**UNITED
        STATES SECURITIES AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-Q**
 
 þ
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 
 **For
        the quarterly period ended July 1, 2006**
 
 **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** **333-124138**
 
 **SIMMONS
        COMPANY**
 (Exact
        name of registrant as specified in its charter)
 
 Delaware
              
              20-0646221(State
                  or other jurisdiction of
                incorporation
                  or organization)
              
              (I.R.S.
                  Employer Identification No.)One
                  Concourse Parkway, Suite 800, Atlanta, Georgia
              
              30328-6188(Address
                  of principal executive offices)
              
              (Zip
                  Code)
 
 Registrant’s
        telephone number, including area code (770)
        512-7700
 
 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:  þ   No:   ̈
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. (See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act).
 
 Large
        accelerated filer:  ̈    Accelerated
        filer:  ̈    Non-accelerated
        filer: þ
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 
 Yes:   ̈   No:  **þ**
 
 The
        number of shares of the registrant’s common stock outstanding as of August 1,
        2006: 4,448,211.36
 
 **DOCUMENTS
        OR PARTS THEREOF INCORPORATED BY REFERENCE: None**
 
  
  **PART
        I — FINANCIAL INFORMATION**
 
 **Item
        1. Financial Statements**
 
 **Simmons
        Company and Subsidiaries**
 **Unaudited
        Condensed Consolidated Statements of Operations**
 **and
        Comprehensive Income (Loss)**
 (In
        thousands)
  Quarters
                              Ended
                          
                          Six
                              Months EndedJuly
                              1,
                          
                          June
                              25,
                          
                          July
                              1,
                          
                          June
                              25,2006
                          
                          2005
                          
                          2006
                          
                          2005Net
                              sales
                          
                          $
                          241,202
                          
                          $
                          208,042
                          
                          $
                          477,069
                          
                          $
                          413,624Cost
                              of products sold
                          
                          
                          132,051
                          
                          
                          117,256
                          
                          
                          268,490
                          
                          
                          231,422Gross
                              profit
                          
                          
                          109,151
                          
                          
                          90,786
                          
                          
                          208,579
                          
                          
                          182,202Operating
                              expenses:Selling,
                              general and administrative expenses
                          
                          
                          81,633
                          
                          
                          73,342
                          
                          
                          152,539
                          
                          
                          152,503Amortization
                              of intangibles
                          
                          
                          1,417
                          
                          
                          1,417
                          
                          
                          2,834
                          
                          
                          2,858Licensing
                              revenues
                          
                          
                          (2,012
                          )
                          
                          (2,815
                          )
                          
                          (4,300
                          )
                          
                          (4,866
                          )81,038
                          
                          
                          71,944
                          
                          
                          151,073
                          
                          
                          150,495Operating
                              income
                          
                          
                          28,113
                          
                          
                          18,842
                          
                          
                          57,506
                          
                          
                          31,707Interest
                              expense, net
                          
                          
                          24,715
                          
                          
                          17,359
                          
                          
                          43,891
                          
                          
                          33,773Income
                              (loss) before income taxes
                          
                          
                          3,398
                          
                          
                          1,483
                          
                          
                          13,615
                          
                          
                          (2,066
                          )Income
                              tax expense (benefit)
                          
                          
                          1,337
                          
                          
                          424
                          
                          
                          5,121
                          
                          
                          (933
                          )Net
                              income (loss)
                          
                          
                          2,061
                          
                          
                          1,059
                          
                          
                          8,494
                          
                          
                          (1,133
                          )Other
                              comprehensive income (loss):Foreign
                              currency translation adjustment
                          
                          
                          71
                          
                          
                          (9
                          )
                          
                          115
                          
                          
                          (6
                          )Comprehensive
                              income (loss)
                          
                          $
                          2,132
                          
                          $
                          1,050
                          
                          $
                          8,609
                          
                          $
                          (1,139
                          )The
                              accompanying notes are an integral part of these condensed
                              consolidated
                              financial statements.
  2
  **Simmons
        Company and Subsidiaries**
 **Condensed
        Consolidated Balance Sheets**
 (Dollars
        in thousands)
 
 July
                      1,
                  
                  December
                      31,2006
                  
                  2005*(Unaudited)**ASSETS**Current
                      assets:Cash
                      and cash equivalents
                  
                  $
                  28,882
                  
                  $
                  24,622Accounts
                      receivable, less allowances for doubtful receivables, discounts
                      and
                      returns of $4,900 and $4,032
                  
                  
                  88,494
                  
                  
                  76,032Inventories
                  
                  
                  28,842
                  
                  
                  33,050Deferred
                      income taxes
                  
                  
                  2,931
                  
                  
                  2,865Other
                      current assets
                  
                  
                  15,767
                  
                  
                  15,085Total
                      current assets
                  
                  
                  164,916
                  
                  
                  151,654Property,
                      plant and equipment, net
                  
                  
                  59,075
                  
                  
                  58,360Goodwill
                  
                  
                  488,185
                  
                  
                  488,230Intangible
                      assets, net
                  
                  
                  534,456
                  
                  
                  537,290Other
                      assets
                  
                  
                  35,592
                  
                  
                  45,243$
                  1,282,224
                  
                  $
                  1,280,777*
                      Derived from the Company's 2005 audited consolidated financial
                      statements.The
                      accompanying notes are an integral part of these condensed
                      consolidated
                      financial statements.
  3
  **Simmons
        Company and Subsidiaries**
 **Condensed
        Consolidated Balance Sheets**
 (Dollars
        in thousands)
 July
                      1,
                  
                  December
                      31,2006
                  
                  2005*(Unaudited)**LIABILITIES
                      AND STOCKHOLDERS' EQUITY**Current
                      liabilities:Current
                      maturities of long-term debt
                  
                  $
                  413
                  
                  $
                  1,602Accounts
                      payable
                  
                  
                  52,397
                  
                  
                  45,031Accrued
                      liabilities
                  
                  
                  66,323
                  
                  
                  65,139Total
                      current liabilities
                  
                  
                  119,133
                  
                  
                  111,772Non-current
                      liabilities:Long-term
                      debt
                  
                  
                  886,444
                  
                  
                  906,148Deferred
                      income taxes
                  
                  
                  148,861
                  
                  
                  144,418Other
                  
                  
                  14,641
                  
                  
                  14,092Total
                      liabilities
                  
                  
                  1,169,079
                  
                  
                  1,176,430Commitments
                      and contingenciesStockholders'
                      equity:Class
                      A common stock, $.01 par value: Authorized - 4,000,000 shares
                      issued and
                      outstanding - 3,878,307 shares
                  
                  
                  39
                  
                  
                  39Class
                      B common stock, $.01 par value: Authorized, issued and outstanding
                      -
                      688,235 shares
                  
                  
                  7
                  
                  
                  7Additional
                      paid-in capital
                  
                  
                  102,486
                  
                  
                  102,337Retained
                      earnings
                  
                  
                  13,037
                  
                  
                  4,648Accumulated
                      other comprehensive income
                  
                  
                  249
                  
                  
                  134Deferred
                      compensation
                  
                  
                  -
                  
                  
                  (361
                  )Treasury
                      stock, at cost, 60,118 and 46,860 shares of class A common
                      stock and
                      58,213 and 48,411 shares of class B common stock
                  
                  
                  (2,673
                  )
                  
                  (2,457
                  )Total
                      stockholders' equity
                  
                  
                  113,145
                  
                  
                  104,347$
                  1,282,224
                  
                  $
                  1,280,777*
                      Derived from the Company's 2005 audited consolidated financial
                      statements.The
                      accompanying notes are an integral part of these condensed
                      consolidated
                      financial statements.
  4
  **Simmons
        Company and Subsidiaries**
 **Unaudited
        Condensed Consolidated Statements of Cash Flows**
 (In
        thousands)
 
 Six
                            Months EndedJuly
                            1,
                        
                        June
                            25,2006
                        
                        2005Cash
                            flows from operating activities:Net
                            income (loss)
                        
                        $
                        8,494
                        
                        $
                        (1,133
                        )Adjustments
                            to reconcile net income (loss) to net cash provided by
                            operating
                            activities:Depreciation
                            and amortization
                        
                        
                        14,057
                        
                        
                        13,121Provision
                            for bad debts, net
                        
                        
                        868
                        
                        
                        (107
                        )Provision
                            for deferred income taxes
                        
                        
                        4,528
                        
                        
                        (1,363
                        )Non-cash
                            interest expense
                        
                        
                        16,629
                        
                        
                        9,457Non-cash
                            stock compensation expense
                        
                        
                        517
                        
                        
                        -Net
                            changes in operating assets and liabilities:Accounts
                            receivable
                        
                        
                        (13,330
                        )
                        
                        13,625Inventories
                        
                        
                        4,209
                        
                        
                        818Other
                            current assets
                        
                        
                        (682
                        )
                        
                        2,311Accounts
                            payable
                        
                        
                        7,366
                        
                        
                        (2,728
                        )Accrued
                            liabilities
                        
                        
                        1,058
                        
                        
                        (12,835
                        )Other,
                            net
                        
                        
                        (2,470
                        )
                        
                        (2,820
                        )Net
                            cash provided by operating activities
                        
                        
                        41,244
                        
                        
                        18,346Cash
                            flows from investing activities:Purchases
                            of property, plant and equipment
                        
                        
                        (5,776
                        )
                        
                        (2,586
                        )Purchase
                            of certain assets of Simmons Juvenile Products, Inc.
                        
                        
                        -
                        
                        
                        (3,337
                        )Net
                            cash used in investing activities
                        
                        
                        (5,776
                        )
                        
                        (5,923
                        )Cash
                            flows from financing activities:Borrowings
                            under New Senior Credit Facility, net
                        
                        
                        480,000
                        
                        
                        -Payments
                            of senior credit facility, net
                        
                        
                        (369,933
                        )
                        
                        (4,668
                        )Repayment
                            of senior unsecured term loan
                        
                        
                        (140,000
                        )
                        
                        -Payments
                            of other debt
                        
                        
                        (106
                        )
                        
                        (158
                        )Payments
                            of financing fees
                        
                        
                        (973
                        )
                        
                        (125
                        )Purchase
                            of treasury stock
                        
                        
                        (311
                        )
                        
                        (304
                        )Net
                            cash used in financing activities
                        
                        
                        (31,323
                        )
                        
                        (5,255
                        )Net
                            effect of exchange rate changes on cash
                        
                        
                        115
                        
                        
                        (6
                        )Change
                            in cash and cash equivalents
                        
                        
                        4,260
                        
                        
                        7,162Cash
                            and cash equivalents, beginning of period
                        
                        
                        24,622
                        
                        
                        24,206Cash
                            and cash equivalents, end of period
                        
                        $
                        28,882
                        
                        $
                        31,368The
                            accompanying notes are an integral part of these condensed
                            consolidated
                            financial statements.
 5
 
  **Simmons
        Company and Subsidiaries**
 **Condensed
        Consolidated Statement of Changes in Stockholders’ Equity**
 (Dollars
        in thousands)
 **Accumulated**
                
                
                
                **Common****Class
                    A**
                
                **Class
                    B**
                
                **Additional**
                
                
                
                **Other**
                
                
                
                **Stock**
                
                **Total****Common**
                
                **Common**
                
                **Common**
                
                **Common**
                
                **Paid-In**
                
                **Retained**
                
                **Comprehensive**
                
                **Deferred**
                
                **Held
                    In**
                
                **Stockholders'****Shares**
                
                **Stock**
                
                **Shares**
                
                **Stock**
                
                **Capital**
                
                **Earnings**
                
                **Income**
                
                **Compensation**
                
                **Treasury**
                
                **Equity****December
                    31, 2005 (audited)**
                
                
                3,831,447
                
                $
                39
                
                
                639,824
                
                $
                7
                
                $
                102,337
                
                $
                4,648
                
                $
                134
                
                $
                (361
                )
                $
                (2,457
                )
                $
                104,347Net
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                8,494
                
                
                -
                
                
                -
                
                
                -
                
                
                8,494Other
                    comprehensive income:Change
                    in foreigncurrency
                    translation
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                115
                
                
                -
                
                
                -
                
                
                115Comprehensive
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                8,494
                
                
                115
                
                
                -
                
                
                -
                
                
                8,609Issuance
                    of Class B commonstock
                    held in treasury
                
                
                -
                
                
                -
                
                
                84,850
                
                
                -
                
                
                12
                
                
                (105
                )
                
                -
                
                
                -
                
                
                95
                
                
                2Non-cash
                    stock compensationexpense
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                517
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                517Adoption
                    of Statementof
                    Financial Standards 123R
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (361
                )
                
                -
                
                
                -
                
                
                361
                
                
                -
                
                
                -Tax
                    shortfall resulting fromrestricted
                    stock awards
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (19
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (19
                )Purchase
                    of treasury stock,at
                    cost
                
                
                (13,258
                )
                
                -
                
                
                (94,652
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (311
                )
                
                (311
                )**July
                    1, 2006 (unaudited)**
                
                
                3,818,189
                
                $
                39
                
                
                630,022
                
                $
                7
                
                $
                102,486
                
                $
                13,037
                
                $
                249
                
                $
                -
                
                $
                (2,673
                )
                $
                113,145The
                    accompanying notes are an integral part of these condensed consolidated
                    financial statements.
 
  6
   **Simmons
        Company and Subsidiaries**
 **Notes
        to Condensed Consolidated Financial Statements**
 
 
 
 **A.**   **Basis
        of Presentation**
 
 Simmons
        Company is a holding company with no operating assets. Through its wholly-owned
        subsidiary THL-SC Bedding Company, which is also a holding company, Simmons
        Company owns the common stock of Simmons Bedding Company. All of Simmons
        Company’s business operations are conducted by Simmons Bedding Company and its
        direct and indirect subsidiaries (collectively “Simmons Bedding”). Simmons
        Company, together with its subsidiaries (collectively the “Company” or “Simmons
        Company”), is one of the largest bedding manufacturers in the United
        States.
 
