UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30,September 29, 2001
COMMISSION FILE NO. 0-25121
--------------------
SELECT COMFORT CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1597886
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6105 TRENTON LANE NORTH
MINNEAPOLIS, MINNESOTA 55442
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (763) 551-7000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
As of June 30,September 29, 2001, 18,126,26518,190,634 shares of Common Stock of the Registrant
were outstanding.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
INDEX
PAGE NO.
---------Page No.
--------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30,September 29, 2001 and December 30, 2000.................................2000............................ 3
Consolidated Statements of Operations
for the Three Months and SixNine Months ended
June 30,September 29, 2001 and July 1, 2000......................................September 30, 2000........................... 4
Consolidated Statements of Cash Flows
for the SixNine Months ended June 30,September 29, 2001
and July 1, 2000....................................................September 30, 2000.............................................. 5
Notes to Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......... 14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.................................................Proceedings................................................... 15
Item 2. Changes in Securities and Use of Proceeds.........................Proceeds........................... 15
Item 3. Defaults Upon Senior Securities...................................Securities..................................... 15
Item 4. Submission of Matters to a Vote of Security Holders...............Holders................. 15
Item 5. Other Information................................................. 16Information................................................... 17
Item 6. Exhibits and Reports on Form 8-K.................................. 168-K.................................... 17
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SELECT COMFORT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30,SEPTEMBER 29, DECEMBER 30,
ASSETS 2001 2000
------------- -------------
Current assets:
Cash and cash equivalents $ 8,84815,435 $ 1,498
Marketable securities - 3,950
Accounts receivable, net of allowance for doubtful
accounts of $260,$273, and $264, respectively 2,106683 2,693
Inventories (note 2) 8,9537,615 11,083
Prepaid expenses 5,2975,199 4,741
------------- -------------
Total current assets 25,20428,932 23,965
Property and equipment, net 34,20733,410 37,063
Other assets 3,5584,637 3,644
------------- -------------
Total assets $ 62,96966,979 $ 64,672
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 2933 $ 38
Accounts payable 19,01418,633 17,271
Accruals:
Sales returns 4,6183,489 5,284
Compensation, taxes and benefits 5,9346,125 6,238
Other 6,6096,877 7,565
------------- -------------
Total current liabilities 36,20435,157 36,396
Long-term debt, less current maturities (note 3) 12,46616,942 2,322
Accrued warranty costs 5,7255,252 5,745
Other liabilities 4,0064,009 3,609
------------- -------------
Total liabilities 58,40161,360 48,072
------------- -------------
Shareholders' equity:
Undesignated preferred stock; 5,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, $.01 par value; 95,000,000 shares authorized,
18,126,26518,190,634 and 17,962,689 shares issued and outstanding,
181respectively 182 180
respectively
Additional paid-in capital 80,77781,600 79,452
Accumulated deficit (76,390)(76,163) (63,032)
------------- -------------
Total shareholders' equity 4,5685,619 16,600
------------- -------------
Total liabilities and shareholders' equity $ 62,96966,979 $ 64,672
============= =============
See accompanying notes to consolidated financial statements.
3
SELECT COMFORT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIXNINE MONTHS ENDED
------------------------ ------------------------
JUNE---------------------------- ----------------------------
SEPTEMBER 29, SEPTEMBER 30, JULY 1, JUNESEPTEMBER 29, SEPTEMBER 30, JULY 1,
2001 2000 2001 2000
----------- ----------- ----------- ------------------------ ------------- ------------- -------------
Net sales $ 62,74264,148 $ 61,787 $128,198 $137,94668,056 $192,346 $206,002
Cost of sales 22,428 21,886 46,039 49,032
----------- ----------- ----------- -----------21,192 24,871 67,231 73,903
------------- ------------- ------------- -------------
Gross margin 40,314 39,901 82,159 88,914
----------- ----------- ----------- -----------42,956 43,185 125,115 132,099
------------- ------------- ------------- -------------
Operating expenses:
Sales and marketing 37,394 38,543 81,568 83,81637,048 43,638 118,616 127,454
General and administrative 5,954 6,712 12,967 15,2325,285 7,054 18,252 22,286
Store closings and asset impairments 142 37 488 37
----------- ----------- ----------- -----------20 1,387 508 1,424
------------- ------------- ------------- -------------
Total operating expenses 43,490 45,292 95,023 99,085
----------- ----------- ----------- -----------42,353 52,079 137,376 151,164
------------- ------------- ------------- -------------
Operating loss (3,176) (5,391) (12,864) (10,171)
----------- ----------- ----------- -----------income (loss) 603 (8,894) (12,261) (19,065)
------------- ------------- ------------- -------------
Other income (expense):
Interest income 40 309 115 68459 253 174 937
Interest expense (254)(422) (2) (352) (4)(774) (6)
Equity in loss of affiliate - (246)(214) - (428)(642)
Other, net (140) (5) (142) (48)
----------- ----------- ----------- -----------(13) (32) (155) (80)
------------- ------------- ------------- -------------
Other income (expense), net (354) 56 (379) 204
----------- ----------- ----------- -----------
Loss(376) 5 (755) 209
------------- ------------- ------------- -------------
Income (loss) before income taxes (3,530) (5,335) (13,243) (9,967)227 (8,889) (13,016) (18,856)
Income tax expense (benefit) - (1,870)(3,197) 115 (3,504)
----------- ----------- ----------- -----------(6,701)
------------- ------------- ------------- -------------
Net lossincome (loss) $ (3,530)227 $ (3,465) $(13,358) $ (6,463)
=========== =========== =========== ===========(5,692) $(13,131) $(12,155)
============= ============= ============= =============
Net lossincome (loss) per share (note 4) - basic and diluted $ (0.19)0.01 $ (0.19)(0.32) $ (0.74)(0.72) $ (0.36)
=========== =========== =========== ===========(0.68)
============= ============= ============= =============
Weighted average shares - basic and18,179 17,874 18,118 17,815
============= ============= ============= =============
Net income (loss) per share (note 4) - diluted 18,119 17,818 18,087 17,786
=========== =========== =========== ===========$ 0.01 $ (0.32) $ (0.72) $ (0.68)
============= ============= ============= =============
Weighted average shares - diluted 18,953 17,874 18,118 17,815
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
4
SELECT COMFORT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
------------------------
JUNE 30, JULY 1,
2001 2000
----------- -----------
Cash flows from operating activities:
Net loss $(13,358) $ (6,463)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 4,994 4,514
Loss on disposal of assets 496 178
Deferred tax assets - (3,583)
Change in operating assets and liabilities:
Accounts receivable, net 681 569
Inventories 2,130 (1,795)
Prepaid expenses 90 49
Income taxes - 2,227
Accounts payable 1,743 1,063
Accrued sales returns (666) (562)
Accrued warranty costs (25) 1,006
Accrued compensation, taxes and benefits (304) (485)
Other accrued liabilities (863) 153
Other assets (75) 447
Other liabilities 397 426
----------- -----------
Net cash used in operating activities (4,760) (2,256)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (2,367) (7,589)
Sales of marketable securities 3,950 10,696
----------- -----------
Net cash provided by investing activities 1,583 3,107
----------- -----------
Cash flows from financing activities:
Principal payments on debt (18) -
Proceeds from issuance of common stock 191 404
Net proceeds from issuance of long-term debt 10,354 -
----------- -----------
Net cash provided by financing activities 10,527 404
----------- -----------
Increase in cash and cash equivalents 7,350 1,255
Cash and cash equivalents, at beginning of period 1,498 7,441
----------- -----------
Cash and cash equivalents, at end of period $ 8,848 $ 8,696
=========== ===========
NINE MONTHS ENDED
----------------------------
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
------------- -------------
Cash flows from operating activities:
Net loss $(13,131) $(12,155)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 7,522 6,075
Loss on disposal of assets 539 1,970
Deferred tax assets - (6,872)
Change in operating assets and liabilities:
Accounts receivable, net 2,104 408
Inventories 3,468 (579)
Prepaid expenses 412 (1,908)
Income taxes - 2,277
Accounts payable 1,362 3,894
Accrued sales returns (1,795) (776)
Accrued warranty costs (616) 1,195
Accrued compensation, taxes and benefits (113) (391)
Other accrued liabilities (443) (24)
Other assets (1,096) 696
Other liabilities 400 556
------------- -------------
Net cash used in operating activities (1,387) (5,634)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (3,918) (9,741)
Sales of marketable securities 3,950 10,557
------------- -------------
Net cash provided by investing activities 32 816
------------- -------------
Cash flows from financing activities:
Principal payments on debt (29) (53)
Proceeds from issuance of common stock 281 539
Net proceeds from issuance of long-term debt 15,040 -
------------- -------------
Net cash provided by financing activities 15,292 486
------------- -------------
Increase (decrease) in cash and cash equivalents 13,937 (4,332)
Cash and cash equivalents, at beginning of period 1,498 7,441
------------- -------------
Cash and cash equivalents, at end of period $ 15,435 $ 3,109
============= =============
See accompanying notes to consolidated financial statements.
