##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 26, 2005
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the transition period from  toCommission file number 333-113861
 SIMMONS BEDDING COMPANY 
  Delaware
    
    13-3875743(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. þ Yes o No Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). o Yes þ No The number of shares of the registrants common stock outstanding as of May 10, 2005 was 100.




---



TABLE OF CONTENTS  PART I FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Internal Controls and ProceduresPART II   OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO    Table of Contents  
 PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements Simmons Bedding Company and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
(In thousands) Quarter
    
    
    QuarterEnded
    
    
    EndedMarch 26,
    
    
    March 27,2005
    
    
    2004Net sales
    
    $
    205,582
    
    
    $
    223,320Cost of products sold
    
    
    114,166
    
    
    
    119,865Gross profit
    
    
    91,416
    
    
    
    103,455Operating expenses:Selling, general and
administrative expenses
    
    
    79,070
    
    
    
    85,261Amortization of intangibles
    
    
    1,441
    
    
    
    3,486Licensing fees
    
    
    (2,051
    )
    
    
    (2,581
    )78,460
    
    
    
    86,166Operating income
    
    
    12,956
    
    
    
    17,289Interest expense, net
    
    
    12,189
    
    
    
    11,093Income before income taxes
    
    
    767
    
    
    
    6,196Income tax expense
    
    
    284
    
    
    
    2,231Net income
    
    
    483
    
    
    
    3,965Other comprehensive income:Foreign currency translation
adjustment
    
    
    3
    
    
    
    (2
    )Comprehensive income
    
    $
    486
    
    
    $
    3,963
 The accompanying notes are an integral part of these condensed
consolidated financial statements. 2




---



##### Table of Contents



Simmons Bedding Company and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands) March 26,
    
    
    December 25,2005
    
    
    2004*(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    17,818
    
    
    $
    23,854Accounts receivable, less allowances for
doubtful receivables, discounts, and returns
of $6,067 and $5,131
    
    
    77,428
    
    
    
    85,433Inventories
    
    
    33,482
    
    
    
    33,300Deferred income taxes
    
    
    1,954
    
    
    
    2,445Other current assets
    
    
    15,884
    
    
    
    20,204Total current assets
    
    
    146,566
    
    
    
    165,236Property, plant and equipment, net
    
    
    61,764
    
    
    
    62,842Goodwill
    
    
    491,750
    
    
    
    488,686Intangible assets, net
    
    
    541,541
    
    
    
    542,983Due from parent company
    
    
    2,365
    
    
    
    2,489Other assets
    
    
    41,168
    
    
    
    41,987$
    1,285,154
    
    
    $
    1,304,223
   *
    
    Derived from the Companys 2004 audited Consolidated Financial Statements. The accompanying notes are an integral part of these condensed consolidated financial statements. 3




---



##### Table of Contents



Simmons Bedding Company and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands) March 26,
    
    
    December 25,2005
    
    
    2004*(Unaudited)LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    457
    
    
    $
    4,124Accounts payable
    
    
    51,254
    
    
    
    54,380Accrued liabilities
    
    
    56,628
    
    
    
    68,977Total current liabilities
    
    
    108,339
    
    
    
    127,481Non-current liabilities:Long-term debt
    
    
    747,939
    
    
    
    748,015Deferred income taxes
    
    
    154,415
    
    
    
    154,775Other
    
    
    13,368
    
    
    
    13,345Total liabilities
    
    
    1,024,061
    
    
    
    1,043,616Commitments and contingenciesCommon stockholders equity:Common stock, $.01 par value; 3,000 shares
authorized; 100 issued and outstanding
    
    
    1
    
    
    
    1Additional paid-in capital
    
    
    243,052
    
    
    
    243,052Retained earnings
    
    
    17,907
    
    
    
    17,424Accumulated other comprehensive income
    
    
    133
    
    
    
    130Total common stockholders equity
    
    
    261,093
    
    
    
    260,607$
    1,285,154
    
    
    $
    1,304,223
   *
    
    Derived from the Companys 2004 audited Consolidated Financial Statements. The accompanying notes are an integral part of these condensed consolidated financial statements. 4




---



##### Table of Contents



Simmons Bedding Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited) Quarter Ended
    
    
    Quarter EndedMarch 26,
    
    
    March 27,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    483
    
    
    $
    3,965Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    6,462
    
    
    
    7,621Provision for bad debts, net
    
    
    936
    
    
    
    915Provision for deferred income taxes
    
    
    131
    
    
    
    1,435Non-cash interest expense
    
    
    597
    
    
    
    472Non-cash stock compensation expense
    
    
    
    
    
    
    3,308Net changes in operating assets and liabilities:Accounts receivable
    
    
    7,069
    
    
    
    (17,946
    )Inventories
    
    
    (182
    )
    
    
    4,285Other current assets
    
    
    4,320
    
    
    
    4,524Accounts payable
    
    
    (3,126
    )
    
    
    4,708Accrued liabilities
    
    
    (15,436
    )
    
    
    2,392Other, net
    
    
    (2,297
    )
    
    
    (3,408
    )Net cash
(used in) provided by operating activities
    
    
    (1,043
    )
    
    
    12,271Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (1,378
    )
    
    
    (1,817
    )Other, net
    
    
    1
    
    
    
    6Net cash used in investing activities
    
    
    (1,377
    )
    
    
    (1,811
    )Cash flows from financing activities:Proceeds from parent company, net
    
    
    124
    
    
    
    Payments of senior credit facility, net
    
    
    (3,655
    )
    
    
    (11,675
    )Payments of other debt
    
    
    (88
    )
    
    
    (641
    )Payments of financing fees
    
    
    
    
    
    
    (238
    )Net cash used in financing activities
    
    
    (3,619
    )
    
    
    (12,554
    )Net effect of exchange rate changes on cash
    
    
    3
    
    
    
    (2
    )Change in cash and cash equivalents
    
    
    (6,036
    )
    
    
    (2,096
    )Cash and cash equivalents, beginning of period
    
    
    23,854
    
    
    
    3,670Cash and cash equivalents, end of period
    
    $
    17,818
    
    
    $
    1,574
 The accompanying notes are an integral part of these condensed consolidated financial
statements. 5




---



##### Table of Contents



Simmons Bedding Company and Subsidiaries
Consolidated Statement of Changes in Stockholders Equity
(Dollars in thousands) AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Common
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    EquityDecember 25, 2004 (audited)
    
    
    100
    
    
    $
    1
    
    
    $
    243,052
    
    
    $
    17,424
    
    
    $
    130
    
    
    $
    260,607Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    483
    
    
    
    
    
    
    
    483Other comprehensive
income:Change in foreign
currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    3Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    483
    
    
    
    3
    
    
    
    486March 26, 2005 (unaudited)
    
    
    100
    
    
    $
    1
    
    
    $
    243,052
    
    
    $
    17,907
    
    
    $
    133
    
    
    $
    261,093
 The accompanying notes are an integral part of these condensed consolidated financial statements. 6




---



##### Table of Contents



Simmons Bedding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)  A.
    Basis of Presentation For purposes of this report, the Company refers to Simmons Bedding Company and its
subsidiaries, collectively. 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 of America (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
March 26, 2005, 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. Certain amounts in the quarter ended March 27, 2004 condensed consolidated financial statements and
related footnotes have been reclassified to conform with the current year presentation. 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 25, 2004.
Operating results for the period ended March 26, 2005 are not necessarily indicative of future
results that may be expected for the fiscal year ending December 31, 2005 or for any future
period. The Company operates on a 52/53 week fiscal year ending on the last Saturday in December.
Fiscal year 2005 is a 53 week year, whereas fiscal year 2004 was a 52 week year. The fourth
quarter of fiscal year 2005 will comprise 14 weeks, whereas each of the first, second and third
quarters will comprise 13 weeks. 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): March 26,
    
