UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended April 1, 2000
COMMISSION FILE NO. 0-25121
--------------------
SELECT COMFORT CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1597886
(State or other jurisdiction of (I.R.S. Employer
corporation or organization) Identification No.)
10400 VIKING DRIVE, SUITE 400
MINNEAPOLIS, MINNESOTA 55344
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (952) 918-3000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
As of April 1, 2000, 17,788,216 shares of Common Stock of the Registrant
were outstanding.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
INDEX
Page No.
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
April 1, 2000 and January 1, 2000................................... 3
Consolidated Statements of Operations
for the Three Months ended April 1, 2000
and April 3, 1999................................................... 4
Consolidated Statements of Cash Flows
for the Three Months ended April 1, 2000
and April 3, 1999................................................... 5
Notes to Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......... 14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings................................................. 15
Item 2. Changes in Securities and Use of Proceeds......................... 15
Item 3. Defaults Upon Senior Securities................................... 15
Item 4. Submission of Matters to a Vote of Security Holders............... 15
Item 5. Other Information................................................. 15
Item 6. Exhibits and Reports on Form 8-K.................................. 16
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
APRIL 1, JANUARY 1,
ASSETS 2000 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 4,692 $ 7,441
Marketable securities 22,112 20,129
Accounts receivable, net of allowance for doubtful accounts
of $319, and $305, respectively 612 1,056
Inventories (note 2) 11,768 11,451
Prepaid expenses 4,693 4,821
Income taxes 391 2,579
Deferred tax assets 6,862 6,639
------------ ------------
Total current assets 51,130 54,116
Property and equipment, net 36,174 34,823
Deferred tax assets 5,701 4,248
Other assets 2,704 2,678
------------ ------------
Total assets $ 95,709 $ 95,865
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 30 $ 51
Accounts payable 16,434 15,911
Accruals:
Sales returns 6,430 5,880
Warranty costs 6,700 5,841
Compensation, taxes and benefits 6,342 6,678
Other 5,479 5,285
------------ ------------
Total current liabilities 41,415 39,646
Long-term debt, less current maturities 25 36
Other liabilities 3,154 2,809
------------ ------------
Total liabilities 44,594 42,491
------------ ------------
Shareholders' equity:
Undesignated preferred stock; 5,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, $.01 par value; 95,000,000 shares
authorized, 17,788,216 and 17,713,247 shares
issued and outstanding, respectively 178 177
Additional paid-in capital 79,035 78,513
Accumulated deficit (28,098) (25,316)
------------ ------------
Total shareholders' equity 51,115 53,374
------------ ------------
Total liabilities and shareholders' equity $ 95,709 $ 95,865
============ ============
See accompanying notes to consolidated financial statements.
3
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
-----------------------
APRIL 1, APRIL 3,
2000 1999
---------- -----------
Net sales $ 76,159 $ 71,632
Cost of sales 27,052 24,547
---------- -----------
Gross margin 49,107 47,085
---------- -----------
Operating expenses:
Sales and marketing 45,396 40,488
General and administrative 8,485 5,219
---------- -----------
Total operating expenses 53,881 45,707
---------- -----------
Operating income (loss) (4,774) 1,378
---------- -----------
Other income (expense):
Interest income 375 539
Interest expense (2) (34)
Other, net (15) 3
---------- -----------
Other income (expense), net 358 508
---------- -----------
Income (loss) before income taxes (4,416) 1,886
Income tax expense (benefit) (1,634) 698
---------- -----------
Net income (loss) $ (2,782) $ 1,188
========== ===========
Net income (loss) per share (note 3) - diluted $ (0.16) $ 0.06
========== ===========
Weighted average share - diluted 17,753 20,348
========== ===========
See accompanying notes to consolidated financial statements.