 These
        condensed consolidated financial statements of the Company are unaudited,
        and
        have been prepared in accordance with accounting principles generally accepted
        in the United States (“GAAP”) for interim financial information and the rules
        and regulations of the Securities and Exchange Commission (the “Commission”).
        The accompanying unaudited condensed consolidated financial statements contain
        all adjustments, which, in the opinion of management, are necessary to present
        fairly the financial position of the Company as of July 1, 2006, and its
        results
        of operations and cash flows for the periods presented herein. All adjustments
        in the periods presented herein are normal and recurring in nature unless
        otherwise disclosed. These unaudited condensed consolidated financial statements
        should be read in conjunction with the Company’s Annual Report on Form 10-K for
        the year ended December 31, 2005. Operating results for the periods ended
        July
        1, 2006 are not necessarily indicative of future results that may be expected
        for the fiscal year ending December 30, 2006 or for any future
        period.
 
 The
        preparation of unaudited condensed consolidated financial statements in
        conformity with GAAP includes some amounts that are based upon management
        estimates and judgments. Future actual results could differ from such current
        estimates.
 
 **B.**   **Inventories**
 
 A
        summary of inventories follows (in thousands):
 
 **July
                    1,**
                
                **December
                    31,****2006**
                
                **2005**Raw
                    materials
                
                $
                14,120
                
                $
                18,541Work-in-progress
                
                
                779
                
                
                1,261Finished
                    goods
                
                
                9,164
                
                
                8,777Inventory
                    held at retail stores
                
                
                4,779
                
                
                4,471$
                28,842
                
                $
                33,050
  7
  **C.**  **Goodwill**
 
 The
        changes in the carrying amount of goodwill for the six months ended July
        1, 2006
        are as follows (in thousands):
 
 **Wholesale****Bedding**
                
                **Retail**
                
                **Consolidated**Balance
                    as of December 31, 2005
                
                $
                481,279
                
                $
                6,951
                
                $
                488,230Tax
                    benefit allocated to reduce goodwill
                
                
                (45
                )
                
                -
                
                
                (45
                )Balance
                    as of July 1, 2006
                
                $
                481,234
                
                $
                6,951
                
                $
                488,185
 
 **D.**   **Warranties**
 
 The
        conventional bedding products that the Company currently manufactures generally
        include a ten year non-prorated warranty. The Company’s warranty accrual is an
        estimate of future warranty returns recorded at the current average cost
        to
        settle warranty claims. The accrual is calculated as follows:
 
 1)
            The
                Company records the amount of warranties issued during the period
                based
                upon its units sold, the cumulative average return rate for the previous
                ten years, and the estimated average cost to settle a warranty
                claim. 
 2)
            The
                Company adjusts the accruals related to pre-existing warranties for
                the
                estimated average cost to settle a warranty claim and changes in
                its
                estimate of the number of future warranty returns resulting from
                changes
                in its cumulative average return rate for the previous ten
                years. 
 3)
            The
                Company reduces the accrual for warranty settlements during the period
                based upon the number of warranty returns recorded at the estimated
                cost
                to settle warranty claims. The estimated cost to settle a warranty
                claims
                is based upon the average manufacturing cost per unit, including
                freight,
                less anticipated cost recovery resulting from the selling of returned
                product to “as-is” dealers and to consumers through the Company’s owned
                retail outlet stores.  8
  
 The
        following table presents a reconciliation of the Company’s warranty accrual for
        the periods ended July 1, 2006 and June 25, 2005 (in thousands):
  **Quarters
                    Ended**
                
                **Six
                    Months Ended****July
                    1,**
                
                **June
                    25,**
                
                **July
                    1,**
                
                **June
                    25,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Balance
                    at beginning of period
                
                $
                3,091
                
                $
                2,858
                
                $
                3,009
                
                $
                2,715Additional
                    warranties issued
                
                
                429
                
                
                502
                
                
                1,054
                
                
                1,014Warranty
                    settlements
                
                
                (441
                )
                
                (193
                )
                
                (884
                )
                
                (950
                )Revisions
                    of estimate
                
                
                (136
                )
                
                (52
                )
                
                (236
                )
                
                336Balance
                    at end of period
                
                $
                2,943
                
                $
                3,115
                
                $
                2,943
                
                $
                3,115
 As
          a result
          of a decrease in warranty returns combined with a lower cost to settle
          warranty
          claims, our warranty accrual as of July 1, 2006 was $0.2 million less than
          the
          accrual as of June 25, 2005.


**E.**  **Long-Term
        Debt**
 
 A
        summary of long-term debt follows (in thousands):
  **July
                      1,**
                  
                  **December
                      31,****2006**
                  
                  **2005**Senior
                      credit facility:Revolving
                      loan
                  
                  $
                  -
                  
                  $
                  -Tranche
                      C term loan
                  
                  
                  -
                  
                  
                  369,933Tranche
                      D term loan
                  
                  
                  480,000
                  
                  
                  -Total
                      senior credit facility
                  
                  
                  480,000
                  
                  
                  369,933Senior
                      unsecured term loan
                  
                  
                  -
                  
                  
                  140,0007.875%
                      senior subordinated notes due 2014
                  
                  
                  200,000
                  
                  
                  200,00010.0%
                      senior discount notes, due 2014, net of discount of $77,025
                      and
                      $86,172
                  
                  
                  191,975
                  
                  
                  182,828Other,
                      including capital lease obligations
                  
                  
                  14,882
                  
                  
                  14,989886,857
                  
                  
                  907,750Less
                      current portion
                  
                  
                  (413
                  )
                  
                  (1,602
                  )$
                  886,444
                  
                  $
                  906,148
 On
        May 25, 2006, Simmons Bedding executed the second amended and restated senior
        credit and guaranty agreement (“New Senior Credit Facility”) with a syndicate of
        lenders, which amends and restates its existing senior credit facility in
        its
        entirety. The New Senior Credit Facility provides for a $75.0 million revolving
        credit facility and a $492.0 million tranche D term loan facility. The proceeds
        from the New Senior Credit Facility were used to replace Simmons Bedding’s
        $350.0 million tranche C term loan and $140.0 million senior unsecured term
        loan. This exchange of debt instruments is referred to as the “Refinancing”.
        Among other things, the New Senior Credit Facility reduces the applicable
        Eurodollar and Base interest rate margins for borrowings under the term loan.
 
 9
 In
        connection with the Refinancing, Simmons Bedding paid approximately $1.9
        million
        in call premiums, agency fees and legal fees (collectively, the “Refinancing
        Costs”). The Refinancing Costs were recorded in accordance with Emerging Issues
        Task Force 96-19, *Modification
        of Debt Instruments with Different Terms* (“EITF 96-19”). Under EITF 96-19, Simmons Bedding compared each syndicated
        lenders’ loan under the tranche D term loan with the syndicated lenders’ loan
        under the tranche C term loan and senior unsecured term loan. For loans under
        the tranche D term loan that were substantially different than loans under
        the
        then existing term loans, Simmons Bedding recorded the exchange of debt
        instruments as a debt extinguishment, expensed deferred financing fees
        associated with the extinguished debt, expensed fees paid to lenders, and
        capitalized third-party costs associated with the New Senior Credit Facility.
        For loans under the tranche D term loan that were not substantially different,
        Simmons Bedding recorded the exchange of debt instruments as a modification
        of
        the existing term loans, expensed third-party costs associated with the New
        Senior Credit Facility, and capitalized fees paid to lenders as deferred
        financing fees. As a result of the Refinancing, Simmons Bedding expensed
        $5.0
        million of deferred financing fees and $1.0 million of Refinancing Costs
        as a
        component of interest expense, net in the consolidated statements of operations
        and capitalized $0.9 million of deferred financing fees as a component of
        other
        assets on the consolidated balance sheets.
 
 The
        revolving loan under the New Senior Credit Facility will expire on the earlier
        of (a) December 19, 2009 or (b) as revolving credit commitments under the
        facility terminate. Simmons Bedding incurs a commitment fee of 0.5% per annum
        on
        the unused portion of its revolving credit facility. As of July 1, 2006,
        Simmons
        Bedding had availability to borrow $65.1 million under the revolving loan
        after
        giving effect to $9.9 million that was reserved for Simmons Bedding’s
        reimbursement obligations with respect to outstanding letters of credit.
        The
        remaining availability under the revolving loan may be utilized to meet current
        working capital requirements, including issuance of stand-by and trade letters
        of credit. Simmons Bedding also may utilize the remaining availability under
        the
        revolving loan to fund distributions, acquisitions and capital
        expenditures.
 
 Subsequent
        to the Refinancing, Simmons Bedding voluntarily prepaid $12.0 million of
        the
        tranche D term loan resulting in the next required principal payment of $0.3
        million being scheduled for September 2008. The tranche D term loans have
        mandatory quarterly principal payments of $1.2 million from December 31,
        2008
        through December 31, 2010 and mandatory quarterly principal payments of $117.2
        million from March 31, 2011 through maturity on December 19, 2011. Depending
        on
        Simmons Bedding’s leverage ratio, it may be required to prepay a portion of the
        tranche D term loan with up to 50% of its excess cash flows (as defined in
        the
        New Senior Credit Facility) from each fiscal year.
 
 10
 The
        New Senior Credit Facility bears interest at Simmons Bedding’s choice of the
        Eurodollar Rate or Base Rate (both as defined), plus the applicable interest
        rate margins as follows:
  **Eurodollar**
                
                **Base****Rate**
                
                **Rate**Revolving
                    loan
                
                
                2.50
                %
                
                1.50
                %Tranche
                    D term loan
                
                
                2.25
                %
                
                1.00
                %
 The
        revolving loan applicable interest margins for both Eurodollar Rate loans
        and
        Base Rate loans are reduced based upon Simmons Bedding’s leverage ratio. The
        weighted average interest rate per annum in effect as of July 1, 2006 for
        the
        tranche D term loan was 7.36%.
 
 Simmons
        Bedding has developed and implemented a policy to utilize extended Eurodollar
        contracts to minimize the impact of near term Eurodollar rate increases.
        For
        $258.0 million of the tranche D term loan, Simmons Bedding has set the interest
        rate utilizing twelve month Eurodollar rate loans which fixed the Eurodollar
        Rate at 4.875% through January 26, 2007. The execution of the extended
        Eurodollar contracts resulted in the Company fixing the interest rate on
        approximately 53% of its floating rate debt as of July 1, 2006.
 
 The
        New Senior Credit Facility requires Simmons Bedding to maintain certain
        financial ratios, including cash interest coverage and total leverage ratios.
        The New Senior Credit Facility also contains other covenants, which among
        other
        things, limit capital expenditures, the incurrence of additional indebtedness,
        investments, dividends, transactions with affiliates, asset sales, mergers
        and
        consolidations, prepayment of other indebtedness, liens and encumbrances
        and
        other matters customarily restricted in such agreements.
 
 Simmons
        Company’s senior discount notes (“Discount Notes”) with an aggregrate principal
        amount at maturity of $269.0 million bear interest at the rate of 10.0% per
        annum, which will be payable semi-annually in cash in arrears on June 15
        and
        December 15 of each year commencing on June 15, 2010. Prior to December 15,
        2009, interest will accrue on the Discount Notes in the form of an increase
        in
        the accreted value of the Discount Notes. The Company’s ability to make payments
        on the Discount Notes is dependent on the earnings and distribution of funds
        from Simmons Bedding.
  Simmons
        Bedding’s 7.875% senior subordinated notes due 2014 are fully and
        unconditionally guaranteed, on a joint and several basis, and on an unsecured,
        senior subordinated basis by Simmons Company and THL-SC Bedding (the “Parent
        Guarantors”) and all of the Company’s active domestic subsidiaries (the
“Subsidiary Guarantors”). All the Subsidiary Guarantors are 100% owned by
        Simmons Bedding. The following Supplemental Consolidating Condensed Financial
        Statements provide additional guarantor/non-guarantor
        information.
  11
  
 **Supplemental
        Consolidating Condensed Statements of Operations**
 **For
        the Quarter Ended July 1, 2006**
 (In
        thousands)
 
 Issuer
                    and GuarantorsSimmonsParent
                
                Bedding
                
                Guarantor
                
                Non-GuarantorGuarantors
                
                Company
                
                Subsidiaries
                
                Subsidiaries
                
                Eliminations
                
                ConsolidatedNet
                    sales
                
                $
                -
                
                $
                (22,488
                )
                $
                261,469
                
                $
                2,220
                
                $
                -
                
                $
                241,202Cost
                    of products sold
                
                
                -
                
                
                862
                
                
                129,484
                
                
                1,705
                
                
                -
                
                
                132,051Gross
                    profit
                
                
                -
                
                
                (23,350
                )
                
                131,985
                
                
                515
                
                
                -
                
                
                109,151Operating
                    expenses:Selling,
                    general and administrative expenses
                
                
                44
                
                
                50,580
                
                
                30,623
                
                
                386
                
                
                -
                
                
                81,633Amortization
                    of intangibles
                
                
                -
                
                
                807
                
                
                610
                
                
                -
                
                
                -
                
                
                1,417Intercompany
                    fees
                
                
                -
                
                
                (77,558
                )
                
                77,331
                
                
                227
                
                
                -
                
                
                -Licensing
                    revenues
                
                
                -
                
                
                (279
                )
                
                (1,557
                )
                
                (176
                )
                
                -
                
                
                (2,012
                )44
                
                
                (26,450
                )
                
                107,007
                
                
                437
                
                
                -
                
                
                81,038Operating
                    income (loss)
                
                
                (44
                )
                
                3,100
                
                
                24,978
                
                
                78
                
                
                -
                
                
                28,113Interest
                    expense, net
                
                
                4,567
                
                
                19,870
                
                
                218
                
                
                61
                
                
                -
                
                
                24,715Income
                    from subsidiaries
                
                
                5,823
                
                
                21,447
                
                
                -
                
                
                -
                
                
                (27,270
                )
                