5
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements for the three months and sixnine months ended
June 30,September 29, 2001 and July 1,September 30, 2000 of Select Comfort Corporation and
subsidiaries ("Select Comfort" or the "Company"), have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission and reflect, in the opinion of management, all normal
recurring adjustments necessary to present fairly the financial position of the
Company as of June 30,September 29, 2001 and December 30, 2000 and the results of
operations and cash flow for the periods presented.
The consolidated financial statements have been prepared on a going-concerngoing concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities and other commitments in the normal course of business. These
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary if the Companycompany is unable
to continue as a going concern. The Company's continuation as a going concern is
dependent, among other things, upon obtainingsustaining positive cash flow from
operations or, uponif necessary, on its ability to raise additional working capital.
Certain prior year financial statement amounts have been reclassified to conform
to the current year presentation. In particular,Specifically, accrued warranty costs have been
divided between current liabilities and long-term liabilities. The resulting
respective accrued warranty cost balances are based on the expected timing of
when warranty claims will be satisfied. The warranty claims expected to be
satisfied within the following twelve12 month period have been included in other
current liabilities.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations, although management believes the disclosures are adequate
to make the information presented not misleading. These consolidated financial
statements should be read in conjunction with the Company's most recent audited
consolidated financial statements and related notes included in the Company's
Annual Report to Shareholders and its Form 10-K for the fiscal year ended
December 30, 2000. Operating results for the Company on a quarterly basis may
not be indicative of operating results for the full year.
During July 2001 the Financial Accounting Standards Board issued statement SFAS
142 "Goodwill and Other Intangible Assets." Statement 142 replaces the
requirement to amortize goodwill and intangible assets with indefinite lives
with a requirement for an annual impairment test. The Company must adopt SFAS
142 at the beginning of fiscal 2002. The Company is analyzing the impact of SFAS
142, but itits implementation is not expected to have a material impact on the
Company's consolidated financial statements.
(2) INVENTORIES
Inventories consist of the following (in thousands):
JUNE 30,SEPTEMBER 29, DECEMBER 30,
2001 2000
------------- -------------
Raw materials $3,250$2,528 $ 5,507
Work in progress 4938 60
Finished goods 5,6545,049 5,516
------------- -------------
$8,953-------------- --------------
$7,615 $11,083
============= =========================== ==============
6
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) LONG-TERM DEBT
In June 2001, the Company issued $11 million in principal amount of its senior
secured notes ("the Notes"(the "Notes") in a private placement. The Notes have a five-year
maturity, bear interest at 8% per annum payable annually in cash and are
convertible into shares of the Company's common stock at the rate of $1.00 per
share. The Notes are secured by a first lien on substantially all of the Company's
assets. In addition, the holders of the Notes received warrants to purchase 4.4
million shares of the Company's common stock for $1.00 per share. The warrants
have a five-year term. The Note conversion price and warrant exercise price are
subject to certainstandard anti-dilution protections, including a
reset of the warrant and conversion prices if the average closing price of the
Company's common stock price for the 10 trading days ending on October 31, 2001
is below $1.00.protections. The net proceeds from thesethe Notes
approximated $10.4 million after deduction of placement fees and expenses. The
warrants were valued at $1.1 million and have been recorded as debt discount to
be amortized as interest expense over the 5-year note term.
In September 2001, the Company obtained $5 million of senior secured debt
financing (the "Debt"), as provided for under the terms of the Company's Notes
issued in June 2001. The Debt has a five-year maturity, bears interest at 12%
per annum payable monthly in cash and calls for payment of interest only for
years one and two of the term and payment of interest and principal for years
three through five. The Debt is secured by a first lien on substantially all of
the Company's assets. In addition, the holders of the Debt received warrants to
purchase 922,819 shares of the Company's common stock for $1.02 per share. The
warrants have a five-year term and are subject to standard anti-dilution
protections. The net proceeds from the Debt approximated $4.8 million after
deducting fees and expenses. The warrants were valued at $0.6 million and have
been recorded as debt discount to be amortized as interest expense over the
5-year term. The Debt is subject to certain financial covenants consisting
primarily of achieving minimum EBITDA levels. The Company was in compliance with
the financial covenants at September 29, 2001.
(4) NET LOSS PER COMMON SHARE
The following computations reconcile net lossincome (loss) with net lossincome (loss)
per common share-basic and diluted (in thousands, except per share amounts).
