Research and development (“R&D”) expenses decreased to $3.4 million in 2008 compared with $5.7 million in 2007, and decreased as a percentage of net sales to 0.6% from 0.7%. Fiscal 2007 included additional R&D expenses related to the development of new fire retardant products and an upgrade of our entire line of bed models.
Asset impairment charges increased to $34.6 million in 2008, compared with $0.4 million in 2007. During the fourth quarter of fiscal 2008, we elected to abandon our plan to implement an integrated suite of SAP®-based applications and recognized asset impairment charges totaling $27.6 million. During 2008, on a quarterly basis, we reviewed all of our stores for impairment and determined that certain store assets at underperforming stores were impaired. We recognized impairment charges totaling $7.0 million for the difference between the fair value and the carrying amounts of the related long-lived assets. The increase in store asset impairment charges compared to the prior year was due primarily to the deterioration of consumer spending. We estimate fair values based on the cash-flows expected to be generated by the assets.
During 2007, we determined that certain store assets at underperforming stores were impaired and recognized impairment charges of $0.4 million for the difference between fair value and the carrying amounts of the related long-lived assets.
Other expense, net increased to $3.3 million compared with $40,000 in 2007. The $3.2 million increase in other expense, net was driven by increased interest expense from borrowings under our revolving line of credit due to higher average debt balances and increased interest rates, and lower average cash and investment balances compared to the prior year.
Income tax benefit in 2008 was $2.6 million compared with income tax expense of $15.8 million in 2007. The effective tax rate was (3.5%) and 36.5% in 2008 and 2007, respectively. The change in the effective income tax rate is primarily due to the establishment of a $26.8 million valuation allowance against our deferred tax assets that we recorded in the fourth quarter of fiscal 2008. The remainder of the change in the effective tax rate resulted from the absence of a manufacturing deduction that we realized in 2007 and a higher state income tax rate in 2008, partially offset by a $0.6 million discrete tax benefit adjustment recognized in 2008 related to research and development tax credits for prior years.
As of January 2, 2010, we had cash and cash equivalents of $17.7 million compared with $13.1 million as of January 3, 2009. The $4.7 million increase in cash and cash equivalents was primarily due to $66.6 million of cash provided by operating activities and $26.5 million of proceeds from the issuance of common stock, partially offset by an $84.8 million net decrease in short-term borrowings.
The following table summarizes our cash flows for the fiscal year ended January 2, 2010, and January 3, 2009 ($ in millions):
Cash provided by operating activities for the fiscal year ended January 2, 2010, and January 3, 2009 were $66.6 million and $3.0 million, respectively. The $63.7 million year-over-year increase in cash from operating activities was driven by a $105.7 million increase in net income (loss) and a $38.7 million increase in cash from changes in operating assets and liabilities, including $26.1 million of income tax refunds associated with the carryback of our 2008 pre-tax loss. These increases were partially offset by an $80.8 million decrease in adjustments to reconcile net income (loss) to cash provided by operating activities, including a $33.9 million decrease in disposals and impairments of assets and a $43.3 million
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change in deferred income taxes which reflected the establishment of a $26.8 million valuation allowance in 2008 and the reversal of that valuation allowance in 2009. Other changes in operating assets and liabilities included the 2008 decrease in accounts receivable (lower sales volume and timing of wholesale payments), a lower current-year decrease in inventories (current-year includes impact resulting from the reduction in our store base; both years reflect efforts to align inventories with lower sales volume), and a current-year increase in prepaid expenses and other assets (timing of rent and advertising expenses), partially offset by a current-year increase in accounts payable (timing of payments).
Net cash used in investing activities was $2.4 million for 2009, compared with $32.2 million for the same period one year ago. The $29.8 million decrease in net cash used in investing activities was principally due to lower capital expenditures. During 2009, we invested $2.5 million in property and equipment, compared to $32.2 million for the same period one year ago. We limited our purchases of property and equipment to business-critical expenditures during 2009. In both periods, our capital expenditures related primarily to new and remodeled retail stores, and investments in information technology. During 2009 we opened four new retail stores, compared with 19 new retail stores opened during the same period one year ago. Capital expenditures are projected to be approximately $10.0 million in 2010.
Net cash used in financing activities was $59.5 million for 2009, compared with net cash provided by financing activities of $35.0 million for the same period one year ago. The $94.5 million decrease in cash (used in) provided by financing activities resulted from an $84.8 million net decrease in short-term borrowings during 2009 compared with a $35.8 million net increase in short-term borrowings in the prior year, partially offset by a $25.9 million increase in proceeds from the issuance of common stock. During fiscal 2009, we completed two separate equity offerings that generated net proceeds of $26.3 million. Book overdrafts are included in the net change in short-term borrowings.
As of January 2, 2010, the remaining authorization under our stock repurchase program was $206.8 million. There is no expiration date governing the period over which we can repurchase shares. During 2008 and 2009, we did not purchase any shares of our common stock. We currently have no plans to repurchase our common stock.
In June 2006, we entered into a Credit Agreement (the “Credit Agreement”) with a syndicate of banks (the “Lenders”). The Credit Agreement was amended on February 1, 2008, May 30, 2008 and November 13, 2009 to allow greater flexibility under the existing financial covenants, provide additional financial covenants, modify the credit limit and maturity date, increase the cost of borrowing, provide the Lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries, and impose additional restrictions and covenants with respect to our operations.
The Credit Agreement, as amended to date, provides a revolving credit facility for general corporate purposes with net aggregate availability of $40.0 million, which amount decreases to $35.0 million as of March 31, 2010, and $20.0 million as of December 31, 2010. The Credit Agreement terminates in June 2011.
We had no outstanding borrowings under the credit facility as of January 2, 2010. Borrowings under the credit facility totaled $79.2 million as of January 3, 2009. We also had outstanding letters of credit of $4.5 million and $5.9 million as of January 2, 2010, and January 3, 2009, respectively. Outstanding letters of credit reduce the amounts available under the credit facility. At January 2, 2010, and January 3, 2009, $35.5 million and $5.0 million, respectively, were available under the credit facility.
At January 2, 2010, borrowings under the credit facility bore interest at a floating rate and could be maintained as base rate loans (tied to the prime rate, plus a margin of 4.5%) or as Eurocurrency rate loans (tied to LIBOR, plus a margin of 5.5%). We also pay certain facility and agent fees. We are subject to certain financial covenants under the agreement, including a maximum leverage ratio, a minimum interest coverage ratio, minimum EBITDA requirement, and maximum capital expenditure limits. At January 2, 2010, we were in compliance with all financial covenants.
During the fourth quarter of 2009, we obtained $26.3 million in net proceeds from the issuance of 8.6 million shares of our common stock through a private equity placement and a public equity offering. These equity financing transactions significantly improved our liquidity and enhanced our financial flexibility.
Cash generated from operations and our existing credit facility are expected to be sufficient sources of liquidity for the short- and long-term and should provide adequate funding for capital expenditures. In addition, our business model, which can operate with minimal working capital, does not require significant additional capital to fund operations and organic growth. During 2010 we expect to limit borrowings under our credit facility to periods with seasonally low net sales.
We have an agreement with GE Money Bank to offer qualified customers revolving credit arrangements to finance purchases from us (the “GE Agreement”). The GE Agreement contains certain financial covenants, including a maximum
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leverage ratio and a minimum interest coverage ratio. We were required under the terms of the GE Agreement to provide GE Money Bank with a $1.7 million letter of credit. The letter of credit is supported by our Credit Agreement and reduces the amount available under the Credit Agreement. The letter of credit covers the risk to GE Money Bank for sales returns and warranty claims should we be unable to satisfy these claims. Under the terms of our agreement with GE, GE Money Bank sets the minimum acceptable credit ratings, the interest rates, fees and all other terms and conditions of the customer accounts, including collection policies and procedures, and is the owner of the accounts. GE Money Bank may draw on this letter of credit by certifying that we have failed to fund any amounts due under the GE Agreement.
Off-Balance Sheet Arrangements and Contractual Obligations
Other than our operating leases and $4.5 million of outstanding letters of credit, we do not have any off-balance-sheet financing. A summary of our operating lease obligations by fiscal year is included in the “Contractual Obligations” section below. Additional information regarding our operating leases is available in Item 2,Properties, and Note 5,Leases, of the Notes to Consolidated Financial Statements, included in Item 8,Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Contractual Obligations
The following table presents information regarding our contractual obligations by fiscal year (in thousands):
| | | | | | | | | | | | | | | | |
| | Payments Due by Period(1) | |
| | Total | | < 1 Year | | 1 – 3 Years | | 3 – 5 Years | | > 5 Years | |
| | | | | | | | | | | | | | | | |
Operating leases | | $ | 133,873 | | $ | 32,538 | | $ | 53,620 | | $ | 31,626 | | $ | 16,089 | |
Capital leases | | | 865 | | | 574 | | | 291 | | | — | | | — | |
Purchase commitments | | | 2,596 | | | 2,596 | | | — | | | — | | | — | |
Total | | $ | 137,334 | | $ | 35,708 | | $ | 53,911 | | $ | 31,626 | | $ | 16,089 | |
| |
(1) | Our unrecognized tax benefits of $1.5 million have not been included in the Contractual Obligations table as we are not able to determine a reasonable estimate of timing of the cash settlement with the respective taxing authorities. |
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Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In connection with the preparation of our financial statements, we are required to make estimates and assumptions about future events, and apply judgments that affect the reported amounts of assets, liabilities, sales, expenses and the related disclosure. Predicting future events is inherently an imprecise activity and as such requires the use of judgment. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could di ffer from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1,Business and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8,Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Management believes the accounting policies discussed below are the most critical because they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting policies and estimates and related disclosures with the Audit Committee of our Board.
Our critical accounting policies and estimates relate to asset impairment charges, stock-based compensation, deferred income taxes, self-insured liabilities, warranty liabilities and revenue recognition.
| | | | |
Description | | Judgments and Uncertainties | | Effect if Actual Results
Differ From Assumptions |
Asset Impairment Charges | | | | |
Long-lived assets other than goodwill and other intangible assets, which are separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We generally estimate fair value of long-lived assets, including our retail stores, using the income approach. The inputs used to determine fair value relate primarily to future assumptions regarding sales volumes, gross profit rates, store operating expenses and applicable probability weightings regarding future alternative uses. These inputs are categorized as Level 3 inputs under the fair value measurements guidance. The inputs used represent management’s assumptions about what information market participants would use in pricing the assets and are based upon the best information available at the balance sheet date.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated fair value plus net proceeds expected from disposition of the asset (if any). When we recognize an impairment loss, the carrying amount of the asset is reduced to estimated fair value based on discounted cash flows, quoted market prices or other valuation techniques.
Assets to be disposed of are reported at the lower of the carrying amount of the asset or fair value less costs to sell. We review store assets for potential impairment based on historical cash flows, lease termination provisions and expected future store operating results.
If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated (amortized) over the remaining useful life of that asset.
Asset impairment charges totaled $0.7 million, $34.6 million and $0.4 million for 2009, 2008 and 2007, respectively. During 2009 total impairment charges included a $0.7 million charge for long-lived assets related to 12 under- performing retail store locations. As of January 2, 2010, the remaining carrying amount of the long-lived assets at these stores totaled $35,000. | | Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to identify events or changes in circumstances indicating the carrying value of assets may not be recoverable, estimate future cash flows, estimate asset fair values, and select a discount rate that reflects the risk inherent in future cash flows.
Expected cash flows may not be realized, which could cause long-lived assets to become impaired in future periods and could have a material adverse effect on future results of operations. | | We have not made any material changes in our impairment loss assessment methodology during the past three fiscal years.
As of January 2, 2010, we evaluated 19 under-performing retail stores and one store expected to close before its lease termination date that had sufficient projected future cash flows to support the carrying value of their long-lived assets and therefore, did not result in additional impairment charges. At January 2, 2010, the carrying amount of the long-lived assets for these stores totaled $2.1 million.
We believe that our estimates and assumptions used to calculate long-lived asset impairment charges were reasonable and reflect the current economic environment. Our fair value calculations reflect current consumer spending trends. Our fair value calculations assume the ongoing availability of consumer credit and our ability to provide cost-effective consumer credit options. However, it is reasonably possible that an unexpected decline in consumer spending may expose us to future impairment charges that could be material.
Alternatively, if consumer spending increases at a higher rate than we anticipated, impaired stores (which continue to operate) could generate higher than expected future cash flows and operating profits. |
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| | | | |
Description | | Judgments and Uncertainties | | Effect if Actual Results
Differ From Assumptions |
Stock-Based Compensation | | | | |
We have a stock-based compensation plan, which includes non-qualified stock options and nonvested share awards, and an employee stock purchase plan. See Note 1, Business and Summary of Significant Accounting Policies, and Note 7, Shareholders’ Equity, to the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for a complete discussion of our stock-based compensation programs.
We determine the fair value of our non-qualified stock option awards and the resulting compensation expense at the date of grant using the Black-Scholes-Merton option-pricing model. The most significant inputs into the Black-Scholes-Merton model are exercise price, our estimate of expected stock price volatility and the expected term of the options.