                -Income
                    before income taxes
                
                
                1,212
                
                
                4,677
                
                
                24,760
                
                
                17
                
                
                (27,270
                )
                
                3,398Income
                    tax expense (benefit)
                
                
                (849
                )
                
                (1,145
                )
                
                3,327
                
                
                3
                
                
                -
                
                
                1,337Net
                    income
                
                $
                2,061
                
                $
                5,822
                
                $
                21,433
                
                $
                14
                
                $
                (27,270
                )
                $
                2,061
  12
  
 
 **Supplemental
        Consolidating Condensed Statements of Operations**
 **For
        the Quarter Ended June 25, 2005**
 (In
        thousands)
 
 Issuer
                    and GuarantorsSimmonsParent
                
                Bedding
                
                Guarantor
                
                Non-GuarantorGuarantors
                
                Company
                
                Subsidiaries
                
                Subsidiaries
                
                Eliminations
                
                ConsolidatedNet
                    sales
                
                $
                -
                
                $
                (17,784
                )
                $
                222,739
                
                $
                3,087
                
                $
                -
                
                $
                208,042Cost
                    of products sold
                
                
                -
                
                
                305
                
                
                114,771
                
                
                2,180
                
                
                -
                
                
                117,256Gross
                    profit
                
                
                -
                
                
                (18,089
                )
                
                107,968
                
                
                907
                
                
                -
                
                
                90,786Operating
                    expenses:Selling,
                    general and administrative expenses
                
                
                69
                
                
                49,040
                
                
                23,591
                
                
                642
                
                
                -
                
                
                73,342Amortization
                    of intangibles
                
                
                -
                
                
                807
                
                
                610
                
                
                -
                
                
                -
                
                
                1,417Intercompany
                    fees
                
                
                -
                
                
                (71,072
                )
                
                70,817
                
                
                255
                
                
                -
                
                
                -Licensing
                    revenues
                
                
                -
                
                
                (265
                )
                
                (2,402
                )
                
                (148
                )
                
                -
                
                
                (2,815
                )69
                
                
                (21,490
                )
                
                92,616
                
                
                749
                
                
                -
                
                
                71,944Operating
                    income (loss)
                
                
                (69
                )
                
                3,401
                
                
                15,352
                
                
                158
                
                
                -
                
                
                18,842Interest
                    expense, net
                
                
                4,156
                
                
                12,974
                
                
                200
                
                
                29
                
                
                -
                
                
                17,359Income
                    from subsidiaries
                
                
                3,679
                
                
                14,173
                
                
                4,162
                
                
                -
                
                
                (22,014
                )
                
                -Income
                    before income taxes
                
                
                (546
                )
                
                4,600
                
                
                19,314
                
                
                129
                
                
                (22,014
                )
                
                1,483Income
                    tax expense (benefit)
                
                
                (1,605
                )
                
                920
                
                
                1,266
                
                
                (157
                )
                
                -
                
                
                424Net
                    income
                
                $
                1,059
                
                $
                3,680
                
                $
                18,048
                
                $
                286
                
                $
                (22,014
                )
                $
                1,059
  13
  **Supplemental
        Consolidating Condensed Statements of Operations**
 **For
        the Six Months Ended July 1, 2006**
 (In
        thousands)
 
 Issuer
                    and GuarantorsSimmonsParent
                
                Bedding
                
                Guarantor
                
                Non-GuarantorGuarantors
                
                Company
                
                Subsidiaries
                
                Subsidiaries
                
                Eliminations
                
                ConsolidatedNet
                    sales
                
                $
                -
                
                $
                (51,740
                )
                $
                524,764
                
                $
                4,045
                
                $
                -
                
                $
                477,069Cost
                    of products sold
                
                
                -
                
                
                1,677
                
                
                263,781
                
                
                3,032
                
                
                -
                
                
                268,490Gross
                    profit
                
                
                -
                
                
                (53,417
                )
                
                260,983
                
                
                1,013
                
                
                -
                
                
                208,579Operating
                    expenses:Selling,
                    general and administrative expenses
                
                
                67
                
                
                93,204
                
                
                58,468
                
                
                800
                
                
                -
                
                
                152,539Amortization
                    of intangibles
                
                
                -
                
                
                1,614
                
                
                1,220
                
                
                -
                
                
                -
                
                
                2,834Intercompany
                    fees
                
                
                -
                
                
                (155,734
                )
                
                155,346
                
                
                388
                
                
                -
                
                
                -Licensing
                    revenues
                
                
                -
                
                
                (556
                )
                
                (3,391
                )
                
                (353
                )
                
                -
                
                
                (4,300
                )67
                
                
                (61,472
                )
                
                211,643
                
                
                835
                
                
                -
                
                
                151,073Operating
                    income (loss)
                
                
                (67
                )
                
                8,055
                
                
                49,340
                
                
                178
                
                
                -
                
                
                57,506Interest
                    expense, net
                
                
                9,225
                
                
                34,148
                
                
                430
                
                
                88
                
                
                -
                
                
                43,891Income
                    from subsidiaries
                
                
                15,195
                
                
                37,252
                
                
                -
                
                
                -
                
                
                (52,447
                )
                
                -Income
                    before income taxes
                
                
                5,903
                
                
                11,159
                
                
                48,910
                
                
                90
                
                
                (52,447
                )
                
                13,615Income
                    tax expense (benefit)
                
                
                (2,591
                )
                
                (4,035
                )
                
                11,695
                
                
                52
                
                
                -
                
                
                5,121Net
                    income
                
                $
                8,494
                
                $
                15,194
                
                $
                37,215
                
                $
                38
                
                $
                (52,447
                )
                $
                8,494
 
 
 
 
 14
 
 
 
  **Supplemental
        Consolidating Condensed Statements of Operations**
 **For
        the Six Months Ended June 25, 2005**
 (In
        thousands)
 
 Issuer
                    and GuarantorsSimmonsParent
                
                Bedding
                
                Guarantor
                
                Non-GuarantorGuarantors
                
                Company
                
                Subsidiaries
                
                Subsidiaries
                
                Eliminations
                
                ConsolidatedNet
                    sales
                
                $
                -
                
                $
                (33,817
                )
                $
                442,133
                
                $
                5,308
                
                $
                -
                
                $
                413,624Cost
                    of products sold
                
                
                -
                
                
                593
                
                
                226,917
                
                
                3,912
                
                
                -
                
                
                231,422Gross
                    profit
                
                
                -
                
                
                (34,410
                )
                
                215,216
                
                
                1,396
                
                
                -
                
                
                182,202Operating
                    expenses:Selling,
                    general and administrative expenses
                
                
                160
                
                
                100,520
                
                
                50,696
                
                
                1,127
                
                
                -
                
                
                152,503Amortization
                    of intangibles
                
                
                -
                
                
                1,615
                
                
                1,243
                
                
                -
                
                
                -
                
                
                2,858Intercompany
                    fees
                
                
                -
                
                
                (142,807
                )
                
                142,348
                
                
                459
                
                
                -
                
                
                -Licensing
                    revenues
                
                
                -
                
                
                (529
                )
                
                (4,009
                )
                
                (328
                )
                
                -
                
                
                (4,866
                )160
                
                
                (41,201
                )
                
                190,278
                
                
                1,258
                
                
                -
                
                
                150,495Operating
                    income (loss)
                
                
                (160
                )
                
                6,791
                
                
                24,938
                
                
                138
                
                
                -
                
                
                31,707Interest
                    expense, net
                
                
                8,381
                
                
                24,940
                
                
                400
                
                
                52
                
                
                -
                
                
                33,773Income
                    from subsidiaries
                
                
                4,162
                
                
                23,711
                
                
                4,162
                
                
                -
                
                
                (32,035
                )
                
                -Income
                    (loss) before income taxes
                
                
                (4,379
                )
                
                5,562
                
                
                28,700
                
                
                86
                
                
                (32,035
                )
                
                (2,066
                )Income
                    tax expense (benefit)
                
                
                (3,246
                )
                
                1,400
                
                
                1,039
                
                
                (126
                )
                
                -
                
                
                (933
                )Net
                    income (loss)
                
                $
                (1,133
                )
                $
                4,162
                
                $
                27,661
                
                $
                212
                
                $
                (32,035
                )
                $
                (1,133
                )
 
 
 
 15
 
 
 **Supplemental
        Consolidating Condensed Balance Sheets**
 **As
        of July 1, 2006**
 (In
        thousands)
 
 Issuer
                          and GuarantorsSimmonsParent
                      
                      Bedding
                      
                      Subsidiary
                      
                      Non-GuarantorGuarantors
                      
                      Company
                      
                      Guarantors
                      
                      Subsidiaries
                      
                      Eliminations
                      
                      ConsolidatedASSETSCurrent
                          assets:Cash
                          and cash equivalents
                      
                      $
                      -
                      
                      $
                      18,519
                      
                      $
                      7,343
                      
                      $
                      3,020
                      
                      $
                      -
                      
                      $
                      28,882Accounts
                          receivable
                      
                      
                      -
                      
                      
                      -
                      
                      
                      87,365
                      
                      
                      1,129
                      
                      
                      -
                      
                      
                      88,494Inventories
                      
                      
                      -
                      
                      
                      -
                      
                      
                      28,216
                      
                      
                      626
                      
                      
                      -
                      
                      
                      28,842Other
                      
                      
                      -
                      
                      
                      7,077
                      
                      
                      11,127
                      
                      
                      494
                      
                      
                      -
                      
                      
                      18,698Total
                          current assets
                      
                      
                      -
                      
                      
                      25,596
                      
                      
                      134,051
                      
                      
                      5,269
                      
                      
                      -
                      
                      
                      164,916Property,
                          plant and equipment, net
                      
                      
                      -
                      
                      
                      10,741
                      
                      
                      43,395
                      
                      
                      4,939
                      
                      
                      -
                      
                      
                      59,075Goodwill
                          and other intangibles, net
                      
                      
                      -
                      
                      
                      66,090
                      
                      
                      956,486
                      
                      
                      65
                      
                      
                      -
                      
                      
                      1,022,641Other
                          assets
                      
                      
                      3,343
                      
                      
                      30,000
                      
                      
                      1,855
                      
                      
                      394
                      
                      
                      -
                      
                      
                      35,592Net
                          investment in and advances to(from)
                          affiliates
                      
                      
                      286,765
                      
                      
                      890,031
                      
                      
                      191,799
                      
                      
                      (2,008
                      )
                      
                      (1,366,587
                      )
                      
                      -$
                      290,108
                      
                      $
                      1,022,458
                      
                      $
                      1,327,586
                      
                      $
                      8,659
                      
                      $
                      (1,366,587
                      )
                      $
                      1,282,224LIABILITIES
                          AND STOCKHOLDERS' EQUITYCurrent
                          liabilities:Current
                          maturities of long-term debt
                      
                      $
                      -
                      
                      $
                      -
                      
                      $
                      200
                      
                      $
                      213
                      
                      $
                      -
                      
                      $
                      413Accounts
                          payable and accrued liabilities
                      
                      
                      145
                      
                      
                      45,037
                      
                      
                      72,658
                      
                      
                      880
                      
                      
                      -
                      
                      
                      118,720Total
                          current liabilities
                      
                      
                      145
                      
                      
                      45,037
                      
                      
                      72,858
                      
                      
                      1,093
                      
                      
                      -
                      
                      
                      119,133Long-term
                          debt
                      
                      
                      191,975
                      
                      
                      680,000
                      
                      
                      13,100
                      
                      
                      1,369
                      
                      
                      -
                      
                      
                      886,444Deferred
                          income taxes
                      
                      
                      (15,157
                      )
                      
                      (10,709
                      )
                      
                      174,548
                      
                      
                      179
                      
                      
                      -
                      
                      
                      148,861Other
                          non-current liabilities
                      
                      
                      -
                      
                      
                      9,304
                      
                      
                      5,129
                      
                      
                      208
                      
                      
                      -
                      
                      
                      14,641Total
                          liabilities
                      
                      
                      176,963
                      
                      
                      723,632
                      
                      
                      265,635
                      
                      
                      2,849
                      
                      
                      -
                      
                      
                      1,169,079Stockholders'
                          equity
                      
                      
                      113,145
                      
                      
                      298,826
                      
                      
                      1,061,951
                      
                      
                      5,810
                      
                      
                      (1,366,587
                      )
                      
                      113,145$
                      290,108
                      
                      $
                      1,022,458
                      
                      $
                      1,327,586
                      
                      $
                      8,659
                      
                      $
                      (1,366,587
                      )
                      $
                      1,282,224
  16
  **Supplemental
        Consolidating Condensed Statements of Cash Flows**
 **For
        the Six Months Ended July 1, 2006**
 (In
        thousands)
 
 Issuer
                        and GuarantorsSimmonsParent
                    
                    Bedding
                    
                    Subsidiary
                    
                    Non-GuarantorGuarantors
                    
                    Company
                    
                    Guarantors
                    
                    Subsidiaries
                    
                    Eliminations
                    
                    ConsolidatedNet
                        cash provided by (used in) operating activities
                    
                    $
                    267
                    
                    $
                    (15,778
                    )
                    $
                    56,456
                    
                    $
                    299
                    
                    $
                    -
                    
                    $
                    41,244Cash
                        flows from investing activities:Purchase
                        of property, plant and equipment, net
                    
                    
                    -
                    
                    
                    (2,446
                    )
                    
                    (3,330
                    )
                    
                    -
                    
                    
                    -
                    
                    
                    (5,776
                    )Net
                        cash used in investing activities
                    
                    
                    -
                    
                    
                    (2,446
                    )
                    
                    (3,330
                    )
                    
                    -
                    
                    
                    -
                    
                    
                    (5,776
                    )Cash
                        flows from financing activities:Borrowings
                        under New Senior Credit Facility, net
                    
                    
                    -
                    
                    
                    480,000
                    
                    
                    -
                    
                    
                    -
                    
                    
                    