    
    December 25,2005
    
    
    2004Raw materials
    
    $
    18,383
    
    
    $
    18,135Work-in-progress
    
    
    1,181
    
    
    
    1,236Finished goods
    
    
    10,470
    
    
    
    9,934Inventory held at retail stores
    
    
    3,448
    
    
    
    3,995$
    33,482
    
    
    $
    33,300
  C.
    Acquisitions and Dispositions In December 2003, THL Bedding Company, a wholly owned subsidiary of THL Bedding Holding
Company (now known as Simmons Company) and an affiliate of Thomas H. Lee Partners, L.P., acquired
Simmons Holdings, Inc. for approximately $1.115 billion, including 7




---



##### Table of Contents



Simmons Bedding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) related acquisition costs (the
Acquisition). Concurrently with the closing of this transaction on December 19, 2003, each of
THL Bedding Company and the operating company of Simmons Holdings, Inc., then named Simmons
Company, merged with and into Simmons Holdings, Inc. with Simmons Holdings, Inc. continuing as the
surviving corporation (now known as Simmons Bedding Company). The Company sold its Gallery Corp. (Mattress Gallery) retail operations in a stock
transaction on May 1, 2004 to Pacific Coast Mattress, Inc. (PCM) for cash proceeds of $6.3
million plus the cancellation of all intercompany debt with the exception of current trade payables
owed by Mattress Gallery to the Company. The cancellation of intercompany debt was recorded as a
capital contribution to Mattress Gallery. No gain or loss was recorded on the sale since Mattress
Gallery was recorded at fair value in connection with the Acquisition. As of March 26, 2005, the
Company continued to guarantee approximately $1.8 million of Mattress Gallerys obligations under
certain store and warehouse leases that expire over various periods through 2010. The Company does
not record a liability for this obligation on the condensed consolidated balance sheet. In
connection with the sale, the Company entered into a five-year supply agreement with PCM. The Company did not reflect the results of operations for Mattress Gallery as discontinued
operations since the Company has an ongoing interest in the cash flows of the operations through
the long-term supply agreement. For the quarter ended March 27, 2004, Mattress Gallerys net sales
and net loss were $9.9 million and $(2.4) million, respectively. On August 27, 2004, one of the
Companys then current subsidiaries, Simmons Juvenile Company, LLC (Simmons
Juvenile), acquired certain assets and liabilities of the crib mattress and related soft goods
business of Simmons Juvenile Products Company, Inc. (Simmons Juvenile, Inc. or the seller), a then-current
licensee of the Company, for $19.7 million in cash, including transaction costs (the Juvenile
Acquisition), plus contingent consideration based on Simmons Juveniles operating performance for
the six months ended February 2005. On May 3, 2005, Simmons
Juvenile merged with and into The Simmons Manufacturing Co., LLC with
The Simmons Manufacturing Co., LLC continuing as the surviving
corporation. The Company paid $3.1 million of the contingent consideration in April 2005 and could pay an
additional $0.5 million upon final agreement with the seller of the amount of contingent consideration.
The Company
anticipates final settlement will occur in the second quarter of
2005. The purchase price allocation was adjusted in the first
quarter of 2005 to reflect the $3.1 million payment and will be adjusted
in the second quarter of 2005 upon final settlement. Simmons Juvenile, Inc. manufactured and sold Simmons branded crib mattresses and related soft goods
to the U.S. infant market. The Juvenile Acquisition provides the Company access to the U.S. infant
market. 8




---



##### Table of Contents



Simmons Bedding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) The Company recorded the Juvenile Acquisition using the purchase method of accounting and,
accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed
based on their estimated fair market values. The following table summarizes the estimated fair
values of the assets acquired and liabilities assumed as of the date of the acquisition (in
thousands): Current assets
    
    $
    3,665Property, plant and equipment
    
    
    23Goodwill
    
    
    3,784Intangibles
    
    
    18,000Total assets acquired
    
    
    25,472Current liabilities
    
    
    (2,476
    )Non-current liabilities
    
    
    (224
    )Total liabilities assumed
    
    
    (2,700
    )Purchase price
    
    $
    22,772
 The intangible assets acquired include non-contractual customer agreements of $8.8
million and trademarks of $9.2 million. The non-contractual customer agreements have a weighted
average life of eleven years. The trademarks have an indefinite life. The goodwill was assigned
to the Companys wholesale segment. The tax-deductible goodwill was $2.9 million and is expected
to be deductible for tax purposes over 15 years. The tax benefit associated with the excess of
tax-deductible goodwill over the reported amount of goodwill will be recognized when realized on
the Companys tax return and will reduce the reported amount of goodwill associated with the
Juvenile Acquisition. There were no pre-acquisition contingencies related to the Juvenile
Acquisition. The
Juvenile Acquisition is not considered significant to the Companys balance sheets and
statements of operations; therefore pro forma information has not been presented.  D.
    Goodwill The changes in the carrying amount of goodwill for the three months ended March 26, 2005 are
as follows (in thousands): WholesaleBedding
    
    
    Retail
    
    
    ConsolidatedBalance as of December 25, 2004
    
    $
    476,394
    
    
    $
    12,292
    
    
    $
    488,686Juvenile
Acquisition contingent consideration (See Note C)
    
    
    3,087
    
    
    
    
    
    
    
    3,087Tax benefit allocated to
reduce goodwill
    
    
    (23
    )
    
    
    
    
    
    
    (23
    )Balance as of March 26, 2005
    
    $
    479,458
    
    
    $
    12,292
    
    
    $
    491,750
 9




---



##### Table of Contents



Simmons Bedding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)  E.
    Warranties The Companys wholesale segment warranty policy provides a 10-year non-prorated warranty
service period on all first quality conventional bedding products. The Companys juvenile bedding
products have warranty periods ranging from five years to a lifetime. The Companys policy is to
accrue the estimated cost of warranty coverage at the time the sale is recorded. The following
table presents a reconciliation of the Companys warranty liability for the quarters ended March
26, 2005 and March 27, 2004 (in thousands): March 26,
    
    
    March 27,2005
    
    
    2004Balance at beginning of period
    
    $
    3,699
    
    
    $
    3,803Additional warranties issued
    
    
    974
    
    
    
    1,103Warranty settlements
    
    
    (1,497
    )
    
    
    (886
    )Revisions of estimate
    
    
    634
    
    
    
    (189
    )Balance at end of period
    
    $
    3,810
    
    
    $
    3,831
  F.
    Long-Term Debt A summary of long-term debt follows (in thousands): March 26,
    
    
    December 25,2005
    
    
    2004Senior Credit Facility:Revolving Loan
    
    $
    
    
    
    $
    Tranche C Term Loan
    
    
    392,945
    
    
    
    396,600Total Senior Credit Facility
    
    
    392,945
    
    
    
    396,600Senior Unsecured Term Loan
    
    
    140,000
    
    
    
    140,000Industrial Revenue Bonds, 7.00%, due 2017
    
    
    9,700
    
    
    
    9,700Industrial Revenue Bonds, 3.62%, due 2016
    
    
    3,800
    
    
    