4
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
------------------------
APRIL 1, APRIL 3,
2000 1999
----------- -----------
Cash flows from operating activities:
Net income (loss) $ (2,782) $ 1,188
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 2,046 1,400
Loss on disposal of assets 69 -
Deferred tax assets (1,667) (290)
Change in operating assets and liabilities:
Accounts receivable, net 444 (1,034)
Inventories (317) (228)
Prepaid expenses 128 (774)
Income taxes 2,188 190
Accounts payable 523 687
Accrued sales returns 550 (328)
Accrued warranty costs 859 538
Accrued compensation, taxes and benefits (69) (727)
Other accrued liabilities 194 (75)
Other assets (26) (2)
Other liabilities 345 271
----------- -----------
Net cash provided by operating activities 2,485 816
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (3,467) (2,774)
Investment in marketable securities (1,983) -
----------- -----------
Net cash used in investing activities (5,450) (2,774)
----------- -----------
Cash flows from financing activities:
Principal payments on debt (32) (267)
Proceeds from issuance of common stock 248 1,087
----------- -----------
Net cash provided by financing activities 216 820
----------- -----------
Decrease in cash and cash equivalents (2,749) (1,138)
Cash and cash equivalents, at beginning of period 7,441 45,561
----------- -----------
Cash and cash equivalents, at end of period $ 4,692 $ 44,423
=========== ===========
See accompanying notes to consolidated financial statements.
5
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements for the three months ended April 1, 2000
and April 3, 1999 of Select Comfort Corporation and subsidiaries ("Select
Comfort" or the "Company"), have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
and reflect, in the opinion of management, all normal recurring adjustments
necessary to present fairly the financial position of the Company as of April 1,
2000 and January 1, 2000 and the results of operations and cash flow for the
periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
management believes the disclosures are adequate to make the information
presented not misleading. These consolidated financial statements should be read
in conjunction with the Company's most recent audited consolidated financial
statements and related notes included in the Company's Annual Report to
Shareholders and its Form 10-K for the fiscal year ended January 1, 2000.
Operating results for the Company on a quarterly basis may not be indicative of
operating results for the full year.
During 1999 the Securities and Exchange Commission issued Staff Accounting
Bulletin No 101, "Revenue Recognition in Financial Statements" (SAB 101). The
SEC delayed the implementation date of SAB 101 until the second quarter of 2000.
The Company is analyzing the impact of SAB 101 which is not expected to have a
material impact on the Company's consolidated financial statements.
(2) INVENTORIES
Inventories consist of the following (in thousands):
APRIL 3, 2000 JANUARY 1, 2000
--------------- -----------------
Raw materials $ 5,563 $ 5,753
Work in progress 64 59
Finished goods 6,141 5,639
--------------- -----------------
$11,768 $11,451
=============== =================
6
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) NET INCOME (LOSS) PER COMMON SHARE
The following computations reconcile net income (loss) with net income (loss)
per common share-basic and diluted (in thousands except per share amounts).
NET PER SHARE
THREE MONTHS ENDED APRIL 1, 2000 LOSS SHARES AMOUNT
-------------------------------- ----------- ----------- ------------
Net loss $(2,782)
-----------
BASIC AND DILUTED EPS
Net loss available to common shareholders $(2,782) 17,753 $(0.16)
=========== =========== ============
NET PER SHARE
THREE MONTHS ENDED APRIL 3, 1999 INCOME SHARES AMOUNT
-------------------------------- ----------- ----------- ------------
Net income $1,188
-----------
BASIC EPS
Net income available to common shareholders $1,188 18,526 $0.06
----------- ----------- ============
EFFECT OF DILUTIVE SECURITIES
Warrants - 861
Options - 961
----------- -----------
DILUTED EPS
Net income available to common shareholders plus
assumed conversions $1,188 20,348 $0.06
=========== =========== ============
(4) LITIGATION
The Company and certain of its former officers and directors have been named as
defendants in a consolidated class action lawsuit filed on behalf of Company
shareholders in U.S. District Court in Minnesota. The named plaintiffs, who
purport to act on behalf of a class of purchasers of the Company's common stock
during the period from December 4, 1998 to June 7, 1999, charge the defendants
with violations of federal securities laws. The suit alleges that the Company
and the named directors and officers failed to disclose or misrepresented
certain information concerning the Company during the class period. The
complaint does not specify an amount of damages claimed. The Company believes
that the complaint is without merit and intends to vigorously defend the claims.