                    
                    
                    480,000Payments
                        of senior credit facility, net
                    
                    
                    -
                    
                    
                    (369,933
                    )
                    
                    -
                    
                    
                    -
                    
                    
                    
                    
                    
                    (369,933
                    )Repayment
                        of senior unsecured term loan
                    
                    
                    -
                    
                    
                    (140,000
                    )
                    
                    -
                    
                    
                    -
                    
                    
                    
                    
                    
                    (140,000
                    )Payment
                        of other long-term obligations
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (106
                    )
                    
                    -
                    
                    
                    (106
                    )Purchase
                        of treasury stock
                    
                    
                    (311
                    )
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (311
                    )Payment
                        of financing fees
                    
                    
                    (41
                    )
                    
                    (932
                    )
                    
                    -
                    
                    
                    -
                    
                    
                    
                    
                    
                    (973
                    )Receipt
                        from (distribution to) affiliates
                    
                    
                    85
                    
                    
                    47,785
                    
                    
                    (47,212
                    )
                    
                    (658
                    )
                    
                    -
                    
                    
                    -Net
                        cash provided by (used in) financing activities
                    
                    
                    (267
                    )
                    
                    16,920
                    
                    
                    (47,212
                    )
                    
                    (764
                    )
                    
                    -
                    
                    
                    (31,323
                    )Net
                        effect of exchange rate changes
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    115
                    
                    
                    -
                    
                    
                    115Change
                        in cash and cash equivalents
                    
                    
                    -
                    
                    
                    (1,304
                    )
                    
                    5,914
                    
                    
                    (350
                    )
                    
                    -
                    
                    
                    4,260Cash
                        and cash equivalents:Beginning
                        of period
                    
                    
                    -
                    
                    
                    19,823
                    
                    
                    1,429
                    
                    
                    3,370
                    
                    
                    -
                    
                    
                    24,622End
                        of period
                    
                    $
                    -
                    
                    $
                    18,519
                    
                    $
                    7,343
                    
                    $
                    3,020
                    
                    $
                    -
                    
                    $
                    28,882
  17
  **Supplemental
        Consolidating Condensed Statements of Cash Flows**
 **For
        the Six Months Ended June 25, 2005**
 (In
        thousands)
 
 Issuer
                          and GuarantorsSimmonsParent
                      
                      Bedding
                      
                      Subsidiary
                      
                      Non-GuarantorGuarantors
                      
                      Company
                      
                      Guarantors
                      
                      Subsidiaries
                      
                      Eliminations
                      
                      ConsolidatedNet
                          cash provided by (used in) operating activities
                      
                      $
                      (202
                      )
                      $
                      4,901
                      
                      $
                      14,517
                      
                      $
                      (870
                      )
                      $
                      -
                      
                      $
                      18,346Cash
                          flows from investing activities:Purchase
                          of property, plant and equipment, net
                      
                      
                      -
                      
                      
                      (1,364
                      )
                      
                      (1,201
                      )
                      
                      (21
                      )
                      
                      -
                      
                      
                      (2,586
                      )Purchase
                          of Simmons Juvenile Products
                      
                      
                      -
                      
                      
                      -
                      
                      
                      (3,337
                      )
                      
                      -
                      
                      
                      -
                      
                      
                      (3,337
                      )Net
                          cash used in investing activities
                      
                      
                      -
                      
                      
                      (1,364
                      )
                      
                      (4,538
                      )
                      
                      (21
                      )
                      
                      -
                      
                      
                      (5,923
                      )Cash
                          flows from financing activities:Payments
                          of deferred financing fees
                      
                      
                      (125
                      )
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      
                      
                      
                      (125
                      )Repayment
                          of long-term obligations
                      
                      
                      -
                      
                      
                      (4,667
                      )
                      
                      (41
                      )
                      
                      (118
                      )
                      
                      -
                      
                      
                      (4,826
                      )Purchase
                          of treasury stock
                      
                      
                      (304
                      )
                      
                      -
                      
                      
                      -
                      
                      
                      
                      
                      
                      -
                      
                      
                      (304
                      )Receipt
                          from (distribution to) affiliates
                      
                      
                      279
                      
                      
                      -
                      
                      
                      (2,069
                      )
                      
                      1,790
                      
                      
                      -
                      
                      
                      -Net
                          cash used in financing activities
                      
                      
                      (150
                      )
                      
                      (4,667
                      )
                      
                      (2,110
                      )
                      
                      1,672
                      
                      
                      -
                      
                      
                      (5,255
                      )Net
                          effect of exchange rate changes
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      (6
                      )
                      
                      -
                      
                      
                      (6
                      )Change
                          in cash and cash equivalents
                      
                      
                      (352
                      )
                      
                      (1,130
                      )
                      
                      7,869
                      
                      
                      775
                      
                      
                      -
                      
                      
                      7,162Cash
                          and cash equivalents:Beginning
                          of period
                      
                      
                      352
                      
                      
                      15,923
                      
                      
                      7,333
                      
                      
                      598
                      
                      
                      -
                      
                      
                      24,206End
                          of period
                      
                      $
                      -
                      
                      $
                      14,793
                      
                      $
                      15,202
                      
                      $
                      1,373
                      
                      $
                      -
                      
                      $
                      31,368
  18
  **F.**  **Share-Based
        Compensation**
 
 Under
        the Simmons Company Equity Incentive Plan (“Incentive Plan”), the Company is
        authorized to issue 688,235 shares of Class B common stock as restricted
        stock
        awards to the management and independent directors of the Company. The
        restricted stock awards are performance based awards, where the restrictions
        lapse based upon the achievement of specific measurable performance criteria.
        As
        of January 1, 2006, most of the awards vested ratably over a four year period
        based upon the Company meeting certain annual Adjusted EBITDA targets or
        on the
        eighth anniversary after issuance. Future vesting was subject to the holders
        continued full-time employment with the Company or continuance as a director
        of
        the Company. Unvested shares accelerated upon a change of control of the
        Company
        if the Company had met certain performance criteria. Holders of the restricted
        stock had the right to receive dividends and vote shares, but could not sell,
        assign, transfer or pledge or otherwise encumber the stock.
 
 The
        Company adopted the provisions of Statement of Financial Accounting Standard
        (“SFAS”) No. 123 (Revised 2004), *Share-Based
        Payment* (“SFAS 123R”) on January 1, 2006 (the first day of the 2006 first quarter).
        Prior to the adoption of SFAS 123R, the Company accounted for its awards
        of
        restricted stock made to its employees, directors and consultants pursuant
        to
        the Incentive Plan in accordance with the Accounting Principles Board Opinion
        No. 25, *Accounting
        for Stock Issued to Employees* (“APB 25”), as permitted by SFAS No. 123, *Accounting
        for Stock-Based Compensation* (“SFAS 123”). Under APB 25, compensation cost was measured upon issuance of the
        restricted stock award as the excess of the fair value of the award over
        the
        purchase price. Fair value was determined by the Company’s board of directors
        based upon a quarterly valuation of the Company’s enterprise value as measured
        by a third party valuation specialist. The
        Company’s enterprise value fluctuates based upon its operating performance,
        changes in market multiples for comparable publicly traded companies, and
        changes in multiples paid for companies with similar operations as the
        Company. **** The
        entire amount of the compensation cost was recorded as deferred compensation
        and
        amortized as a charge to selling, general and administrative expense over
        the
        period that the restrictions were expected to lapse.
 
 The
        Company used the modified prospective application method of transition under
        SFAS 123R. Under the modified prospective application method, the Company
        will
        apply SFAS 123R for new awards granted after January 1, 2006 and for
        unvested awards as of January 1, 2006. Upon adoption of SFAS 123R, the Company
        made a one-time cumulative adjustment to record an estimate of the future
        forfeitures on all outstanding restricted stock awards. Additionally, the
        Company netted its deferred compensation related to awards issued prior to
        the
        adoption of SFAS 123R against additional paid in capital. Under SFAS 123R,
        compensation cost is measured at the grant date as the excess of the fair
        value
        of the award over the purchase price. Fair value is determined by the Company’s
        board of directors based upon a quarterly valuation of the Company’s enterprise
        value as measured by a third party valuation specialist.
 
 19
 Since
        vesting of certain restricted stock awards granted under the Incentive Plan
        was
        unlikely, 569,136 shares of restricted stock awards were modified by the
        Company
        on April
        17, 2006. Among other things, the modification resulted in the vesting of
        18.75%
        of restricted stock awards for certain individuals not previously vested;
        revising of the vesting schedule through 2008; lowering of the Adjusted EBITDA
        performance targets for 2006 and 2007; and the elimination of cliff vesting.
        The
        fair value of the restricted stock awards post-modification was greater than
        the
        fair value of the awards prior to modification. As a result, the Company
        recorded an additional $1.0 million of deferred compensation, which will
        be
        recognized as an expense over the modified three year graded vesting
        schedule.
 
 The
        following table presents a rollforward of the number of nonvested shares
        for the
        six months ended July 1, 2006 and the weighted-average grant-date fair value
        of
        the restricted stock awards:
 **Weighted****Average****Number
                    of**
                
                **Fair
                    Value at****Shares**
                
                **Grant
                    Date**Nonvested
                    shares as of December 31, 2005
                
                
                536,652
                
                $
                0.84Granted
                
                
                84,850
                
                $
                2.43Vested
                
                
                (26,287
                )
                $
                3.19Forfeited
                
                
                (95,561
                )
                $
                0.67Nonvested
                    shares as of July 1, 2006
                
                
                499,654
                
                $
                1.01
 
 Non-cash
        stock compensation expense was $0.5 million for the quarter and six months
        ended
        July 1, 2006 and zero for the quarter and six months ended June 25, 2005.
        As of
        July 1, 2006, there was $1.0 million of total unrecognized compensation cost
        related to nonvested restricted stock awards granted under the Incentive
        Plan
        which is expected to be recognized as an expense over a weighted average
        period
        of 2.6 years.
 
 **G.**  **Segment
        Information**
 
 Operating
        segments are generally organized internally by whether the products are sold
        to
        a reseller or to an end consumer. The Company has aggregated similar operating
        segments into two reportable segments: (1) wholesale bedding and (2) retail
        bedding.
 
 The
        wholesale bedding segment consists of (i) the manufacture, sale and distribution
        of premium branded bedding products to retail customers and institutional
        users
        of bedding products, such as the hospitality industry; (ii) the manufacture,
        sale and distribution of juvenile bedding and related soft good products;
        (iii)
        the licensing of intellectual property to domestic and international companies
        that manufacture and sell the Company’s premium branded bedding products or
        products which complement the bedding products manufactured by the Company
        and
        its licensees; (iv) the sale of product returns, off-quality product and
        excess
        inventory to “as-is” dealers and to consumers through the Company’s owned retail
        outlet stores; and (v) corporate costs related to the Company.
 
 The
        retail bedding segment currently operates specialty sleep stores under the
        Sleep
        Country USA name in Oregon and Washington that principally sell premium
        branded bedding products to consumers. On July 24, 2006, the Company entered
        into a definitive purchase agreement with an affiliate of Sleep Train, Inc.
        to
        sell Sleep Country USA, Inc. (see note I - Subsequent Event). The transaction
        is
        expected to close in August of 2006. Subsequent to the transaction, the Company
        will only have one reportable segment, the wholesale bedding
        segment.
 
 20
 The
        Company evaluates segment performance and allocates resources based on net
        sales
        and Adjusted EBITDA. Adjusted EBITDA differs from the term “EBITDA” as it is
        commonly used. In addition to adjusting net income to exclude interest expense,
        income taxes, depreciation and amortization, Adjusted EBITDA also adjusts
        net
        income by excluding items or expenses not typically excluded in the calculation
        of “EBITDA” such as management fees and unusual or non-recurring items as
        defined by the Company’s senior credit facility. Management believes the
        aforementioned approach is the most informative representation of how management
        evaluates performance. Adjusted EBITDA does not represent net income or cash
        flow from operations as those terms are defined by GAAP and does not necessarily
        indicate whether cash flows will be sufficient to fund cash needs.
 