We determine the fair value of our performance-based nonvested share awards at the date of grant using generally accepted valuation techniques and the closing market price of our stock. | | Option-pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the future volatility of our stock price, future employee forfeiture rates and future employee stock option exercise behaviors. Changes in these assumptions can materially affect the fair value estimate or future earnings adjustments.
Performance-based nonvested share awards require management to make assumptions regarding the likelihood of achieving performance goals. | | We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to determine stock-based compensation expense. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in stock-based compensation expense that could be material.
If actual results are not consistent with the assumptions used, the stock-based compensation expense reported in our financial statements may not be representative of the actual economic cost of the stock-based compensation. Also, if the actual forfeiture rates are not consistent with the assumptions used, it could result in future earnings adjustments.
A 10% change in our stock-based compensation expense for the year ended January 2, 2010, would have affected net income by approximately $197,000 in 2009. |
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| | | | |
Description | | Judgments and Uncertainties | | Effect if Actual Results
Differ From Assumptions |
Deferred Income Taxes | | | | |
We recognize deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Realization of deferred tax assets is dependent on generating sufficient taxable income within the carryback or carryforward periods provided for in the tax law of each applicable tax jurisdiction.
We establish a valuation allowance for any portion of deferred tax assets that are not considered more likely than not to be realized. Our evaluation includes a review of the future reversal of existing taxable temporary differences, future taxable income, taxable income available in carryback periods and tax planning strategies.
Our net deferred tax assets, prior to the valuation allowance, totaled $24.3 million and $34.2 million, respectively, for 2009 and 2008. | | Our deferred tax valuation allowance contains uncertainties because it requires management to consider all available evidence, both positive and negative, including past operating results and apply judgment on our ability to generate future taxable income sufficient to realize our deferred tax assets.
From 2002 through 2007, we generated income before income taxes on average of $50.6 million. Our 2008 operating results were significantly affected by the industry-wide decrease in consumer spending and we realized a loss before income taxes of $72.7 million, including $34.6 million of asset impairment charges. In 2009, we returned to profitability and generated income before income taxes of $14.7 million.
During 2008, due to our net loss, our expectations that consumer spending would remain weak and uncertainty regarding future taxable income; we determined that it was more likely than not that a portion of our deferred tax assets would not be realized and we established a $26.8 million deferred tax valuation allowance.
In the fourth quarter of 2009, after reviewing all evidence, we concluded that it was more likely than not that substantially all of our deferred tax assets would be realizable. Our conclusion was based on the quality and quantity of positive evidence, including our return to profitability in 2009, our expectations of profitability going forward, successful renegotiation of our credit facility, additional equity infusions, the significant improvement in our liquidity position, actions taken to reduce our cost structure, all providing support for our ability to rely on our estimates of future profitability. Based on that evidence, much of it occurring in the fourth quarter, we reversed substantially all of the deferred tax valuation allowance at the end of 2009. In order to fully realize our federal deferred tax assets, we would need to generate approximately $54 million of future taxable income. There is no expiration period for us to utilize our federal deferred tax assets. | | We have not made any material changes in our deferred tax assessment methodology during the past three fiscal years.
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used in determining the need for a deferred tax valuation allowance. However, if deeper economic slowdown occurs or consumer spending unexpectedly declines, our conclusion regarding the need for a deferred tax valuation allowance could change in future periods. |
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| | | | |
Description | | Judgments and Uncertainties | | Effect if Actual Results
Differ From Assumptions |
Self-Insured Liabilities | | | | |
We are self-insured for certain losses related to health and workers’ compensation claims. However, we obtain third-party insurance coverage to limit our exposure to these claims.
When estimating our self-insured liabilities, we consider a number of factors, including historical claims experience, demographic factors, severity factors and valuations provided by third-party administrators.
Periodically, management reviews its assumptions and the valuations provided by third-party administrators to determine the adequacy of our self-insured liabilities. | | Our self-insured liabilities contain uncertainties because management is required to make assumptions and to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date.
| | We have not made any material changes in the accounting methodology used to establish our self-insured liabilities during the past three fiscal years.
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our self-insured liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
A 10% change in our self-insured liabilities at January 2, 2010, would have affected net income by approximately $281,000 in 2009. |
| | | | |
Warranty Liabilities | | | | |
The estimated cost to service warranty claims of customers is included in cost of sales. This estimate is based on historical trends of warranty claims.
We regularly assess and adjust the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs. | | Our warranty liability contains uncertainties because our warranty obligations cover an extended period of time. A revision of estimated claim rates or the projected cost of materials and freight associated with sending replacement parts to customers could have a material adverse effect on future results of operations. | | We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our warranty liability. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
A 10% change in our warranty liability at January 2, 2010, would have affected net income by approximately $436,000 in 2009. |
| | | | |
Revenue Recognition | | | | |
Revenue is recognized when the sales price is fixed or determinable, collectability is reasonably assured and title passes. Amounts billed to customers for delivery and set up are included in net sales. Revenue is reported net of estimated sales returns and excludes sales taxes.
We accrue for sales returns at the time revenue is recognized and charge actual returns against the liability when they are received. Our general return policy is to allow returns after a 30-day trial period. We estimate future projected returns based on historical return rates. | | Our estimates of sales returns contain uncertainties as actual returns may vary from expected rates, resulting in adjustments to net sales in future periods. These adjustments could have a material adverse effect on future results of operations. | | We have not made any material changes in the accounting methodology used to establish our sales returns allowance during the past three fiscal years.
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our sales returns allowance. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
A 10% change in our sales returns allowance at January 2, 2010, would have affected net income by approximately $176,000 in 2009. |
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Recent Accounting Pronouncements
Fair Value Measurements– In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance clarifying existing disclosure requirements as well as guidance on new disclosure requirements regarding fair value measurements. The new guidance requires separate disclosure of transfers within the fair value hierarchy between level 1 and level 2. In addition, disclosure of the gross amounts will be required for all purchase, sales, issuances and settlements within level 3 of the fair value hierarchy. This guidance also clarifies current guidance regarding the disclosure of the level of disaggregation a company uses for its fair value measurements. Also, further disclosures regarding inputs and valuation techniques used for the fair value measurements will be required. This guidance is effective for fiscal years beginning after December 15, 2009. We will adopt these disclosure provisions beginning in the first quarter of 2010. We do not expect the adoption of th is guidance to have a material impact on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At January 2, 2010, we had no short-term borrowings. We do not currently manage interest rate risk on our debt through the use of derivative instruments.
Any borrowings under our revolving credit facility are currently not subject to material interest rate risk. The credit facility’s interest rate may be reset due to fluctuations in a market-based index, such as the prime rate or LIBOR.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Select Comfort Corporation:
We have audited the accompanying consolidated balance sheets of Select Comfort Corporation and subsidiaries as of January 2, 2010 and January 3, 2009, and the related consolidated statements of operations, shareholders’ equity (deficit), and cash flows for each of the fiscal years in the three-year period ended January 2, 2010. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II related to valuation and qualifying accounts. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Select Comfort Corporation and subsidiaries as of January 2, 2010 and January 3, 2009, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended January 2, 2010, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As described in Note 1 to the consolidated financial statements, the Company adopted the provisions of SFAS 157,Fair Value Measurements(included in FASB ASC Topic 820,Fair Value Measurements and Disclosures), and SFAS 159,The Fair Value Option for Financial Assets and Liabilities(included in FASB ASC Topic 825,Financial Instruments), on December 30, 2007 and FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes(included in FASB ASC Topic 740,Income Taxes), on December 31, 2006.
Minneapolis, Minnesota
February 25, 2010
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|
SELECT COMFORT CORPORATION |
AND SUBSIDIARIES |
|
Consolidated Balance Sheets |
January 2, 2010 and January 3, 2009 |
(in thousands, except per share amounts) |
| | | | | | | |
| | 2009 | | 2008 | |
Assets | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 17,717 | | $ | 13,057 | |
Accounts receivable, net of allowance for doubtful accounts of $379 and $713, respectively | | | 5,094 | | | 4,939 | |
Inventories | | | 15,646 | | | 18,675 | |
Income taxes receivable | | | 3,893 | | | 25,900 | |
Prepaid expenses | | | 5,879 | | | 4,109 | |
Deferred income taxes | | | 5,153 | | | 1,323 | |
Other current assets | | | 720 | | | 1,150 | |
Total current assets | | | 54,102 | | | 69,153 | |
| | | | | | | |
Property and equipment, net | | | 37,682 | | | 53,274 | |
Deferred income taxes | | | 19,071 | | | 5,941 | |
Other assets | | | 7,385 | | | 7,045 | |
Total assets | | $ | 118,240 | | $ | 135,413 | |
| | | | | | | |
Liabilities and Shareholders’ Equity (Deficit) | | | | | | | |
Current liabilities: | | | | | | | |
Borrowings under revolving credit facility | | $ | — | | $ | 79,150 | |
Accounts payable | | | 37,538 | | | 40,274 | |
Customer prepayments | | | 11,237 | | | 11,480 | |
Accruals: | | | | | | | |
Sales returns | | | 2,885 | | | 2,744 | |
Compensation and benefits | | | 15,518 | | | 14,575 | |
Taxes and withholding | | | 4,528 | | | 2,938 | |
Other current liabilities | | | 7,831 | | | 8,526 | |
Total current liabilities | | | 79,537 | | | 159,687 | |
| | | | | | | |
Warranty liabilities | | | 5,286 | | | 5,956 | |
Capital lease obligations | | | 262 | | | 621 | |
Other long-term liabilities | | | 10,697 | | | 10,779 | |
Total non-current liabilities | | | 16,245 | | | 17,356 | |
Total liabilities | | | 95,782 | | | 177,043 | |
| | | | | | | |
Shareholders’ equity (deficit): | | | | | | | |
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding | | | — | | | — | |
Common stock, $0.01 par value; 142,500 shares authorized, 54,310 and 44,962 shares issued and outstanding, respectively | | | 543 | | | 450 | |
Additional paid-in capital | | | 32,860 | | | 4,417 | |
Accumulated deficit | | | (10,945 | ) | | (46,497 | ) |
Total shareholders’ equity (deficit) | | | 22,458 | | | (41,630 | ) |
Total liabilities and shareholders’ equity (deficit) | | $ | 118,240 | | $ | 135,413 | |
See accompanying notes to consolidated financial statements.
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|
SELECT COMFORT CORPORATION |
AND SUBSIDIARIES |
|
Consolidated Statements of Operations |
Years ended January 2, 2010, January 3, 2009 and December 29, 2007 |
(in thousands, except per share amounts) |
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | | | | |
Net sales | | $ | 544,202 | | $ | 608,524 | | $ | 799,242 | |
Cost of sales | | | 208,742 | | | 249,952 | | | 312,827 | |
Gross profit | | | 335,460 | | | 358,572 | | | 486,415 | |
| | | | | | | | | | |
Operating expenses: | | | | | | | | | | |
Sales and marketing | | | 259,244 | | | 332,068 | | | 372,467 | |
General and administrative | | | 49,560 | | | 57,994 | | | 64,351 | |
Research and development | | | 1,973 | | | 3,374 | | | 5,682 | |
Terminated equity financing costs | | | 3,324 | | | — | | | — | |
Asset impairment charges | | | 686 | | | 34,594 | | | 409 | |
Total operating expenses | | | 314,787 | | | 428,030 | | | 442,909 | |
Operating income (loss) | | | 20,673 | | | (69,458 | ) | | 43,506 | |
Other expense, net | | | (5,983 | ) | | (3,285 | ) | | (40 | ) |
Income (loss) before income taxes | | | 14,690 | | | (72,743 | ) | | 43,466 | |
Income tax (benefit) expense | | | (20,862 | ) | | (2,566 | ) | | 15,846 | |
Net income (loss) | | $ | 35,552 | | $ | (70,177 | ) | $ | 27,620 | |
| | | | | | | | | | |
Basic net income (loss) per share: | | | | | | | | | | |
Net income (loss) per share – basic | | $ | 0.78 | | $ | (1.59 | ) | $ | 0.59 | |
Weighted-average common shares – basic | | | 45,682 | | | 44,186 | | | 46,536 | |
Diluted net income (loss) per share: | | | | | | | | | | |
Net income (loss) per share – diluted | | $ | 0.77 | | $ | (1.59 | ) | $ | 0.57 | |
Weighted-average common shares – diluted | | | 46,198 | | | 44,186 | | | 48,292 | |
See accompanying notes to consolidated financial statements.