THREE MONTHS ENDED SIXNINE MONTHS ENDED
SEPTEMBER 29, 2001 SEPTEMBER 29, 2001
------------------------------- -------------------------------
NET PER SHARE NET PER JUNE 30, 2001 LOSSSHARE
INCOME SHARES AMOUNT LOSS SHARES SHARE
------------- ----------AMOUNT
--------- --------- ---------- --------- ------------------- --------- ---------
Net income (loss) $ 227 $(13,131)
BASIC EPS
Net income (loss) attributable
to common shareholders $ 227 18,179 $0.01 $(13,131) 18,118 $(0.72)
--------- --------- ========= --------- --------- =========
EFFECT OF DILUTIVE SECURITIES
Warrants - 497 - -
Options - 277 - -
--------- --------- --------- ---------
DILUTED EPS
Net income (loss) attributable
to common shareholders plus
assumed conversions $ 227 18,953 $0.01 $(13,131) 18,118 $(0.72)
========= ========= ========= ========= ========= =========
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------------------- -------------------------------
NET PER SHARE NET PER SHARE
INCOME SHARES AMOUNT LOSS SHARES AMOUNT
--------- --------- --------- --------- --------- ---------
BASIC AND DILUTED EPS
Net loss attributable to common
shareholders $(3,530) 18,119 $(0.19) $(13,358) 18,087 $(0.74)
==========$(5,692) 17,874 $(0.32) $(12,155) 17,815 $(0.68)
========= ========== ========== ========= ==========
JULY 1, 2000
------------
BASIC AND DILUTED EPS
Net loss attributable to
common shareholders $(3,465) 17,818 $(0.19) $(6,463) 17,786 $(0.36)
========== ========= ========== ========== ========= =================== =========
7
(5) LITIGATION
The Company and certainIn June of its former officers and directors have been named as
defendants in a class action lawsuit filed on June 1, 1999, on behalf of Company
shareholders in U.S. District Court in Minnesota. The named plaintiffs, who
purport to act on behalf of a class of purchasers of the Company's common stock
during the period from December 4, 1998 to June 7, 1999, charge the defendants
with violations of federal securities laws. The suit alleges that the Company
and the named directors and officers failed to disclose or misrepresented
certain information concerning the Company during the class period. The
complaint does not specify an amount of damages claimed. The Company believes
that the complaint is without merit and intends to vigorously defend the claims.
The Company and the individual defendants brought a motion to dismiss all claims
on November 10, 1999. The motion was heard by a magistrate judge on December 21,
1999. On January 27, 2000, the magistrate recommended that the claims based on
Section 11 of the federal securities laws be dismissed. The magistrate
recommended that the motion to dismiss be denied with respect to the claims
based on Rule 10b-5 of the federal securities laws. In February 2000, both the
plaintiffs and the defendants formally objected to the magistrate's
recommendation. The objection was made to the United States District Court in
Minnesota. On May 12, 2000, the United States District Court in Minnesota
adopted the recommendation of the magistrate and denied the defendants' motion
to dismiss the Rule 10b-5 claims. The Court also adopted the recommendation of
the magistrate and dismissed the plaintiff's Section 11 claims without prejudice
and with leave to amend.
On March 31, 2000, the Company and certain of its former officers and directors
were named as defendants in a class action lawsuit filed on behalf of the
Company's shareholders in U.S. District Court
in Minnesota asserting identical
factual allegations as the consolidated complaint described above.Minnesota. The suit, alleges claims basedfiled on Sections 11 and 12(a)(2)behalf of purchasers of the Company's common
stock between December 4, 1998 and June 7, 1999, alleges that the Company and
the named former directors and officers failed to disclose or misrepresented
certain information concerning the Company in violation of federal securities
laws. The complaint does not specifyIn March of 2000, the same defendants were named in another class action
lawsuit asserting factual allegations identical to the first suit. Neither of
the suits specified an amount of damages claimed. The U.S. District Court
consolidated the two class actions in July of 2000.
In September of 2001, the consolidated case was certified to proceed as a class
action on behalf of purchasers of the Company's common stock issued under or
traceable to the Company's initial public offering prospectus dated December 4,
1998 and purchasers of the Company's common stock in the open market during the
period from December 4, 1998 through June 7, 1999.
The Company believes this complaintthat the suit is without merit and intends to vigorously
defend the claims. The above two class actions were consolidated by the United States
District Court Magistrate on July 24, 2000.
7
On January 30, 2001, the plaintiffs made a motion to certify a class. The class
certification motion is pending. Discovery has begun.
The Company is a party to other various claims, legal actions, sales tax
disputes, and other complaints arising in the ordinary course of business. In
the opinion of management, any losses that may occur from these other matters
are adequately covered by insurance or are provided for in the consolidated
financial statements and the ultimate outcome of these other matters will not
have a material effect on the consolidated financial position or results of
operations of the Company.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED HEREIN. THIS
QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. YOU CAN
IDENTIFY FORWARD-LOOKING STATEMENTS BY THOSE THAT ARE NOT HISTORICAL IN NATURE,
PARTICULARLY THOSE THAT USE TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD,"
"EXPECTS," "ANTICIPATES," "CONTEMPLATES," "ESTIMATES," "BELIEVES," "PLANS,"
"PROJECTS," "PREDICTS," "POTENTIAL" OR "CONTINUE" OR THE NEGATIVE OF THESE OR
SIMILAR TERMS. THESE STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S
HISTORICAL EXPERIENCE AND ITS PRESENT EXPECTATIONS OR PROJECTIONS. IMPORTANT
FACTORS KNOWN TO SELECT COMFORT THAT COULD CAUSE SUCH MATERIAL DIFFERENCES ARE
IDENTIFIED AND DISCUSSED IN PART I, ITEM 1 OF OUR ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED DECEMBER 30, 2000, WHICH DISCUSSION IS INCORPORATED HEREIN
BY REFERENCE. THESE IMPORTANT FACTORS INCLUDE:
o THE ABILITY OF THE COMPANY TO MAINTAIN SUFFICIENT LEVELS OF WORKING CAPITAL
TO SUPPORT OPERATING NEEDS AND GROWTH INITIATIVES.
o THE COMPANY'S ABILITY TO CREATE PRODUCT AND BRAND NAME AWARENESS.
o THE EFFICIENCY AND EFFECTIVENESS OF THE COMPANY'S MARKETING AND
ADVERTISING.
o THE ABILITY OF THE COMPANY TO INCREASE SALES VOLUMES THROUGH ITS EXISTING
DISTRIBUTION CHANNELS.
o THE ABILITY OF THE COMPANY TOEFFECTIVELY AND EFFICIENTLY AND EFFECTIVELY PURSUE NEW
CHANNELS OF DISTRIBUTION.
o THE PERFORMANCE OF THE COMPANY'S EXISTING AND NEW STORES.
o THE ABILITY OF THE COMPANY TO CONTINUE TO ATTRACT AND RETAIN KEY PERSONNEL,
INCLUDING QUALIFIED SALES PROFESSIONALS.
o THE ABILITY OF THE COMPANY TO REALIZE THE BENEFITS OF ITS COST SAVING
INITIATIVES.
o THE LEVELS OF CONSUMER ACCEPTANCE OF THE COMPANY'S PRODUCT LINES.
o THE ABILITY OF THE COMPANY TO CONTINUOUSLY IMPROVE ITS EXISTING PRODUCT
LINES AND TO INTRODUCE NEW PRODUCTS.
o THE ABILITY OF THE COMPANY TO EFFICIENTLY IMPLEMENT NATIONWIDE HOME
DELIVERY AND ASSEMBLY.
o ECONOMIC TRENDS AND CONSUMER CONFIDENCE.
o INDUSTRY COMPETITION.
o THE ABILITY OF THE COMPANY TO MAINTAIN SUFFICIENT LEVELS OF WORKING CAPITAL
TO SUPPORT OPERATING NEEDS AND GROWTH INITIATIVES.
o THE ABILITY OF THE COMPANY TO MAINTAIN COMPLIANCE WITH THE LISTING
REQUIREMENTS OF NASDAQ.
o THE RISKS AND UNCERTAINTIES DETAILED FROM TIME TO TIME IN THE COMPANY'S
FILINGS WITH THE SEC, INCLUDING THE COMPANY'S ANNUAL REPORT ON FORM 10-K
AND OTHER PERIODIC REPORTS FILED WITH THE SEC.