The Company and the individual defendants brought a motion to dismiss all claims
on November 10, 1999. The motion was heard by a magistrate judge on December 21,
1999. On January 27, 2000, the magistrate recommended that the claims based on
Section 11 of the federal securities laws be dismissed. The magistrate
recommended that the motion to dismiss be denied with respect to the claims
based on Rule 10b-5 of the federal securities laws. In February 2000, both the
plaintiffs and the defendants formally objected to the magistrate's
recommendation. The objection was made to the United States District Court in
Minnesota. On May 12, 2000, the United States District Court in Minnesota
adopted the recommendation of the magistrate and denied the defendants' motion
to dismiss the Rule 10b-5 claims. The Court also adopted the recommendation of
the magistrate and dismissed the plaintiff's without prejudice and with leave to
amend Section 11 claims.
7
On March 31, 2000, the Company and certain of its former officers and directors
were named as defendants in a class action lawsuit filed on behalf of the
Company's shareholders in U.S. District Court in Minnesota asserting identical
factual allegations as the consolidated complaint described above. The suit
alleges claims based on Sections 11 and 12(a)(2) of the federal securities laws.
The complaint does not specify an amount of damages claimed The Company believes
this complaint is without merit and intends to vigorously defend the claims.
We are involved in various other claims, legal actions, sales tax disputes and
other complaints arising in the ordinary course of business. In the opinion of
management, any losses that may occur from these other matters are adequately
covered by insurance or are provided for in the consolidated financial
statements, and the ultimate outcome of these other matters will not have a
material effect on the consolidated financial position or results of operations
of the Company.
(5) SUBSEQUENT EVENT
In May 2000, the Company moved some of its production requirements from its
Plymouth facility to its Salt Lake City facility in order to better balance
manufacturing capacity among the Company's three plants. This move resulted in
the elimination of 77 manufacturing positions at the Plymouth facility.
8
PART I: FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto included herein. This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. You can
identify forward-looking statements by those that are not historical in nature,
particularly those that use terminology such as "may," "will," "should,"
"expects," "anticipates," "contemplates," "estimates," "believes," "plans,"
"projected," "predicts," "potential" or "continue" or the negative of these or
similar terms. These statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from the Company's
historical experience and its present expectations or projections. Important
factors known to Select Comfort that could cause such material differences are
identified and discussed in Part I, Item 1 of our Annual Report on Form 10-K for
the fiscal year ended January 1, 2000, which discussion is incorporated herein
by reference. These important factors include our ability to achieve the
objectives of our strategic plan, the level of consumer acceptance of our
products, our ability to create product and brand name awareness, effectiveness
and efficiency of our marketing and advertising, performance of our existing and
new retail stores, our ability to successfully identify and respond to emerging
trends in the mattress industry, the level of competition in the mattress
industry, general economic conditions and consumer confidence, our ability to
maintain cost-effective production and delivery of products and certain sales
tax considerations.
OVERVIEW
Select Comfort is the leading vertically integrated manufacturer, specialty
retailer and direct marketer of innovative air beds and sleep-related products.
Since the introduction of our first air bed product in 1987, management has
focused on improving our product, expanding our product line, building
manufacturing and distribution systems and growing our three distribution
channels: retail, direct marketing and e-commerce. Vertically integrated
operations and control over these complementary distribution channels gives us
direct contact with our customers and gives our customers multiple opportunities
to purchase our products. Sales generation is driven primarily by targeted
print, radio, television, and internet media that generate customer inquiries,
as well as by our retail store and internet presence.