    3,800Banco Santander Loan, 3.15%, due 2013
    
    
    1,849
    
    
    
    1,9027.875% Senior Subordinated Notes due 2014
    
    
    200,000
    
    
    
    200,000Other, including capital lease obligations
    
    
    102
    
    
    
    137748,396
    
    
    
    752,139Less current portion
    
    
    (457
    )
    
    
    (4,124
    )$
    747,939
    
    
    $
    748,015
 As of March 26, 2005, the Company had availability to borrow $64.9 million under the
revolving loan after giving effect to $10.1 million that was reserved for the Companys
reimbursement obligations with respect to outstanding letters of credit. The remaining availability
under the revolving loan may be utilized to meet the Companys current working capital
requirements, including issuance of stand-by and trade letters of credit. The Company also may
utilize the remaining availability under the revolving loan to fund distributions,
acquisitions and capital expenditures. 10




---



##### Table of Contents



Simmons Bedding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)  Depending on the Companys leverage ratio, the Company may be required to prepay the
tranche C term loan with up to 50% of the Companys excess cash flow (as defined in the senior credit
facility) from each fiscal year. As a result of the Companys fiscal year 2004 excess cash flow,
the Company made a $3.7 million mandatory prepayment on the tranche C term loan in March 2005. The
prepayment of debt requires us to make the next quarterly principal payment on the tranche C term
loan in March 2006. The senior credit facility and the senior unsecured term loan bear interest at the Companys
choice of the Eurodollar Rate or Base Rate (both as defined), plus the applicable interest rate
margins as follows: Eurodollar
    
    
    BaseRate
    
    
    RateRevolving Loan
    
    
    2.50
    %
    
    
    1.50
    %Tranche C Term Loan
    
    
    2.50
    %
    
    
    1.50
    %Senior Unsecured Term Loan
    
    
    3.75
    %
    
    
    2.75
    %
 The weighted average interest rates per annum in effect as of March 26, 2005 for the
tranche C term loan and senior unsecured term loan were 5.78% and 7.00%, respectively. The Company has developed and implemented a policy to utilize extended Eurodollar contracts to
minimize the impact of near term Eurodollar rate increases. For
approximately $325 million of the
tranche C term loan and $140 million of the senior unsecured term loan, the Company has set the
interest rate at the twelve month Eurodollar Rate on January 26, 2005, which fixed the Eurodollar
Rate at 3.25% through January 26, 2006. To further address interest rate risk, the Company has an
interest rate cap agreement for a notional amount of $170 million which capped the Eurodollar Rate
at 5.0% for the period of January 26, 2005 through January 26, 2006. The interest rate cap
agreement has not been designated for hedge accounting and, accordingly, any changes in the fair
value are recorded in interest expense. The fair value of the interest rate cap agreement is less than
$0.3 million. The execution of these debt instruments resulted in the Company fixing the
interest rate on approximately 87% of its floating rate debt. The 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 all the Companys active
domestic subsidiaries. All the subsidiary guarantors are 100% owned by the Company. The following
supplemental consolidating condensed financial statements provide additional
guarantor/non-guarantor information. 11




---



##### Table of Contents



Simmons Bedding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) Supplemental Consolidating Condensed Statements of Operations
For the Quarter Ended March 26, 2005
(In thousands) Issuer and GuarantorsSimmonsBedding
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    (16,033
    )
    
    $
    219,394
    
    
    $
    2,221
    
    
    $
    
    
    
    $
    205,582Cost of products sold
    
    
    288
    
    
    
    112,146
    
    
    
    1,732
    
    
    
    
    
    
    
    114,166Gross profit
    
    
    (16,321
    )
    
    
    107,248
    
    
    
    489
    
    
    
    
    
    
    
    91,416Operating expenses:Selling, general and administrative expenses
    
    
    51,480
    
    
    
    27,105
    
    
    
    485
    
    
    
    
    
    
    
    79,070Amortization of intangibles
    
    
    807
    
    
    
    634
    
    
    
    
    
    
    
    
    
    
    
    1,441Intercompany fees
    
    
    (71,734
    )
    
    
    71,531
    
    
    
    203
    
    
    
    
    
    
    
    Licensing fees
    
    
    (265
    )
    
    
    (1,607
    )
    
    
    (179
    )
    
    
    
    
    
    
    (2,051
    )(19,712
    )
    
    
    97,663
    
    
    
    509
    
    
    
    
    
    
    
    78,460Operating income (loss)
    
    
    3,391
    
    
    
    9,585
    
    
    
    (20
    )
    
    
    
    
    
    
    12,956Interest expense, net
    
    
    11,966
    
    
    
    200
    
    
    
    23
    
    
    
    
    
    
    
    12,189Income from
affiliates
    
    
    (9,538
    )
    
    
    
    
    
    
    
    
    
    
    9,538
    
    
    
    Income
(loss) before income taxes
    
    
    963
    
    
    
    9,385
    
    
    
    (43
    )
    
    
    (9,538
    )
    
    
    767Income tax expense
    
    
    480
    
    
    
    (227
    )
    
    
    31
    
    
    
    
    
    
    
    284Net income
(loss)
    
    $
    483
    
    
    $
    9,612
    
    
    $
    (74
    )
    
    $
    (9,538
    )
    
    $
    483
 12




---



##### Table of Contents



Simmons Bedding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) Supplemental Consolidating Condensed Statements of Operations
For the Quarter Ended March 27, 2004
(In thousands) Issuer and GuarantorsSimmonsBedding
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    (12,166
    )
    
    $
    233,061
    
    
    $
    2,425
    
    
    $
    
    
    
    $
    223,320Cost of products sold
    
    
    313
    
    
    
    117,699
    
    
    
    1,853
    
    
    
    
    
    
    
    119,865Gross profit
    
    
    (12,479
    )
    
    
    115,362
    
    
    
    572
    
    
    
    
    
    
    
    103,455Operating expenses:Selling, general and administrative expenses
    
    
    56,019
    
    
    
    28,697
    
    
    
    545
    
    
    
    
    
    
    
    85,261Amortization of intangibles
    
    
    2,669
    
    
    
    817
    
    
    
    
    
    
    
    
    
    
    
    3,486Intercompany fees
    
    
    (53,929
    )
    
    
    53,708
    
    
    
    221
    
    
    
    
    
    
    
    Licensing fees
    
    
    (346
    )
    
    
    (2,098
    )
    
    
    (137
    )
    
    
    
    
    
    
    (2,581
    )4,413
    
    
    
    81,124
    
    
    
    629
    
    
    
    
    
    
    
    86,166Operating income (loss)
    
    
    (16,892
    )
    
    
    34,238
    
    
    
    (57
    )
    
    
    
    
    
    
    17,289Interest expense, net
    
    
    10,888
    
    
    
    196
    
    
    
    9
    
    
    
    
    
    
    
    11,093Income from
affiliates
    
    
    (20,690
    )
    
    
    
    
    
    
    
    
    
    
    20,690
    
    
    
    Income (loss) before income taxes
    
    
    (7,090
    )
    
    
    34,042
    
    
    
    (66
    )
    
    
    (20,690
    )
    
    
    6,196Income tax expense
    
    
    (11,055
    )
    
    
    13,279
    
    
    
    7
    
    
    
    
    
    
    
    2,231Net income (loss)
    
    $
    3,965
    
    
    $
    20,763
    
    
    $
    (73
    )
    
    $
    (20,690
    )
    