THE COMPANY HAS NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY OF THE
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q.
OVERVIEW
Select Comfort is the leading manufacturer and retailer of adjustable-firmness
air beds whichthat are clinically proven to improve sleep and relieve back pain. The
company'sCompany's mission is to improve people's lives by providing a better night's
sleep. FromOur operations are vertically integrated, including product design,
todomestic manufacturing and assembly (supported by a global manufacturing, Select Comfort is vertically
integrated withsupply chain),
dedicated nationwide sales channels and dedicated customer service operations.
Our Company-owned sales channels include mall-based retail stores, a direct
marketing call center and its own selling channels
including direct phone, e-commerce and company-owned retail stores.capability. We value our direct contact
with our customers because it fosters continuous improvement and innovation.
For 2001, our goal ishas been to return to profitability, driven by the following
strategic priorities:
o Rightsizing our cost structure,
o Building consumer awareness,
o Improving our sales conversion effectiveness,
o Expanding profitable distribution, and
o Improving product quality, innovation and service levels.
As we move into 2002 we will maintain our focus on profitability and our cost
structure, but expect to more heavily prioritize growth initiatives.
9
BUSINESS STRUCTURE
SALES DISTRIBUTION/POINTS OF SALE
Our growth strategies are focused on building brand awareness for our products
and increasing the number of points of sale at which consumers can purchase our
products. We currently sell through four sales channels. We began selling
through our direct marketing call center in 1991, through our company-owned
retail stores in 1992, over the internet in 1999 and through wholesale
opportunities in 2000.
9
The proportion of our total net sales, by dollar volume, from each of these
channels is as follows:
Three Months Ended SixNine Months Ended
-------------------- -------------------
6/30/------------------ ------------------
9/29/01 7/01/9/30/00 6/30/9/29/01 7/01/9/30/00
--------- --------- --------- ----------------- -------- -------- --------
Stores 75%79% 80% 78% 78% 76%
Direct Call Center 15% 16% 15% 19%
15% 21%
E-commerce 3% 3%4% 4% 3% 3%
Wholesale 7%2% - 4% -
Our company-ownedCompany-owned retail store locations are summarized as follows:
Three Months Ended SixNine Months Ended
-------------------- -------------------
6/30/------------------ ------------------
9/29/01 7/01/9/30/00 6/30/9/29/01 7/01/9/30/00
--------- --------- --------- ----------------- -------- -------- --------
Beginning of period 326 342327 333 333 341
Opened 3 62 5 117 16
Closed (2) (15) (11)- (13) (19)
--------- --------- --------- ----------------- -------- -------- --------
End of period 327 333338 327 333338
Our company-ownedCompany-owned stores include leased space within 24 Bed, Bath & Beyond
stores as of June 30,September 29, 2001. In addition to our company-ownedCompany-owned stores,
internally managed call center and web site, our adjustable-firmness beds and
sleep-related products are sold wholesale to anselected independent furniture
retailer with threeretailers consisting of four retail stores as of September 29, 2001 and over the
QVC shopping network. Sales volumes to date in the wholesale channels have been
driven primarily by the number and size of QVC shows.
We do not have plans to open or close a significant number of company-ownedCompany-owned
stores in the near future. We are evaluating the relative economic benefits of
selling through our own stores versus wholesale distribution through
independently owned furniture/mattress retailers and are considering the
initiation of larger-scale wholesale tests in specific markets.
MARKETING DRIVERS
We utilize advertising, sales promotions and public relations efforts to build
consumer awareness of our brand, products and the locations of our points of
sale. Advertising spending is summarized as follows (in 000's):
Three Months Ended SixNine Months Ended
-------------------- -------------------
6/30/------------------ ------------------
9/29/01 7/01/9/30/00 6/30/9/29/01 7/01/9/30/00
--------- --------- --------- ----------------- -------- -------- --------
Advertising $6,999 $6,306 $17,429 $15,540$6,690 $9,943 $24,118 $25,482
Future advertising expenditures will depend on the effectiveness and efficiency
of the advertising in creating awareness of our products and brand name,
generating consumer inquiries and driving consumer traffic to our points of
sale. We have begun, to, and expect to continue, to spend an increasing percentage
of our marketing budget on advertising designed to attract consumers to retail
stores. We anticipate that full year advertising spend levels in 2001 will be
slightly lower than in 2000 reflectingdue in part to the re-apportionmentdeferral of media
dollarsplans to introduce a
test campaign.sofa sleeper product, against which the Company invested approximately $2
million of advertising support in the third quarter of 2000.
In addition to the factors noted above, sales results are influenced by a
variety of factors, including general economic conditions and consumer
confidence, levels of retail mall traffic, the maturation of our store base, the
timing and effectiveness of promotional events and advertising expenditures, the
timing and success of new product introductions and product line extensions, the
quality and tenure of store-level managers and sales professionals, and the
amount of competitive activity. Our business is also subject to some seasonal
influences, with lower sales levels in the second quarter and heavier
concentrations of sales during the fourth quarter holiday season due to
increased mall
10
traffic. Comparable store sales decreased(decreased) increased for the three months ended
June 30,September 29, 2001 and July 1,September 30, 2000 by 3.6%(7.7)% and 4.0%3.7%, respectively.
Comparable store sales decreased(decreased) increased for the sixnine months ended June 30,September
29, 2001 and July 1,September 30, 2000 by 5.2%(6.0)% and 1.9%0.0%, respectively. 10
Sales volumes
and comparable store sales were negatively affected by consumer purchasing
patterns after the September 11 terrorist attacks. While sales trends improved
near the end of September, we anticipate that sales levels in the near term will
continue to be affected by changes in consumer confidence, general economic
conditions and consumer purchasing levels in response to recent and future world
events.
OPERATING STRUCTURE
A substantial portion of operating expenses is related to sales and marketing
expenses, including costs associated with operating existing stores, advertising
expenditures, supporting our store infrastructure and opening new stores. These
costs are relatively fixed in nature, and spending cannot be adjusted quickly in
response to shortfalls in customer inquiries or net sales. We believe historical
operating losses have been primarily the result of an aggressive retail store
opening strategy, significant marketing, advertising and product development
expenditures, and the development of a substantial corporate infrastructure to
support future growth.
In the second half of 2000, we began to implement initiatives designed to bring
our cost structure in line with our sales volumes, with the ultimate objective
of making our core bed business profitable at sales volumes equal to those
achieved in year 2000. To date we have implemented programs designed to reduce our
total annual fixed and variable costs by approximately $35 million, reducing our
sales breakeven point by 17%.