 The
        following tables summarize segment information:
 
 Quarter
        Ended July 1, 2006
  WholesaleBedding
              
              Retail
              
              Eliminations
              
              TotalsNet
                  sales to external customers
              
              $
              218,260
              
              $
              22,942
              
              $
              -
              
              $
              241,202Intersegment
                  net sales
              
              
              4,409
              
              
              -
              
              
              (4,409
              )
              
              -Adjusted
                  EBITDA
              
              
              35,438
              
              
              1,843
              
              
              43
              
              
              37,324Depreciation
                  and amortization expense
              
              
              6,446
              
              
              331
              
              
              -
              
              
              6,777Expenditures
                  for long-lived assets
              
              
              1,786
              
              
              682
              
              
              -
              
              
              2,468Segment
                  assets
              
              
              1,258,499
              
              
              25,217
              
              
              (1,492
              )
              
              1,282,224Reconciliation
                  of EBITDA and Adjusted EBITDA to net income:Net
                  income
              
              $
              1,034
              
              $
              984
              
              $
              43
              
              $
              2,061Depreciation
                  and amortization
              
              
              6,446
              
              
              331
              
              
              -
              
              
              6,777Income
                  taxes
              
              
              1,012
              
              
              325
              
              
              -
              
              
              1,337Interest
                  expense, net
              
              
              24,715
              
              
              -
              
              
              -
              
              
              24,715Interest
                  income
              
              
              151
              
              
              -
              
              
              -
              
              
              151EBITDA
              
              
              33,358
              
              
              1,640
              
              
              43
              
              
              35,041Reorganization
                  costs
              
              
              728
              
              
              -
              
              
              -
              
              
              728Non-cash
                  stock compensation
              
              
              515
              
              
              -
              
              
              -
              
              
              515Management
                  fees
              
              
              326
              
              
              115
              
              
              -
              
              
              441State
                  taxes in lieu of income taxes
              
              
              153
              
              
              88
              
              
              -
              
              
              241Transaction
                  expenses
              
              
              133
              
              
              -
              
              
              -
              
              
              133Management
                  severance
              
              
              101
              
              
              -
              
              
              -
              
              
              101Other
              
              
              124
              
              
              -
              
              
              -
              
              
              124Adjusted
                  EBITDA
              
              $
              35,438
              
              $
              1,843
              
              $
              43
              
              $
              37,324
 
 
 
 
 21
 
 Quarter
          Ended June 25, 2005
  WholesaleBedding
                  
                  Retail
                  
                  Eliminations
                  
                  TotalsNet
                      sales to external customers
                  $
                  189,283
                  
                  $
                  18,759
                  
                  $
                  -
                  
                  $
                  208,042Intersegment
                      net sales
                  
                  3,414
                  
                  
                  -
                  
                  
                  (3,414
                  )
                  
                  -Adjusted
                      EBITDA
                  
                  25,890
                  
                  
                  1,606
                  
                  
                  95
                  
                  
                  27,591Depreciation
                      and amortization expense
                  
                  6,234
                  
                  
                  427
                  
                  
                  -
                  
                  
                  6,661Expenditures
                      for long-lived assets
                  
                  1,032
                  
                  
                  176
                  
                  
                  -
                  
                  
                  1,208Segment
                      assets
                  
                  1,263,943
                  
                  
                  27,406
                  
                  
                  (1,505
                  )
                  
                  1,289,844Reconciliation
                      of EBITDA and Adjusted EBITDA to net income:Net
                      income
                  
                  
                  
                  
                  $
                  320
                  
                  $
                  644
                  
                  $
                  95
                  
                  $
                  1,059Depreciation
                      and amortization
                  
                  
                  
                  
                  
                  6,234
                  
                  
                  427
                  
                  
                  -
                  
                  
                  6,661Income
                      taxes
                  
                  
                  
                  
                  
                  57
                  
                  
                  367
                  
                  
                  -
                  
                  
                  424Interest
                      expense, net
                  
                  
                  
                  
                  
                  17,356
                  
                  
                  3
                  
                  
                  -
                  
                  
                  17,359Interest
                      income
                  
                  
                  
                  
                  
                  20
                  
                  
                  1
                  
                  
                  -
                  
                  
                  21EBITDA
                  
                  
                  
                  
                  
                  23,987
                  
                  
                  1,442
                  
                  
                  95
                  
                  
                  25,524Reorganization
                      costs
                  
                  
                  
                  
                  
                  1,345
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,345Management
                      fees
                  
                  
                  
                  
                  
                  238
                  
                  
                  94
                  
                  
                  -
                  
                  
                  332Transaction
                      expenses
                  
                  
                  
                  
                  
                  177
                  
                  
                  -
                  
                  
                  -
                  
                  
                  177State
                      taxes in lieu of income taxes
                  
                  
                  
                  
                  
                  103
                  
                  
                  70
                  
                  
                  -
                  
                  
                  173Other
                  
                  
                  
                  
                  
                  40
                  
                  
                  -
                  
                  
                  -
                  
                  
                  40Adjusted
                      EBITDA
                  
                  
                  
                  
                  $
                  25,890
                  
                  $
                  1,606
                  
                  $
                  95
                  
                  $
                  27,591
 
 22
 Six
          Months Ended July 1, 2006
 WholesaleBedding
                
                Retail
                
                Eliminations
                
                TotalsNet
                    sales to external customers
                $
                430,492
                
                $
                46,577
                
                $
                -
                
                $
                477,069Intersegment
                    net sales
                
                9,124
                
                
                -
                
                
                (9,124
                )
                
                -Adjusted
                    EBITDA
                
                71,703
                
                
                4,547
                
                
                22
                
                
                76,272Depreciation
                    and amortization expense
                
                13,408
                
                
                649
                
                
                -
                
                
                14,057Expenditures
                    for long-lived assets
                
                4,400
                
                
                1,376
                
                
                -
                
                
                5,776Segment
                    assets
                
                1,258,499
                
                
                25,217
                
                
                (1,492
                )
                
                1,282,224Reconciliation
                    of EBITDA and Adjusted EBITDA to net income:Net
                    income
                
                
                
                
                $
                6,114
                
                $
                2,358
                
                $
                22
                
                $
                8,494Depreciation
                    and amortization
                
                
                
                
                
                13,408
                
                
                649
                
                
                -
                
                
                14,057Income
                    taxes
                
                
                
                
                
                3,995
                
                
                1,126
                
                
                -
                
                
                5,121Interest
                    expense, net
                
                
                
                
                
                43,887
                
                
                4
                
                
                -
                
                
                43,891Interest
                    income
                
                
                
                
                
                235
                
                
                -
                
                
                -
                
                
                235EBITDA
                
                
                
                
                
                67,639
                
                
                4,137
                
                
                22
                
                
                71,798Reorganization
                    costs
                
                
                
                
                
                1,454
                
                
                -
                
                
                -
                
                
                1,454Management
                    severance
                
                
                
                
                
                927
                
                
                -
                
                
                -
                
                
                927Management
                    fees
                
                
                
                
                
                613
                
                
                233
                
                
                -
                
                
                846Non-cash
                    stock compensation
                
                
                
                
                
                517
                
                
                -
                
                
                -
                
                
                517State
                    taxes in lieu of income taxes
                
                
                
                
                
                311
                
                
                177
                
                
                -
                
                
                488Transaction
                    expenses
                
                
                
                
                
                133
                
                
                -
                
                
                -
                
                
                133Other
                
                
                
                
                
                109
                
                
                -
                
                
                -
                
                
                109Adjusted
                    EBITDA
                
                
                
                
                $
                71,703
                
                $
                4,547
                
                $
                22
                
                $
                76,272
 
 23
  Six
          Months Ended June 25, 2005
  WholesaleBedding
                
                Retail
                
                Eliminations
                
                TotalsNet
                    sales to external customers
                $
                375,734
                
                $
                37,890
                
                $
                -
                
                $
                413,624Intersegment
                    net sales
                
                6,563
                
                
                -
                
                
                (6,563
                )
                
                -Adjusted
                    EBITDA
                
                43,609
                
                
                3,790
                
                
                242
                
                
                47,641Depreciation
                    and amortization expense
                
                12,369
                
                
                752
                
                
                -
                
                
                13,121Expenditures
                    for long-lived assets
                
                2,156
                
                
                430
                
                
                -
                
                
                2,586Segment
                    assets
                
                1,263,943
                
                
                27,406
                
                
                (1,505
                )
                
                1,289,844Reconciliation
                    of EBITDA and Adjusted EBITDA to net income (loss):Net
                    income (loss)
                
                
                
                
                $
                (3,114
                )
                $
                1,739
                
                $
                242
                
                $
                (1,133
                )Depreciation
                    and amortization
                
                
                
                
                
                12,369
                
                
                752
                
                
                -
                
                
                13,121Income
                    taxes
                
                
                
                
                
                (1,898
                )
                
                965
                
                
                -
                
                
                (933
                )Interest
                    expense, net
                
                
                
                
                
                33,769
                
                
                4
                
                
                -
                
                
                33,773Interest
                    income
                
                
                
                
                
                58
                
                
                1
                
                
                -
                
                
                59EBITDA
                
                
                
                
                
                41,184
                
                
                3,461
                
                
                242
                
                
                44,887Reorganization
                    costs
                
                
                
                
                
                1,345
                
                
                -
                
                
                -
                
                
                1,345Management
                    fees
                
                
                
                
                
                562
                
                
                190
                
                
                -
                
                
                752State
                    taxes in lieu of income taxes
                
                
                
                
                
                196
                
                
                139
                
                
                -
                
                
                335Transaction
                    expenses
                
                
                
                
                
                177
                
                
                -
                
                
                -
                
                
                177Management
                    severance
                
                
                
                
                
                105
                
                
                -
                
                
                -
                
                
                105Other
                
                
                
                
                
                40
                
                
                -
                
                
                -
                
                
                40Adjusted
                    EBITDA
                
                
                
                
                $
                43,609
                
                $
                3,790
                
                $
                242
                
                $
                47,641
 **H.**  **Contingencies**
 
 From
        time to time, the Company has been involved in various legal proceedings.
        The
        Company believes that all current litigation is routine in nature and incidental
        to the conduct of the Company’s business, and that none of this litigation, if
        determined adversely to the Company, would have a material adverse effect
        on the
        Company’s financial condition or results of its operations.
 
 **I.**  **Subsequent
        Event**
 
 On
        July 24, 2006, the Company entered into a definitive purchase agreement to
        sell
        Sleep Country USA, Inc. ("Sleep Country"), its retail bedding segment, to
        an affiliate of Sleep Train, Inc. ("Sleep Train") for cash proceeds of
        approximately $55 million.  The transaction is anticipated to close in
        August of 2006. Separately, the Company agreed to enter into a multi-year
        supply
        agreement with the combined Sleep Country and Sleep Train entities.
 24
 **J.**  **Accounting
        Pronouncements**
 
 In
        February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
        155, *Accounting
        for Certain Hybrid Instruments* (“SFAS
        155”). SFAS 155 allows financial instruments that have embedded derivatives to
        be accounted for as a whole (eliminating the need to bifurcate the derivative
        from its host) if the holder elects to account for the whole instrument on
        a
        fair value basis. SFAS 155 will be effective for all financial instruments
        acquired or issued by the Company beginning in fiscal year 2007. The Company
        does not have any financial instruments with embedded derivatives and does
        not
        expect this statement to have a significant impact on its consolidated financial
        statements or results of operations.
 
 In
        March 2006, the FASB issued SFAS No. 156, *Accounting
        for Servicing of Financial Assets - An Amendment of FASB Statement No.
        140* (“SFAS 156”). Among other requirements, SFAS 156 provides guidance on the
        accounting for servicing assets or liabilities when an entity undertakes
        an
        obligation to service a financial asset by entering into a service contract.
        SFAS 156 will be effective for the Company at the beginning of fiscal year
        2007.
        The Company does not expect this statement to have a significant impact on
        its
        consolidated financial statements or results of operations.
 
 In
        July 2006, the FASB issued Interpretation No. 48, *Accounting
        for Uncertainty in Income Taxes - An Interpretation of FASB Statement No.
        109* (“FIN
        48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
        in an enterprise’s financial statements in accordance with FASB Statement No.
        109, *Accounting
        for Income Taxes* .
        FIN 48 also prescribes a recognition threshold and measurement attribute
        for the
        financial statement recognition and measurement of a tax position taken or
        expected to be taken in a tax return. FIN 48 also provides guidance on
        derecognition, classification, interest and penalties, accounting in interim
        periods, disclosure, and transition. FIN 48 will be effective for the Company
        at
        the beginning of fiscal year 2007. The Company is in the process of evaluating
        the impact of this guidance on its consolidated financial statements and
        results
        of operations.
  25
  
 **Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations**
 
 This
        Management’s Discussion and Analysis of Financial Condition and Results of
        Operations should be read in conjunction with our audited consolidated financial
        statements as of December 31, 2005, including related notes, and Management’s
        Discussion and Analysis of Financial Condition and Results of Operations
        contained in our 2005 Annual Report on Form 10-K, and the unaudited interim
        financial statements included elsewhere in this report.
 
 **Recent
        Events**
 
 *Sale
        of Retail Segment*
 
 On
        July 24, 2006, we entered into a definitive purchase agreement to sell Sleep
        Country USA, Inc. ("Sleep Country"), our retail bedding segment, to an affiliate
        of Sleep Train, Inc. ("Sleep Train") for cash proceeds of approximately $55
        million. The transaction is anticipated to close in August of 2006. 
Separately, we agreed to enter into a multi-year supply agreement with the
        combined Sleep Country and Sleep Train entities.
 
  26
  **Results
        of Operations**
 
 The
        following table sets forth historical consolidated financial information
        as a
        percent of net sales:
 Quarters
                    Ended
                
                Six
                    Months EndedJuly
                    1,
                
                June
                    25,
                
                July
                    1,
                
                June
                    25,2006
                
                2005
                
                2006
                
                2005Net
                    sales
                
                
                100.0
                %
                
                100.0
                %
                
                100.0
                %
                
                100.0
                %Cost
                    of products sold
                
                
                54.7
                %
                
                56.4
                %
                
                56.3
                %
                
                55.9
                %Gross
                    margin
                
                
                45.3
                %
                
                43.6
                %
                
                43.7
                %
                
                44.1
                %Operating
                    expenses:Selling,
                    general and administrative expenses
                
                
                33.8
                %
                
                35.3
                %
                
                32.0
                %
                
                36.9
                %Amortization
                    of intangibles
                
                
                0.6
                %
                
                0.7
                %
                
                0.6
                %
                
                0.7
                %Licensing
                    revenues
                
                
                (0.8
                %)
                
                (1.4
                %)
                
                (0.9
                %)
                
                (1.2
                %)33.7
                %
                
                34.5
                %
                
                31.6
                %
                
                36.3
                %Operating
                    income
                
                
                11.6
                %
                
                9.1
                %
                
                12.1
                %
                
                7.8
                %Interest
                    expense, net
                
                
                10.2
                %
                
                8.3
                %
                
                9.2
                %
                
                8.2
                %Income
                    (loss) before income taxes
                
                
                1.4
                %
                
                0.8
                %
                
                2.9
                %
                
                (0.4
                %)Income
                    tax expense (benefit)
                
                
                0.6
                %
                
                0.2
                %
                
                1.1
                %
                
                (0.2
                %)Net
                    income (loss)
                
                
                0.8
                %
                
                0.6
                %
                
                1.8
                %
                
                (0.2
                %)
 **Quarter
        Ended July 1, 2006 as Compared to the Quarter Ended June 25,
        2005**
 
 *Net
        Sales.* The following table presents our net sales and the dollar amount and percentage
        change by segment for the quarter ended July 1, 2006 compared to the quarter
        ended June 25, 2005.
 $
                    increase
                
                %
                    increase2006
                
                2005
                
                (decrease)
                
                (decrease)(in
                    millions)Wholesale
                    bedding segment
                
                $
                222.7
                
                $
                192.7
                
                $
                30.0
                
                
                15.6
                %Retail
                    bedding segment
                
                
                22.9
                
                
                18.7
                
                
                4.2
                
                
                22.3
                %Eliminations
                
                
                (4.4
                )
                
                (3.4
                )
                
                (1.0
                )
                
                29.1
                %Consolidated
                    net sales
                
                $
                241.2
                
                $
                208.0
                
                $
                33.2
                
                
                15.9
                %
 
 For
        the quarter ended July 1, 2006, wholesale bedding segment net sales increased
        15.6% compared to the same period a year ago primarily as a result of (i)
        a
        13.8% increase in our conventional bedding unit volume resulting in an estimated
        increase in wholesale bedding net sales of $28.0 million and (ii) a 2.4%
        increase in our conventional bedding average unit selling price (“AUSP”)
        resulting in an estimated increase of wholesale bedding net sales of $5.6
        million. Our conventional bedding unit volume increase resulted principally
        from
        the remerchandising of our product lines with our dealers primarily in the
        second and third quarters of 2005 to include better product offerings at
        key
        retail price points. Our improvement in AUSP in the second quarter was primarily
        attributable to the price increase implemented during the fourth quarter
        of 2005
        to help minimize the impact of rising raw material costs, partially offset
        by a
        change in our sales mix.
 
