See accompanying notes to financial statements.
SELECT COMFORT
PROFIT SHARING AND 401(k) PLAN
Notes to Financial Statements
December 31, 2009 and 2008
| |
(1) | DESCRIPTION OF THE PLAN |
The following brief description of the Select Comfort (the “Company”) Profit Sharing and 401(k) Plan (the “Plan”) provides only general information. Participants should refer to the Plan agreement for a more complete description of the Plan’s provisions.
General – The Plan is a defined contribution plan covering all employees. A full-time employee is eligible on the first day of the calendar month following 30 days of employment provided the employee is age 21 or older. A part-time employee is eligible after completing one year of at least 1,000 hours of service and is age 21 or older. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”). The inception date of the Plan was January 1, 1994.
Recordkeeper and Custodian – The Plan assets are in the custody of The Prudential Insurance Company of America (“Prudential”). Prudential is the recordkeeper, custodian and trustee of the Plan.
Contributions – Each year, participants may contribute a percentage of eligible earnings, as defined by the Plan. Participants can contribute up to 50% of eligible earnings. Participants may also contribute amounts representing distributions from other qualified defined benefit or contribution plans. Participants who have attained age 50 before the end of the calendar year are eligible to make catch-up contributions. Company contributions are determined at the discretion of the Company’s Board of Directors. There were no Company discretionary contributions during 2009.
Participant Accounts – Individual accounts are maintained for each Plan participant. Each participant’s account is credited with the participant’s contributions, the Company’s discretionary contributions, if applicable, and Plan earnings.
Vesting – Participants are immediately vested in their contributions plus actual earnings thereon. Vesting in the Company’s discretionary contribution to their accounts plus actual earnings thereon is based on years of service. Participants are vested 25% upon the completion of one year, 50% after two years, 75% after three years, and fully vested after completion of four years of service, or if they have reached normal retirement age of 65, die, or become disabled.
Forfeitures – Forfeited non-vested accounts are used to either reduce Company contributions or to pay administrative expenses. The balances of forfeited non-vested accounts at December 31, 2009 and 2008 were $288,077 and $112,920, respectively. Forfeitures of non-vested amounts were used to pay Plan expenses of $22,581 and $18,600 in 2009 and 2008, respectively. In addition, forfeitures of non-vested amounts reduced 2008 Company contributions by $290,000.
Participant Loans – Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000, or 50% of their vested account balance. Loans are made on a pro-rata basis from all investment funds in which a participant’s account is invested. Loan terms range from one to five years or up to 15 years for the purchase of a primary residence. The loans are secured by the balance in the participant’s account. Loans bear interest at the prime rate plus two percentage points for loans initiated from January 1, 2001 to November 8, 2002 or, plus one percentage point for loans initiated from November 9, 2002 to December 31, 2009. Principal and interest are paid ratably through payroll deductions not less frequently than quarterly.
Participant loans are valued at their outstanding balances.
Investment Options – Upon enrollment in the Plan, participants may direct their contributions in 1% increments into any of the eleven investment funds, Company common stock or the Self-Directed Brokerage Account. Participants may modify their investment options daily.