Retail operations included 330 stores at April 1, 2000, including 33 leased
departments within larger stores and 341 stores at January 2, 1999, including 45
leased departments. We plan to open approximately 13 additional retail stores
during the remainder of 2000. From inception through April 1, 2000, we have
closed 23 stores of which 16 stores were closed in the first quarter of 2000
(four mall based stores, 12 leased departments). During the second and third
quarters of 2000, we plan to close six additional underperforming retail stores.
A significant portion of the costs associated with the store closings in 2000
was accrued in 1999.
Comparable store sales growth for the three months ended April 1, 2000 and April
3, 1999 was 0.2% and 12.8%, respectively. Comparable store sales results have
been and will continue to be influenced by a variety of factors, including
levels of awareness of our products and brand name, levels of consumer
acceptance of our existing and new products, our ability to successfully
introduce new products and product line extensions, comparable store sales
performance in prior periods, the maturation of our store base, the amount,
effectiveness and efficiency of retail advertising expenditures and promotional
activity, the amount of competitive activity, our ability to effectively
integrate our multiple distribution channels, the evolution of store operations,
including improvements in store design, the quality and tenure of store-level
managers and sales professionals, and general economic conditions and consumer
confidence.
Advertising expenditures increased from $9.0 million in 1995 to $43.4 million in
1999. Advertising costs are expensed as incurred as a component of sales and
marketing expenses, although we believe that advertising expenditures provide
significant benefits beyond the period in which they are expensed. Future
advertising expenditures will depend on the effectiveness and efficiency of the
advertising in creating awareness of our products and brand name, generating
consumer inquiries and driving consumer traffic to retail stores. Pre-opening
costs associated with new retail stores are also expensed as incurred.
9
We believe historical operating losses have been primarily the result of an
aggressive retail store opening strategy, a relatively immature store base,
significant marketing, advertising and product development expenditures, and the
development of a substantial corporate infrastructure to support future growth.
Future increases in net sales and the achievement of long-term profitability
will depend upon greater consumer awareness and acceptance of our air bed
products, improved effectiveness and efficiency of our marketing and advertising
expenditures, the opening and successful performance of new retail stores,
improvement in the performance of current stores and our ability to execute our
stated strategic initiatives. There can be no assurance that we will be able to
achieve or sustain historical sales growth rates or profitability in the future,
on a quarterly or annual basis.
Quarterly and annual operating results may fluctuate significantly as a result
of a variety of factors, including increases or decreases in comparable store
sales, the timing, amount and effectiveness of advertising expenditures, any
changes in return rates, the timing of new store openings and related expenses,
competitive factors, net sales contributed by new stores, any disruptions in
third-party delivery services and general economic conditions and consumer
confidence. Our business is also subject to some seasonal influences, with
heavier concentrations of sales during the fourth quarter holiday season due to
increased mall traffic.
A substantial portion of operating expenses is related to sales and marketing
expenses, including costs associated with opening new stores, operating existing
stores and advertising expenditures. The level of such spending cannot be
adjusted quickly and is based, in significant part, on expectations of future
customer inquiries and net sales. Furthermore, a substantial portion of net
sales is often realized in the last month of a quarter with such net sales
frequently concentrated in the last weeks or days of a quarter, due in part to
our promotional schedule. Should the Company experience a shortfall in expected
net sales or in the conversion rate of customer inquiries, we may be unable to
adjust spending in a timely manner and our business, financial condition and
operating results may be materially adversely affected. Our historical results
of operations may not be indicative of the results that may be achieved for any
future fiscal period.
At April 1, 2000, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $13.6 million expiring between the years
2003 and 2019. The Company expects that approximately $1.4 million of these
carryforwards will expire unutilized due to an Internal Revenue Code (IRC)
Section 382 limitation resulting from a prior ownership change and has,
therefore, provided a valuation allowance for this portion of the carryforwards.
The Company has not provided a valuation allowance for any other deferred tax
assets because it believes that it is more likely than not that they will be
realized.