    $
    3,965
 13




---



##### Table of Contents



Simmons Bedding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) Supplemental Consolidating Condensed Balance Sheets
As of March 26, 2005
(In thousands) Issuer and GuarantorsSimmonsBedding
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,953
    
    
    $
    3,873
    
    
    $
    992
    
    
    $
    
    
    
    $
    17,818Accounts receivable
    
    
    
    
    
    
    75,817
    
    
    
    1,611
    
    
    
    
    
    
    
    77,428Inventories
    
    
    
    
    
    
    32,351
    
    
    
    1,131
    
    
    
    
    
    
    
    33,482Other
    
    
    8,338
    
    
    
    9,015
    
    
    
    485
    
    
    
    
    
    
    
    17,838Total current assets
    
    
    21,291
    
    
    
    121,056
    
    
    
    4,219
    
    
    
    
    
    
    
    146,566Property, plant and equipment, net
    
    
    11,023
    
    
    
    45,585
    
    
    
    5,156
    
    
    
    
    
    
    
    61,764Goodwill and other intangibles, net
    
    
    68,477
    
    
    
    964,749
    
    
    
    65
    
    
    
    
    
    
    
    1,033,291Other assets
    
    
    19,847
    
    
    
    20,591
    
    
    
    730
    
    
    
    
    
    
    
    41,168Due from parent company
    
    
    2,365
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,365Investment in affiliates
    
    
    545,846
    
    
    
    
    
    
    
    
    
    
    
    (545,846
    )
    
    
    $
    668,849
    
    
    $
    1,151,981
    
    
    $
    10,170
    
    
    $
    (545,846
    )
    
    $
    1,285,154LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    230
    
    
    $
    227
    
    
    $
    
    
    
    $
    457Accounts payable and accrued liabilities
    
    
    44,278
    
    
    
    62,345
    
    
    
    1,259
    
    
    
    
    
    
    
    107,882Total current liabilities
    
    
    44,278
    
    
    
    62,575
    
    
    
    1,486
    
    
    
    
    
    
    
    108,339Long-term debt
    
    
    732,945
    
    
    
    13,359
    
    
    
    1,636
    
    
    
    
    
    
    
    747,939Deferred income taxes
    
    
    (14,488
    )
    
    
    168,460
    
    
    
    443
    
    
    
    
    
    
    
    154,415Net due to (from) affiliates
    
    
    (363,360
    )
    
    
    363,112
    
    
    
    (457
    )
    
    
    705
    
    
    
    Other non-current liabilities
    
    
    8,381
    
    
    
    4,570
    
    
    
    417
    
    
    
    
    
    
    
    13,368Total liabilities
    
    
    407,756
    
    
    
    612,076
    
    
    
    3,525
    
    
    
    705
    
    
    
    1,024,061Stockholders equity
    
    
    261,093
    
    
    
    539,905
    
    
    
    6,646
    
    
    
    (546,551
    )
    
    
    261,093$
    668,849
    
    
    $
    1,151,981
    
    
    $
    10,170
    
    
    $
    (545,846
    )
    
    $
    1,285,154
 14




---



##### Table of Contents



Simmons Bedding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) Supplemental Consolidating Condensed Statements of Cash Flows
For the Quarter Ended March 26, 2005
(In thousands) Issuer and GuarantorsSimmonsBedding
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by (used in) operating
activities
    
    $
    2,549
    
    
    $
    (2,829
    )
    
    $
    (763
    )
    
    $
    
    
    
    $
    (1,043
    )Cash flows from investing activities:Purchase of property, plant and
equipment, net
    
    
    (585
    )
    
    
    (782
    )
    
    
    (11
    )
    
    
    
    
    
    
    (1,378
    )Other, net
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Net cash used in investing
activities
    
    
    (584
    )
    
    
    (782
    )
    
    
    (11
    )
    
    
    
    
    
    
    (1,377
    )Cash flows from financing activities:Repayment of long-term obligations
    
    
    (3,655
    )
    
    
    (33
    )
    
    
    (55
    )
    
    
    
    
    
    
    (3,743
    )Receipts
from (distributions to)
affiliates
    
    
    (1,280
    )
    
    
    184
    
    
    
    1,220
    
    
    
    
    
    
    
    124Net cash provided by (used in) financing
activities
    
    
    (4,935
    )
    
    
    151
    
    
    
    1,165
    
    
    
    
    
    
    
    (3,619
    )Net effect of exchange rate change
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    

    
    
    
    3Change in cash and cash equivalents
    
    
    (2,970
    )
    
    
    (3,460
    )
    
    
    394
    
    
    
    
    
    
    
    (6,036
    )Cash and cash equivalents:Beginning of period
    
    
    15,923
    
    
    
    7,333
    
    
    
    598
    
    
    
    
    
    
    
    23,854End of period
    
    $
    12,953
    
    
    $
    3,873
    
    
    $
    992
    
    
    $
    
    
    
    $
    17,818
 15




---



##### Table of Contents



Simmons Bedding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) Supplemental Consolidating Condensed Statements of Cash Flows
For the Quarter Ended March 27, 2004
(In thousands) Issuer and GuarantorsSimmonsBedding
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by operating activities
    
    $
    959
    
    
    $
    11,169
    
    
    $
    143
    
    
    $
    
    
    
    $
    12,271Cash flows from investing activities:Purchase of property, plant and
equipment, net
    
    
    (617
    )
    
    
    (1,200
    )
    
    
    
    
    
    
    
    
    
    
    (1,817
    )Other, net
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    6Net cash used in investing activities
    
    
    (617
    )
    
    
    (1,194
    )
    
    
    
    
    
    
    
    
    
    
    (1,811
    )Cash flows from financing activities:Repayment of long-term obligations, net
    
    
    (11,676
    )
    
    
    (563
    )
    
    
    (77
    )
    
    
    
    
    
    
    (12,316
    )Receipts from (distributions to) affiliates
    
    
    11,766
    
    
    
    (9,966
    )
    
    
    (1,800
    )
    
    
    
    
    
    
    Debt issuance costs
    
    
    (238
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (238
    )Net cash used in financing activities
    
    
    (148
    )
    
    
    (10,529
    )
    
    
    (1,877
    )
    
    
    
    
    
    
    (12,554
    )Net effect of exchange rate change
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Change in cash and cash equivalents
    
    
    194
    
    
    
    (554
    )
    
    
    (1,736
    )
    
    
    
    
    
    
    (2,096
    )Cash and cash equivalents:Beginning of period
    
    
    615
    
    
    
    667
    
    
    
    2,388
    
    
    
    
    
    
    
    3,670End of period
    
    $
    809
    
    
    $
    113
    
    
    $
    652
    
    
    $
    
    
    
    $
    1,574
 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 and distribution of branded 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 (iv) the sale to
consumers of product returns, off-quality product and excess inventory through retail outlet
stores. The retail bedding segment currently operates specialty sleep stores in Oregon and Washington
that sell to consumers principally premium branded bedding products. On May 1, 2004, the
Company sold its retail bedding subsidiary, Mattress Gallery (see Note C to the condensed
consolidated financial statements for further explanation). 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 16




---



##### Table of Contents



Simmons Bedding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) 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, non-cash stock
compensation expenses, and other 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 March 26, 2005
(In thousands) WholesaleBedding
    
    
    Retail
    
    
    Eliminations
    
    
    TotalsNet sales to external customers
    
    $
    186,451
    
    
    $
    19,131
    
    
    $
    
    
    