The following descriptions summarize the investment philosophy of the various investment alternatives offered through Prudential as outlined in the fund literature:
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| Prudential Guaranteed Income Fund – Fixed-interest annuity backed by Prudential Retirement Insurance and Annuity Company’s general account. Funds are invested primarily in private placement bonds, intermediate-term bonds, and commercial mortgages. |
4
SELECT COMFORT
PROFIT SHARING AND 401(k) PLAN
Notes to Financial Statements (continued)
December 31, 2009 and 2008
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| Artio International Blend Fund – Funds are invested primarily in foreign stock markets seeking long-term growth of capital. |
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| Waddell & Reed Large Cap Growth Fund – Funds are invested primarily in equity and equity-related securities of large companies. |
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| LSV Asset Management Large Cap Value Fund– Funds are invested primarily in equity and equity-related securities of large-sized companies, including common stocks, as well as securities convertible into common stocks. |
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| Goldman Sachs Mid Cap Growth Fund – Funds are invested in common stocks of companies that the fund advisor believes offer long-term capital appreciation potential. |
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| PIMCO Core Plus Bond Fund – Funds are invested in a diversified portfolio of fixed-income securities, consistent with preservation of capital. |
| |
| Oakmark Equity & Income Fund (Class I Shares) – Funds are invested in equity and fixed-income securities that the fund advisor believes offer high current income, preservation and growth of capital. |
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| Dryden Stock Index Fund Z – Fund seeks to provide investment results that correspond to the price and yield performance of the S&P 500 index. |
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| Victory Diversified Stock Fund A – Funds are invested primarily in equity securities and securities convertible into common stock traded on U.S. exchanges and issued by large, established companies. |
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| Essex Small Cap Growth Fund – Funds are invested in common stocks of small capitalization companies that the fund advisor believes offer long-term capital appreciation potential. |
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| Wells Fargo Advantage Small Cap Val Inv – Funds are invested primarily in common stocks of small capitalization companies that the fund advisor believes are undervalued. |
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| Self-Directed Brokerage Account – This brokerage account gives the participant access to more than 8,000 mutual funds and any publicly traded stock with a share price greater than $5.00, with the exception of Select Comfort Corporation common stock. |
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| Select Comfort Corporation Common Stock – Funds are invested in shares of common stock of the Company. |
Payment of Benefits – On termination of service due to death, disability, or retirement, or for termination of service due to other reasons, a participant will generally receive a lump-sum amount equal to the value of the participant’s vested interest in his or her account, subject to certain Plan restrictions. Participants may elect to rollover their account balance into a different tax-qualified retirement plan or individual account upon separation from the Company. Participants may also withdraw some or all of their account balances prior to termination, subject to certain Plan restrictions.
Plan Expenses – The Plan allows for recordkeeping fees, legal fees, trustee’s fees, and other reasonable costs of administering the Plan to be paid out of Plan assets.
5
SELECT COMFORT
PROFIT SHARING AND 401(k) PLAN
Notes to Financial Statements (continued)
December 31, 2009 and 2008
| |
(2) | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Accounting – The accompanying financial statements of the Plan are prepared under the accrual method of accounting in accordance with U.S. generally accepted accounting principles.
Investment Valuation and Income Recognition – The Plan’s investments are stated at fair value.
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date.
Payment of Benefits – Benefit payments are recorded upon distribution.
Use of Estimates in the Preparation of Financial Statements – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of net assets available for benefits and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of change in net assets available for benefits during the reporting period. Predicting future events is inherently an imprecise activity and as such requires the use of judgment. Future results could be materially affected if actual results differ from these estimates and assumptions.
Risks and Uncertainties – The Plan provides for investment, at the participant’s option, in any combination of the Company’s common stock, investment funds, a guaranteed investment contract or a self-directed brokerage account which enables participants to invest in mutual funds or publically traded stocks with a share value of greater than $5.00. Investment securities are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of risk and uncertainty, it is reasonably possible that changes in the values of the investments will occur in the near term, and such changes could materially affect participants’ account balances and the amounts reported in the statements of net assets available for benefits and the statements of changes in net assets available for benefits.
Concentration of Market Risk – At December 31, 2009 and 2008, approximately 21% and 1%, respectively, of the Plan’s net assets were invested in the common stock of the Company. The underlying value of the Company’s common stock is entirely dependent upon the performance of the Company and the market’s evaluation of such performance. It is at least reasonably possible that changes in the fair value of the Company’s common stock could materially affect participants’ account balances and the amounts reported in the statements of net assets available for benefits and the statements of changes in net assets available for benefits.
Adoption of New Accounting Standard – In April 2009, the Financial Accounting Standards Board (“FASB”) issued updated guidance for determining when a transaction is not orderly and for estimating fair value when there has been a significant decrease in the volume and level of activity for an asset or liability. The guidance also requires disclosure of the inputs and valuation techniques used, as well as any changes in valuation techniques and inputs used during the period, to measure fair value. In addition, the presentation of the fair value hierarchy is required to be presented by major security type. The provisions of the guidance were effective for the Plan beginning in 2009. The adoption of the guidance did not have a material effect on the Plan’s financial statements.