10
LOOKING FORWARD
We are continuing to execute our strategic plan which focuses on:
o Development of an integrated approach to marketing with improved marketing
messages that are consistent across our distribution channels;
o Leveraging the profitability of our sales channels, with a particular
emphasis on retail store profitability;
o Providing in-home delivery, assembly and mattress removal across all of our
distribution channels;
o Continuous improvement of our core product line; and
o Launching the sofa sleeper product across all of our distribution channels.
Our integrated approach to marketing is being developed with testing to begin
during the third quarter of 2000. Marketing messages will be designed to be
consistent across all channels to optimize our multiple, complementary
distribution channels. These messages will focus on the key benefits provided by
our products, and will be targeted to key consumer groups.
We are developing market by market and store by store action plans focused on
improving the profitability of our retail store operations. We closed four
underperforming retail stores and 12 leased department locations during the
first quarter. During the second quarter we plan to close six additional
underperforming retail stores. A significant portion of the costs associated
with these 2000 closures was accrued in 1999. We opened four stores during the
first quarter and expect to open approximately 13 stores during the remainder of
2000 in current markets where increased store density is required to leverage
advertising expenditures. In addition, we have developed a new retail store
design with a bedroom-like setting that is more consistent with our sleep
solutions oriented brand. During the first quarter, 11 stores were remodeled to
incorporate this new design. We plan to remodel approximately 89 additional
stores during the remainder of 2000 to incorporate this new design.
In February 2000, we eliminated our road show distribution channel and
approximately 15% of our corporate and administrative positions. The road show
channel sold in markets with no retail stores and accounted for less than 3% of
sales. The Company will continue to focus on event marketing through home shows,
state fairs and similar venues. In May 2000, the Company moved some of its
production requirements from its Plymouth facility to its Salt Lake City
facility in order to better balance manufacturing capacity among the Company's
three plants. This move resulted in the elimination of 77 manufacturing
positions at the Plymouth facility.
We are currently developing plans to ultimately provide in-home delivery,
assembly and mattress removal across all of our distribution channels and
throughout the continental United States. Currently, in-home delivery and
assembly is provided through our retail channel in selected markets on a test
basis.
Our product development efforts will be focused primarily on continuous
improvement of our core line of air bed products. We believe that we have
attained a leadership position in air bed technology and intend to continue to
lead the industry in innovation.
One product line extension that we intend to launch on a staged basis to major
markets later this year is the sofa sleeper product with an air supported
mattress. This product is currently available in a limited number of our retail
sites. We believe that this sofa sleeper product represents a significant
advancement in the sofa sleeper market that could add incremental sales as well
as attract customers to our retail stores. In addition, we will be rolling out
our catalog during the second quarter of 2000.
The success of our strategy will depend on many factors including (i) the
effectiveness and efficiency of our integrated marketing strategy in creating
awareness of our products and brand name and in generating sales, (ii) our
ability to enhance the profitability of our retail stores and leased
departments, (iii) our ability to manage operating costs, (iv) our ability to
successfully launch in-home delivery, assembly and mattress removal services
nationally on a cost-effective basis, (v) our ability to successfully launch the
sofa sleeper product nationally, (vi) the levels of consumer awareness and
acceptance of the sofa sleeper product, (vii) our ability to continue to improve
our core product line and differentiate our products from competitive products,
(viii) competition in the mattress and sofa sleeper markets and (ix) general
economic factors and consumer confidence.
11
The strategic initiatives described above are directed toward improving our
long-term performance and are not expected to contribute significantly to growth
in sales and earnings, and may negatively impact earnings in 2000.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's results
of operations expressed as percentages of net sales. Percentage amounts may not
total due to rounding.