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|
SELECT COMFORT CORPORATION |
AND SUBSIDIARIES |
|
Consolidated Statements of Shareholders’ Equity (Deficit) |
Years ended January 2, 2010, January 3, 2009 and December 29, 2007 |
(in thousands) |
| | | | | | | | | | | | | | | | |
| | | | Additional
Paid-In
Capital | | Retained
Earnings/
(Accumulated
Deficit) | | | |
| | Common Stock | | | | | |
| | Shares | | Amount | | | | Total | |
| | | | | | | | | | | | | | | | |
Balance at December 30, 2006 | | | 51,544 | | | 515 | | | 4,039 | | | 111,140 | | | 115,694 | |
Exercise of common stock options | | | 566 | | | 6 | | | 3,483 | | | — | | | 3,489 | |
Tax benefit from stock-based compensation | | | — | | | — | | | 1,887 | | | — | | | 1,887 | |
Stock-based compensation | | | — | | | — | | | 6,252 | | | — | | | 6,252 | |
Repurchases of common stock | | | (7,617 | ) | | (76 | ) | | (16,756 | ) | | (115,080 | ) | | (131,912 | ) |
Issuances of common stock | | | 104 | | | 1 | | | 1,095 | | | — | | | 1,096 | |
Net income | | | — | | | — | | | — | | | 27,620 | | | 27,620 | |
Balance at December 29, 2007 | | | 44,597 | | $ | 446 | | $ | — | | $ | 23,680 | | $ | 24,126 | |
Exercise of common stock options | | | 61 | | | 1 | | | 92 | | | — | | | 93 | |
Tax benefit from stock-based compensation | | | — | | | — | | | 28 | | | — | | | 28 | |
Stock-based compensation | | | — | | | — | | | 3,702 | | | — | | | 3,702 | |
Issuances of common stock | | | 304 | | | 3 | | | 595 | | | — | | | 598 | |
Net loss | | | — | | | — | | | — | | | (70,177 | ) | | (70,177 | ) |
Balance at January 3, 2009 | | | 44,962 | | $ | 450 | | $ | 4,417 | | $ | (46,497 | ) | $ | (41,630 | ) |
Exercise of common stock options | | | 57 | | | — | | | 130 | | | — | | | 130 | |
Exercise of warrants | | | 2,000 | | | 20 | | | — | | | — | | | 20 | |
Tax benefit from stock-based compensation | | | — | | | — | | | (1,234 | ) | | — | | | (1,234 | ) |
Stock-based compensation | | | 328 | | | 3 | | | 3,233 | | | — | | | 3,236 | |
Issuances of common stock | | | 6,963 | | | 70 | | | 26,314 | | | — | | | 26,384 | |
Net income | | | — | | | — | | | — | | | 35,552 | | | 35,552 | |
Balance at January 2, 2010 | | | 54,310 | | $ | 543 | | $ | 32,860 | | $ | (10,945 | ) | $ | 22,458 | |
See accompanying notes to consolidated financial statements.
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SELECT COMFORT CORPORATION |
AND SUBSIDIARIES |
|
Consolidated Statements of Cash Flows |
Years ended January 2, 2010, January 3, 2009 and December 29, 2007 |
(in thousands) |
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
Cash flows from operating activities: | | | | | | | | | | |
Net income (loss) | | $ | 35,552 | | $ | (70,177 | ) | $ | 27,620 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | |
Depreciation and amortization | | | 19,054 | | | 22,186 | | | 24,791 | |
Stock-based compensation | | | 3,236 | | | 3,702 | | | 6,252 | |
Disposals and impairments of assets | | | 683 | | | 34,577 | | | 596 | |
Excess tax benefits from stock-based compensation | | | — | | | (19 | ) | | (1,497 | ) |
Changes in deferred income taxes | | | (18,209 | ) | | 25,075 | | | (7,280 | ) |
Other, net | | | — | | | — | | | 270 | |
Change in operating assets and liabilities: | | | | | | | | | | |
Accounts receivable | | | (155 | ) | | 13,963 | | | (6,738 | ) |
Inventories | | | 3,029 | | | 13,842 | | | (8,397 | ) |
Income taxes receivable | | | 22,007 | | | (25,900 | ) | | — | |
Prepaid expenses and other assets | | | (1,776 | ) | | 7,627 | | | (1,020 | ) |
Accounts payable | | | 2,545 | | | (20,047 | ) | | 12,201 | |
Customer prepayments | | | (243 | ) | | 3,153 | | | (1,225 | ) |
Accrued sales returns | | | 141 | | | (1,007 | ) | | (156 | ) |
Accrued compensation and benefits | | | 943 | | | (250 | ) | | (5,179 | ) |
Accrued taxes and withholding | | | 1,604 | | | (1,846 | ) | | 1,646 | |
Warranty liabilities | | | (906 | ) | | (1,454 | ) | | (719 | ) |
Other accruals and liabilities | | | (866 | ) | | (452 | ) | | 2,866 | |
Net cash provided by operating activities | | | 66,639 | | | 2,973 | | | 44,031 | |
Cash flows from investing activities: | | | | | | | | | | |
Purchases of property and equipment | | | (2,459 | ) | | (32,202 | ) | | (43,514 | ) |
Proceeds from sales of property and equipment | | | 15 | | | — | | | — | |
Proceeds from sales and maturity of marketable debt securities | | | — | | | — | | | 81,086 | |
Net cash (used in) provided by investing activities | | | (2,444 | ) | | (32,202 | ) | | 37,572 | |
Cash flows from financing activities: | | | | | | | | | | |
Net (decrease) increase in short-term borrowings | | | (84,756 | ) | | 35,809 | | | 45,240 | |
Repurchases of common stock | | | — | | | — | | | (134,452 | ) |
Proceeds from issuance of common stock | | | 26,534 | | | 651 | | | 4,572 | |
Debt issuance costs | | | (1,313 | ) | | (1,472 | ) | | — | |
Excess tax benefits from stock-based compensation | | | — | | | 19 | | | 1,497 | |
Net cash (used in) provided by financing activities | | | (59,535 | ) | | 35,007 | | | (83,143 | ) |
Increase (decrease) in cash and cash equivalents | | | 4,660 | | | 5,778 | | | (1,540 | ) |
Cash and cash equivalents, at beginning of year | | | 13,057 | | | 7,279 | | | 8,819 | |
Cash and cash equivalents, at end of year | | $ | 17,717 | | $ | 13,057 | | $ | 7,279 | |
| | | | | | | | | | |
Supplemental Disclosure of Cash Flow Information | | | | | | | | | | |
Income taxes (refunded) paid | | $ | (25,978 | ) | $ | (1,313 | ) | $ | 20,622 | |
Interest paid | | $ | 4,747 | | $ | 3,636 | | $ | 1,095 | |
Capital lease obligations incurred | | $ | 674 | | $ | 1,032 | | $ | — | |
Purchases of property and equipment included in accounts payable | | $ | 388 | | $ | 770 | | $ | 4,960 | |
See accompanying notes to consolidated financial statements.
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SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Business and Summary of Significant Accounting Policies
Business
Select Comfort Corporation and our wholly-owned subsidiaries (“Select Comfort” or the “Company”) develop, manufacture and market premium quality, adjustable-firmness beds and related bedding accessories in the United States. In addition, we also sell to wholesale customers in Alaska, Hawaii, Canada and Australia. We sell through four distribution channels: Retail, Direct, E-Commerce and Wholesale. The percentage of our total net sales from each of our channels during the last three years was as follows:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 |
Retail | | | 81.2% | | | 78.2% | | | 75.4 | % |
Direct | | | 6.2% | | | 7.7% | | | 8.0 | % |
E-Commerce | | | 5.3% | | | 6.1% | | | 6.8 | % |
Wholesale | | | 7.3% | | | 8.0% | | | 9.8 | % |
Total | | | 100.0% | | | 100.0% | | | 100.0 | % |
Basis of Presentation
The consolidated financial statements include the accounts of Select Comfort Corporation and our subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Fiscal Year
Our fiscal year ends on the Saturday closest to December 31. Fiscal years and their respective fiscal year ends are as follows: fiscal 2009 ended January 2, 2010; fiscal 2008 ended January 3, 2009; and fiscal 2007 ended December 29, 2007. Fiscal 2008 had 53 weeks. Fiscal years 2009 and 2007 each had 52 weeks.
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of sales and expenses during the reporting period. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. The uncertain economic environment has combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. Our critical accounting policies consist of asset impairment charges, stock-based compensation, deferred income taxes, self-insured liabilities, warranty liabilities and revenue recognition.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original maturities of three months or less. Outstanding checks in excess of funds on deposit (“book overdrafts”) totaled $7.4 million and $11.7 million at January 2, 2010, and January 3, 2009, respectively. Book overdrafts are included in accounts payable in our consolidated balance sheets and in financing activities in our consolidated statements of cash flows.
The majority of payments due from third-parties for credit card and debit card transactions are processed within one to three business days. All credit card and debit card transactions that process in less than seven days are classified as cash and cash equivalents. Amounts due for these transactions that are classified as cash and cash equivalents totaled $5.5 million and $2.1 million at January 2, 2010, and January 3, 2009, respectively.
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Notes to Consolidated Financial Statements – (continued)
Accounts Receivable
Accounts receivable are recorded net of an allowance for expected losses and consist primarily of wholesale receivables and receivables from third-party financiers for customer credit card purchases. The allowance is recognized in an amount equal to anticipated future write-offs. We estimate future write-offs based on delinquencies, aging trends, industry risk trends and our historical experience. Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered.
Marketable Debt Securities
Marketable debt securities included highly liquid investment grade debt instruments with original maturities of greater than 90 days issued by the U.S. government and related agencies and municipalities. We did not hold any marketable debt securities at January 2, 2010, or January 3, 2009.
Investments held had an original maturity of up to 36 months. Marketable debt securities with a remaining maturity of greater than one year were classified as non-current.
Through December 30, 2006, we classified our marketable debt securities as “held-to-maturity.” We historically valued our marketable debt securities at amortized cost based upon our intent and ability to hold these securities to maturity. On March 23, 2007, marketable debt securities of $67.8 million with an unrealized net loss of $0.3 million were transferred from “held-to-maturity” classification to “available-for-sale” classification. Investments classified as “available-for-sale” are carried at fair market value. The classification change was made to increase liquidity and fund our common stock repurchase program.
During 2007, marketable debt securities with a cost of $64.4 million were sold at a realized loss of $0.3 million. Realized gains and losses are included in other expense, net in our consolidated statements of operations.
Inventories
Inventories include material, labor and overhead and are stated at the lower of cost or market. Cost is determined by the first-in, first-out method.
Property and Equipment
Property and equipment, carried at cost, is depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of the estimated useful lives of the assets or the contractual term of the lease, with consideration of lease renewal options if renewal appears probable. Property under capital lease is comprised of manufacturing equipment, and computer equipment used in our retail operations and corporate support areas. Estimated useful lives of our property and equipment by major asset category are as follows:
| | |
Leasehold improvements | | 5 to 10 years |
Office furniture and equipment | | 5 to 7 years |
Production machinery, computer equipment and software | | 3 to 7 years |
Property under capital lease | | 3 to 4 years |
Other Assets
Other assets include deposits, patents, trademarks and goodwill. Patents and trademarks are amortized using the straight-line method over periods ranging from 10 to 17 years. The carrying value of goodwill at both January 2, 2010, and January 3, 2009, was $2.9 million.
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SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements – (continued)
Asset Impairment Charges
We review our long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset plus net proceeds expected from disposition of the asset (if any). When we recognize an impairment loss, the carrying amount of the asset is reduced to estimated fair value based on discounted cash flows, quoted market prices or other valuation techniques. Assets to be disposed of are reported at the lower of the carrying amount of the asset or fair value less costs to sell. We review store assets for potential impairment based on historical cash flows, lease termination provisions and expected future store operating results.
The test for goodwill impairment is a two-step process, and is performed at least annually. The first step is a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If this step reflects impairment, then the loss would be measured as the excess of recorded goodwill over its implied fair value. Implied fair value is the excess of fair value of the reporting unit over the fair value of all identified assets and liabilities. Fair value is determined utilizing widely accepted valuation techniques, including quoted market prices and our market capitalization. During the fourth quarter of 2009, we completed our annual impairment testing of goodwill, using the valuation techniques as described above, and determined there was no impairment.
Warranty Liabilities
We provide a 20-year limited warranty on our adjustable-firmness beds. The customer participates over the last 18 years of the warranty period by paying a portion of the retail value of replacement parts. Estimated warranty costs are expensed at the time of sale based on historical claims rates incurred by us and are adjusted for any current trends as appropriate. Actual warranty claim costs could differ from these estimates. We classify as noncurrent those estimated warranty costs expected to be paid out in greater than one year. The activity in the accrued warranty liabilities account was as follows (in thousands):
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
Balance at beginning of year | | $ | 8,049 | | $ | 9,503 | | $ | 10,223 | |
Additions charged to costs and expenses for current-year sales | | | 5,114 | | | 6,105 | | | 10,383 | |
Deductions from reserves | | | (5,822 | ) | | (9,537 | ) | | (11,093 | ) |
Changes in liability for pre-existing warranties during the current year, including expirations | | | (198 | ) | | 1,978 | | | (10 | ) |
Balance at end of period | | $ | 7,143 | | $ | 8,049 | | $ | 9,503 | |
Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-tier fair value hierarchy based upon observable and non-observable inputs that prioritizes the information used to develop our assumptions regarding fair value. Fair value measurements are separately disclosed by level within the fair value hierarchy. We adopted the guidance for fair value measurements, as it related to financial assets and liabilities on December 30, 2007, the beginning of our 2008 fiscal year and for nonfinancial assets and liabilities on January 4, 2009, the beginning of our 2009 fiscal year. The adoption of this guidance had no impact on our consolidated financial statements.