Subsequent Events – Events that have occurred subsequent to December 31, 2009 have been evaluated through the date we filed this Form 11-K with the SEC. There have been no subsequent events that occurred during such period that would require disclosure in this Form 11-K or would be required to be recognized in the financial statements as of or for the twelve months ended December 31, 2009.
6
SELECT COMFORT
PROFIT SHARING AND 401(k) PLAN
Notes to Financial Statements (continued)
December 31, 2009 and 2008
Although it has not expressed any intent to do so, the Company has the right under the Plan to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants will become 100% vested in their accounts.
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(4) | FEDERAL INCOME TAX STATUS |
The Plan has received a favorable determination letter from the Internal Revenue Service dated January 12, 2009 indicating that the Plan is designed in accordance with applicable sections of the Internal Revenue Code (the “IRC”). Therefore, no provisions for income taxes have been made.
| �� |
(5) | GROUP ANNUITY INSURANCE CONTRACT |
The Prudential Guaranteed Income Fund (the “Fund”) offers a full guarantee on principal and interest by Prudential Retirement Insurance and Annuity Company (the “Issuer”), an affiliate of the trustee. Investment contracts held in the Fund are recorded at their contract value. Investment contracts held by a defined-contribution plan are required to be reported at fair value. As the Fund’s interest rates are adjusted to market semi-annually, on July 1 and January 1, contract value, which represents net contributions plus interest at the contract rate, approximates fair value. The contracts are fully benefit responsive.
The Fund qualifies as a fully benefit-responsive investment contract because it meets all of the following criteria:
| | |
| a. | The investment contract is effected directly between the Fund and the Issuer and prohibits the Fund from assigning or selling the contract or its proceeds to another party without the consent of the Issuer. |
| | |
| b. | The contract Issuer is obligated to (i) repay principal and interest, or (ii) apply prospective crediting rate adjustments with an assurance the crediting rate will not be less than zero. |
| | |
| c. | The terms of the investment contract require all permitted participant-initiated transactions with the Fund to occur at contract value with no conditions, limits, or restrictions. Permitted participant-initiated transactions are those transactions allowed by the underlying defined-contribution plan, such as withdrawals for benefits, loans, or transfers to other funds within the Plan. |
| | |
| d. | An event that limits the ability of the Fund to transact at contract value with the Issuer (for example, premature termination of the contracts by the Fund, plant closings, plan termination, bankruptcy, mergers, and early retirement incentives) and that also limits the ability of the Fund to transact at contract value with the participants in the Fund must be probable of not occurring. |
| | |
| e. | The Fund itself must allow participants reasonable access to their funds. |
The interest crediting rate is determined semi-annually and during 2009 and 2008 resulted in an average annual yield earned and credited to participants of approximately 2.50% and 3.35%, respectively. The minimum crediting rate is 1.50%. The interest crediting rate is calculated based upon many factors, including current economic and market conditions, the general interest rate environment, and both the expected and actual experience of a reference portfolio within the Issuer’s general account.
For information related to fair value measurements in accordance with U.S. generally accepted accounting principles, refer to Note 6, Fair Value Measurements.
There is no event that limits the ability of the Plan to transact at contract value with the Issuer. There are also no events or circumstances that would allow the Issuer to terminate the fully benefit-responsive group annuity insurance contract with the Plan and settle at an amount different from contract value.
The credit rating of the Issuer at December 31, 2009 was A2 as reported by Moody’s Investors Service.
7
SELECT COMFORT
PROFIT SHARING AND 401(k) PLAN
Notes to Financial Statements (continued)
December 31, 2009 and 2008
| |
(6) | FAIR VALUE MEASUREMENTS |
The FASB’s 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:
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• | 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. |
The fair value of participation units owned by the Plan in the pooled separate accounts are based on unit values on the last business day of the Plan year. Mutual funds are valued at the quoted net asset value on the last business day of the Plan year. Select Comfort Corporation common stock is valued at the quoted market price on the last business day of the Plan year. The fair value of the guaranteed investment contract is estimated using the current yields of similar investments in the marketplace with comparable durations and the overall creditworthiness of the Issuer.