    $
    205,582Intersegment net sales
    
    
    3,149
    
    
    
    
    
    
    
    (3,149
    )
    
    
    Adjusted EBITDA
    
    
    17,784
    
    
    
    2,117
    
    
    
    78
    
    
    
    19,979Depreciation and amortization expense
    
    
    6,136
    
    
    
    326
    
    
    
    
    
    
    
    6,462Expenditures for long-lived assets
    
    
    1,124
    
    
    
    254
    
    
    
    
    
    
    
    1,378Segment assets
    
    
    1,292,262
    
    
    
    24,779
    
    
    
    (31,887
    )
    
    
    1,285,154Reconciliation of EBITDA and AdjustedEBITDA to net income:Net income (loss)
    
    $
    (689
    )
    
    $
    1,094
    
    
    $
    78
    
    
    $
    483Depreciation and amortization
    
    
    6,136
    
    
    
    326
    
    
    
    
    
    
    
    6,462Income taxes
    
    
    (314
    )
    
    
    598
    
    
    
    
    
    
    
    284Interest expense, net
    
    
    12,186
    
    
    
    3
    
    
    
    
    
    
    
    12,189Interest income
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    36EBITDA
    
    
    17,355
    
    
    
    2,021
    
    
    
    78
    
    
    
    19,454Management fees
    
    
    420
    
    
    
    
    
    
    
    
    
    
    
    420Management severance
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    105Other, net
    
    
    (96
    )
    
    
    96
    
    
    
    
    
    
    
    Adjusted EBITDA
    
    $
    17,784
    
    
    $
    2,117
    
    
    $
    78
    
    
    $
    19,979
 17




---



##### Table of Contents



Simmons Bedding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited) Quarter Ended March 27, 2004
(In thousands) WholesaleBedding
    
    
    Retail
    
    
    Eliminations
    
    
    TotalsNet sales to external customers
    
    $
    198,213
    
    
    $
    25,107
    
    
    $
    
    
    
    $
    223,320Intersegment net sales
    
    
    8,889
    
    
    
    
    
    
    
    (8,889
    )
    
    
    Adjusted EBITDA
    
    
    36,755
    
    
    
    1,106
    
    
    
    (561
    )
    
    
    37,300Depreciation and amortization expense
    
    
    7,304
    
    
    
    317
    
    
    
    
    
    
    
    7,621Expenditures for long-lived assets
    
    
    1,351
    
    
    
    466
    
    
    
    
    
    
    
    1,817Segment assets
    
    
    1,147,918
    
    
    
    35,651
    
    
    
    812
    
    
    
    1,184,381Reconciliation of EBITDA and Adjusted
EBITDA to net income:Net income (loss)
    
    $
    8,200
    
    
    $
    (3,674
    )
    
    $
    (561
    )
    
    $
    3,965Depreciation and amortization
    
    
    7,304
    
    
    
    317
    
    
    
    
    
    
    
    7,621Income taxes
    
    
    2,461
    
    
    
    (230
    )
    
    
    
    
    
    
    2,231Interest expense, net
    
    
    11,042
    
    
    
    51
    
    
    
    
    
    
    
    11,093Interest income
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    44EBITDA
    
    
    29,051
    
    
    
    (3,536
    )
    

    
    (561
    )
    
    
    24,954Non-cash stock compensation expense
    
    
    3,308
    
    
    
    
    
    
    
    
    
    
    
    3,308Management fees
    
    
    400
    
    
    
    
    
    
    
    
    
    
    
    400Plant opening charges
    
    
    2,229
    
    
    
    
    
    
    
    
    
    
    
    2,229Transaction expenses, including cost
of products sold
    
    
    2,640
    
    
    
    3,813
    
    
    
    
    
    
    
    6,453Other
    
    
    (873
    )
    
    
    828
    
    
    
    
    
    
    
    (45
    )Adjusted EBITDA
    
    $
    36,755
    
    
    $
    1,105
    
    
    $
    (561
    )
    
    $
    37,299
 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. Accounting Pronouncements



     In
December 2004, the Financial Accounting Standards Board issued
SFAS No. 123 (Revised 2004), Share-Based Payment
(SFAS 123R). SFAS 123R requires that compensation cost
relating to share-based payment transactions be recognized in
financial statements based upon the fair value of the award. FAS
123R eliminates the option to account for the cost of stock-based
compensation using the intrinsic value method as allowed under APB
Opinion No. 25, Accounting for Stock Issued to Employees. The
Company is considered a non-public entity as defined by SFAS 123R.
SFAS 123R is effective for non-public entities for fiscal years
beginning after December 15, 2005. The Company expects to adopt
SFAS 123R as of the beginning of its fiscal year 2006. The Company is
still in the process of evaluating the potential effect of the
adoption of SFAS 123R on its consolidated financial statements. 18




---



##### Table of Contents



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
25, 2004, including related notes, and Managements Discussion and Analysis of Financial Condition
and Results of Operations contained in our 2004 Annual Report on Form 10-K, and the unaudited
interim financial statements included elsewhere in this report. Results of Operations The following table sets forth historical consolidated financial information as a percent of
net sales: Quarter EndedMarch 26,
    
    
    March 27,2005
    
    
    2004Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of products sold
    
    
    55.5
    %
    
    
    53.7
    %Gross margin
    
    
    44.5
    %
    
    
    46.3
    %Operating expenses:Selling, general and
administrative expenses
    
    
    38.5
    %
    
    
    38.2
    %Amortization of intangibles
    
    
    0.7
    %
    
    
    1.6
    %Licensing fees
    
    
    -1.0
    %
    
    
    -1.2
    %38.2
    %
    
    
    38.6
    %Operating income
    
    
    6.3
    %
    
    
    7.7
    %Interest expense, net
    
    
    5.9
    %
    
    
    5.0
    %Income before income taxes
    
    
    0.4
    %
    
    
    2.7
    %Income tax expense
    
    
    0.1
    %
    
    
    1.0
    %Net income
    
    
    0.3
    %
    
    
    1.7
    %
 19




---



##### Table of Contents



Quarter Ended March 26, 2005 as Compared to Quarter Ended March 27, 2004 Net sales.The following table presents our net sales and the dollar amount and
percentage change by segment for the quarter ended March 26, 2005 compared to the quarter ended
March 27, 2004. $ increase
    
    
    % increase2005
    
    
    2004
    
    
    (decrease)
    
    
    (decrease)(in millions)Wholesale bedding segment
    
    $
    189.6
    
    
    $
    207.1
    
    
    $
    (17.5
    )
    
    
    -8.5
    %Retail bedding segment
    
    
    19.1
    
    
    
    25.1
    
    
    
    (6.0
    )
    
    
    -23.8
    %Eliminations
    
    
    (3.1
    )
    
    
    (8.9
    )
    
    
    5.7
    
    
    
    -64.6
    %Consolidated net sales
    
    $
    205.6
    
    
    $
    223.3
    
    
    $
    (17.7
    )
    