We are permitted by current accounting guidance to measure certain financial assets and liabilities at fair value that are not currently required to be measured at fair value (the “Fair Value Option”). Election of the Fair Value Option is made on an instrument-by-instrument basis and is irrevocable. At the adoption date, unrealized gains and losses on financial assets and liabilities for which the Fair Value Option has been elected are reported as a cumulative adjustment to beginning retained earnings. We have not elected the Fair Value Option as we had no financial assets or liabilities that qualified for this
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Notes to Consolidated Financial Statements – (continued)
treatment. In the future, if we elect the Fair Value Option for certain financial assets and liabilities, we would report unrealized gains and losses due to changes in their fair value in net income at each subsequent reporting date.
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, borrowings under our revolving credit facility, and other current assets and liabilities approximate fair value because of their short-term maturity.
Revenue Recognition
Revenue is recognized when the sales price is fixed or determinable, collectability is reasonably assured and title passes. Amounts billed to customers for delivery and set up are included in net sales. Revenue is reported net of estimated sales returns and excludes sales taxes.
We accept sales returns after a 30-day trial period. The accrued sales returns estimate is based on historical return rates, which are reasonably consistent from period to period and is adjusted for any current trends as appropriate. If actual returns vary from expected rates, sales in future periods are adjusted.
Cost of Sales, Sales and Marketing, General and Administrative (“G&A”) and Research & Development (“R&D”) Expenses
The following tables summarize the primary costs classified in each major expense category (the classification of which may vary within our industry):
| | | | |
Cost of Sales | | Sales & Marketing |
| | | | | |
• | Costs associated with purchasing, manufacturing, shipping, handling and | | • | Advertising and media production; |
| | delivering our products to our stores and customers; | | | |
| | | | • | Marketing and selling materials such as brochures, videos, customer |
| • | Physical inventory losses, scrap and obsolescence; | | | mailings and in-store signage; |
| | | | | |
| • | Related occupancy and depreciation expenses; and | | • | Payroll and benefits for sales and customer service staff; |
| | | | | |
| • | Estimated costs to service warranty claims of customers. | | • | Store occupancy costs; |
| | | | | |
| | | | • | Store depreciation expense; and |
| | | | | |
| | | | • | Promotional financing costs. |
| | |
G&A | | R&D(1) |
| | | | | |
| • | Payroll and benefit costs for corporate employees, including information | | • | Internal labor and benefits related to research and development activities; |
| | technology, legal, human resources, finance, sales and marketing | | | |
| | administration, investor relations and risk management; | | • | Outside consulting services related to research and development activities; |
| | | | | and |
| • | Occupancy costs of corporate facilities; | | | |
| | | | • | Testing equipment related to research and development activities. |
| • | Depreciation related to corporate assets; | | | |
| | | | (1) Costs incurred in connection with R&D are charged to expense as incurred. |
| • | Information hardware, software and maintenance; | | |
| | | | | |
| • | Insurance; | | | |
| | | | | |
| • | Investor relations costs; and | | | |
| | | | | |
| • | Other overhead costs. | | | |
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SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements – (continued)
Operating Leases
We rent office and manufacturing space under operating leases which, in addition to the minimum lease payments, require payment of a proportionate share of the real estate taxes and certain building operating expenses. We also rent retail space under operating leases which, in addition to the minimum lease payments, may require payment of contingent rents based upon sales levels and payment of a proportionate share of the real estate taxes and certain building operating expenses.
Rent expense is recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. We record any difference between the straight-line rent amounts and amounts payable under the leases as part of deferred rent, in other current liabilities or other long-term liabilities, as appropriate. The lease term for purposes of the calculation begins on the earlier of the lease commencement date or the date we take possession of the property. During lease renewal negotiations that extend beyond the original lease term, we estimate straight-line rent expense based on current market conditions. At January 2, 2010, and January 3, 2009, deferred rent included in other current liabilities in our consolidated balance sheets was $1.4 million and $1.3 million, respectively, and deferred rent included in other long-term liabilities in our consolidated balance sheets was $4.0 million and $4.3 million, respectively.
Leasehold improvements that are funded by landlord incentives or allowances under an operating lease are recorded as deferred lease incentives, in other current liabilities or other long-term liabilities, as appropriate and amortized as reductions to rent expense over the lease term. At January 2, 2010, and January 3, 2009, deferred lease incentives included in other current liabilities in our consolidated balance sheets were $1.4 million and $1.6 million, respectively, and deferred lease incentives included in other long-term liabilities in our consolidated balance sheets were $4.6 million and $6.1 million, respectively.
Lease payments that depend on factors that are not measurable at the inception of the lease, such as future sales levels, are contingent rents and are excluded from minimum lease payments and included in the determination of total rent expense when it is probable the expense has been incurred and the amount is reasonably estimable. Future payments for real estate taxes and certain building operating expenses for which we are obligated are not included in minimum lease payments.
We also lease delivery trucks associated with our home delivery service, which in addition to the minimum lease payments, require payment of a management fee and contain certain residual value guarantee provisions that would become due at the expiration of the operating agreement if the fair value of the leased vehicles is less than the guaranteed residual value. As of January 2, 2010, the maximum guaranteed residual value at lease expiration was $0.1 million. Historically, payments related to these guarantees have been insignificant. We believe the likelihood of funding the guarantee obligation under any provision of the operating lease is remote and thus, we have not recognized a liability.
Pre-opening Costs
Costs associated with the start up and promotion of new store openings are expensed as incurred.
Advertising Costs
We incur advertising costs associated with print and broadcast advertisements. Advertising costs are charged to expense when the ad first runs. Advertising expense was $61.4 million, $92.0 million and $109.9 million, in 2009, 2008 and 2007, respectively. Advertising costs deferred and included in prepaid expenses in our consolidated balance sheets were $1.8 million and $0.7 million as of January 2, 2010, and January 3, 2009, respectively.
Insurance
We are self-insured for certain losses related to health and workers’ compensation claims, although we do obtain third-party insurance coverage to limit exposure to these claims. We estimate our self-insured liabilities using a number of factors including historical claims experience and analysis of incurred but not reported claims. Our self-insurance liability was $4.6 million and $4.8 million at January 2, 2010, and January 3, 2009, respectively, and is included in other current liabilities in our consolidated balance sheets.
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SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements – (continued)
Stock-Based Compensation
We record stock-based compensation expense based on the award’s fair value at the date of grant and the awards that are expected to vest. We recognize stock-based compensation expense over the period during which an employee is required to provide services in exchange for the award, or to their eligible retirement date, if earlier. We use the Black-Scholes-Merton option-pricing model to estimate the fair value of stock options and resulting compensation expense. The most significant inputs into the Black-Scholes-Merton option-pricing model are exercise price, our estimate of expected stock price volatility and the weighted-average expected life of the options. We reduce compensation expense by estimated forfeitures. We include as part of cash flows from financing activities the benefit of tax deductions in excess of recognized compensation expense.
See Note 7,Shareholders’ Equity, for additional information on stock-based compensation.
Income Taxes
We recognize deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established for any portion of deferred tax assets that are not considered more likely than not to be realized. We evaluate all available positive and negative evidence, including the existence of cumulative year losses and our forecast of future taxable income, to assess the need for a valuation allowance on our deferred tax assets.
We account for uncertain tax benefits by recording a liability for unrecognized tax benefits from uncertain tax positions taken, or expected to be taken, in our tax returns.
We classify interest and penalties on tax uncertainties as a component of income tax (benefit) expense in our consolidated statements of operations.
Income (Loss) Per Share
Basic income (loss) per share excludes dilution and is computed by dividing net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted income (loss) per share includes potentially dilutive common shares consisting of stock options, restricted stock and warrants using the treasury stock method. In 2008, we excluded shares of restricted stock and stock options from our computation of diluted net loss per share, as their inclusion would have had an anti-dilutive effect (i.e., resulted in a lower loss per share).
Sources of Supply
We currently obtain materials and components used to produce our beds from outside sources. As a result, we are dependent upon suppliers that in some instances, are our sole source of supply. We are continuing our efforts to dual-source key components. The failure of one or more of our suppliers to provide us with materials or components on a timely basis could significantly impact our consolidated results of operations and net income (loss) per share. We believe we can obtain these raw materials and components from other sources of supply in the ordinary course of business, although an unexpected loss of supply over a short period of time may not allow us to replace these sources in the ordinary course of business.
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SELECT COMFORT CORPORATION
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Notes to Consolidated Financial Statements – (continued)
New Accounting Pronouncements
Accounting Standards Codification— In June 2009, the Financial Accounting Standards Board (“FASB”) issued a standard that established the FASB Accounting Standards Codification (the “ASC”), which effectively amended the hierarchy of U.S. generally accepted accounting principles (“GAAP”) and established only two levels of GAAP, authoritative and nonauthoritative. All previously existing accounting standard documents were superseded, and the ASC became the single source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the ASC became nonauthoritative. The ASC was intended to provide access to the authoritative guidance related to a particular topic in one place. New guidance issued subsequent to June 30, 2009 will be co mmunicated by the FASB through Accounting Standards Updates. The ASC was effective for financial statements for interim or annual reporting periods ending after September 15, 2009. We adopted and applied the provisions of the ASC for our third quarter of 2009, and have eliminated references to pre-ASC accounting standards throughout our consolidated financial statements. As the ASC was not intended to change or alter existing GAAP, it did not have any impact on our consolidated financial statements.
Subsequent Events— In May 2009, the FASB issued new guidance on the treatment of subsequent events which is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This new guidance was effective for fiscal years and interim periods ended after June 15, 2009, and must be applied prospectively. We adopted and applied the provisions of the new guidance for our second quarter 2009, and have included the required disclosures in Note 1,Business and Summary of Significant Accounting Policies. Our adoption of the new guidance did not have an impact on our consolidated financial statements.
Fair Value and Other-Than-Temporary Impairments— In April 2009, the FASB issued new guidance intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. New guidance related to determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly provides additional guidelines for estimating fair value in accordance with pre-existing guidance on fair value measurements. New guidance on recognition and presentation of other-than-temporary impairments provides additional guidance related to the disclosure of impairment losses on securities and the accounting for impairment losses on debt securities, but does not amend existing guidance related to other-than-temporary impairments of equity securities. Lastly, new guidance on interim disclosures about the fair value of financial instruments increases the frequency of fair value disclosures. The new guidance was effective for fiscal years and interim periods ended after June 15, 2009. As such, we adopted the new guidance in the second quarter of 2009, and have included the additional required disclosures about the fair value of financial instruments and valuation techniques within Note 2,Fair Value Measurements. Our adoption of the new guidance did not have a material impact on our consolidated financial statements.
Subsequent Events
Events that have occurred subsequent to January 2, 2010 have been evaluated through February 25, 2010, the date we filed this Annual Report on Form 10-K with the Securities and Exchange Commission. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-K or would be required to be recognized in the consolidated financial statements as of or for the fiscal year ended January 2, 2010.
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Notes to Consolidated Financial Statements – (continued)
(2) Fair Value Measurements
On January 4, 2009, we adopted new guidance for fair value measurements, related to nonfinancial assets and liabilities. Our nonfinancial assets relate primarily to long-lived assets and goodwill. We adopted the guidance for fair value measurements related to financial assets and liabilities on December 30, 2007, the beginning of fiscal 2008.
The guidance for fair value measurements establishes the authoritative definition of fair value, sets out a framework for measuring fair value and outlines the required disclosures regarding fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-tier fair value hierarchy based upon observable and non-observable inputs as follows:
| |
• | Level 1 – observable inputs such as quoted prices in active markets; |
• | Level 2 – inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
• | Level 3 – unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Assets and liabilities that are measured at fair value on a recurring basis
At January 2, 2010, we did not have any nonfinancial assets or liabilities that required a fair-value measurement on a recurring basis. Our financial assets and liabilities requiring a fair-value measurement on a recurring basis were not significant as of January 2, 2010.
Assets and liabilities that are measured at fair value on a non-recurring basis
Goodwill
The test for goodwill impairment is performed at least annually. Fair value is determined using a market-based approach utilizing widely accepted valuation techniques, including quoted market prices and our market capitalization. These inputs are categorized as Level 1 inputs.
Long-Lived Assets
We generally estimate long-lived asset fair values, including our retail stores, using the income approach. The inputs used to determine fair value relate primarily to future assumptions regarding sales volumes, gross profit rates, store operating expenses and applicable probability weightings regarding future alternative uses. These inputs are categorized as Level 3 inputs. The inputs used represent management’s assumptions about what information market participants would use in pricing the assets and are based upon the best information available at the balance sheet date.