The following table presents, by level in the fair value hierarchy, the Plan’s investments at fair value as of December 31, 2009 and 2008:
| | | | | | | | | | | | | |
2009
| | Level 1 | | Level 2 | | Level 3 | | Total | |
Pooled separate accounts | | $ | — | | $ | 22,781,647 | | $ | — | | $ | 22,781,647 | |
Select Comfort Corporation common stock | | | 9,079,232 | | | — | | | — | | | 9,079,232 | |
Guaranteed investment contract | | | — | | | — | | | 7,015,331 | | | 7,015,331 | |
Mutual funds | | | 2,860,785 | | | — | | | — | | | 2,860,785 | |
Self-directed brokerage account | | | 133,856 | | | — | | | — | | | 133,856 | |
Total participant-directed investments at fair value | | $ | 12,073,873 | | $ | 22,781,647 | | $ | 7,015,331 | | $ | 41,870,851 | |
| | | | | | | | | | | | | |
2008
| | Level 1
| | Level 2 | | Level 3 | | Total | |
Pooled separate accounts | | $ | — | | $ | 19,892,558 | | $ | — | | $ | 19,892,558 | |
Select Comfort Corporation common stock | | | 317,496 | | | — | | | — | | | 317,496 | |
Guaranteed investment contract | | | — | | | — | | | 6,591,552 | | | 6,591,552 | |
Mutual funds | | | 2,044,961 | | | — | | | — | | | 2,044,961 | |
Self-directed brokerage account | | | 98,540 | | | — | | | — | | | 98,540 | |
Total participant-directed investments at fair value | | $ | 2,460,997 | | $ | 19,892,558 | | $ | 6,591,552 | | $ | 28,945,107 | |
Level 3 – Changes in Fair Value
The following table presents a summary of changes in the fair value of the Plan’s Level 3 investments during the years ended December 31, 2009 and 2008:
| | | | | | | | |
Guaranteed Investment Contract
| | | 2009 | | 2008 | |
Balance, beginning of year | | | $ | 6,591,552 | | $ | 5,975,245 | |
Interest income | | | | 185,530 | | | 214,827 | |
Purchases, sales, issuances or settlements, net | | | | 238,249 | | | 401,480 | |
Balance, end of year
| | | $ | 7,015,331 | | $ | 6,591,552 | |
8
SELECT COMFORT
PROFIT SHARING AND 401(k) PLAN
Notes to Financial Statements (continued)
December 31, 2009 and 2008
The following presents investments that represent 5% or more of the Plan’s net assets:
| | | | | | | |
| | December 31 | |
| | 2009 | | 2008 | |
Guaranteed Investment Contract: | | | | | | | |
Prudential Guaranteed Income Fund | | $ | 7,015,331 | | $ | 6,591,552 | |
| | | | | | | |
Pooled separate accounts: | | | | | | | |
Artio International Blend Fund | | | 3,655,562 | | | 3,464,855 | |
Waddell & Reed Large Cap Growth Fund | | | 5,367,412 | | | 4,603,410 | |
LSV Asset Management Large Cap Value Fund | | | 4,432,401 | | | 3,829,320 | |
PIMCO Core Plus Bond Fund | | | 3,136,908 | | | 3,248,417 | |
Essex Small Cap Growth Fund | | | 2,399,626 | | | 1,953,374 | |
Oakmark Equity & Income Fund (Class I Shares) | | | 2,872,642 | | | 2,269,626 | |
Wells Fargo Advantage Small Cap Val Inv | | | 2,361,166 | | | 1,718,739 | |
| | | | | | | |
Select Comfort Corporation common stock | | | 9,079,232 | | | * | |
|
* Less than 5% of net assets available for benefits. | | | | | | | |
The Plan’s investments (including gains and losses on investments bought and sold, as well as held, during the year), appreciated (depreciated) in value as follows:
| | | | | | | |
| | Year ended December 31 | |
| | 2009 | | 2008 | |
Self-directed brokerage account | | $ | 66,966 | | $ | (73,911 | ) |
Pooled separate accounts | | | 4,125,102 | | | (11,220,439 | ) |
Select Comfort Corporation common stock | | | 9,561,669 | | | (3,391,667 | ) |
Mutual funds | | | 867,489 | | | (1,087,503 | ) |
| | | | | | | |
| | $ | 14,621,226 | | $ | (15,773,520 | ) |
| |
(8) | PARTY-IN-INTEREST TRANSACTIONS |
Transactions resulting in plan assets being transferred to or used by a related party are prohibited under ERISA unless a specific exemption applies. Prudential, as custodian of the Plan, and the Company are defined as parties-in-interest with respect to the Plan. The Plan invests in certain investments issued by Prudential and in common stock of the Company. These transactions are exempt under Section 408(b) of ERISA and are not considered prohibited transactions.