These cost reduction measures have included:
o Closing one of three manufacturing plants, one of two call centers and
consolidating two administrative offices,
o Closing over 30 under-performing stores,
o Reducing overall staffing, including approximately 20% of field sales
support and approximately 12% of administrative staffing,
o Discontinuing our catalog sales channel and deferring roll outthe rollout of
our sofa sleeper product,
o Restructuring our promotional programs and developing more efficient
programs to utilize in-store signage and customer fulfillment
materials, and
o Developing a program to resell returned products to targeted markets.
We believe we have taken steps that can return us to profitability in the second
half of 2001. However, there can be no assurance that we will be able to achieve
or sustain sales levels or expense levels that will enable us to achieve or
sustain profitability in the future, on a quarterly or annual basis.2001 and our third quarter results are indicative of these efforts.
Quarterly and annual operating results may fluctuate significantly as a result
of a variety of factors, including increases or decreases in comparable store
sales, the timing, amount and effectiveness of advertising expenditures, any
changes in return rates, the timing of new store openings and related expenses,
net sales contributed by new stores, competitive factors, any disruptions in
third-party delivery services and general economic conditions and consumer
confidence. Furthermore, a substantial portion of net sales is often realized in
the last month of a quarter with such net sales frequently concentrated in the
last weeks or days of a quarter, due in part to our promotional schedule. As a
result, we may be unable to adjust spending in a timely manner and our business,
financial condition and operating results may be materially adversely affected.
Our historical results of operations may not be indicative of the results that
may be achieved for any future fiscal period.
At June 30,September 29, 2001, we had net operating loss carryforwards ("NOLs") for
federal income tax purposes of approximately $44.3$43.8 million expiring between the
years 2003 and 2021. We expect that approximately $1.4 million of these NOLs
will expire unutilized due to an Internal Revenue Code (IRC) Section 382
limitation resulting from a prior ownership change. Through the third quarter of
2000, the Company's Consolidated Statement of Operations reflected an income tax
benefit from net operating losses. Beginning in the fourth quarter of 2000 and
in 2001 the Company has not recorded any value in its Consolidated Balance Sheet
for the potential future benefit of NOL's.
FISCAL 2001 - SECONDTHIRD QUARTER RESULTS
Net sales during the secondthird quarter of 2001 were $62.7$64.1 million, or 1.5% higher5.9% lower
than the prior year. HigherLower sales volumes were net of two contrasting factors:
11
o An increase in sales volumes associated primarily with QVC shows and sales
from new product introductions (European pillowtop and refurbished returned
beds), partially offset by
o Slowing economic conditions reflected in consumer confidence measures and
lower volumes of mall traffic and direct-marketing response. Sales were
negatively affected immediately following the September 11 terrorist
attacks. While sales have improved significantly since that time, ongoing
affects of these events on our sales is uncertain.
Operating lossesincome for the secondthird quarter of 2001 totaled $3.2$0.6 million as compared to
operating losses of $5.4$8.9 million for the secondthird quarter of 2000. The improvement
in profitability is a direct result of successful execution of cost
restructuring efforts. Specific cost reductions haveimprovements included:
o Lower return rates, contributing $600,000 toIncreased gross margin percentages from improved product quality and
restructured promotional programs. These improvements in gross margins
o Sales of refurbished return product, contributing $600,000 to grosscombined with efficiencies in the sales and marketing programs have
contributed $3.1 in operating margins,
o Reductions of general and administrative expenses of $800,000,$1.8 million,
o Reductions of advertising costs of $3.3 million, and
o RestructuringReductions of promotional programsstore closings and sales support to maintain product
and operating margins.asset impairment charges of $1.4 million
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's results
of operations expressed as percentages of net sales. Percentage amounts may not
total due to rounding.
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2001 2000 2001 2000
-------- -------- -------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 35.7 35.4 35.9 35.5
-------- -------- -------- --------
Gross margin 64.3 64.6 64.1 64.5
-------- -------- -------- --------
Operating expenses:
Sales and marketing 59.6 62.4 63.6 60.8
General and administrative 9.5 10.9 10.1 11.0
Store closings/impairments 0.2 0.1 0.4 0.0
-------- -------- -------- --------
Total operating expenses 69.3 73.3 74.1 71.8
-------- -------- -------- --------
Operating loss (5.1) (8.7) (10.0) (7.4)
Other income (expense), net (0.6) 0.1 (0.3) 0.1
-------- -------- -------- --------
Loss before income taxes (5.6) (8.6) (10.3) (7.2)
Income tax expense (benefit) 0.0 (3.0) 0.1 (2.5)
-------- -------- -------- --------
Net loss (5.6)% (5.6)% (10.4)% (4.7)%
======== ======== ======== ========
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 33.0 36.5 35.0 35.9
------------- ------------- ------------- -------------
Gross margin 67.0 63.5 65.0 64.1
------------- ------------- ------------- -------------
Operating expenses:
Sales and marketing 57.8 64.1 61.7 61.9
General and administrative 8.2 10.4 9.5 10.8
Store closings/impairments 0.0 2.0 0.3 0.7
------------- ------------- ------------- -------------
Total operating expenses 66.0 76.5 71.4 73.4
------------- ------------- ------------- -------------
Operating income (loss) 0.9 (13.1) (6.4) (9.3)
Other income (expense), net (0.6) 0.0 (0.4) 0.1
------------- ------------- ------------- -------------
Income (loss) before income taxes 0.4 (13.1) (6.8) (9.2)
Income tax expense (benefit) 0.0 (4.7) 0.1 (3.3)
------------- ------------- ------------- -------------
Net income (loss) 0.4% (8.4)% (6.8)% (5.9)%
============== ============= ============= =============
COMPARISON OF THREE MONTHS ENDED JUNE 30,SEPTEMBER 29, 2001 WITH THREE MONTHS ENDED
JULY 1,SEPTEMBER 30, 2000
NET SALES
Net sales increased 1.5%decreased 5.9% to $62.7$64.1 million for the three months ended June 30,September
29, 2001 from $61.8$68.1 million for the three months ended July 1,September 30, 2000, due
primarily to an increasea decrease in mattress unit sales with no significant change in the average
mattress selling price, although slightly higher retail selling prices have been
offset by lower wholesale price points.sales. The increasedecrease in net sales
was due
primarily to a $4.6 million increaseresulted from the Company's wholesale channel,
offset by (i) a $2.2$4.2 million decrease in direct marketing sales (ii) a $1.3
million decrease in company-ownedfrom Company-owned retail
store sales, comprised primarily ofstores, including a decrease in comparable store sales of $1.6$4.0 million, and(ii) a
$0.7 million decrease in direct marketing sales, (iii) a $0.1$0.2 million decrease
in the Company's e-commerce channel, offset by an increase of $1.4 million in
net sales from the Company's e-commercewholesale channel.
GROSS MARGIN
Gross margin decreasedincreased to 64.3%67.0% for the three months ended June 30,September 29, 2001
from 64.6%63.5% for the three months ended July 1,September 30, 2000, primarily due to increased saleslower
cost promotional offerings, and reductions in the wholesale channel, which contribute lower gross margin percentages than
retail sales channels, partially offset by higher gross margin percentagesmanufacturing costs through
product improvements and savings in retail sales channels, due primarily to decreases in discounts associated with
promotional offerings.processing returned product.