Our projected fair value calculations reflect recent consumer spending trends with no significant change in the macroeconomic environment for the foreseeable future. Our fair value calculations assume the ongoing availability of consumer credit and our ability to provide cost-effective consumer credit options.
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Notes to Consolidated Financial Statements – (continued)
The following table presents the asset impairment charges we recorded during 2009 and the remaining net carrying value of those impaired long-lived assets as of January 2, 2010 (in thousands):
| | | | | | | | | | | | | | | | |
| | | | | Fair Value Measured and
Recorded
At Reporting Date Using | | | | |
| | Net Carrying Value
as of
January 2, 2010 | | Level 1 | | Level 2 | | Level 3 | | Impairment
Charges for
2009 | |
Long-lived assets | | $ | 35 | | $ | — | | $ | — | | $ | 35 | | $ | (686 | ) |
Financial Assets and Liabilities not Measured at Fair Value
Certain of our financial assets and liabilities are recorded at their carrying amounts which approximate fair value, based on their short-term nature or variable interest rate. These financial assets and liabilities include cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings under our revolving credit facility.
(3) Inventories
Inventories consist of the following (in thousands):
| | | | | | | |
| | January 2,
2010 | | January 3,
2009 | |
Raw materials | | $ | 3,257 | | $ | 4,280 | |
Work in progress | | | 102 | | | 99 | |
Finished goods | | | 12,287 | | | 14,296 | |
| | $ | 15,646 | | $ | 18,675 | |
Our finished goods inventory, as of January 2, 2010, was comprised of $4.8 million of finished beds, including retail display beds and deliveries in-transit to those customers who have utilized home delivery services, $3.4 million of finished components that were ready for assembly for the completion of beds, and $4.1 million of retail accessories.
Our finished goods inventory, as of January 3, 2009, was comprised of $5.6 million of finished beds, including retail display beds and deliveries in-transit to those customers who have utilized home delivery services, $2.7 million of finished components that were ready for assembly for the completion of beds, and $6.0 million of retail accessories.
(4) Property and Equipment
Property and equipment consist of the following (in thousands):
| | | | | | | |
| | January 2,
2010 | | January 3,
2009 | |
Land | | $ | 1,999 | | $ | 1,999 | |
Leasehold improvements | | | 76,579 | | | 89,321 | |
Office furniture and equipment | | | 5,260 | | | 5,396 | |
Production machinery, computer equipment and software | | | 66,966 | | | 68,130 | |
Property under capital lease | | | 1,837 | | | 1,163 | |
Less: Accumulated depreciation and amortization | | | (114,959 | ) | | (112,735 | ) |
| | $ | 37,682 | | $ | 53,274 | |
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Notes to Consolidated Financial Statements – (continued)
During 2009, 2008 and 2007, we recorded asset impairment charges of $0.7 million, $34.6 million and $0.4 million, respectively. The impairment charges for 2009 were primarily related to assets at certain stores expected to close prior to their normal lease termination dates. During the fourth quarter of fiscal 2008, we elected to abandon our plan to implement an integrated suite of SAP®-based applications in 2009 and recognized asset impairment charges totaling $27.6 million. In addition, during 2008 and 2007, we reviewed all of our stores for impairment and determined that certain store assets at underperforming stores were impaired. We recognized impairment charges of $7.0 million and $0.4 million, respectively, for the difference between the fair value and the carrying amounts of the related long-lived assets.
Asset impairment charges is one of our critical accounting estimates and requires management to make estimates about future events including sales growth rates, cash flows and asset fair values. We estimate fair values based on probability-weighted discounted cash flows, quoted market prices or other valuation techniques. Predicting future events is inherently an imprecise activity. If actual results are not consistent with the estimates and assumptions used in our asset impairment calculations, we may incur additional impairment charges in the near term.
(5) Leases
Operating Leases
Rent expense was as follows (in thousands):
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
Facility Rents: | | | | | | | | | | |
Minimum rents | | $ | 36,040 | | $ | 38,157 | | $ | 32,663 | |
Contingent rents | | | 1,507 | | | 1,962 | | | 7,564 | |
Total | | $ | 37,547 | | $ | 40,119 | | $ | 40,227 | |
| | | | | | | | | | |
Equipment rents | | $ | 2,238 | | $ | 3,412 | | $ | 2,753 | |
Capital Leases
During 2009, we entered into capital leases totaling $0.7 million for certain computer software. During 2008, we entered into capital leases totaling $1.0 million for certain computer and manufacturing equipment. At January 2, 2010, and January 3, 2009, $0.5 million and $0.3 million, respectively, were included in other current liabilities and $0.3 million and $0.5 million, respectively, were included in other long-term liabilities in our consolidated balance sheets.
The aggregate minimum rental commitments under operating leases and future maturities of capital leases for subsequent years are as follows (in thousands):
| | | | | | | |
| | Operating | | Capital | |
2010 | | $ | 32,538 | | $ | 574 | |
2011 | | | 29,115 | | | 285 | |
2012 | | | 24,505 | | | 6 | |
2013 | | | 19,372 | | | — | |
2014 | | | 12,254 | | | — | |
Thereafter | | | 16,089 | | | — | |
Total future minimum lease payments | | $ | 133,873 | | | 865 | |
Less: amount representing interest | | | | | | (52 | ) |
Present value of future minimum lease payments | | | | | $ | 813 | |
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Notes to Consolidated Financial Statements – (continued)
(6) Debt
Credit Agreement
In June 2006, we entered into a Credit Agreement (the “Credit Agreement”) with a syndicate of banks (the “Lenders”). The Credit Agreement was amended on February 1, 2008, May 30, 2008 and November 13, 2009 to allow greater flexibility under the existing financial covenants, provide additional financial covenants, modify the credit limit and maturity date, increase the cost of borrowing, provide the Lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries, and impose additional restrictions and covenants with respect to our operations.
The Credit Agreement, as amended to date, provides a revolving credit facility for general corporate purposes with net aggregate availability of $40.0 million, which amount decreases to $35.0 million as of March 31, 2010, and $20.0 million as of December 31, 2010. The Credit Agreement terminates in June 2011.
We had no outstanding borrowings as of January 2, 2010. We had outstanding borrowings of $79.2 million under the credit facility as of January 3, 2009. We also had outstanding letters of credit of $4.5 million and $5.9 million as of January 2, 2010, and January 3, 2009, respectively. Outstanding letters of credit reduce the amounts available under the credit facility. At January 2, 2010, and January 3, 2009, $35.5 million and $5.0 million, respectively, were available under this credit facility.
Borrowings under the credit facility bear interest at a floating rate and may be maintained as base rate loans (tied to the prime rate, plus a margin of 4.5%) or as Eurocurrency rate loans (tied to LIBOR, plus a margin of 5.5%). At January 3, 2009, the interest rate on borrowings outstanding under the credit agreements was 6.0%. We also pay certain facility and agent fees. We are subject to certain financial covenants under the agreement, including a maximum leverage ratio, a minimum interest coverage ratio, minimum EBITDA requirement, and maximum capital expenditure limits. At January 2, 2010, we were in compliance with all financial covenants.
(7) Shareholders’ Equity
Stock-Based Compensation Plans
We compensate officers, directors and key employees with stock-based compensation under three stock plans approved by our shareholders in 1990, 1997 and 2004 and administered under the supervision of our Board of Directors (“Board”). At January 2, 2010, a total of 852,000 shares were available for future grant under the 2004 stock plan. Stock option awards are granted at exercise prices equal to the closing price of our stock on the date of grant. Generally, options vest proportionally over periods of three to four years from the dates of the grant and expire after ten years. Compensation expense is recognized ratably over the vesting period.
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Notes to Consolidated Financial Statements – (continued)
Stock Options
A summary of our stock option activity for the year ended January 2, 2010, is as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | |
| | Stock
Options | | Weighted-
Average
Exercise
Price
per Share | | Weighted-
Average
Remaining
Contractual
Term
(years) | | Aggregate
Intrinsic
Value(1) | |
| | | | | | | | | | | | | |
Outstanding at January 3, 2009 | | | 5,074 | | $ | 10.67 | | | 4.9 | | $ | — | |
Granted | | | 575 | | | 1.72 | | | | | | | |
Exercised | | | (57 | ) | | 2.29 | | | | | | | |
Canceled/Forfeited | | | (781 | ) | | 11.44 | | | | | | | |
Outstanding at January 2, 2010 | | | 4,811 | | $ | 9.57 | | | 4.8 | | $ | 9,935 | |
| | | | | | | | | | | | | |
Exercisable at January 2, 2010 | | | 3,281 | | $ | 8.60 | | | 3.4 | | $ | 6,286 | |
| |
(1) | Aggregate intrinsic value includes only those options where the current share price is equal to or greater than the share price on the date of grant. At January 3, 2009, the intrinsic value of all outstanding options was zero. |
Other information pertaining to options for the years ended January 2, 2010; January 3, 2009; and December 29, 2007; is as follows (in thousands, except per share amounts):
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | | | | |
Weighted-average grant date fair value of stock options granted | | $ | 1.17 | | $ | 1.65 | | $ | 8.94 | |
Total intrinsic value (at exercise) of stock options exercised | | $ | 140 | | $ | 115 | | $ | 6,637 | |
Cash received from the exercise of stock options | | $ | 130 | | $ | 92 | | $ | 3,489 | |
Stock-based compensation expense recognized in the consolidated statements of operations | | $ | 2,184 | | $ | 2,916 | | $ | 4,528 | |
Excess income tax benefits from exercise of stock options | | $ | — | | $ | 19 | | $ | 1,497 | |
At January 2, 2010, there was $4.7 million of total stock option compensation expense related to non-vested awards not yet recognized, which is expected to be recognized over a weighted-average period of 4.6 years.
Determining Fair Value
We estimated the fair value of stock options granted using the Black-Scholes-Merton option-pricing model and a single option award approach. Forfeitures are estimated using historical experience and projected employee turnover. A description of significant assumptions used to estimate the expected volatility, risk-free interest rate and expected terms is follows:
| |
| Expected Volatility – Expected volatility was determined based on implied volatility of our traded options and historical volatility of our stock price. |
| |
| Risk-Free Interest Rate – The risk-free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues at the date of grant with a term equal to the expected term. |
| |
| Expected Term –Expected term represents the period that our stock-based awards are expected to be outstanding and was determined based on historical experience and anticipated future exercise patterns, giving consideration to the contractual terms of unexercised stock-based awards. |
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Notes to Consolidated Financial Statements – (continued)
The assumptions used to calculate the fair value of awards granted during 2009, 2008 and 2007 using the Black-Scholes-Merton option-pricing model were as follows:
| | | | | | | | | | |
Valuation Assumptions | | 2009 | | 2008 | | 2007 | |
| | | | | | | | | | |
Expected dividend yield | | | 0 | % | | 0 | % | | 0 | % |
Expected volatility | | | 89 | % | | 52 | % | | 50 | % |
Risk-free interest rate | | | 2.4 | % | | 2.5 | % | | 4.7 | % |
Expected term (in years) | | | 4.8 | | | 5.3 | | | 5.2 | |
Restricted and Performance Stock
We issue restricted and performance stock awards to certain employees in conjunction with our stock-based compensation plan. The awards generally cliff-vest from three to five years based on continued employment (“time based”). Compensation expense related to time-based stock awards is determined on the grant-date based on the publicly quoted fair market value of our common stock and is charged to earnings on a straight-line basis over the vesting period. Performance stock may be earned and become vested in a specific percentage depending upon the extent to which the target performance is met as of the last day of the performance cycle (“performance based”).
Total compensation expense related to time-based restricted and performance-based stock awards was $1.1 million, $0.8 million and $1.7 million, for the years ended January 2, 2010; January 3, 2009; and December 29, 2007, respectively. There were 190,000 and 38,000 restricted and performance stock awards vested at January 2, 2010, and January 3, 2009, respectively. All outstanding restricted and performance stock awards were unvested at December 29, 2007. Restricted and performance stock activity was as follows for the year ended January 2, 2010 (in thousands, except per share amounts):
| | | | | | | | | | | | | |
| | Restricted
Stock | | Weighted-
Average
Grant Date
Fair Value | | Performance
Stock | | Weighted-
Average
Grant Date
Fair Value | |
| | | | | | | | | | | | | |
Outstanding at January 3, 2009 | | | 360 | | $ | 13.20 | | | 251 | | $ | 12.36 | |
Granted | | | 105 | | | 2.98 | | | 298 | | | 0.92 | |
Canceled/Forfeited | | | (151 | ) | | 14.76 | | | (76 | ) | | 7.14 | |
| | | | | | | | | | | | | |
Outstanding at January 2, 2010 | | | 314 | | $ | 9.03 | | | 473 | | $ | 5.81 | |
At January 2, 2010, there was $1.5 million of unrecognized compensation expense related to non-vested restricted and performance share awards, which is expected to be recognized over a weighted-average period of 2.0 years.