9
SELECT COMFORT
PROFIT SHARING AND 401(k) PLAN
Schedule H, Line 4i – Schedule of Assets (Held at End of Year)
as of December 31, 2009
| | | | | | | | | | |
(a)
| | (b) Identity of issuer or borrower | | (c) Description of investment | | Number of
shares | | | (e)
Current
value
| |
* | | Prudential Retirement Insurance and Annuity Company | | Prudential Guaranteed Income Fund | | 240,628 | | $ | 7,015,331 | |
* | | Prudential Insurance Co. Separate Account | | Artio International Blend Fund | | 185,531 | | | 3,655,562 | |
* | | Prudential Insurance Co. Separate Account | | Waddell & Reed Large Cap Growth Fund | | 464,290 | | | 5,367,412 | |
* | | Prudential Insurance Co. Separate Account | | LSV Asset Management Large Cap Value Fund | | 301,313 | | | 4,432,401 | |
* | | Prudential Insurance Co. Separate Account | | Goldman Sachs Mid Cap Growth Fund | | 65,633 | | | 917,096 | |
* | | Prudential Insurance Co. Separate Account | | PIMCO Core Plus Bond Fund | | 199,843 | | | 3,136,908 | |
* | | Prudential Insurance Co. Separate Account | | Essex Small Cap Growth Fund | | 326,114 | | | 2,399,626 | |
* | | Prudential Insurance Co. Separate Account | | Oakmark Equity & Income Fund (Class I Shares) | | 85,469 | | | 2,872,642 | |
| | Wells Fargo Funds Management LLC | | Wells Fargo Advantage Small Cap Val Inv | | 86,080 | | | 2,361,166 | |
| | Victory Capital Management Inc. | | Victory Diversified Stock Fund A | | 23,250 | | | 325,030 | |
* | | Prudential Insurance Co. JennisonDryden Mutual Fund | | Dryden Stock Index Fund Z | | 7,126 | | | 174,589 | |
* | | Prudential Financial | | Self-Directed Brokerage Account | | — | | | 133,856 | |
* | | Select Comfort Corporation | | Common stock | | 1,392,520 | | | 9,079,232 | |
| | Participant loans | | Loans secured by participant-vested balance with interest rates of 4.25% to 9.25% and maturing in 2010 to 2021 | | — | | | 1,432,314 | |
| | | | Total | | | | $ | 43,303,165 | |
* Party-in-Interest.
Note: Disclosure of cost not required for participant directed investments.
See accompanying Report of Independent Registered Public Accounting Firm.
10
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Plan Administrator has duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized.
| | |
| | SELECT COMFORT PROFIT SHARING AND 401(k) PLAN |
| | (Name of Plan) |
Date: June 28, 2010 | | |
| By: | /s/ Karen R. Richard |
| | Karen R. Richard |
| | Senior Vice President, Chief Human Resources & Strategy Officer
Plan Administrator |
11