 27
 For
        the quarters ended July 1, 2006 and June 25, 2005, our wholesale bedding
        segment
        net sales reflect a reduction of $20.2 million and $17.7 million, respectively,
        for cash consideration paid to our customers for certain promotional programs,
        allowances and volume rebates. Our sales reductions increased for the quarter
        ended July 1, 2006 compared to the quarter ended June 25, 2005 principally
        due
        to (i) an increase in special promotional allowances of $1.5 million related
        to
        second quarter 2006 sales events at certain of our dealers and (ii) a $1.1
        million increase of co-op advertising expenditures, recorded as a sales
        reduction, due to our increase in sales. As a percentage of our sales, our
        overall co-op advertising expenditures, regardless of whether reported as
        selling expense or a sales reduction, for the quarter ended July 1, 2006,
        were
        0.1 percentage points higher than the overall co-op advertising expenditures
        for
        the quarter ended June 25, 2005.
 
 Retail
        bedding segment net sales increased $4.2 million, or 22.3%, for the quarter
        ended July 1, 2006 compared to the quarter ended June 25, 2005 as a result
        of
        the net addition of nine new retail stores and increased same store sales.
        On a
        comparable store basis, sales for our retail stores increased 3.4% for the
        quarter ended July 1, 2006 versus the quarter ended June 25, 2005. Retail
        segment same store sales benefited from a rise in the average retail sales
        transaction due to an increase in retail prices and a shift in sales
        mix.
 
 *Gross
        Margin.* The following table presents our gross profit, gross margin, and the gross
        margin percentage point change by segment for the quarter ended July 1, 2006
        compared to the quarter ended June 25, 2005.
 
 Margin
                    %Gross
                    Profit
                
                Gross
                    Margin
                
                Point2006
                
                2005
                
                2006
                
                2005
                
                Change(in
                    millions)Wholesale
                    bedding segment
                
                $
                96.6
                
                $
                80.7
                
                
                43.4
                %
                
                41.9
                %
                
                1.5
                %Retail
                    bedding segment
                
                
                12.5
                
                
                10.0
                
                
                54.3
                %
                
                53.1
                %
                
                1.2
                %Eliminations
                
                
                0.0
                
                
                0.1
                
                
                (1.0
                %)
                
                (2.8
                %)
                
                1.8
                %Consolidated
                
                $
                109.1
                
                $
                90.8
                
                
                45.3
                %
                
                43.6
                %
                
                1.7
                %
 Our
        wholesale bedding segment gross margin for the quarter ended July 1, 2006,
        increased by 1.5 percentage points compared to the quarter ended June 25,
        2005,
        primarily due to an 8.1% decrease in our conventional bedding labor and overhead
        cost per unit resulting from favorable efficiencies driven by our increased
        unit
        volume. Partially offsetting the improvement in labor and overhead cost per
        unit, our conventional bedding material cost per unit increased 3.3% for
        the
        quarter ended July 1, 2006 compared to the quarter ended June 25, 2005 due
        to
        inflation in raw material costs.
 
 28
 Our
        retail bedding segment gross margin increased 1.2 percentage points principally
        due to a shift in sales mix to higher margin products during the second quarter
        of 2006 compared to the second quarter of 2005.
 
 *Selling,
        general and administrative expenses (“SG&A”).* The following table presents our SG&A by dollar amount, as a percentage of
        net sales and the percentage point change by segment for the quarter ended
        July
        1, 2006 compared to the quarter ended June 25, 2005.
 
 Margin
                    %SG&A
                
                As
                    a % of Segment Net Sales
                
                Point2006
                
                2005
                
                2006
                
                2005
                
                Change(in
                    millions)Wholesale
                    bedding segment
                
                $
                70.6
                
                $
                64.5
                
                
                31.7
                %
                
                33.5
                %
                
                (1.8
                %)Retail
                    bedding segment
                
                
                11.1
                
                
                8.9
                
                
                48.3
                %
                
                47.2
                %
                
                1.1
                %Consolidated
                
                $
                81.6
                
                $
                73.3
                
                
                33.8
                %
                
                35.3
                %
                
                (1.5
                %)
 As
        a percentage of wholesale bedding segment net sales, our wholesale bedding
        segment SG&A for the quarter ended July 1, 2006 declined 1.8 percentage
        points compared to the quarter ended June 25, 2005. SG&A decreased
        principally due to lower selling expenses, which decreased $3.6 million, or
        3.0 percentage points, primarily as a result of our sales force reorganization
        in December 2005 and the timing of new product
        introductions. Partially offsetting our lower selling expenses, our general
        and administrative expenses increased $3.8 million, or 0.7 percentage points,
        principally due to higher bonus and non-cash stock compensation expense as
        a
        result our improved operating performance, and our national advertising
        expenses increased $2.2 million, or 0.7 percentage points, due to the
        timing of our 2006 national advertising campaign in comparison to the same
        period last year.
 
 Our
        retail segment SG&A increased 1.1 percentage points for the quarter ended
        July 1, 2006 compared to the quarter ended June 25,  2005
        primarily due to the addition
        of the nine new stores, higher bonus expense, and a company training
        event.
 
 *Amortization
        of Intangibles* .
        For each of the quarters ended July 1, 2006 and June 25, 2005, amortization
        of
        intangibles was $1.4 million.
 
 *Licensing
        Revenues* .
        For the quarter ended July 1, 2006, licensing fees decreased $0.8 million
        to
        $2.0 million from $2.8 million for the quarter ended June 25, 2005. Licensing
        fees for the quarter ended June 25, 2005 included additional royalties of
        $0.6
        million resulting from an audit of a licensee.
  29
 *Interest
        Expense* , *Net* .
        For the quarter ended July 1, 2006, interest expense increased $7.4 million
        to
        $24.7 million from $17.4 million for the quarter ended June 25,
        2005.  Interest
        expense increased principally due to the expensing of $5.0 million of deferred
        financing fees associated with the tranche C and senior secured term loans
        that
        were extinguished in connection with Simmons Bedding’s borrowing of $492 million
        in May 2006 under a tranche D term loan (the “Refinancing”). Additionally, in
        connection with the Refinancing, Simmons Bedding incurred $1.0 million of
        refinancing costs that were recorded as interest expense. Excluding the expenses
        associated with the Refinancing, interest expense for the quarter ended July
        1,
        2006 compared to the quarter ended June 25, 2005 increased $1.4 million due
        primarily to higher LIBOR base rates on our senior credit facility, partially
        offset by lower average outstanding borrowings and reduced interest rate
        margins
        for our senior credit facility as a result of the Refinancing. Our non-cash
        interest expense for the quarter ended July 1, 2006 was $10.1 million, which
        included $5.0 million of deferred financing fees expensed as a result of
        the
        Refinancing and $4.5 million related to the amortization of the original
        issuance discount on our 10% senior discount notes.
 
 *Income
        Taxes.* The
        combined federal, state and foreign effective income tax rate for the quarter
        ended July 1, 2006 of 39.3% differs from the federal statutory rate of 35.0%
        primarily due to state income tax expense. The combined federal, state and
        foreign effective income tax rate for the quarter ended June 25, 2005 of
        28.6%
        differs from the federal statutory rate of 35.0% primarily due to (i) tax
        benefits realized as a result of a decrease in the rate applicable to our
        Puerto
        Rico subsidiary’s deferred tax assets and liabilities and (ii) state income tax
        expense.
 
 **Six
        Months Ended July 1, 2006 as Compared to the Six Months Ended June 25,
        2005**
 
 *Net
        Sales.* The following table presents our net sales and the dollar amount and percentage
        change by segment for the six months ended July 1, 2006 compared to the six
        months ended June 25, 2005.
 
 $
                    increase
                
                %
                    increase2006
                
                2005
                
                (decrease)
                
                (decrease)(in
                    millions)Wholesale
                    bedding segment
                
                $
                439.6
                
                $
                382.3
                
                $
                57.3
                
                
                15.0
                %Retail
                    bedding segment
                
                
                46.6
                
                
                37.9
                
                
                8.7
                
                
                22.9
                %Eliminations
                
                
                (9.1
                )
                
                (6.6
                )
                
                (2.5
                )
                
                39.4
                %Consolidated
                    net sales
                
                $
                477.1
                
                $
                413.6
                
                $
                63.5
                
                
                15.3
                %
 
 For
        the six months ended July 1, 2006, wholesale bedding segment net sales increased
        15.0% compared to the same period a year ago primarily as a result of (i)
        a
        14.2% increase in our conventional bedding unit volume resulting in an estimated
        increase in wholesale bedding net sales of $57.1 million and (ii) a 2.8%
        increase in our conventional bedding AUSP resulting in an estimated increase
        of
        wholesale bedding net sales of $12.7 million. Our conventional bedding unit
        volume increase resulted principally from the remerchandising of our product
        lines with our dealers primarily in the second and third quarters of 2005
        to
        include better product offerings at key retail price points. Our improvement
        in
        AUSP was primarily attributable to the price increase implemented during
        the
        fourth quarter of 2005 to help minimize the impact of rising raw material
        costs,
        partially offset by a change in our sales mix.
 
 30
 Partially
        offsetting the six months wholesale bedding segment net sales increase, our
        sales reductions for cash consideration paid to our customers for certain
        promotional programs, allowances and volume rebates increased $12.4 million
        to
        $47.1 million for the six months ended July 1, 2006 compared to $34.7 million
        for the six months ended June 25, 2005. Our sales reductions increased for
        the
        six months ended July 1, 2006 compared to the six months ended June 25, 2005
        principally due to (i) an $8.9 million increase resulting from our increase
        in
        sales and dealers providing less proof of advertising for the co-op subsidies
        they receive from us, which resulted in more co-op advertising expenditures
        being recorded as a sales reduction versus a selling expense and (ii) an
        increase in special promotional allowances of $2.1 million related to 2006
        sales
        events at certain of our dealers during the first six months of 2006. As
        a
        percentage of our sales, our overall co-op advertising expenditures, regardless
        of whether reported as selling expense or a sales reduction, for the six
        months
        ended July 1, 2006, was 0.6 percentage points higher than the overall co-op
        advertising expenditures for the six months ended June 25, 2005, due to a
        shift
        in product and sales mix to dealers that receive more subsidies.
 
 Retail
        bedding segment net sales increased $8.7 million, or 22.9%, for the six months
        ended July 1, 2006 compared to the six months ended June 25, 2005 as a result
        of
        the net addition of nine new retail stores and increased same store sales.
        On a
        comparable store basis, sales for our retail stores increased 6.5% for the
        six
        months ended July 1, 2006 versus the six months ended June 25, 2005. Retail
        segment same store sales benefited from a rise in the average retail sales
        transaction due to an increase in retail prices and a shift in sales
        mix.
 
 *Gross
        Margin.* The following table presents our gross profit, gross margin, and the gross
        margin percentage point change by segment for the six months ended July 1,
        2006
        compared to the six months ended June 25, 2005.
 
 Margin
                    %Gross
                    Profit
                
                Gross
                    Margin
                
                Point2006
                
                2005
                
                2006
                
                2005
                
                Change(in
                    millions)Wholesale
                    bedding segment
                
                $
                183.6
                
                $
                161.7
                
                
                41.8
                %
                
                42.3
                %
                
                (0.5
                %)Retail
                    bedding segment
                
                
                24.9
                
                
                20.2
                
                
                53.5
                %
                
                53.4
                %
                
                0.1
                %Eliminations
                
                
                0.0
                
                
                0.2
                
                
                (0.2
                %)
                
                (3.7
                %)
                
                3.5
                %Consolidated
                
                $
                208.6
                
                $
                182.2
                
                
                43.7
                %
                
                44.1
                %
                
                (0.4
                %)
 Our
        wholesale bedding segment gross margin for the six months ended July 1, 2006,
        declined by 0.5 percentage points compared to the six months ended June 25,
        2005, principally due to (i) a 6.2% increase in our conventional bedding
        material cost per unit resulting from inflation in raw material costs and
        (ii) a
        $12.4 million increase in our sales reductions (see above “Net Sales”
discussion). Partially offsetting these decreases, our conventional bedding
        labor and overhead cost per unit decreased 8.3% for the six months ended
        July 1,
        2006 compared to the six months ended June 25, 2005 as a result of favorable
        efficiencies driven by our increased unit volume.
 