Repurchases of Common Stock
On April 20, 2007, our Board authorized the repurchase of up to an additional $250.0 million of our common stock, bringing the total availability under our share repurchase program to $290.0 million. During 2009 and 2008, we did not repurchase any shares of common stock. During 2007, we repurchased and retired 7,617,000 shares through open market purchases at a cost of $131.9 million (based on trade dates). As of January 2, 2010, the remaining authorization under our share repurchase program was $206.8 million. There is no expiration date governing the period over which we can repurchase shares. We currently have no plans to repurchase our stock under this authorization.
The cost of stock repurchases is first charged to additional paid-in capital. Once additional paid-in capital is reduced to zero, any additional amounts are charged to retained earnings (accumulated deficit).
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Notes to Consolidated Financial Statements – (continued)
Equity Financing
In May 2009 we entered into a securities purchase agreement with Sterling Partners, a private equity firm. During a special meeting of shareholders held August 27, 2009, our shareholders did not approve the May 2009 securities purchase agreement. During the third quarter of 2009, we expensed $3.3 million of direct, incremental costs incurred in connection with the terminated equity financing.
During the fourth quarter of 2009, we obtained $26.3 million in net proceeds from the issuance of 8.6 million shares of our common stock through a private equity placement and a public equity offering.
Dividends
We have not historically paid cash dividends on our common stock and we are restricted from paying dividends under our credit agreement.
Net Income (Loss) per Common Share
The following computations reconcile net income (loss) per share – basic with net income (loss) per share – diluted (in thousands, except per share amounts):
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | | | | |
Net income (loss) | | $ | 35,552 | | $ | (70,177 | ) | $ | 27,620 | |
| | | | | | | | | | |
Reconciliation of weighted-average shares outstanding: | | | | | | | | | | |
Basic weighted-average shares outstanding | | | 45,682 | | | 44,186 | | | 46,536 | |
Effect of dilutive securities: | | | | | | | | | | |
Options | | | 219 | | | — | | | 1,455 | |
Warrants | | | 28 | | | — | | | — | |
Restricted shares | | | 269 | | | — | | | 301 | |
Diluted weighted-average shares outstanding | | | 46,198 | | | 44,186 | | | 48,292 | |
| | | | | | | | | | |
Net income (loss) per share – basic | | $ | 0.78 | | $ | (1.59 | ) | $ | 0.59 | |
Net income (loss) per share – diluted | | | 0.77 | | | (1.59 | ) | | 0.57 | |
Additional potentially dilutive stock options totaling 4,405,000, 5,124,000 and 2,441,000 for the years 2009, 2008 and 2007, respectively, have been excluded from diluted EPS because these securities’ exercise prices were greater than the average market price of our common shares.
In addition, we excluded certain shares of restricted stock and stock options from our diluted net income (loss) per share calculations as their inclusion would have had an anti-dilutive effect on our net income (loss) per diluted share (i.e., resulted in a lower loss per share). For 2008, we excluded 444,000 shares of restricted stock and 212,000 stock options from our computation of diluted net loss per share.
(8) Other Expense, Net
Other expense, net, consisted of the following (in thousands):
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | |
Interest income | | $ | 16 | | $ | 90 | | $ | 1,079 | |
Interest expense | | | (5,708 | ) | | (4,120 | ) | | (1,163 | ) |
Write-off unamortized debt cost | | | (291 | ) | | (131 | ) | | — | |
Capitalized interest expense | | | — | | | 876 | | | 314 | |
Realized loss on sales of marketable debt securities | | | — | | | — | | | (270 | ) |
Other expense, net | | $ | (5,983 | ) | $ | (3,285 | ) | $ | (40 | ) |
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Notes to Consolidated Financial Statements – (continued)
(9) Income Taxes
The (benefit) expense for income taxes consisted of the following (in thousands):
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
Current: | | | | | | | | | | |
Federal | | $ | (2,763 | ) | $ | (26,910 | ) | $ | 19,454 | |
State | | | 103 | | | (732 | ) | | 3,672 | |
| | | (2,660 | ) | | (27,642 | ) | | 23,126 | |
Deferred: | | | | | | | | | | |
Federal | | | (16,231 | ) | | 26,853 | | | (6,348 | ) |
State | | | (1,971 | ) | | (1,777 | ) | | (932 | ) |
| | | (18,202 | ) | | 25,076 | | | (7,280 | ) |
Income tax (benefit) expense | | $ | (20,862 | ) | $ | (2,566 | ) | $ | 15,846 | |
The following table provides a reconciliation of our income tax (benefit) expense at the statutory federal tax rate to our actual income tax (benefit) expense:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
Statutory federal income tax | | $ | 5,141 | | $ | (25,460 | ) | $ | 15,213 | |
Change in valuation allowance | | | (26,840 | ) | | 26,840 | | | — | |
Changes in unrecognized tax benefits | | | 730 | | | — | | | — | |
State income taxes, net of federal benefit | | | 688 | | | (3,258 | ) | | 1,781 | |
Other | | | (581 | ) | | (688 | ) | | (1,148 | ) |
| | $ | (20,862 | ) | $ | (2,566 | ) | $ | 15,846 | |
We file income tax returns with the U.S. federal government and various state jurisdictions. In the normal course of business, we are subject to examination by federal and state taxing authorities. We are no longer subject to federal or state income tax examinations for years prior to 2005.
Deferred Income Taxes
The tax effects of temporary differences that give rise to deferred income taxes were as follows (in thousands):
| | | | | | | |
| | 2009 | | 2008 | |
Deferred tax assets: | | | | | | | |
Current: | | | | | | | |
Compensation and benefits | | $ | 1,193 | | $ | 2,689 | |
Warranty and returns liabilities | | | 1,775 | | | 1,935 | |
Deferred rent and lease incentives | | | 953 | | | 984 | |
Other | | | 1,231 | | | 609 | |
Long-term: | | | | | | | |
Property and equipment | | | 3,188 | | | 12,161 | |
Stock-based compensation | | | 6,957 | | | 6,835 | |
Deferred rent and lease incentives | | | 2,701 | | | 3,324 | |
Warranty liability | | | 2,096 | | | 2,008 | |
Net operating loss, capital loss and tax credit carryforwards | | | 3,418 | | | 2,933 | |
Other | | | 806 | | | 719 | |
Total gross deferred tax assets | | | 24,318 | | | 34,197 | |
Valuation allowance | | | (94 | ) | | (26,933 | ) |
Total net deferred tax assets | | $ | 24,224 | | $ | 7,264 | |
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Notes to Consolidated Financial Statements – (continued)
At January 2, 2010, we had net operating loss carryforwards for state income tax purposes of $67.3 million which will expire between 2011 and 2029.
We evaluate our deferred income taxes quarterly to determine if valuation allowances are required. As part of this evaluation, we assess whether valuation allowances should be established for any deferred tax assets that are not considered more likely than not to be realized, using all available evidence, both positive and negative. This assessment considers, among other matters, the nature, frequency, and severity of recent losses, forecasts of future profitability, taxable income in available carryback periods and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified.
We had a $0.1 million and $26.9 million tax valuation allowance at January 2, 2010, and January 3, 2009, respectively.
In 2008 based on all available evidence, we established a $26.8 million valuation allowance against deferred tax assets. In 2009, after reviewing all evidence, we concluded that it was more likely than not that substantially all of our deferred tax assets would be realizable. Our conclusion was based on the quality and quantity of positive evidence, including our return to profitability in 2009, our expectations of profitability going forward, successful renegotiation of our credit facility, additional equity infusions, the significant improvement in our liquidity position, actions taken to reduce our cost structure, all providing support for our ability to rely on our estimates of future profitability. Based on that evidence, much of it occurring in the fourth quarter, we reversed substantially all of the deferred tax valuation allowance at the end of 2009. In order to fully realize our federal deferred tax assets, we would need to generate approximately $54 million of future taxable income. There is no expiration period for us to utilize our federal deferred tax assets.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amounts of unrecognized tax benefits for 2008 and 2009 was as follows (in thousands):
| | | | | | | | | | |
| | Federal
And
State
Tax | | Accrued
Interest
And
Penalties | | Gross
Unrecognized
Income Tax
Benefits | |
Balance December 29, 2007 | | $ | 97 | | $ | — | | $ | 97 | |
Decreases related to prior-year tax positions | | | (50 | ) | | — | | | (50 | ) |
Increases related to prior-year tax positions | | | 105 | | | 3 | | | 108 | |
Balance January 3, 2009 | | $ | 152 | | $ | 3 | | $ | 155 | |
Increases related to prior-year tax positions | | | 243 | | | 78 | | | 321 | |
Increases related to current-year tax positions | | | 980 | | | — | | | 980 | |
Balance January 2, 2010 | | $ | 1,375 | | $ | 81 | | $ | 1,456 | |
In 2009, 2008 and 2007, we included $78,000, $3,000 and $8,000, respectively, of penalties and interest in income tax (benefit) expense.
At January 2, 2010, and January 3, 2009, the total amounts of unrecognized tax benefits for uncertain tax positions were $884,000 and $155,000, respectively, that if recognized, would impact the effective tax rate. The amount of unrecognized tax benefits are not expected to change materially within the next 12 months.
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Notes to Consolidated Financial Statements – (continued)
(10) Employee Benefit Plans
Profit Sharing and 401(k) Plan
Under our profit sharing and 401(k) plan, eligible employees may defer up to 50% of their compensation on a pre-tax basis, subject to Internal Revenue Service limitations. Each year, we may make a discretionary contribution equal to a percentage of the employee’s contribution. Beginning in the fourth quarter of fiscal 2008, due to the challenging business environment, we temporarily discontinued our discretionary 401(k) contribution. There was no contribution during 2009. During 2008 and 2007, our contributions, net of forfeitures, were $1.9 million and $2.8 million, respectively.
Employee Stock Purchase Plan
We had an employee stock purchase plan (“ESPP”) which permitted employees to purchase our common stock at a 5% discount based on the average price of the stock on the last business day of the offering period (calendar quarter basis). Purchases were funded by employee payroll deductions during the offering period. We discontinued our ESPP plan at the beginning of 2009. At January 3, 2009, ESPP participants had accumulated $132,000 to purchase our common stock. Employees purchased 342,561 shares in 2009, 236,847 shares in 2008 and 68,670 shares in 2007 under this plan.
(11) Commitments and Contingencies
On April 25, 2008, a lawsuit was filed against one of our subsidiaries in Superior Court in Santa Clara County, California by one of our customers. The complaint asserted various claims related to products liability, breach of warranty, concealment, intentional misrepresentation and negligent misrepresentation and sought class certification. The complaint alleged that products sold by us prior to 2006 had a unique propensity to develop mold, alleged that the plaintiff suffered adverse health effects, and sought various forms of legal and equitable relief, including without limitation unspecified damages, punitive and exemplary damages, attorneys’ fees and costs, and injunctive relief. We removed the case to the U.S. District Court for the Northern District of California. On September 30, 2008, the Court granted our motion to dismiss and strike the purported class action claims, and allowed plaintiff leave to amend the complaint. On October 30, 2008, plaintiff and additional named plainti ffs filed a first amended complaint alleging facts similar to those asserted in the initial complaint and asserting additional claims, including antitrust and RICO claims. On June 5, 2009, the Court granted our motion to dismiss and strike the purported class action claims of the first amended complaint, and allowed plaintiffs leave to amend the complaint with respect to certain of the alleged claims. On July 6, 2009, plaintiffs filed a second amended complaint alleging facts similar to those asserted in the prior complaints, limiting the purported class to California and Florida residents, and asserting claims related to negligence, product liability, breach of warranty under federal and state statutes and unfair competition under state statutes. On December 4, the Court granted our motion to strike plaintiffs’ newly alleged claims and granted our motion to dismiss plaintiffs’ remaining claims, and allowed plaintiffs leave to amend only with respect to certain of the alleged claims. On January 4, 2010, plaintiffs filed a third amended complaint alleging facts similar to those asserted in the prior complaints, limiting the purported class to California and Florida residents, and asserting claims related to negligence, product liability, breach of warranty under federal and state statutes and unfair competition under state statutes. We have filed a motion to dismiss that is scheduled to be heard on April 30, 2010. As of January 2, 2010, no accrual had been established with respect to this matter as we believe that the complaint is without merit and we intend to continue to vigorously defend the claims.
On April 30, 2009, a lawsuit was filed against the Company and one of its subsidiaries in United States District Court for the Northern District of Illinois by a former employee alleging that the Company misclassified all non-California store managers as exempt from the overtime requirements of the Fair Labor Standards Act. The plaintiff further alleges that all Illinois store managers were similarly misclassified under the Illinois Minimum Wage Law. After an initial round of discovery, on July 27, 2009, plaintiff filed a motion seeking permission to send notices to all similarly situated store managers informing them that they have the right to join this potential collective action lawsuit. On December 9, 2009, the Court ruled that plaintiff is permitted to send notice only to certain existing and former store managers within the State of Illinois inviting them to join the case. The opt-in period for potential class members to join the case expires on March 15, 2010. We believe that all store managers have been properly classified under both federal and state standards and we intend to vigorously defend the case. As of January 2, 2010, no accrual had been established with respect to this matter as we believe that the complaint is without merit and we intend to continue to vigorously defend the claims.