THREE MONTHS ENDED
-----------------------
APRIL 1, APRIL 3,
2000 1999
----------- -----------
Net sales 100.0% 100.0%
Cost of sales 35.5 34.3
----------- -----------
Gross margin 64.5 65.7
----------- -----------
Operating expenses:
Sales and marketing 59.6 56.5
General and administrative 11.1 7.3
----------- -----------
Total operating expenses 70.7 63.8
----------- -----------
Operating income (loss) (6.3) 1.9
Other income (expense), net 0.5 0.7
----------- -----------
Income (loss) before income taxes (5.8) 2.6
Income tax expense (benefit) (2.1) 1.0
----------- -----------
Net income (loss) (3.7)% 1.7%
=========== ===========
COMPARISON OF THREE MONTHS ENDED APRIL 1, 2000 WITH THREE MONTHS ENDED
APRIL 3, 1999
NET SALES
Net sales increased 6.3% to $76.2 million for the three months ended April 1,
2000 from $71.6 million for the three months ended April 3, 1999, primarily due
to an increase in unit sales. The increase in net sales was due primarily to (i)
a $9.6 million increase from 68 more retail stores in 2000 as compared to 1999
and (ii) a $2.6 million increase in net sales from the Company's newly developed
e-commerce channel, which increases were partially offset by (i) a $5.0 million
decrease in direct marketing sales and (ii) a $2.0 million decrease in sales
from the elimination of our roadshow distribution channel.
GROSS MARGIN
Gross margin decreased to 64.5% for the three months ended April 1, 2000 from
65.7% for the three months ended April 3, 1999 primarily due to higher sales
discounts partially offset by reductions in variable cost of sales per unit from
process and purchasing improvements.
SALES AND MARKETING
Sales and marketing expenses increased 12.1% to $45.4 million for the three
months ended April 1, 2000 from $40.5 million for the three months ended April
3, 1999, and increased as a percentage of net sales to 59.6% from 56.5% for the
comparable prior-year period. The increase in the dollar amount of sales and
marketing expenses during 1999 was primarily due to (i) the 68 additional retail
stores open in 2000 and (ii) higher commissions and freight expense related to
higher net sales, partially offset by a decrease in media spending. Sales and
marketing expenses increased as a percentage of net sales primarily due to (i)
lower direct marketing sales and (ii) selling expenses in new stores increasing
at a greater rate than net sales, partially offset by a decrease in media
spending.
12
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 62.6% to $8.5 million for the
three months ended April 1, 2000 from $5.2 million for the three months ended
April 3, 1999. The increase in general and administrative expenses was primarily
due to increased spending on infrastructure associated with growth including
information technology and product development as well as costs associated with
staffing reductions during the three months ended April 1, 2000.
OTHER INCOME (EXPENSE), NET
Other income decreased $150,000 to approximately$358,000 for the three months
ended April 1, 2000 from $508,000 in other income for the three months ended
April 3, 1999. The decrease was primarily due to lower cash levels in 2000
following repurchases of stock and capital expenditures in 1999.
INCOME TAX EXPENSE (BENEFIT)
Income tax benefit increased to $1.6 million for the three months ended April 1,
2000 from a $698,000 expense for the three months ended April 3, 1999 due to a
decrease in taxable income in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity has been the sale of equity securities. We
completed our initial public offering in December 1998, resulting in net
proceeds of $44.6 million, which have been partially used for (i) the repayment
of $15.0 million of debt, (ii) expansion of retail stores, (iii) the build-out
of our third manufacturing plant, (iv) the repurchase of 1,220,000 shares of
Company common stock for $12.7 million and (v) the development of information
technology systems. The Company had working capital of approximately $9.7
million at April 1, 2000, and $14.5 million at January 1, 2000.
Net cash provided by operating activities for the three months ended April 1,
2000 was approximately $2.5 million and consisted primarily of increases in
accounts payable and accrued liabilities and the receipt of an income tax
refund, partially offset by the net loss adjusted for non-cash expenses. Net
cash provided by operating activities for the three months ended April 3, 1999
was approximately $800,000 and consisted primarily of cash flows from operations
before non-cash expenses, partially offset by increases in accounts receivable,
inventory and prepaid expenses.