    
    -7.9
    %
 Wholesale bedding segment net sales decreased primarily as a result of (i) a 15.2%
decline in our conventional bedding unit volume resulting in a
decrease in wholesale bedding net sales of
$33.3 million and (ii) a $4.3 million increase in cash consideration paid to our customers for
certain promotional programs and volume rebates that was recorded as a reduction of net sales. Our
conventional bedding unit volume decline resulted principally from
lower volume at retail price
points per queen set between $500 and $1,000 driven by lower demand
as a result of increased wholesale
prices by retail price point on
certain products in our new 2005 product lines, combined with
increased competition. Additionally, the
sales of our new HealthSmartTM product at premium price points
were not as well received by our retailers as our previous premium priced products. To address our volume decline, we have
introduced new products in the second quarter to complement our existing product lines and also
reduced wholesale prices on certain products. For the quarters ended March 26, 2005 and March 27, 2004, our wholesale bedding segment net
sales reflect a reduction of $16.9 million and $12.6 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 March 26, 2005 compared to the quarter ended March 27,
2004 principally due to more of our co-op advertising spending meeting the criteria of a sales
reduction versus a selling expense. As a percentage of our sales, our
aggregate co-op advertising
expenditures, regardless of whether reported as selling expense or a sales reduction, for the
quarter ended March 26, 2005, was comparable with the aggregate co-op advertising expenditures for
the quarter ended March 27, 2004. Partially offsetting the decline in conventional bedding unit volume and the increase in sales
reductions, our conventional bedding average unit selling price
(AUSP) increased 6.7% for the
quarter ended March 26, 2005 compared to the quarter ended March 27, 2004 resulting in an
increase of wholesale bedding net sales of $14.7 million. Our
conventional bedding AUSP increased 4.8% for the quarter ended March 26, 2005
compared to the quarter ended December 25, 2004. Our improvement in conventional bedding AUSP was primarily
attributable to the shipment of our new product lines in 2005 and the price increase
implemented on our 2004 product line in October 2004, some of which was sold during the first
quarter of 2005. Partially offsetting our improvement in
conventional bedding AUSP, our AUSP at retail price points per queen set between $500 and
$1,000 has decreased as a result of a shift to lower priced products
within these retail price points for the quarter ended March 26,
2005 compared to the quarter ended March 27, 2004. Additionally,
our wholesale bedding segment net sales improved $5.7 million for the
quarter ended March 26, 2005 due to sales of juvenile products as a result of the acquisition
of the crib mattress and related soft goods of Simmons Juvenile Products Company, Inc. in August
2004 (the Juvenile Acquisition). For the quarter ended March 26, 2005, our wholesale conventional bedding sales, exclusive of
cash consideration paid to our customers for certain promotional
programs and volume rebates that were recorded as a reduction of net
sales, which is the methodology used by the International Sleep Products
Association (ISPA) in estimating industry sales, were down 8.5% compared to the quarter ended
March 27, 2004. In comparison, ISPA estimated that the first quarter of 2005 20




---



##### Table of Contents



total U.S. bedding
manufacturers sales were up 9.6% over the prior year first quarter. 
 Retail bedding segment sales decreased as a result of the sale of our Mattress Gallery retail
operations on May 1, 2004. Mattress Gallery contributed $9.9 million of retail sales for the
quarter ended March 27, 2004. On a comparable store basis, sales for our retail stores increased
22.3% for the quarter ended March 26, 2005 versus the quarter ended March 27, 2004. Retail segment
same store sales have benefited from increased advertising and an improved retail sales environment
in Washington and Oregon. Gross Margin.The following table presents our gross profit, gross margin, and the gross
margin percentage point change by segment for the quarter ended March 26, 2005 compared to the
quarter ended March 27, 2004. Margin %Gross Profit
    
    
    Gross Margin
    
    
    Point2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    Change(in millions)Wholesale bedding segment
    
    $
    81.0
    
    
    $
    95.3
    
    
    
    42.7
    %
    
    
    46.0
    %
    
    
    (3.3
    )Retail bedding segment
    
    
    10.3
    
    
    
    8.8
    
    
    
    53.7
    %
    
    
    34.9
    %
    
    
    18.8Eliminations
    
    
    0.1
    
    
    
    (0.6
    )
    
    
    -4.7
    %
    
    
    6.3
    %
    
    
    (11.0
    )Consolidated
    
    $
    91.4
    
    
    $
    103.5
    
    
    
    44.5
    %
    
    
    46.3
    %
    
    
    (1.8
    )
 Our wholesale bedding segment gross margin for the quarter ended March 27, 2004 declined by
1.3 percentage points as a result of the selling of inventory recorded at fair market value in
connection with the purchase accounting associated with the December 19, 2003 acquisition of the
company by affiliates of Thomas H. Lee Equity Fund V (the Acquisition). Excluding the effect on
gross margin of selling inventory recorded at fair market value, our wholesale bedding segment
gross margin decreased 4.6 percentage points for the quarter ended March 26, 2005 compared to the
quarter ended March 27, 2004 due primarily to (i) an increase in our
conventional bedding material costs of 2.8 percentage points, as a
percentage of net sales, due principally to our increase in AUSP
being less than the inflation in the prices of our raw materials;
(ii) an increase in overhead costs of 1.1 percentage points, as a
percentage of net sales, due principally to the decline in
our unit volume as discussed above and operating inefficiencies resulting from the ramp-up of
production at our manufacturing facilities in Waycross, Georgia and Hazleton, Pennsylvania which
opened in March 2004 and August 2004, respectively; and (iii) the selling of juvenile products, which sell at lower margins, in 2005 as a
result of the Juvenile Acquisition, which resulted in a 0.4
percentage point decline in gross
margin. Our retail bedding segment gross margin improved principally due to the selling of inventory
in 2004 recorded at fair market value in connection with Acquisition. The selling of the marked-up
inventory reduced our 2004 retail bedding segment gross margin by 15.3 percentage points.
Additionally, our retail bedding segment gross margin improved as a result of (i) the sale of our
Mattress Gallery retail operations in May 2004, which had a lower margin product sales mix than our
Sleep Country retail operations; and (ii) the gross margins at our Sleep Country retail operations
improving due to a shift in sales mix to products that have higher gross margins. 21




---



##### Table of Contents



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 March 26, 2005 compared to the quarter ended March 27, 2004. Margin %SG&A
    
    
    As a % of Net Sales
    
    
    Point2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    Change(in millions)Wholesale bedding segment
    
    $
    70.6
    
    
    $
    72.7
    
    
    
    37.2
    %
    
    
    35.1
    %
    
    
    2.1Retail bedding segment
    
    
    8.5
    
    
    
    12.6
    
    
    
    44.4
    %
    
    
    50.0
    %
    
    
    (5.6
    )Consolidated
    
    $
    79.1
    
    
    $
    85.3
    
    
    