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SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements – (continued)
We are subject from time to time to various other potential claims and other legal proceedings arising in the ordinary course of our business, including primarily commercial, employment and intellectual property claims. In accordance with generally accepted accounting principles in the United States, we record a liability in our consolidated financial statements with respect to any of these other matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. In the fiscal quarter ended January 2, 2010, we recorded a liability in our consolidated financial statements of $1.6 million with respect to contingent liabilities that we determined to be both probable and reasonably estimable. We believe that we have valid defenses to the various claims that have or may be asserted against us as described above and we do not expect the outcome of these matters to have a material effect on our consolidated results of operations, financial position or cash flows beyond the liabilities that have been accrued. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us, or claims as to which we are presently unaware, could adversely impact our results of operations, financial position or cash flows. We expense legal costs as incurred.
Consumer Credit Arrangements
We refer customers seeking extended financing to certain third party financiers (“Card Servicers”). The Card Servicers, if credit is granted, establish the interest rates, fees, and all other terms and conditions of the customer’s account based on their evaluation of the creditworthiness of the customers. As the receivables are owned by the Card Servicers, at no time are the receivables purchased or acquired from us. We are not liable to the Card Servicers for our customers’ credit defaults. In connection with customer purchases financed under these arrangements, the Card Servicers pay us an amount equal to the total amount of such purchases, net of promotional related discounts. The amounts due from Card Servicers under the program were included in accounts receivable and totaled $1.2 million and $1.0 million as of January 2, 2010, and January 3, 2009, respectively.
Our agreement, under which GE Money Bank offers to our qualified customers revolving credit arrangements to finance purchases from us (the “GE Agreement”), contains certain financial covenants, including maximum leverage ratio and minimum interest coverage. We were required under the terms of the GE Agreement to provide GE Money Bank with a $1.7 million letter of credit as collateral security.
Commitments
As of January 2, 2010, we had $2.6 million of inventory purchase commitments with our suppliers as part of the normal course of business. There are a limited number of supply contracts that contain penalty provisions for failure to purchase contracted quantities. We do not currently expect any payments under these provisions.
At January 2, 2010, we had entered into one lease commitment for a future retail store location. This lease commitment provides for minimum rentals over five years, which if consummated based on current cost estimates, would approximate $0.3 million annually over the initial lease term. These minimum rentals have been included in the future minimum lease payments in Note 5, Leases.
(12) Summary of Quarterly Financial Data (unaudited)
The following is a condensed summary of actual quarterly results for 2009 and 2008 (in thousands, except per share amounts):
| | | | | | | | | | | | | |
2009 | | Fourth | | Third | | Second | | First | |
Net sales | | $ | 136,471 | | $ | 147,470 | | $ | 120,647 | | $ | 139,614 | |
Gross profit | | | 85,781 | | | 93,555 | | | 74,340 | | | 81,784 | |
Operating income | | | 7,479 | | | 11,980 | | | 952 | | | 262 | |
Net income (loss) | | | 35,309 | | | 6,899 | | | (3,961 | ) | | (2,695 | ) |
Net income (loss) per share – diluted | | | 0.69 | | | 0.15 | | | (0.09 | ) | | (0.06 | ) |
| | | | | | | | | | | | | |
2008 | | Fourth | | Third | | Second | | First | |
Net sales | | $ | 131,073 | | $ | 157,231 | | $ | 152,055 | | $ | 168,165 | |
Gross profit | | | 73,246 | | | 97,756 | | | 90,644 | | | 96,926 | |
Operating (loss) income | | | (50,217 | ) | | 2,052 | | | (10,251 | ) | | (11,042 | ) |
Net (loss) income | | | (57,436 | ) | | 983 | | | (6,591 | ) | | (7,133 | ) |
Net (loss) income per share – diluted | | | (1.30 | ) | | 0.02 | | | (0.15 | ) | | (0.16 | ) |
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this annual report. Based on this evaluation, our principal executive o fficer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Management’s Report on Internal Control Over Financial Reporting
Select Comfort’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizat ions of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Select Comfort’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our internal control over financial reporting based on the framework inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under these criteria, management concluded that our internal control over financial reporting was effective as of January 2, 2010.
Fourth Quarter Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended January 2, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information under the captions “Election of Directors,” “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for our 2010 Annual Meeting of Shareholders is incorporated herein by reference. Information concerning our executive officers is included in Part I of this report under the caption “Executive Officers of the Registrant.”
We have adopted a Code of Business Conduct applicable to our directors, officers and employees (including our principal executive officer, principal financial officer, principal accounting officer and controller). The Code of Business Conduct is available on the Investor Relations section of our Web site athttp://www.selectcomfort.com. In the event that we amend or waive any of the provisions of the Code of Business Conduct applicable to our principal executive officer, principal financial officer, principal accounting officer and controller, we intend to disclose the same on our Web site athttp://www.selectcomfort.com.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption “Executive Compensation” in our Proxy Statement for our 2010 Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information under the caption “Equity Compensation Plan Information” in Item 5 of this Annual Report on Form 10-K and the information under the caption “Stock Ownership of Management and Certain Beneficial Owners” in our Proxy Statement for our 2010 Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information under the caption “Corporate Governance” in our Proxy Statement for our 2010 Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information under the caption “Approval of Selection of Independent Registered Public Accounting Firm” in our Proxy Statement for our 2010 Annual Meeting of Shareholders is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| | |
(a) | | Consolidated Financial Statements and Schedule |
| | |
| (1) | Consolidated Balance Sheets |
| | |
| | Consolidated Statements of Operations |
| | |
| | Consolidated Statements of Shareholders’ Equity (Deficit) |
| | |
| | Consolidated Statements of Cash Flows |
| | |
| | Notes to Consolidated Financial Statements |
| | |
| | Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements and Financial Statement Schedule |
| | |
| (2) | Consolidated Financial Statement Schedule |
| | |
| | The following Report and financial statement schedule are included in this Part IV. |
| | |
| | Schedule II – Valuation and Qualifying Accounts |
| | |
| | All other schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. |
| | |
| (3) | Exhibits |
| | |
| | The exhibits to this Report are listed in the Exhibit Index below. |
We will furnish a copy of any of the exhibits referred to above at a reasonable cost to any shareholder upon receipt of a written request. Requests should be sent to: Select Comfort Corporation, Investor Relations Department, 9800 59th Avenue North, Minneapolis, Minnesota 55442.
The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(c):
| | |
| 1. | Select Comfort Corporation 1990 Omnibus Stock Option Plan, as amended and restated |
| 2. | Select Comfort Corporation 1997 Stock Incentive Plan, as amended and restated |
| 3. | Form of Incentive Stock Option Agreement under the 1990 and 1997 Stock Plans |
| 4. | Form of Performance Based Stock Option Agreement under the 1990 and 1997 Stock Plans |
| 5. | Select Comfort Corporation 2004 Stock Incentive Plan (Amended and Restated as of January 1, 2007) |
| 6. | Form of Nonstatutory Stock Option Award Agreement under the 2004 Stock Incentive Plan |
| 7. | Form of Restricted Stock Award Agreement under the 2004 Stock Incentive Plan |
| 8. | Form of Performance Stock Award Agreement under the 2004 Stock Incentive Plan |
| 9. | Form of Nonstatutory Stock Option Award Agreement (Subject to Performance Adjustment) under the 2004 Stock Incentive Plan |
| 10. | Select Comfort Profit Sharing and 401(K) Plan – 2007 Restatement |
| 11. | Select Comfort Executive Investment Plan, as Amended and Restated October 29, 2008 |
| 12. | Select Comfort Executive and Key Employee Incentive Plan |
| 13. | Employment Letter from the Company to William R. McLaughlin dated March 3, 2000 |
| 14. | Employment Letter from the Company to William R. McLaughlin dated March 2, 2006 |
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| | |
| 15. | Letter Agreement between William R. McLaughlin and Select Comfort Corporation dated as of February 21, 2008 |
| 16. | Amended and Restated Non-Statutory Stock Option Agreement between Select Comfort Corporation and William R. McLaughlin dated as of April 22, 2008 |
| 17. | Employment Letter from the Company to Kathryn V. Roedel dated March 8, 2005 |
| 18. | Employment Letter from the Company to Wendy L. Schoppert dated March 15, 2005 |
| 19. | Employment Letter from the Company to Mark A. Kimball dated April 22, 1999 |
| 20. | Summary of Executive Health Program |
| 21. | Summary of Executive Tax and Financial Planning Program |
| 22. | Amended and Restated Select Comfort Corporation Executive Severance Pay Plan |
| 23. | First Amendment to Amended and Restated Select Comfort Corporation Executive Severance Pay Plan |
| 24. | Summary of Non-Employee Director Compensation |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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 |
| (Registrant) |
| | |
Dated: February 25, 2010 | By: | /s/ William R. McLaughlin |
| | William R. McLaughlin |
| | Chief Executive Officer |
| | (principal executive officer) |
| | |
| By: | /s/ James C. Raabe |
| | James C. Raabe |
| | Chief Financial Officer |
| | (principal financial and accounting officer) |
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POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature appears below constitutes and appoints William R. McLaughlin, James C. Raabe and Mark A. Kimball, and each of them, as such person’s true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such person and in such person’s name, place and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or such person’s substitute or substitu tes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date or dates indicated.