12
SALES AND MARKETING
Sales and marketing expenses decreased 3.0%15.1% to $37.4$37.0 million for the three
months ended June 30,September 29, 2001 from $38.5$43.6 million for the three months ended
July 1,September 30, 2000, and decreased as a percentage of net sales to 59.6%57.8% from
62.4%64.1% for the comparable prior-year period. TheThis decrease in the dollar amount of sales and
marketing expenses was primarily due to
decreases in selling expenses associated
with lower retail sales volumes and fewer stores, partially offset by increases
in media and media production expense. Sales and marketing expenses decreased as
a percentage of net sales
12
primarily due to decreased compensation, occupancyreduced advertising expenditures and other selling expenses,
partially offset by increased mediapromotional costs resulting from more
efficient and media production expenses.effective deployment of these funds, and reduced sales support
costs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 10.4%25.4% to $6.0$5.3 million for the
three months ended June 30,September 29, 2001 from $6.7$7.1 million for the three months
ended July 1, 2000.September 30, 2000, and decreased as a percentage of net sales to 8.2%
from 10.4% for the comparable prior year period. The decrease in general and
administrative expenses was primarily due to staffing reductions and reduced
occupancy expense resulting from the consolidation of our two corporate offices.
OTHER INCOME (EXPENSE), NET
Other income decreased $410,000(expense) changed $381,000 to approximately $354,000$376,000 in other
expense for the three months ended June 30,September 29, 2001 from $56,000$5,000 in other
income for the three months ended July 1,September 30, 2000. The decrease is primarily
due to interest expense associated with the $11 million infrom long-term debt and lower cash levels affecting
interest income in 2001.
INCOME TAX EXPENSE (BENEFIT)
Income tax expense increased $1.9$3.2 million to $0 for the three months ended
June
30,September 29, 2001 from a $1.9$3.2 million benefit for the three months ended
July 1,September 30, 2000 due to not recognizing an income tax benefit fromfor operating losses
incurred in the three months ended JuneSeptember 30, 2001.2000.
COMPARISON OF SIXNINE MONTHS ENDED JUNE 30,SEPTEMBER 29, 2001 WITH SIXNINE MONTHS ENDED
JULY 1,SEPTEMBER 30, 2000
NET SALES
Net sales decreased 7.0%6.7% to $128.2$192.3 million for the sixnine months ended June 30,September
29, 2001 from $137.9$206.0 million for the sixnine months ended July 1,September 30, 2000, due
primarily to a decrease in mattress unit sales with no significant change in the average
mattress selling price, although slightly higher retail selling prices have been
offset by lower wholesale price points.sales. The decrease in net sales
was due
primarily toresulted from (i) a $9.9$10.7 million decrease in direct marketing sales, (ii) a $4.6an
$8.7 million decrease in sales from company-ownedCompany-owned retail store sales, comprised primarily ofincluding
a decrease in comparable store sales of $5.1$9.1 million and a decrease of $2.1$2.8
million from the elimination of our roadshow distribution channel partially
offset by a net increase of $2.6$3.3 million from non-comparable stores opened in the past 12
months and (iii) a $0.8$1.0 million decrease in net sales from the Company's
e-commerce channel, offset by an increase of $5.7$7.0 million in net sales from the
Company's wholesale channel.
GROSS MARGIN
Gross margin decreasedincreased to 65.0% for the nine months ended September 29, 2001
from 64.1% for the sixnine months ended JuneSeptember 30, 2001 from
64.5% for the six months ended July 1, 2000, primarily due to increased saleslower
cost promotional offerings and reductions in the wholesale channel, which contribute lower gross margin percentages than
retail sales channels, partially offset by higher gross margin percentagesmanufacturing costs through product
improvements and savings in retail sales channels, due primarily to decreases in discounts associated with
promotional offerings.processing returned product.
SALES AND MARKETING
Sales and marketing expenses decreased 2.7%7.0% to $81.6$118.6 million for the sixnine
months ended June 30,September 29, 2001 from $83.8$127.5 million for the sixnine months ended
July 1,September 30, 2000, and increaseddecreased as a percentage of net sales to 63.6%61.7% from
60.8%61.9% for the comparable prior-year period. The decrease in the dollar amount of
sales and marketing expenses was primarily due to decreases inreduced expenses from
promotional and fulfillment materials, lower selling expenses associated with
lower retail sales volumes and fewer stores,reduced sales support staffing, partially offset
by increases in media and media production expense. SalesThe slight reduction in
sales and marketing expenses increased as a percentage of net sales was primarily due to
reduced sales support staffing partially offset by increased media and media
production expense.expenses.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 14.5%17.9% to $13.0$18.3 million for the
sixnine months ended June 30,September 29, 2001 from $15.2$22.3 million for the sixnine months
ended July 1,
2000.September 30, 2000, and decreased as a percentage of net sales to 9.5%
from 10.8% for the comparable prior year period. The decrease in general and
administrative expenses was primarily due to staffing reductions and reduced
occupancy expense resulting from the consolidation of our two corporate offices
and severance costs associated with a reduction in force in 2000.
13
OTHER INCOME (EXPENSE), NET
Other income decreased $583,000(expense) changed $964,000 to approximately $379,000$755,000 in other
expense for the sixnine months ended June 30,September 29, 2001 from $204,000$209,000 in other
income for the sixnine months ended July 1,September 30, 2000. The decrease is due to
interest expense associated
with the $11 million in financing that closed in June 2001from long-term debt and lower average cash levels affecting
interest income in 2001.
13
INCOME TAX EXPENSE (BENEFIT)
Income tax expense increased $3.6$6.8 million to $115,000 for the sixnine months ended
June 30,September 29, 2001 from a $3.5$6.7 million benefit for the sixnine months ended
July 1,September 30, 2000 due to not recognizing an income tax benefit from operating
losses in the threenine months ended June 30,September 29, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity has been the sale of equity securities. Our most recent
source of capital resources has been from the completion of our $11.0 million convertible
debt offering in June 2001 and $5.0 million senior secured term debt financing
completed in September 2001. We completed our initial public
offeringIn addition, we generated cash from operations in
December 1998, resulting in net proceedsthe third quarter of $44.6 million, which
have been used for (i) the repayment of $15.0 million of debt, (ii) capital
expenditures related to expansion of retail stores, manufacturing capabilities
and development of information technology systems, (iii) the repurchase of
1,220,000 shares of Company common stock for $12.7 million and (iv) working
capital needs.2001.
Net cash used in operating activities for the sixnine months ended June 30,September 29,
2001 was approximately $4.8$1.4 million and consisted primarily of the net loss
adjusted for non-cash expenses and decreases in accrued sales returns and
accrued warranty costs, partially offset by decreases in inventories and
accounts receivable and increases in accounts payable. Net cash used in
operating activities for the sixnine months ended July 1,September 30, 2000 was
approximately $2.3$5.6 million and consisted primarily of the net loss adjusted for
non-cash expenses and increases in inventory and prepaid expenses partially
offset by increases in accounts payable and receipt of an income tax refund.
