  Option Plan (2000 10-K).






                                       68
<PAGE>
Exhibit
Number            Exhibit Description
------            -------------------

  #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, 2001 to October 15, 2005.

  #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, 2001 to October 15, 2004.

  #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, 2001 to October 15, 2004.

  *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).







                                       69
<PAGE>
Exhibit
Number            Exhibit Description
------            -------------------

  *10.27          Simmons Retirement Savings Plan adopted February 1, 1987, as
                  amended and restated (2000 10-K).

  *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).

  *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).

  #10.34          Employment Agreement between the Company and Mark A. Parrish,
                  dated as of July 15, 2001.

  #10.35          Letter Agreement dated as of October 11, 2001 by and among
                  Simmons Holdings, Inc., the Company and Robert K. Barton.

  #21             Subsidiaries of the Company.





                                       70
<PAGE>
                                  EXHIBIT INDEX
                                  -------------

Exhibit
Number.           Exhibit Description
-------           -------------------
10.11.1           Form of 2001 Management Bonus Agreement.

10.11.2           Form of 2002 Management Bonus Agreement.

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, 2001 to
                  October 15, 2005.

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, 2001 to October 15,
                  2004.

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,
                  2001 to October 15, 2005.

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, 2001 to October 15, 2005.

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, 2001 to October 15, 2004.

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, 2001 to October 15, 2004.

10.34             Employment Agreement between the Company and Mark A. Parrish,
                  dated as of July 15, 2001.

10.35             Letter Agreement dated as of October 11, 2001 by and among
                  Simmons Holdings, Inc., the Company and Robert K. Barton.

21                Subsidiaries of the Company.

                                       71
<PAGE>

                                   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>
<CAPTION>

<S>                                                  <C>                                          <C>

                                 SIMMONS COMPANY
                        Signature                   Title
By                    /s/ Charles R. Eitel          Chairman of the Board of Directors, Chief         March 29, 2002
       --------------------------------------------
                           Charles R. Eitel              Executive Officer
                                                             (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, 2002
       --------------------------------------------
                           Charles R. Eitel              Executive Officer
                                                             (Principal Executive Officer)

                      /s/ Robert W. Hellyer         President and Director                            March 29, 2002
       --------------------------------------------
                           Robert W. Hellyer

                      /s/ William S. Creekmuir          Executive Vice President, Chief               March 29, 2002
       --------------------------------------------  Financial Officer, Assistant Treasurer,
                           William S. Creekmuir              Secretary and Director
                                                          (Principal Financial Officer)


                      /s/ Peter Lamm                Director                                          March 29, 2002
       --------------------------------------------
                           Peter Lamm

                      /s/ Richard C. Dresdale       Director                                          March 29, 2002
       --------------------------------------------
                           Richard C. Dresdale

                      /s/ Mark R. Genender          Director                                          March 29, 2002
       --------------------------------------------
                           Mark R. Genender

                      /s/ Mark F. Chambless         Vice President -  Corporate Controller            March 29, 2002
       --------------------------------------------    (Principal Accounting Officer)
                           Mark F. Chambless
</TABLE>




                                       72
<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    SCHEDULE

         YEAR ENDED DECEMBER 29, 2001, YEAR ENDED DECEMBER 30, 1999, AND
                          YEAR ENDED DECEMBER 25, 1999

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

                                    FORM 10-K

                                       OF

                                 SIMMONS COMPANY





                                       73
<PAGE>
<TABLE>
<CAPTION>

                                                          SIMMONS COMPANY

                                                 SCHEDULE V - VALUATION ACCOUNTS

                   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 29, 2001
     Doubtful accounts                                  $ 4,426            $ 6,006           $ 8,633             $ 1,799
     Discounts, returns and allowances                    5,000                  -             2,104               2,896
     Tax valuation allowance                              3,999                  -             3,999                   -
                                                        -------            -------           -------             -------
                                                        $13,425            $ 6,006           $14,736             $ 4,695
                                                        =======            =======           =======             =======

Fiscal year ended December 30, 2000
     Doubtful accounts                                  $ 3,449            $12,929           $11,952             $ 4,426
     Discounts, returns and allowances                    3,408              1,592                 -               5,000
     Tax valuation allowance                              3,999                  -                 -               3,999
                                                        -------            -------           -------             -------
                                                        $10,856            $14,521           $11,952             $13,425
                                                        =======             ======           =======             =======

Fiscal year ended December 25, 1999
     Doubtful accounts                                  $ 4,177            $ 7,597           $  8,325            $ 3,449
     Discounts, returns and allowances                    3,324                300                216              3,408
     Tax valuation allowance                              3,999                  -                  -              3,999
                                                        -------            -------           --------            -------
                                                        $11,500            $ 7,897           $  8,541            $10,856
                                                        =======            =======           ========            =======
</TABLE>