| | | | |
NAME | | TITLE | | DATE |
| | | | |
/s/ Ervin R. Shames | | Chairman of the Board | | February 19, 2010 |
Ervin R. Shames | | | | |
| | | | |
/s/ William R. McLaughlin | | Director | | February 25, 2010 |
William R. McLaughlin | | | | |
| | | | |
/s/ Thomas J. Albani | | Director | | February 17, 2010 |
Thomas J. Albani | | | | |
| | | | |
/s/ Stephen L. Gulis, Jr. | | Director | | February 22, 2010 |
Stephen L. Gulis, Jr. | | | | |
| | | | |
/s/ Christopher P. Kirchen | | Director | | February 21, 2010 |
Christopher P. Kirchen | | | | |
| | | | |
/s/ David T. Kollat | | Director | | February 18, 2010 |
David T. Kollat | | | | |
| | | | |
/s/ Brenda J. Lauderback | | Director | | February 25, 2010 |
Brenda J. Lauderback | | | | |
| | | | |
/s/ Michael A. Peel | | Director | | February 22, 2010 |
Michael A. Peel | | | | |
| | | | |
/s/ Jean-Michel Valette | | Director | | February 21, 2010 |
Jean-Michel Valette | | | | |
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SELECT COMFORT CORPORATION
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JANUARY 2, 2010
| | | | |
Exhibit
No. | | Description | | Method Of Filing |
| | | | |
3.1 | | Third Restated Articles of Incorporation of the Company, as amended | | Incorporated by reference to Exhibit 3.1 contained in Select Comfort’s Annual Report on Form 10-K for the fiscal year ended January 1, 2000
(File No. 0-25121) |
| | | | |
3.2 | | Articles of Amendment to Third Restated Articles of Incorporation of the Company | | Incorporated by reference to Exhibit 3.1 contained in Select Comfort’s Current Report on Form 8-K filed May 16, 2006 (File No. 0-25121) |
| | | | |
3.3 | | Restated Bylaws of the Company | | Incorporated by reference to Exhibit 3.1 contained in Select Comfort’s Current Report on Form 8-K filed May 21, 2007 (File No. 0-25121) |
| | | | |
10.1 | | Net Lease Agreement dated December 3, 1993 between the Company and Opus Corporation | | Incorporated by reference to Exhibit 10.1 contained in Select Comfort’s Registration Statement on Form S-1, as amended
(Reg. No. 333-62793) |
| | | | |
10.2 | | Amendment of Lease dated August 10, 1994 between the Company and Opus Corporation | | Incorporated by reference to Exhibit 10.2 contained in the Select Comfort’s Registration Statement on Form S-1, as amended
(Reg. No. 333-62793) |
| | | | |
10.3 | | Second Amendment to Lease dated May 10, 1995 between the Company and Rushmore Plaza Partners Limited Partnership (successor to Opus Corporation) | | Incorporated by reference to Exhibit 10.3 contained in Select Comfort’s Registration Statement on Form S-1, as amended
(Reg. No. 333-62793) |
| | | | |
10.4 | | Letter Agreement dated as of October 5, 1995 between the Company and Rushmore Plaza Partners Limited Partnership | | Incorporated by reference to Exhibit 10.4 contained in Select Comfort’s Registration Statement on Form S-1, as amended
(Reg. No. 333-62793) |
| | | | |
10.5 | | Third Amendment of Lease, Assignment and Assumption of Lease and Consent dated as of January 1, 1996 among the Company, Rushmore Plaza Partners Limited Partnership and Select Comfort Direct Corporation | | Incorporated by reference to Exhibit 10.5 contained in Select Comfort’s Registration Statement on Form S-1, as amended
(Reg. No. 333-62793) |
| | | | |
10.6 | | Fourth Amendment to Lease dated June 30, 2003 between Cabot Industrial Properties, L.P. (successor to Rushmore Plaza Partners Limited Partnership) and Select Comfort Direct Corporation | | Incorporated by reference to Exhibit 10.6 contained in Select Comfort’s Annual report on Form 10-K for the fiscal year ended January 3, 2004 (File No. 0-25121) |
| | | | |
10.7 | | Fifth Amendment to Lease dated August 28, 2006 between Cabot Industrial Properties, L.P. (successor to Rushmore Plaza Partners Limited Partnership) and Select Comfort Direct Corporation | | Incorporated by reference to Exhibit 10.1 contained in Select Comfort’s Quarterly report on Form 10-Q for the quarter ended September 30, 2006 (File No. 0-25121) |
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| | | | |
Exhibit
No. | | Description | | Method Of Filing |
| | | | |
10.8 | | Lease Agreement dated as of September 19, 2002 between the Company and Blind John, LLC (as successor to Frastacky (US) Properties Limited Partnership) | | Incorporated by reference to Exhibit 10.6 contained in Select Comfort’s Annual Report on Form 10-K for the fiscal year ended December 28, 2002 (File No. 0-25121) |
| | | | |
10.9 | | Lease Agreement dated September 30, 1998 between the Company and ProLogis Development Services Incorporated | | Incorporated by reference to Exhibit 10.12 contained in Select Comfort’s Annual Report on Form 10-K for the fiscal year ended December 28, 2002 (File No. 0-25121) |
| | | | |
10.10 | | Net Lease Agreement (Build-to-Suit) by and between Opus Northwest LLC, as Landlord, and Select Comfort Corporation, as Tenant, dated July 26, 2006 | | Incorporated by reference to Exhibit 10.1 contained in Select Comfort’s Quarterly report on Form 10-Q for the quarter ended July 1, 2006 (File No. 0-25121) |
| | | | |
10.11 | | Select Comfort Corporation 1990 Omnibus Stock Option Plan, as amended and restated | | Incorporated by reference to Exhibit 10.1 contained in Select Comfort’s Quarterly Report on Form 10-Q for the quarter ended October 2, 1999 (File No. 0-25121) |
| | | | |
10.12 | | Select Comfort Corporation 1997 Stock Incentive Plan, as amended and restated | | Incorporated by reference to Exhibit 10.8 contained in Select Comfort’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (File No. 0-25121) |
| | | | |
10.13 | | Form of Incentive Stock Option Agreement under the 1990 and 1997 Stock Plans | | Incorporated by reference to Exhibit 10.16 contained in the Company’s Registration Statement on Form S-1, as amended
(Reg. No. 333-62793) |
| | | | |
10.14 | | Form of Performance Based Stock Option Agreement under the 1990 and 1997 Stock Plans | | Incorporated by reference to Exhibit 10.17 contained in Select Comfort’s Registration Statement on Form S-1, as amended
(Reg. No. 333-62793) |
| | | | |
10.15 | | Select Comfort Corporation 2004 Stock Incentive Plan (Amended and Restated as of January 1, 2007) | | Incorporated by reference to Exhibit 10.16 contained in Select Comfort’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006 (File No. 0-25121) |
| | | | |
10.16 | | Form of Nonstatutory Stock Option Award Agreement under the Select Comfort Corporation 2004 Stock Incentive Plan | | Incorporated by reference to Exhibit 10.28 contained in Select Comfort’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (File No. 0-25121) |
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| | | | |
Exhibit
No. | | Description | | Method Of Filing |
| | | | |
10.17 | | Form of Restricted Stock Award Agreement under the Select Comfort Corporation 2004 Stock Incentive Plan | | Incorporated by reference to Exhibit 10.29 contained in Select Comfort’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (File No. 0-25121) |
| | | | |
10.18 | | Form of Performance Stock Award Agreement under the Select Comfort Corporation 2004 Stock Incentive Plan | | Incorporated by reference to Exhibit 10.30 contained in Select Comfort’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (File No. 0-25121) |
| | | | |
10.19 | | Form of Nonstatutory Stock Option Award Agreement (Subject to Performance Adjustment) under the Select Comfort Corporation 2004 Stock Incentive Plan | | Incorporated by reference to Exhibit 10.20 contained in Select Comfort’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006 (File No. 0-25121) |
| | | | |
10.20 | | Select Comfort Profit Sharing and 401(K) Plan – 2007 Restatement | | Incorporated by reference to Exhibit 10.22 contained in Select Comfort’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006 (File No. 0-25121) |
| | | | |
10.21 | | Select Comfort Executive Investment Plan, as Amended and Restated October 29, 2008 | | Incorporated by reference to Exhibit 10.21 contained in Select Comfort’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009 (File No. 0-25121). |
| | | | |
10.22 | | Select Comfort Executive and Key Employee Incentive Plan | | Incorporated by reference to Exhibit 10.22 contained in Select Comfort’s Annual Report on Form 10-K for the fiscal year ended December 30, 2000 (File No. 0-25121) |
| | | | |
10.23 | | Employment Letter from the Company to William R. McLaughlin dated March 3, 2000 | | Incorporated by reference to Exhibit 10.1 contained in Select Comfort’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2000 (File No. 0-25121) |
| | | | |
10.24 | | Employment Letter from the Company to William R. McLaughlin dated March 2, 2006 | | Incorporated by reference to Exhibit 10.1 contained in Select Comfort’s Current Report on Form 8-K filed March 6, 2006 (File No. 0-25121) |
| | | | |
10.25 | | Letter Agreement between William R. McLaughlin and Select Comfort Corporation dated as of February 21, 2008 | | Incorporated by reference to Exhibit 10.1 contained in Select Comfort’s Current Report on Form 8-K filed February 27, 2008
(File No. 0-25121) |
| | | | |
10.26 | | Amended and Restated Non-Statutory Stock Option Agreement between Select Comfort Corporation and William R. McLaughlin dated as of April 22, 2008 | | Incorporated by reference to Exhibit 10.1 contained in Select Comfort’s Current Report on Form 8-K filed April 24, 2008 (File No. 0-25121) |
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| | | | |
Exhibit
No. | | Description | | Method Of Filing |
| | | | |
10.27 | | Employment Letter from the Company to Kathryn V. Roedel dated March 8, 2005 | | Incorporated by reference to Exhibit 10.17 contained in Select Comfort’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (File No. 0-25121) |
| | | | |
10.28 | | Employment Letter from the Company to Wendy L. Schoppert dated March 15, 2005 | | Incorporated by reference to Exhibit 10.18 contained in Select Comfort’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (File No. 0-25121) |
| | | | |
10.29 | | Employment Letter from the Company to Mark A. Kimball dated April 22, 1999 | | Incorporated by reference to Exhibit 10.25 contained in Select Comfort’s Annual Report on Form 10-K for the fiscal year ended January 1, 2000 (File No. 0-25121) |
| | | | |
10.30 | | Summary of Executive Health Program | | Incorporated by reference to Exhibit 10.36 contained in Select Comfort’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (File No. 0-25121) |
| | | | |
10.31 | | Summary of Executive Tax and Financial Planning Program | | Incorporated by reference to Exhibit 10.1 contained in Select Comfort’s Current Report on Form 8-K filed January 3, 2005
(File No. 0-25121) |
| | | | |
10.32 | | Amended and Restated Select Comfort Corporation Executive Severance Pay Plan, dated as of August 21, 2008 | | Incorporated by reference to Exhibit 10.1 contained in Select Comfort’s Current Report on Form 8-K filed August 21, 2008
(File No. 0-25121) |
| | | | |
10.33 | | First Amendment to Amended and Restated Select Comfort Corporation Executive Severance Pay Plan | | Incorporated by reference to Exhibit 10.34 contained in Select Comfort’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009 (File No. 0-25121). |
| | | | |
10.34 | | Summary of Non-Employee Director Compensation | | Filed herewith |
| | | | |
10.35 | | Supply Agreement dated October 3, 2006 between the Company and Supplier (1) | | Incorporated by reference to Exhibit 10.39 contained in Select Comfort’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006 (File No. 0-25121) |
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| | | | |
Exhibit
No. | | Description | | Method Of Filing |
| | | | |
10.36 | | Amended and Restated Private Label Consumer Credit Card Program Agreement dated as of December 14, 2005 between GE Money Bank and Select Comfort Corporation and Select Comfort Retail Corporation (1) | | Incorporated by reference to Exhibit 10.1 contained in Select Comfort’s Current Report on Form 8-K filed December 20, 2005
(File No. 0-25121) |
| | | | |
10.37 | | First Amendment to Amended and Restated Private Label Consumer Credit Card Program Agreement dated as of April 23, 2007 between GE Money Bank and Select Comfort Corporation and Select Comfort Retail Corporation | | Incorporated by reference to Exhibit 10.1 contained in Select Comfort’s Current Report on Form 8-K filed April 27, 2007 (File No. 0-25121) |
| | | | |
10.38 | | Second Amendment to Amended and Restated Private Label Consumer Credit Card Program Agreement dated as of February 1, 2008 between GE Money Bank and Select Comfort Corporation and Select Comfort Retail Corporation | | Incorporated by reference to Exhibit 10.3 contained in Select Comfort’s Current Report on Form 8-K filed February 7, 2008
(File No. 0-25121) |
| | | | |
10.39 | | GE Waiver and Consent dated May 21, 2009 | | Incorporated by reference to Exhibit 10.6 contained in Select Comfort’s Current Report on Form 8-K filed May 26, 2009 (File No. 0-25121) |
| | | | |
10.40 | | Securities Purchase Agreement by and between Select Comfort Corporation and Sterling SC Investor, LLC | | Incorporated by reference to Exhibit 10.1 contained in Select Comfort’s Current Report on Form 8-K filed October 5, 2009 (File No. 0-25121) |
| | | | |
10.41 | | Guarantee by Sterling Capital Partners III, LP in favor of Select Comfort | | Incorporated by reference to Exhibit 10.2 contained in Select Comfort’s Current Report on Form 8-K filed October 5, 2009 (File No. 0-25121) |
| | | | |
10.42 | | Settlement, Mutual Termination and General Release Agreement by and between Select Comfort Corporation and Sterling SC Investor, LLC | | Incorporated by reference to Exhibit 10.3 contained in Select Comfort’s Current Report on Form 8-K filed October 5, 2009 (File No. 0-25121) |
| | | | |
10.43 | | Registration Rights Agreement by and between Select Comfort Corporation and Sterling SC Investor, LLC | | Incorporated by reference to Exhibit 10.4 contained in Select Comfort’s Current Report on Form 8-K filed October 5, 2009 (File No. 0-25121) |
| | | | |
10.44 | | Amended and Restated Credit Agreement, dated November 13, 2009, by and among Select Comfort Corporation and the Lenders party thereto, JPMorgan Chase Bank, National Association, as Administrative Agent, Bank of America, N.A., as Syndication Agent | | Incorporated by reference to Exhibit 10.1 contained in Select Comfort’s Current Report on Form 8-K filed November 16, 2009 (File No. 0-25121) |
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| | | | |
Exhibit
No. | | Description | | Method Of Filing |
| | | | |
10.45 | | Purchase Agreement, dated as of December 8, 2009, by and among Select Comfort Corporation and Piper Jaffray & Co. | | Incorporated by reference to Exhibit 1.1 contained in Select Comfort’s Current Report on Form 8-K filed December 8, 2009 (File No. 0-25121) |
| | | | |
21.1 | | Subsidiaries of the Company | | Filed herewith |
| | | | |
23.1 | | Consent of Independent Registered Public Accounting Firm | | Filed herewith |
| | | | |
24.1 | | Power of Attorney | | Included on signature page |
| | | | |
31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | | | |
31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | | | |
32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | | | |
32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| |
(1) | Confidential treatment has been granted by the Securities and Exchange Commission with respect to designated portions contained within document. Such portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities and Exchange Act of 1934, as amended. |
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SELECT COMFORT CORPORATION AND SUBSIDIARIES
Schedule II – Valuation and Qualifying Accounts
(in thousands)
| | | | | | | | | | | | | |
Description | | Balance at
Beginning
of Period | | Additions
Charged to
Costs and
Expenses | | Deductions
From Reserves | | Balance at End
of Period | |
Allowance for doubtful accounts | | | | | | | | | | | | | |
2009 | | $ | 713 | | $ | 138 | | $ | 472 | | $ | 379 | |
2008 | | | 876 | | | 814 | | | 977 | | | 713 | |
2007 | | | 529 | | | 1,035 | | | 688 | | | 876 | |
| | | | | | | | | | | | | |
Accrued sales returns | | | | | | | | | | | | | |
2009 | | $ | 2,744 | | $ | 25,920 | | $ | 25,779 | | $ | 2,885 | |
2008 | | | 3,751 | | | 34,410 | | | 35,417 | | | 2,744 | |
2007 | | | 3,907 | | | 43,716 | | | 43,872 | | | 3,751 | |
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