Net cash used in investing activities was approximately $5.5 million for the
three months ended April 1, 2000 and $2.8 million for the three months ended
April 3,1999. Investing activities consisted of purchases of property and
equipment for new retail stores and manufacturing facilities in both periods,
and the investment of excess cash in marketable securities with maturities in
excess of 90 days in 2000.
Net cash provided by financing activities was approximately $200,000 for the
three months ended April 1, 2000 and $800,000 for the three months ended April
3, 1999 which consisted of stock option exercises net of debt repayments.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of investments. The counterparties to the
agreements consist of government agencies and various major corporations of high
credit standing. The Company does not believe there is significant risk of
non-performance by these counterparties because the Company limits the amount of
credit exposure to any one financial institution and any one type of investment.
We believe cash generated from operations, together with existing cash balances,
will be sufficient to satisfy anticipated short-term working capital
requirements and long-term liquidity needs.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company holds securities classified as held to maturity. These securities
have maturities of less than one year that management has the ability and intent
to hold to maturity, are carried at amortized cost and have average interest
rates of 5.9%.
14
PART II: OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company and certain of its former officers and directors have been
named as defendants in a consolidated class action lawsuit filed on
behalf of Company shareholders in U.S. District Court in Minnesota.
The named plaintiffs, who purport to act on behalf of a class of
purchasers of the Company's common stock during the period from
December 4, 1998 to June 7, 1999, charge the defendants with
violations of federal securities laws. The suit alleges that the
Company and the named directors and officers failed to disclose or
misrepresented certain information concerning the Company during the
class period. The complaint does not specify an amount of damages
claimed. The Company believes that the complaint is without merit and
intends to vigorously defend the claims.
The Company and the individual defendants brought a motion to dismiss
all claims on November 10, 1999. The motion was heard by a magistrate
judge on December 21, 1999. On January 27, 2000, the magistrate
recommended that the claims based on Section 11 of the federal
securities laws be dismissed. The magistrate recommended that the
motion to dismiss be denied with respect to the claims based on Rule
10b-5 of the federal securities laws. In February 2000, both the
plaintiffs and the defendants formally objected to the magistrate's
recommendation. The objection was made to the United States District
Court in Minnesota. On May 12, 2000, the United States District Court
in Minnesota adopted the recommendation of the magistrate and denied
the defendants' motion to dismiss the Rule 10b-5 claims. The Court
also adopted the recommendation of the magistrate and dismissed the
plaintiff's without prejudice and with leave to amend Section 11
claims.
On March 31, 2000, the Company and certain of its former officers and
directors were named as defendants in a class action lawsuit filed on
behalf of the Company's shareholders in U.S. District Court in
Minnesota asserting identical factual allegations as the consolidated
complaint described above. The suit alleges claims based on Sections
11 and 12(a)(2) of the federal securities laws. The complaint does not
specify an amount of damages claimed. The Company believes this
complaint is without merit and intends to vigorously defend the
claims.
We are involved in various other claims, legal actions, sales tax
disputes and other complaints arising in the ordinary course of
business. In the opinion of management, any losses that may occur from
these other matters are adequately covered by insurance or are
provided for in the consolidated financial statements, and the
ultimate outcome of these other matters will not have a material
effect on the consolidated financial position or results of operations
of the Company.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
Not applicable.
15
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
Exhibit
Number Description
------- -----------
10.1 Employment letter dated March 3, 2000
between the Company and William R. McLaughlin.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
None.
16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SELECT COMFORT CORPORATION
/s/William R. McLaughlin
-------------------------------------
May 16, 2000 William R. McLaughlin
President and Chief
Executive Officer (principal
executive officer)
/s/James C. Raabe
-------------------------------------
James C. Raabe
Chief Financial Officer (principal
financial and accounting officer)
17
EXHIBIT INDEX
Exhibit Number Description Location
- -------------- ----------------------- -----------------------------
10.1 Employment letter dated Filed herewith electronically
March 3, 2000 between the
Company and William R.
McLaughlin
27.1 Financial Data Schedule Filed herewith electronically
18