    38.5
    %
    
    
    38.2
    %
    
    
    0.3
 Our wholesale bedding segment SG&A increased for the quarter ended March 26, 2005 compared to
the quarter ended March 27, 2004 principally due to (i) national advertising expenditures
increasing $4.6 million, or 2.5 percentage points, due to
the launch of our national advertising
campaign associated with our HealthSmart TM product line; (ii) corporate
function expenses increasing $2.2 million, or 1.2 percentage points, due to our bi-annual national
leadership meeting which occurred in January 2005; (iii) distribution expenses increasing 0.5
percentage points resulting from higher fuel costs and more miles driven to service our customers
from existing manufacturing facilities until production at our new manufacturing facilities
normalizes; (iv) professional service fees increasing 0.4 percentage points due principally to the
use of outside consultants to assist us in our Sarbanes-Oxley compliance efforts; and (v) rent
expense increasing 0.3 percentage points due principally to the addition of new computer and
software leases. Partially offsetting these increases, our wholesale bedding segment SG&A benefited from (i)
our non-cash stock compensation expense decreasing $3.3 million, or 1.6 percentage points, as a
result of our indirect  parent, Simmons Company, terminating its deferred compensation plan in June 2004;
(ii) our co-op advertising expenses decreasing 1.3 percentage points due to more of our
expenditures meeting the criteria of a sales reduction versus a selling expense; and (iii) our
administrative compensation decreasing 0.4 percentage points as a result of lower anticipated
management bonus payouts for 2005 than in 2004. Our retail segment SG&A decreased primarily due to the sale of our Mattress Gallery retail
operations as discussed above and our Sleep Country retail operations growing their same store
sales which allows Sleep Country to better leverage their fixed costs, such as salaries and rent. Amortization of Intangibles. For the quarter ended March 26, 2005, amortization of
intangibles decreased $2.1 million to $1.4 million from $3.5 million for the quarter ended March
27, 2004. The decrease in amortization expense is attributable to the purchase price allocation
associated with the Acquisition which was not finalized until the second quarter of 2004. Prior to
the finalization of the purchase price allocation, the amortization of intangibles was recorded
based upon a preliminary valuation of the intangible assets. Licensing Fees. For the quarter ended March 26, 2005, licensing fees decreased $0.5 million
to $2.1 million from $2.6 million for the quarter ended March 27, 2004. Licensing fees decreased
primarily due to (i) lower sales of licensed products by one of
our domestic licensees for the quarter ended March 26, 2005
compared to the quarter ended March 27, 2004 and (ii) the
loss of a domestic licensee as a result of their filing for bankruptcy during the
second quarter of 2004. 22




---



##### Table of Contents



Interest Expense, Net. For the quarter ended March 26, 2005, interest expense increased $1.1
million to $12.2 million from $11.1 million for the quarter ended March 27, 2004. Interest expense
increased due to higher LIBOR base rates on our senior credit facility, partially offset by lower
average outstanding borrowings for the quarter ended March 26, 2005 compared to the quarter ended
March 27, 2004. Income Taxes.The combined federal, state, and foreign effective income tax rate of 37.0% for
the quarter ended March 26, 2005 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 of
36.0% for the quarter ended March 27, 2004 differed from the federal statutory rate of 35.0%
primarily due to a tax benefit realized as a result of a decrease in the tax rate at which deferred
tax assets and liabilities were recorded in order to more properly reflect our overall state income
tax effective rate, the tax expense effect of a valuation allowance increase for Sleep Countrys
net deferred tax assets, and state income tax expense. Liquidity and Capital Resources Our principal sources of cash to fund liquidity needs are (i) cash provided by operating
activities and (ii) borrowings available under our senior credit facility. Our primary use of
funds consists of payments to fund working capital increases, principal and interest for our
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 our senior credit facility to be
sufficient to meet our short-term and long-term liquidity needs. 23




---



##### Table of Contents



The following table summarizes our changes in cash (in millions): Quarter Ended
    
    
    Quarter EndedMarch 26,
    
    
    March 27,2005
    
    
    2004Statement of Cash Flow Data:Cash flows provided by (used in):Operating activities
    
    $
    (1.0
    )
    
    $
    12.3Investing activities
    
    
    (1.4
    )
    
    
    (1.8
    )Financing activities
    
    
    (3.6
    )
    
    
    (12.6
    )Change in cash and cash equivalents
    
    
    (6.0
    )
    
    
    (2.1
    )Cash and cash equivalents:Beginning of period
    
    
    23.8
    
    
    
    3.7End of period
    
    $
    17.8
    
    
    $
    1.6
 Quarter Ended March 26, 2005 as Compared to Quarter Ended March 27, 2004 Cash flows (used in) provided by Operating Activities. Our cash flows from operations
decreased primarily due to our lower net sales and operating margins combined with an increase in
the use of working capital for the quarter ended March 26, 2005 compared to the quarter ended March
27, 2004. Cash flows used in Investing Activities.Our cash flows from investing activities decreased
due to lower capital expenditures for the quarter ended March 26, 2005 compared to the quarter
ended March 27, 2004. Cash flows used in Financing Activities.Our cash flows used in financing activities
decreased as a result of our reduced payments on our senior credit facility for the quarter ended
March 26, 2005 compared to the quarter ended March 27, 2004. Debt The
terms of our senior credit facility required a mandatory prepayment of our tranche C term
loan of $3.7 million, based upon our Consolidated Excess Cash Flows (as defined in the senior
credit facility) for the year ended December 25, 2004. This payment was made in March 2005 and
results in our next quarterly principal payment on the senior credit facility being in March 2006. As of March 26, 2005, we had availability to borrow $64.9 million under our revolving loan
facility after giving effect to $10.1 million that was reserved for our reimbursement obligations
with respect to outstanding letters of credit. The weighted average interest rates per annum in
effect as of March 26, 2005 for the tranche C term loan and senior unsecured term loan were 5.78%
and 7.0%, respectively. 24




---



##### Table of Contents



We have developed and implemented a policy to utilize extended Eurodollar contracts to
minimize the impact of near term Eurodollar rate increases. For
approximately $325 million of the
tranche C term loan and $140 million of the senior unsecured term loan, we set the interest rate at
the twelve month Eurodollar Rate on January 26, 2005, which fixed the Eurodollar Rate at 3.25%
through January 26, 2006. To further address interest rate risk, we have an interest rate cap
agreement for a notional amount of $170 million which capped the Eurodollar Rate at 5.0% for the
period of January 26, 2005 through January 26, 2006. The interest rate cap agreement has not been
designated for hedge accounting and, accordingly, any changes in the fair value are recorded in
interest expense. The fair value of the interest rate cap agreement is less than $0.3 million. The
execution of these debt instruments resulted in us fixing the interest rate on
approximately 87% of our floating rate debt as of March 26, 2005. Our long-term obligations contain various financial tests and covenants. We were in compliance
with such covenants as of March 26, 2005. However, if our operating results fall below current
expectations, we may not be able to meet such covenants in future periods. If we 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. We may not be able to obtain such a waiver on a timely basis or
at all. The most restrictive covenants relate to ratios of Adjusted EBITDA to interest
coverage (interest coverage ratio), total debt to Adjusted EBITDA (leverage ratio), and maximum
capital expenditures, all as defined in the senior credit facility, as amended. The interest
coverage and leverage ratios are computed based on our results for the last twelve months ended.
More specifically, the senior credit facilitys covenants, as amended, require:  
    a minimum interest coverage ratio, with compliance levels ranging from an interest
coverage of no less than 2.30:1.00 from March 31, 2005 through December 31, 2005; 2.40:1.00
from March 31, 2006 through December 31, 2006; 2.55:1.00 from March 31, 2007
through 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 ending thereafter.
    A maximum leverage ratio, with compliance levels ranging from total leverage of no
greater than 6.50:1.00 from March 31, 2005 through December 31, 2005; 6.00:1.00 from March
31, 2006 through June 30, 2006; 5.75:1.00 from September 30, 2006 through December 31,
2006; 5.00:1.00 from March 31, 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.
    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 other events. Adjusted EBITDA (as defined in the 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; ESOP
expenses; the aggregate amount of the fees, costs and cash expenses paid by us in connection with
the consummation of the Acquisition (including without limitation, 25