Net cash provided by investing activities was approximately $1.6 million$32,000 for the sixnine
months ended June 30,September 29, 2001 and $3.1 million$816,000 for the sixnine months ended July 1,September
30, 2000. Investing activities consisted primarily of purchases of property and
equipment for new retail stores and information technology system development
costs in 2001 and purchases of property and equipment for new retail stores,
information technology systems and manufacturing facilities in 2000. In 2001 we
liquidated $4.0 million of marketable securities to support continuing
operations, while in 2000 we liquidated $10.7$10.6 million.
Net cash provided by financing activities was approximately $10.5$15.3 million for
the sixnine months ended June 30,September 29, 2001 which consisted primarily of net
proceeds from issuance of long-term debt and $404,000$486,000 for the sixnine months ended
July 1,September 30, 2000 from the issuance of common stock.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of investments. The counterparties to the
agreements consist of government agencies and various major corporations of high
credit standing. The Company does not believe there is significant risk of
non-performance by these counterparties because the Company limits the amount of
credit exposure to any one financial institution and any one type of investment.
The Company had negative working capital of approximately $11.0$6.2 million at
June
30,September 29, 2001, and $12.4 million at December 30, 2000. The Company has
incurred negative cash flows and has incurred pretax losses from operations of $13.2
million for the six months ended June 30, 2001 and
$26.0 million for the year ended December 30, 2000. Based on these factors,
among others, the Company's auditors have included an emphasis paragraph in
their opinion regarding the Company's fiscal 2000 financial statements to
express substantial doubt about the Company's ability to continue as a going
concern. The Company's continuation asAs a going concern is dependent, among other things,
upon obtaining positive cash flow from operationsresult of the completion of $16.0 million of long-term debt
financing during June and upon its ability to
generate or obtain additional working capital. Our ability to return to
profitabilitySeptember of 2001 and positive cash flow,improvements in operating
results, we believe the Company has adequate capital and liquidity to meet
our short termnear-term and long term
working capital needs, and to generate or obtain additional working capital are
dependent, in large part, on our ability to improve sales trends, which will be
impacted by the length and severity of the current economic downturn.long-term operating needs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.During the nine months ended September 29, 2001, the Company issued $11 million
in principal amount of senior secured notes that bear interest at 8% and $5
million of senior secured notes that bear interest at 12%. Both of these
instruments bear interest at a fixed rate over the life of the instruments. The
Company does not believe it has significant exposure to interest rate risk.
14
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Select Comfort and certain former officers and directors were named as
defendants in a class action lawsuit initially filed onIn June 1,of 1999, on behalf
of shareholders in U.S. District Court in Minnesota. The named plaintiffs, who
purport to act on behalf of a class of purchasers of our common stock during the
period from December 4, 1998 to June 7, 1999, charge the defendants with
violations of federal securities laws. The suit alleges that we and the named
directors and officers failed to disclose or misrepresented certain information
concerning our business during the class period. The complaint does not specify
an amount of damages claimed. We believe that the complaint is without merit and
intend to vigorously defend the claims.
The Company and the individual defendants brought a motion to dismiss all claims
on November 10, 1999. The motion was heard by a magistrate judge on December 21,
1999. On January 27, 2000, the magistrate recommended that the claims based on
Section 11 of the federal securities laws be dismissed. The magistrate
recommended that the motion to dismiss be denied with respect to the claims
based on Rule 10b-5 of the federal securities laws. In February 2000, both the
plaintiffs and the defendants formally objected to the magistrate's
recommendation. The objection was made to the United States District Court in
Minnesota. On May 12, 2000, the United States District Court in Minnesota
adopted the recommendation of the magistrate and denied the defendants' motion
to dismiss the Rule 10b-5 claims. The Court also adopted the recommendation of
the magistrate and dismissed the plaintiff's Section 11 claims without prejudice
and with leave to amend.
On March 31, 2000, the Company and certain of its former officers and directors
were named as defendants in a class action lawsuit filed on behalf of the
Company's shareholders in U.S. District Court
in Minnesota asserting identical
factual allegations as the consolidated complaint described above.Minnesota. The suit, alleges claims basedfiled on Sections 11 and 12(a)(2)behalf of purchasers of the Company's common
stock between December 4, 1998 and June 7, 1999, alleges that the Company and
the named former directors and officers failed to disclose or misrepresented
certain information concerning the Company in violation of federal securities
laws. The complaint does not specifyIn March of 2000, the same defendants were named in another class action
lawsuit asserting factual allegations identical to the first suit. Neither of
the suits specified an amount of damages claimed. The U.S. District Court
consolidated the two class actions in July of 2000.
In September of 2001, the consolidated case was certified to proceed as a class
action on behalf of purchasers of the Company's common stock issued under or
traceable to the Company's initial public offering prospectus dated December 4,
1998 and purchasers of the Company's common stock in the open market during the
period from December 4, 1998 through June 7, 1999.
The Company believes this complaintthat the suit is without merit and intends to vigorously
defend the claims. The above two class actions were consolidated by the United States
District Court Magistrate on July 24, 2000.
On January 30, 2001, the plaintiffs made a motion to certify a class. The class
certification motion is pending. Discovery has begun.
We have agreed to indemnify the individual defendants and to advance reasonable
expenses of defense of the litigation to the individual defendants under
applicable Minnesota corporate law. To date, we have paid an aggregate of $3,891$4,591
to the law firm of Briggs & Morgan on behalf of defendant H. Robert Hawthorne.
We are involved in other various claims, legal actions, sales tax disputes, and
other complaints arising in the ordinary course of business. In the opinion of
management, any losses that may occur from these other matters are adequately
covered by insurance or are provided for in the consolidated financial
statements and the ultimate outcome of these other matters will not have a
material effect on the consolidated financial position or results of operations
of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.Our Annual Meeting of Shareholders was held on July 17, 2001. The
following individuals were elected at the Annual Meeting as Directors
of the Company to serve for terms of three years expiring at the 2004
Annual Meeting of Shareholders or until their successors are elected
and qualified. Shares voted in favor of these Directors and shares
withheld were as follows:
Thomas J. Albani
Shares For 16,228,041
Shares Withheld 684,428
David T. Kollat
Shares For 16,228,295
Shares Withheld 684,174
William R. McLaughlin
Shares For 16,333,548
Shares Withheld 578,921
15
In addition to the Directors named above, the following Directors'
terms continued after the Annual Meeting and will expire at the Annual
Meeting of Shareholders in the year indicated below:
Name Term Expires
---- ------------
Christopher P. Kirchen 2002
Jean-Michel Valette 2002
Patrick A. Hopf 2003
Ervin R. Shames 2003
Shareholders approved the granting of full voting rights to The St.