 31
 *SG&A.* The following table presents our SG&A by dollar amount, as a percentage of
        net sales and the percentage point change by segment for the six months ended
        July 1, 2006 compared to the six months ended June 25, 2005.
  Margin
                    %SG&A
                
                As
                    a % of Segment Net Sales
                
                Point2006
                
                2005
                
                2006
                
                2005
                
                Change(in
                    millions)Wholesale
                    bedding segment
                
                $
                131.3
                
                $
                135.1
                
                
                29.9
                %
                
                35.4
                %
                
                (5.5
                %)Retail
                    bedding segment
                
                
                21.3
                
                
                17.4
                
                
                45.7
                %
                
                45.8
                %
                
                (0.1
                %)Consolidated
                
                $
                152.5
                
                $
                152.5
                
                
                32.0
                %
                
                36.9
                %
                
                (4.9
                %)
 As
        a percentage of wholesale bedding segment net sales, our wholesale bedding
        segment SG&A for the six months ended July 1, 2006 declined 5.5 percentage
        points compared to the six months ended June 25, 2005. SG&A decreased
        principally due to reductions (i) in our
        selling expenses of $8.9 million, or 3.5 percentage points, primarily as a
        result of our sales force reorganization and the timing of new product
        introductions; (ii) our advertising
        expenses of 1.3 percentage points, principally due to the classification of
        more co-op advertising expenditures as a reduction of net sales as
        discussed above under "Net Sales" and less national advertising; and (iii)
our
        corporate function expenses of $2.2 million, or 0.6 percentage points, due
        to
        our bi-annual national leadership meeting having occurred in the first six
        months of 2005, whereas no such event occurred in
        2006.
  *Amortization
        of Intangibles* .
        For each of the six months ended July 1, 2006 and June 25, 2005, amortization
        of
        intangibles was $2.8 million.
 
 *Licensing
        Revenues* .
        For the six months ended July 1, 2006, licensing fees decreased $0.6 million
        to
        $4.3 million from $4.9 million for the six months ended June 25, 2005. Licensing
        fees for the six months ended June 25, 2005 included additional royalties
        of
        $0.6 million related to an audit of a licensee.
 
 *Interest
        Expense* , *Net* .
        For the six months ended July 1, 2006, interest expense increased $10.1 million
        to $43.9 million from $33.8 million for the six months ended June 25, 2005.
        Interest expense increased principally due to the expensing of $5.0 million
        of
        deferred financing fees associated with the Refinancing. Additionally, in
        connection with the Refinancing, Simmons Bedding incurred $1.0 million of
        refinancing costs that were recorded as interest expense. Excluding the expenses
        related to the Refinancing, interest expense for the six months ended July
        1,
        2006 compared to the six months ended June 25, 2005 increased $4.1 million
        due
        primarily to higher LIBOR base rates on our senior credit facility, partially
        offset by lower average outstanding borrowings and reduced interest rate
        margins
        for our senior credit facility as a result of the Refinancing. Our non-cash
        interest expense for the six months ended July 1, 2006 was $15.7 million,
        which
        included $9.1 million related to the amortization of the original issuance
        discount on our 10% senior discount notes and $5.0 million of deferred financing
        fees expensed as a result of the Refinancing.
 
 *Income
        Taxes.* The
        combined federal, state, and foreign effective income tax rate for the six
        months ended July 1, 2006 of 37.6%, differs from the federal statutory rate
        of
        35.0% primarily due to state income tax expense. The combined federal, state,
        and foreign effective income tax rate for the six months ended June 25, 2005
        of
        45.2% differs from the federal statutory rate of 35.0% primarily due to (i)
        tax
        benefits realized as a result of a decrease in the rate applicable to our
        Puerto
        Rico subsidiary’s deferred tax assets and liabilities and (ii) state income tax
        expense.
 
 32
 **Liquidity
        and Capital Resources**
 
 Simmons
        Company is a holding company and, as a result, its primary sources of funds
        are
        cash generated from the operating activities of its indirect operating
        subsidiary, Simmons Bedding, and from borrowings by Simmons Bedding. Restrictive
        covenants in Simmons Bedding’s debt agreements restrict its ability to pay cash
        dividends and make other distributions to Simmons Company.
 
 Simmons
        Bedding’s principal sources of cash to fund liquidity needs are (i) cash
        provided by operating activities and (ii) borrowings available under its
        senior
        credit facility. Simmons Bedding’s primary uses of funds consists of payments of
        funding for working capital increases, principal and interest payments for
        Simmons Bedding’s debt, capital expenditures, customer supply agreements and
        acquisitions. Barring any unexpected significant external or internal
        developments, we expect current cash balances on hand, cash provided by
        operating activities and borrowings available under Simmons Bedding’s senior
        credit facility to be sufficient to meet Simmons Bedding’s short-term and
        long-term liquidity needs.
 
 On
        May 25, 2006, Simmons Bedding executed the second amended and restated senior
        credit and guaranty agreement (“New Senior Credit Facility”) with a syndicate of
        lenders, which amends and restates its existing senior credit facility in
        its
        entirety. The New Senior Credit Facility provides for a $75.0 million revolving
        credit facility and a $492.0 million tranche D term loan facility. The proceeds
        from the New Senior Credit Facility were used to replace Simmons Bedding’s
        $350.0 million tranche C term loan and $140.0 million senior unsecured term
        loan. This exchange of debt instruments is referred to as the “Refinancing”.
        Among other things, the New Senior Credit Facility reduces the applicable
        Eurodollar and Base interest rate margins for borrowings under the term
        loan.  Subsequent to the Refinancing, Simmons Bedding voluntarily prepaid
        $12.0 million of the tranche D term loan resulting in the next required
        principal payment of $0.3 million being scheduled for September
        2008.
 
 Future
        principal payments of our debt are expected to be paid out of cash flow from
        operations, borrowings available under the senior credit facility or proceeds
        from the sale of assets. Historically, we have paid minimal federal income
        taxes
        as a result of net operating loss carryforwards. For 2006, we had net operating
        loss carryforwards for federal income tax purposes of $123.1 million and
        state
        net operating loss carryforwards of $95.8 million. Our federal and state
        net
        operating loss carryforwards expire on various dates through 2024 and 2025,
        respectively. As a result of our net operating losses, we expect to pay minimal
        federal and state income taxes in 2006.
  33
  
 The
        following table summarizes our changes in cash (in millions):
 **Six
                              Months Ended****July
                              1,**
                          
                          **June
                              25,****2006**
                          
                          **2005**Statement
                              of Cash Flow Data:Cash
                            flows provided by (used in):Operating
                              activities
                          
                          
                          
                          
                          $
                          41.2
                          
                          $
                          18.3Investing
                              activities
                          
                          
                          
                          
                          
                          (5.8
                          )
                          
                          (5.9
                          )Financing
                              activities
                          
                          
                          
                          
                          
                          (31.3
                          )
                          
                          (5.2
                          )Net
                              effect of exchange rates
                          
                          
                          
                          
                          
                          0.1
                          
                          
                          -Increase
                              in cash and cash equivalents
                          
                          
                          
                          
                          
                          4.2
                          
                          
                          7.2Cash
                              and cash equivalents:Beginning
                              of period
                          
                          
                          
                          
                          
                          24.7
                          
                          
                          24.2End
                              of period
                          
                          
                          
                          
                          $
                          28.9
                          
                          $
                          31.4
 ***Six
        Months Ended July 1, 2006 as Compared to Six Months Ended June 25, 2005***
 
 *Cash
        flows provided by Operating Activities* .
        Our cash flows from operating activities increased $22.9 million for the
        six
        months ended July 1, 2006 compared to the six months ended June 25, 2005
        primarily due to increased cash flows resulting from our increase in net
        sales
        and our lower cost structure. Our working capital as a percentage of last
        twelve
        months net sales decreased to 1.8% as of July 1, 2006 compared to 1.9% as
        of
        December 31, 2005.
 
 *Cash
        flows used in Investing Activities.* Our cash flows used in investing activities decreased $0.1 million for the
        six
        months ended July 1, 2006 compared to the six months ended June 25, 2005.
        We
        paid $3.3 million of contingent cash consideration related to the acquisition
        of
        certain assets of Simmons Juvenile Products, Inc. (“Juvenile Acquisition”)
        during the first six months of 2005. Exclusive of the Juvenile Acquisition,
        cash
        flows used in investing activities increased $3.2 million principally due
        to the
        upgrade of our computer systems software.
 
 *Cash
        flows used in Financing Activities.* Our cash flows used in financing activities increased $26.1 million during
        the
        six months ended July 1, 2006 compared to the six months ended June 25, 2005
        principally due to more voluntary payments on our senior credit facility.
        For
        the first six months of 2006, we have repaid $30.0 million of debt (net of
        borrowings) compared to $4.8 million for the first six months of 2005.
 
 ***Debt***
 
 The
        New Senior Credit Facility provides for a $75.0 million revolving loan and
        a
        $492.0 million tranche D term loan facility. The revolving loan will expire
        on
        the earlier of (a) December 19, 2009 or (b) as revolving credit commitments
        under the facility terminate. Simmons Bedding incurs a commitment fee of
        0.5%
        per annum on the unused portion of its revolving credit facility. As of July
        1,
        2006, Simmons Bedding had availability to borrow $65.1 million under the
        revolving loan after giving effect to $9.9 million that was reserved for
        Simmons
        Bedding’s reimbursement obligations with respect to outstanding letters of
        credit. The remaining availability under the revolving loan may be utilized
        to
        meet Simmons Bedding’s current working capital requirements, including issuance
        of stand-by and trade letters of credit. Simmons Bedding also may utilize
        the
        remaining availability under the revolving loan to fund distributions,
        acquisitions and capital expenditures.
 
 34
 Prior
        to the Refinancing, Simmons Bedding prepaid $19.9 million of its tranche
        C term
        loan. Subsequent to the Refinancing, Simmons Bedding voluntarily prepaid
        $12.0
        million of the tranche D term loan resulting in the next required principal
        payment of $0.3 million being scheduled for September 2008. The tranche D
        term
        loans have mandatory quarterly principal payments of $1.2 million from December
        31, 2008 through December 31, 2010 and mandatory quarterly principal payments
        of
        $117.2 million from March 31, 2011 through maturity on December 19, 2011.
        Depending on Simmons Bedding’s leverage ratio, Simmons Bedding may be required
        to prepay a portion of the tranche D term loan with up to 50% of Simmons
        Bedding’s excess cash flows (as defined in the New Senior Credit Facility) from
        each fiscal year.
 
 The
        New Senior Credit Facility bears interest at Simmons Bedding’s choice of the
        Eurodollar Rate or Base Rate (both as defined), plus the applicable interest
        rate margins as follows:
  **Eurodollar**
                
                **Base****Rate**
                
                **Rate**Revolving
                    loan
                
                
                2.50
                %
                
                1.50
                %Tranche
                    D term loan
                
                
                2.25
                %
                
                1.00
                %
 The
          revolving
          loan applicable interest margins for both Eurodollar Rate loans and Base
          Rate
          loans are reduced based upon Simmons Bedding’s leverage ratio. The weighted
          average interest rate per annum in effect as of July 1, 2006 for the tranche
          D
          term loan was 7.36%.
 
 Simmons
        Bedding has developed and implemented a policy to utilize extended Eurodollar
        contracts to minimize the impact of near term Eurodollar rate increases.
        For
        $258.0 million of the tranche D term loan, Simmons Bedding set the interest
        rate
        utilizing twelve month Eurodollar rate loans which fixed the Eurodollar Rate
        at
        4.875% through January 26, 2007. The execution of extended Eurodollar contracts
        resulted in Simmons Bedding fixing the interest rate on approximately 53%
        of its
        floating rate debt.
 
 35
 Simmons
        Company’s and Simmons Bedding’s long-term obligations contain various financial
        tests and covenants. Simmons Company and Simmons Bedding were in compliance
        with
        such covenants as of July 1, 2006. However, if Simmons Bedding’s operating
        results fall below current expectations, Simmons Company or Simmons Bedding
        may
        not be able to meet such covenants in future periods.  If Simmons Company
        or Simmons Bedding are not in compliance with such covenants in future periods
        we would be required to obtain a waiver from our lenders to avoid being in
        default.  Simmons Bedding may not be able to obtain such a waiver on a
        timely basis or at all.  The
        most restrictive covenants apply to Simmons Bedding and relate to ratios
        of
        Adjusted EBITDA to interest coverage (interest coverage ratio) and total
        net
        debt (debt less cash) to Adjusted EBITDA (leverage ratio), all as defined
        in
        Simmons Bedding’s senior credit facility. The minimum cash interest coverage
        ratio and maximum leverage ratios are computed based on Simmons Bedding’s
        results for the last twelve months ended, adjusted for any dispositions or
        acquisitions. The senior credit facility covenants also contain a maximum
        capital expenditure limitation of $30.0 million per fiscal year, with the
        ability to roll forward to future years unused amounts from the previous
        fiscal
        year, and also subject to adjustments for certain acquisitions and dispositions.
        More specifically, Simmons Bedding’s financial covenants related to minimum cash
        interest coverage ratio and maximum leverage ratios, as amended, are as follows:
 
 ·
            A
                minimum cash interest coverage ratio, with compliance levels ranging
                from
                cash interest coverage of no less than 1.85:1.00 from July 1, 2006
                through
                December 31, 2006; 2.00:1.00 as of March 31, 2007; 2.15:1.00 from
                June 30,
                2007 through September 30, 2007; 2.25:1.00 as of December 31, 2007;
                2.75:1.00 from March 31, 2008 through December 31, 2008; and 3.00:1.00
                from March 31, 2009 through each fiscal quarter
                thereafter. 
 ·
            A
                maximum leverage ratio, with compliance levels ranging from total
                leverage
                of no greater than 6.25:1.00 as of July 1, 2006; 6.15:1.00 as of
                September
                30, 2006; 5.90:1.00 as of December 31, 2006; 5.60:1.00 as of March
                31,
                2007; 5.25:1.00 as of June 30, 2007; 5.00:1.00 from September 30,
                2007
                through December 31, 2007; 4.50:1.00 from March 31, 2008 through
                December
                31, 2008; and 4.00:1.00 from March 31, 2009 through each fiscal quarter
                ending thereafter. 
 Adjusted
        EBITDA (as defined in Simmons Bedding’s senior credit facility) differs from the
        term “EBITDA” as it is commonly used. In addition to adjusting net income to
        exclude interest expense, income taxes, depreciation and amortization, Adjusted
        EBITDA also adjusts net income by excluding items or expenses not typically
        excluded in the calculation of “EBITDA” such as management fees; other non-cash
        items reducing consolidated net income (including, without limitation, non-cash
        purchase accounting adjustments and debt extinguishment costs); any
        extraordinary, unusual, or non-recurring gains or losses or charges or credits;
        and any reasonable expenses or charges related to any issuance of securities,
        investments permitted, permitted acquisitions, recapitalizations, asset sales
        permitted or indebtedness permitted to be incurred, less other non-cash items
        increasing consolidated net income, all of the foregoing as determined on
        a
        consolidated basis for Simmons Bedding in conformity with GAAP. Adjusted
        EBITDA
        is presented herein because it is a material component of the covenants
        contained within the aforementioned credit agreements. Non-compliance with
        such
        covenants could result in the requirement to immediately repay all amounts
        outstanding under such agreements, which could have a material adverse effect
        on
        our results of operations, financial position and cash flow. While the
        determination of “unusual and nonrecurring losses” is subject to interpretation
        and requires judgment, we believe the Adjusted EBITDA presented below is
        in
        accordance with the senior credit facility. Adjusted EBITDA does not represent
        net income or cash flow from operations as those terms are defined by GAAP
        and
        does not necessarily indicate whether cash flows will be sufficient to fund
        cash
        needs.
 