---



##### Table of Contents



bonus and option payments); other non-cash items reducing consolidated net income (including,
without limitation, non-cash purchase accounting adjustments and debt extinguishment costs); the
cure amount, if any, received by us in respect of that period; any extraordinary, unusual or
non-recurring gains or losses or charges or credits; and any reasonable expenses or charges related
to any issuance of securities, investments permitted, permitted acquisitions, recapitalizations,
asset sales permitted or indebtedness permitted to be incurred, less other non-cash items
increasing consolidated net income, all of the foregoing as determined on a consolidated basis for
us 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. The following is a calculation of our minimum interest coverage and maximum leverage ratios
under our senior credit facility as of March 26, 2005 (dollar amounts in millions, except ratios).
The terms and related calculations are defined in our senior credit facility. March 26,2005Calculation of minimum cash interest coverage ratio:Twelve months ended Adjusted EBITDA(1)
    
    $
    115.4Consolidated cash interest expense(2)
    
    $
    42.9Actual interest coverage ratio(3)
    
    
    2.69xMinimum permitted interest coverage ratio
    
    
    2.30xCalculation of maximum leverage ratio:Consolidated indebtedness
    
    $
    748.4Less: Cash and cash equivalents
    
    
    17.8Net debt
    
    $
    730.6Adjusted EBITDA(1)
    
    $
    115.4Actual leverage ratio(4)
    
    
    6.33xMaximum permitted leverage ratio
    
    
    6.50x
  (1)
    
    Adjusted EBITDA for the twelve months ended March 26, 2005 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, certain litigation and insurance charges relating to previous periods, retail
segment charges relating to previous periods, management fees, and other
non-recurring/non-cash charges as permitted under our senior credit facility.
Additionally, Adjusted EBITDA is adjusted to include the operating results of our Simmons
Juvenile division as 26




---



##### Table of Contents



though we operated our Simmons Juvenile division as of the beginning of the twelve months ended March 26,
2005 and excludes the operating results of Mattress Gallery as though we sold Mattress
Gallery as of the beginning of the twelve months ended March 26, 2005.(2)
    
    Consolidated cash interest expense, as defined in the senior credit facility, for the
twelve months ended March 26, 2005, as follows (in millions): Interest expense, net
    
    $
    44.9Interest income
    
    
    0.1Gross interest expense
    
    
    45.0Less: Non-cash interest expense
    
    
    2.1$
    42.9
  (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. Off-Balance Sheet Arrangements On December 15, 2004, our indirect parent, Simmons Company, completed a private placement for
approximately $165.1 million in aggregate proceeds from its issuance of 10% senior discount notes
due 2014 (the Discount Notes). The proceeds from the offering were used to make a dividend
distribution to its class A shareholders and to pay expenses related to the sale and distribution
of the Discount Notes. No payments are due on the Discount Notes until June 15, 2010. Simmons
Companys ability to make payments on the Discount Notes is dependent on our earnings and
distributions of funds to Simmons Company. As of March 26, 2005, the aggregate amount of Discount
Notes outstanding was $169.8 million, which is not reflected on our condensed consolidated balance
sheet. In connection with the sale of Mattress Gallery, we continue to guarantee approximately $1.8
million of Mattress Gallery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
consolidate balance sheet as of March 26, 2005. Seasonality/Other For the past several years, there has not been significant seasonality to our wholesale
bedding business. Our retail bedding business, which accounted for $19.1 million, or 9.3%, of our
consolidated net sales for the first quarter of 2005, has historically experienced, and we expect
will continue to experience, seasonal and quarterly fluctuations in net sales, operating income and
Adjusted EBITDA. As is the case with many bedding retailers, our retail business is subject to
seasonal influences, typically characterized by higher sales for the months of May through
September, which impacts our second and third quarter results. 27




---



##### Table of Contents



Accounting Pronouncements In
December 2004, the Financial Accounting Standards Board issued
SFAS No. 123 (Revised 2004), Share-Based Payment
(SFAS 123R). SFAS 123R requires that
compensation cost relating to share-based payment transactions be
recognized in financial statements based upon the fair value of the
award. FAS 123R eliminates the option to account for the cost
of stock-based compensation using the intrinsic value method as
allowed under APB Opinion No. 25, Accounting for Stock Issued to
Employees. We are considered a non-public entity as defined by
SFAS 123R. SFAS 123R is effective for non-public entities
for fiscal years beginning after December 15, 2005. We expect to
adopt SFAS 123R as of the beginning of our fiscal year 2006. We
are still in the process of evaluating the potential effect of the
adoption of SFAS 123R on our consolidated financial statements. 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 and pricing pressures in the bedding industry;
    legal and regulatory requirements;
    the success of new products, including
HealthSmartTM;
    our relationships with our major suppliers;
    fluctuations in costs of raw materials;
    our relationship with significant customers and licensees;
    our labor relations;
    departure of key personnel;
    encroachments on our intellectual property;
    product liability claims;
    the timing, cost and success of opening new manufacturing facilities;
    our level of indebtedness;
    interest rate risks;
    compliance with covenants in our debt agreements; 28




---



##### Table of Contents




    future acquisitions;
    an increase in return rates; 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
25, 2004 is presented under Item 7A of our Annual Report on Form 10-K for the fiscal year ended
December 25, 2004. 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 risk from changes in interest rates. In order to address this risk,
the senior credit facility requires us to adopt interest rate protection measures on our variable
rate indebtedness such that 50% of our consolidated funded indebtedness is either fixed or
protected. We have developed and implemented a policy to utilize extended Eurodollar contracts to
minimize the impact of near term Eurodollar rate increases. For
approximately $325 million of the
tranche C term loan and $140 million of the senior unsecured term loan, we set the interest rate at
the twelve month Eurodollar Rate on January 26, 2005, which fixed the Eurodollar Rate at 3.25%
through January 26, 2006. To further address interest rate risk, we have an interest rate cap
agreement for a notional amount of $170 million which capped the Eurodollar Rate at 5.0% for the
period of January 26, 2005 through January 26, 2006. The interest rate cap agreement has not been
designated for hedge accounting and, accordingly, any changes in the fair value are recorded in
interest expense. The fair value of the interest rate cap agreement
is less than $0.3 million. The execution of these debt instruments resulted in us fixing the interest rate on
approximately 87% of our floating rate debt as of March 26, 2005. 29




---



##### Table of Contents



All other factors remaining unchanged, a hypothetical 10% increase or decrease in interest
rates for one year on our variable rate financial instruments would not have a material impact on
earnings during 2005, but would result in an additional $3.5 million of interest expense in 2006. Commodity Price Risk The major raw materials that we purchase for production are wire, spring components, lumber,
cotton, insulator pads, innersprings, 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
affected by supply and demand. In particular, many of our goods can be impacted by fluctuations in
petrochemical and steel prices. Additionally, our distribution costs can be impacted by
fluctuations in diesel fuel 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. 30




---



##### Table of Contents



PART II   OTHER INFORMATION 
 Item 1. Legal Proceedings See Note H to the Condensed Consolidated Financial Statements, Part 1, Item 1 included herein. 
 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  31.1
    Chief Executive Officer Certification of the Type Described in Rule 13a  14(a) and
Rule 15d  14(a)31.2
    Chief Financial Officer Certification of the Type Described in Rule 13a  14(a) and
Rule 15d  14(a)32.1
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (furnished
herewith)32.2
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (furnished
herewith) 31




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Act of 1934, Simmons Bedding Company has duly caused
this report to be signed on its behalf by the undersigned thereto duly authorized. SIMMONS BEDDING COMPANYBy:
    
    /s/William S. CreekmuirWilliam S. CreekmuirExecutive Vice President & Chief Financial OfficerDate:
    
    May 10, 2005
 32