Paul Companies, Inc. and its affiliates related to the acquisition of
shares of common stock of the Company under the Minnesota Control Share
Acquisition Act, with shares voted as follows:
Shares For 12,754,345
Shares Withheld 734,518
Shares Abstaining 8,459
Broker Non-Vote 3,415,147
Vote results excluding interested parties were as follows:
Shares For 6,590,999
Shares Withheld 734,518
Shares Abstaining 8,459
Broker Non-Vote 3,415,147
Shareholders approved the issuance by the Company of its Senior Secured
Convertible Notes in the aggregate principal amount of up to $12
million together with warrants to purchase up to an aggregate of
4,800,000 shares of the common stock of the Company in a private
placement, with shares voted as follows:
Shares For 12,872,325
Shares Withheld 619,032
Shares Abstaining 5,965
Broker Non-Vote 3,415,147
Shareholders approved an amendment of the Company's 1997 Stock
Incentive Plan to increase the number of shares of common stock
reserved for issuance by 3,000,000 shares from 3,500,000 shares to
6,500,000 shares, with shares voted as follows:
Shares For 12,563,083
Shares Withheld 926,237
Shares Abstaining 8,002
Broker Non-Vote 3,415,147
Shareholders approved an amendment of the Company's 1999 Employee Stock
Purchase Plan to increase the number of shares of common stock reserved
for issuance by 500,000 shares from 500,000 shares to a total of
1,000,000 shares, with shares voted as follows:
Shares For 13,273,074
Shares Withheld 220,596
Shares Abstaining 3,652
Broker Non-Vote 3,415,147
16
Shareholders approved the material terms of the performance goals under
the Company's Executive and Key Employee Incentive Plan, with shares
voted as follows:
Shares For 13,258,241
Shares Withheld 229,758
Shares Abstaining 9,323
Broker Non-Vote 3,415,147
Shareholders ratified the appointment of KPMG LLP as the Company's
independent auditor for the fiscal year ending December 29, 2001, with
shares voted as follows:
Shares For 16,860,443
Shares Withheld 48,302
Shares Abstaining 3,724
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
--------- -------------
10.1 Note PurchaseLoan Agreement dated as of June 1,September 28, 2001 by and among Select
Comfort Corporation, Select Comfort Retail Corporation,
Select Comfort Direct Corporation, Select Comfort SC
Corporation, Direct Call Centers, Inc., selectcomfort.com
corporation and the Purchasers named
therein.Medallion Capital, Inc.
10.2 Form ofPromissory Note issued to Medallion Capital, Inc. under the
NoteLoan Agreement of September 28, 2001.
10.3 Common Stock Purchase Agreement.
10.3 Form of Warrant issued to Medallion Capital,
Inc. under the Note Purchase Agreement.Loan Agreement of September 28, 2001.
10.4 Security Agreement dated June 6, 2001 executed by Select
Comfort Corporation in favor of St. Paul Venture Capital
VI, LLC.
10.5 Pledge Agreement dated June 6, 2001 executed by Select
Comfort Corporation in favor of St. Paul Venture Capital
VI, LLC.
10.6 Patent and Trademark Security Agreement dated June 6,
2001 executed by Select Comfort Corporation in favor of
St. Paul Venture Capital VI, LLC.
10.7 Registration Rights Agreement dated June 6,September 28, 2001 by and among
Select Comfort Corporation, Select Comfort Retail
Corporation, Select Comfort Direct Corporation, Select
Comfort SC Corporation, Direct Call Centers, Inc.,
selectcomfort.com corporation and the securityholders
named therein.
10.8Medallion Capital, Inc.
10.5 Patent and Trademark Security Agreement dated September 28,
2001 by and among Select Comfort Corporation, 1997 Stock Incentive Plan, as
amendedSelect Comfort
Retail Corporation, Select Comfort Direct Corporation,
Select Comfort SC Corporation, Direct Call Centers, Inc.,
selectcomfort.com corporation and restated through May 1, 2001.Medallion Capital, Inc.
10.6 Subordination Agreement dated September 28, 2001 by and
among Select Comfort Corporation, each of its subsidiary
corporations, Medallion Capital, Inc. and the Subordinated
Lenders named therein.
17
(b) REPORTS ON FORM 8-K
During the quarter ended June 30,September 29, 2001, the Company filed three
Current Reports on Form 8-K. The Reports consisted of the following:
(i) Current Report filed AprilJuly 16, 2001, announcing the filing of
Form 10-K and final audited results for the fourth quarter and
year ended December 30, 2000.
(ii) Current Report filed April 24, 2001, announcing comments on
unaudited results for the first quarter ended March 31, 2001.
(iii)Current Report filed June 6, 2001, announcing securing of
commitments for financing.
(iv) Current Report filed July 12, 2001, announcing comments on
unaudited results for the second quarter ended June 30, 2001.
(ii) Current Report filed October 9, 2001, announcing securing of
additional financing.
(iii)Current Report filed October 16, 2001, announcing comments on
unaudited results for the third quarter ended September 29, 2001.
18
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SELECT COMFORT CORPORATION
/s/ William R. McLaughlin
----------------------------------------------
August 14,-------------------------------------------
November 9, 2001 William R. McLaughlin
President and Chief Executive Officer
(principal executive officer)
/s/ James C. Raabe
-----------------------------------------------------------------------------------------
James C. Raabe
Chief Financial Officer
(principal financial and accounting officer)
1719
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION LOCATION
- -------------- ------------------------------------ ------------------------------------------------------------------ -------------------------------
10.1 Note PurchaseLoan Agreement dated as ofSeptember 28, Filed herewith electronically
June 1,
2001 by and among Select Comfort
Corporation, Select Comfort Retail
Corporation, Select Comfort Direct
Corporation, Select Comfort SC
Corporation, Direct Call Centers,
Inc., selectcomfort.com corporation
and the
Purchasers named thereinMedallion Capital, Inc.
10.2 Form ofPromissory Note issued under the Noteto Medallion Filed herewith electronically
Purchase Agreement
10.3 Form of Warrant issuedCapital, Inc. under the Loan
Agreement of September 28, 2001.
10.3 Common Stock Purchase Warrant Filed herewith electronically
Note Purchaseissued to Medallion Capital, Inc.
under the Loan Agreement of
September 28, 2001.
10.4 Security Agreement dated June 6,September Filed herewith electronically
28, 2001 executed by and among Select
Comfort Corporation, in favor of St. Paul
Venture Capital VI, LLC
10.5 Pledge Agreement dated June 6, 2001 Filed herewith electronically
executed by Select Comfort
Retail Corporation, in favor of St. Paul
VentureSelect Comfort
Direct Corporation, Select Comfort
SC Corporation, Direct Call
Centers, Inc., selectcomfort.com
corporation and Medallion Capital,
VI, LLC
10.6Inc.
10.5 Patent and Trademark Security Filed herewith electronically
Agreement dated June 6, 2001
executed by Select Comfort
Corporation in favor of St. Paul
Venture Capital VI, LLC
10.7 Registration Rights Agreement dated Filed herewith electronically
June 6,September 28, 2001
by and among Select Comfort
Corporation, Select Comfort Retail
Corporation, Select Comfort Direct
Corporation, Select Comfort SC
Corporation, Direct Call Centers,
Inc., selectcomfort.com corporation
and the
securityholders named therein
10.8Medallion Capital, Inc.
10.6 Subordination Agreement dated Filed herewith electronically
September 28, 2001 by and among Select
Comfort Corporation, 1997 Filed herewith electronically
Stock Incentive Plan, as amendedeach of its
subsidiary corporations, Medallion
Capital, Inc. and restated through May 1, 2001the Subordinated
Lenders named therein.
1820