  36
  The
        following is a calculation of Simmons Bedding’s minimum cash interest coverage
        and maximum leverage ratios under its senior credit facility as of July 1,
        2006
        (dollar amounts in millions, except ratios). The terms and related calculations
        are defined in Simmons Bedding’s senior credit facility.
 
 **July
                      1,****2006**Calculation
                      of minimum cash interest coverage ratio:Simmons
                      Bedding twelve months ended adjusted EBITDA(1)
                  
                  $
                  143.2Simmons
                      Bedding consolidated cash interest expense(2)
                  
                  $
                  54.2Actual
                      interest coverage ratio(3)
                  
                  
                  2.64xMinimum
                      permitted interest coverage ratio
                  
                  
                  1.85xCalculation
                      of maximum leverage ratio:Simmons
                      Company consolidated indebtedness
                  
                  $
                  886.9Less:
                      10% senior discount notes
                  
                  
                  192.0Simmons
                      Bedding consolidated indebtedness
                  
                  
                  694.9Less:
                      Simmons Bedding cash and cash equivalents
                  
                  
                  28.9Simmons
                      Bedding net debt
                  
                  $
                  666.0Simmons
                      Bedding twelve months ended adjusted EBITDA(1)
                  
                  $
                  143.2Actual
                      leverage ratio(4)
                  
                  
                  4.65xMaximum
                      permitted leverage ratio
                  
                  
                  6.25x
 
 (1)
            Simmons
                Bedding’s Adjusted EBITDA for the twelve months ended July 1, 2006 adds
                back to net income the following items: income taxes, interest expense,
                depreciation and amortization, non-cash stock compensation expense,
                transaction related expenditures, plant opening and closing charges,
                reorganization costs, management fees, state taxes in lieu of state
                income
                taxes and other non-recurring/non-cash charges as permitted under
                Simmons
                Bedding’s senior credit facility. 
 (2)
            A
                calculation of Simmons Bedding’s consolidated cash interest expense, as
                defined in its senior credit facility, for the twelve months ended
                July 1,
                2006, as follows (in millions): 
 Simmons
                      Company interest expense, net
                  
                  $
                  80.5Less:
                      Simmons Company non-cash interest expense
                  
                  
                  (18.3
                  )Simmons
                      Bedding interest expense, net
                  
                  
                  62.2Add:
                      Simmons Bedding interest income
                  
                  
                  0.4Less:
                      Call premium included in interest expense
                  
                  
                  (0.8
                  )Simmons
                      Bedding gross interest expense
                  
                  
                  61.8Less:
                      Simmons Bedding non-cash interest expense
                  
                  
                  (7.6
                  )$
                  54.2
 (3)
            Represents
                ratio of Adjusted EBITDA to consolidated cash interest
                expense. (4)
            Represents
                ratio of consolidated indebtedness less cash and cash equivalents
                to
                Adjusted EBITDA.  37
  **Off-Balance
        Sheet Arrangements**
 
 In
        connection with the sale of Gallery Corp. to Pacific Coast Mattress, Inc.
        (PCM”)
        on May 1, 2004, we continue to guarantee approximately $0.6 million of PCM’s
        obligations under certain store and warehouse leases that expire over various
        periods through 2010. We have no liability recorded for this obligation on
        our
        condensed consolidated balance sheet as of July 1, 2006.
 
 **Seasonality/Other**
 
 Our
        third quarter sales are typically higher than sales for our other fiscal
        quarters. We attribute this seasonality principally to retailers’ sales
        promotions related to the 4 th of July and Labor Day holidays.
 
 **Accounting
        Pronouncements**
 
 In
        February 2006, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standard (“SFAS”) No. 155, *Accounting
        for Certain Hybrid Instruments* (“SFAS
        155”). SFAS 155 allows financial instruments that have embedded derivatives to
        be accounted for as a whole (eliminating the need to bifurcate the derivative
        from its host) if the holder elects to account for the whole instrument on
        a
        fair value basis. SFAS 155 is effective for all financial instruments acquired
        or issued by us beginning in fiscal year 2007. We do not have any financial
        instruments that have embedded derivatives and do not expect this statement
        to
        have a significant impact on our consolidated financial statements or results
        of
        operations.
 
 In
        March 2006, the FASB issued SFAS No. 156, *Accounting
        for Servicing of Financial Assets - An Amendment of FASB Statement No.
        140* (“SFAS 156”). Among other requirements, SFAS 156 provides guidance on the
        accounting for servicing assets or liabilities when an entity undertakes
        an
        obligation to service a financial asset by entering into a service contract.
        SFAS 156 is effective for us at the beginning of fiscal year 2007. We do
        not
        expect this statement to have a significant impact on our consolidated financial
        statements or results of operations.
 
 In
        July 2006, the FASB issued Interpretation No. 48, *Accounting
        for Uncertainty in Income Taxes - An Interpretation of FASB Statement No.
        109* (“FIN
        48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
        in an enterprise’s financial statements in accordance with FASB Statement No.
        109, *Accounting
        for Income Taxes* .
        FIN 48 also prescribes a recognition threshold and measurement attribute
        for the
        financial statement recognition and measurement of a tax position taken or
        expected to be taken in a tax return. FIN 48 also provides guidance on
        derecognition, classification, interest and penalties, accounting in interim
        periods, disclosure, and transition. FIN 48 is effective for us at the beginning
        of fiscal year 2007. We are in the process of evaluating the impact of this
        guidance on our consolidated financial statements and our results of
        operations.
 
  38
  **Forward
        Looking Statements**
 
 *“Safe
        Harbor” statement under the Private Securities Litigation Reform Act of
        1995* .
        When used in this Quarterly Report on Form 10-Q, 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
        products. Any forward-looking statements contained in this report represent
        our
        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:
 
 ·
            competitive
                pricing pressures in the bedding industry; 
 ·
            legal
                and regulatory requirements; 
 ·
            the
                success of our new products; 
 ·
            our
                relationships with and viability of our major suppliers; 
 ·
            fluctuations
                in costs of our raw materials; 
 ·
            our
                relationship with significant customers and licensees; 
 ·
            our
                ability to increase prices on our products and the effect of these
                price
                increases on our unit sales; 
 ·
            an
                increase in our return rates and warranty
                claims; 
 ·
            our
                labor relations; 
 ·
            departure
                of our key personnel; 
 ·
            encroachments
                on our intellectual property; 
 ·
            our
                product liability claims; 
 ·
            our
                level of indebtedness; 
 ·
            interest
                rate risks; 
 ·
            compliance
                with covenants in our debt agreements; 
 39
 ·
            our
                future acquisitions; 
 ·
            our
                ability to achieve the expected benefits from any personnel realignments;
                and 
 ·
            other
                risks and factors identified from time to time in the Company’s reports
                filed with the Securities and Exchange Commission
                (“SEC”). 
 All
        forward-looking statements attributable to us or persons acting on our behalf
        apply only as of the date of this Quarterly Report on Form 10-Q and are
        expressly qualified in their entirety by the cautionary statements included
        in
        this Quarterly Report on Form 10-Q. Except as may be required by law, we
        undertake no obligation to publicly update or revise forward-looking statements
        which may be made to reflect events or circumstances after the date made
        or to
        reflect the occurrence of unanticipated events.
 
 **Item
        3.**   **Quantitative
        and Qualitative Disclosures About Market Risk**
 
 Information
        relative to our market risk sensitive instruments by major category as of
        December 31, 2005 is presented under Item 7A of our Annual Report on Form
        10-K
        for the fiscal year ended December 31, 2005.
 
 **Market
        Risk**
 
 The
        principal market risks to which we are exposed that may adversely affect
        our
        results of operations and financial position include changes in future raw
        material prices and interest rates. We seek to minimize or manage these market
        risks through normal operating and financing activities and through the use
        of
        interest rate cap agreements, where practicable. We do not trade or use
        instruments with the objective of earning financial gains on the interest
        rate
        fluctuations, nor do we use instruments where there are not underlying
        exposures.
 
 **Interest
        Rate Risk**
 
 We
        are exposed to market risks from changes in interest rates. Simmons Bedding
        has
        developed and implemented a policy to utilize extended Eurodollar contracts
        to
        minimize the impact of near term Eurodollar rate increases. For $258 million
        of
        the tranche D term loan, Simmons Bedding set the interest rate utilizing
        twelve
        month Eurodollar rate loans which fixed the Eurodollar Rate at 4.875% through
        January 26, 2007. The execution of this debt instrument resulted in Simmons
        Bedding fixing the interest rate on approximately 53% of its floating rate
        debt.
 
 All
        other factors remaining unchanged, a hypothetical 10% increase or decrease
        in
        interest rates in effect on our floating rate debt as of July 1, 2006 would
        result in an additional $0.5 million and $4.4 million of interest expense
        in
        2006 and 2007, respectively.
 
 40
 **Commodity
        Price Risk**
 
 The
        major raw materials that we purchase for production are foam, wire, spring
        components, lumber, cotton, insulator pads, innersprings, foundation
        constructions, fabrics and roll goods consisting of foam, fiber, ticking
        and
        non-wovens. The price and availability of these raw materials are subject
        to
        market conditions affecting supply and demand. In particular, many of our
        goods
        can be impacted by fluctuations in petrochemical and steel prices. For the
        first
        six months of 2006, the costs of our raw materials have been above historical
        price averages and we expect prices to remain at current levels or increase
        further for the remainder of 2006.  Additionally, our distribution costs
        can be impacted by fluctuations in diesel prices. We currently do not have
        a
        hedging program in place to manage fluctuations in commodity prices.
 
 **Item
        4.**   **Internal
        Controls and Procedures**
 
 Under
        the supervision and with the participation of our management, including our
        principal executive officer and principal financial officer, we conducted
        an
        evaluation of the effectiveness of the design and operation of our disclosure
        controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
        the
        Securities Exchange Act of 1934, as amended, as of the end of the period
        covered
        by this report (the “Evaluation Date”). Based on this evaluation, our principal
        executive officer and principal financial officer concluded as of the Evaluation
        Date that our disclosure controls and procedures were effective such that
        the
        information relating to the Company, including our consolidated subsidiaries,
        required to be disclosed in our SEC reports (i) is recorded, processed,
        summarized and reported within the time periods specified in SEC rules and
        forms, and (ii) is accumulated and communicated to the Company’s management,
        including our principal executive and principal financial officer, as
        appropriate, to allow timely decisions regarding required
        disclosure.
 
 
 
  41
  
 **PART
                  II -****OTHER
                  INFORMATION****Item
                  1.****Legal
                  Proceedings**See
                  Note H to the Condensed Consolidated Financial Statements, Part
                  1, Item 1
                  included herein.**Item
                  1A.  Risk Factors**There
                  were no material changes to the Company’s risk factors outlined in its
                  annual report filed with the Commission on form 10-K on March 14,
                  2006.**Item
                  2.****Unregistered
                  Sales of Equity Securities and Use of Proceeds**None**Item
                  3.****Defaults
                  Upon Senior Securities**None**Item
                  4.****Submission
                  of Matters to a Vote of Security Holders**None**Item
                  5.****Other
                  Information**None**Item
                  6.****Exhibits**
 
 10.1
              Unit
                  Purchase Agreement by and among ST San Diego, LLC, Sleep Country
                  USA,
                  Inc., SC Holdings, Inc. and Simmons Bedding Company31.1
              Chief
                  Executive Officer Certification of the Type Described in Rule 13a
                  - 14(a)
                  and Rule 15d - 14(a)31.2
              Chief
                  Financial Officer Certification of the Type Described in Rule 13a
                  - 14(a)
                  and Rule 15d - 14(a)32.1
              Certification
                  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (furnished
                  herewith)32.2
              Certification
                  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (furnished
                  herewith)
  42
   SIGNATURES
 
 Pursuant
        to the requirements of the Securities Act of 1934, Simmons Company has duly
        caused this report to be signed on its behalf by the undersigned thereto
        duly
        authorized.
 
 SIMMONS
        COMPANY
 By:
                /s/
                    William S. CreekmuirName:
                William
                    S. CreekmuirTitle:
                Executive
                    Vice President & Chief Financial OfficerDate:
                August
                  15,
                  2006
  43