UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): NOVEMBER 10, 2000
SELECT COMFORT CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 0-25121 41-1597886
(State of Incorporation) (Commission File Number) (IRS Employer
Identification No.)
6105 TRENTON LANE NORTH
MINNEAPOLIS, MINNESOTA 55442
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (763) 551-7000
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
This Form 8-K/A is being filed to amend the Form 8-K filed on November 22, 2000
by Select Comfort Corporation (the "Company" or the "Registrant") to include
financial statements and proforma financial information referred to in Item 7
below relating to the Company's acquistion of SleepTec, Inc., a Delaware
corporation ("SleepTec") pursuant to an Asset Purchase Agreement dated as of
November 10, 2000.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
------------------------------------------------------------------
a. Financial statements of business acquired.
-----------------------------------------
The financial statements of SleepTec are included herein as exhibits 99.1 and
99.2.
b. Pro forma financial information.
-------------------------------
The pro forma combined financial statements are included herein as exhibits
99.3.
c. Exhibits.
--------
2.1 Asset Purchase Agreement dated as of November 10, 2000, among
SleepTec, Inc., St. Paul Venture Capital IV, LLC, St. Paul
Venture Capital V, LLC, St. Paul Venture Capital VI, LLC and
Select Comfort Corporation. (previously filed with the Securities
and Exchange Commission as an exhibit to the registrant's Report
on Form 8-K filed on November 22, 2000 and incorporated herein by
reference.)
4.1 Convertible Subordinated Debenture dated as of November 10, 2000,
among Select Comfort Corporation and SleepTec, Inc. (previously
filed with the Securities and Exchange Commission as an exhibit
to the registrant's Report on Form 8-K filed on November 22, 2000
and incorporated herein by reference.)
23.1 Consent of Independent Public Acountants for SleepTec, Inc.
99.1 Audited Financial Statements of SleepTec, Inc. as of December 31,
1999 and for the year ended December 31, 1999 and the period
August 13, 1997 (date of incorporation) to December 31, 1999.
99.2 Unaudited Interim Financial Statements of SleepTec, Inc. as of
September 30, 2000 and for the nine months ended September 30,
2000 and 1999.
99.3 Unaudited Pro Forma Condensed Combined Financial Information as
of September 30, 2000 and for the year ended January 1, 2000 and
for the nine months ended September 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SELECT COMFORT CORPORATION
(Registrant)
Dated: January 25, 2001 By: /s/ Mark A. Kimball
---------------------------------
Title: Senior Vice President
------------------------------
Exhibit 23.1
I. INDEPENDENT AUDITORS' CONSENT
We consent to incorporation by reference in Registration Statements on Form S-8
No.333-70493, No.333-79157, No.333-80755, and No.333-84329 of Select Comfort
Corporation, of our report dated March 3, 2000 appearing herein (which report
expresses an unqualified opinion and includes an explanatory paragraph relating
to the Company's ability to continue as a going concern), relating to the
balance sheet of SleepTec, Inc. as of December 31, 1999 and the related
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 1999 and for the period August 13, 1997 (date of incorporation) to
December 31, 1999.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
January 22, 2001
Exhibit 99.1
SLEEPTEC, INC. (FORMERLY AIRGONOMICS, INC.)
(A DEVELOPMENT STAGE COMPANY)
Financial Statements as of
December 31, 1999, for the Year Ended
December 31, 1999 and for the Period
August 13, 1997 (Date of Incorporation)
to December 31, 1999, and
Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
SleepTec, Inc.:
We have audited the accompanying balance sheets of SleepTec, Inc. (a development
stage company) (the "Company") as of December 31, 1999, and the related
statements of operations, cash flows and stockholders' equity for the year ended
December 31, 1999 and for the period August 13, 1997 (date of incorporation) to
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1999, and the
results of its operations and its cash flows for the year ended December 31,
1999 and for the period August 13, 1997 (date of incorporation) to December 31,
1999 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development stage
enterprise engaged in the manufacture and sale of its own line of high-quality
upholstered sleeper sofas and complementary pieces. As discussed in Note 2 to
the financial statements, the Company's recurring losses from operations raise
substantial doubt about its ability to continue as a going concern without
additional financing. Management's plans concerning these matters are also
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
March 3, 2000
Atlanta, Georgia Deloitte & Touche LLP
SLEEPTEC, INC.
(A Development Stage Company)
BALANCE SHEET
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 746,317
Trade receivables, net of allowance for doubtful
accounts of $9,000 87,666
Inventories 386,985
Other current assets 93,460
-----------
Total current assets 1,314,428
PROPERTY AND EQUIPMENT - Net 540,676
OTHER ASSETS 121,455
-----------
Total assets $ 1,976,559
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 150,521
Accrued expenses 183,551
-----------
Total current liabilities 334,072
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $.01 par value;
authorized 1,570,000 shares; outstanding 1,570,000 shares 15,700
Series B convertible preferred stock, $.01 par value;
authorized 730,000 shares; outstanding 730,000 shares 7,300
Series C convertible preferred stock, $.35 per value;
authorized 1,000,004 shares; outstanding 1,000,004 shares 10,000
Common stock, $.10 par value; authorized 4,300,000;
outstanding 333,599 shares 33,360
Paid-in capital 7,264,327
Accumulated deficit during development stage (5,688,200)
-----------
Total stockholders' equity 1,642,487
-----------
Total liabilities and stockholders' equity $ 1,976,559
===========
See notes to financial statements.
2
SLEEPTEC, INC.
(A DEVELOPMENT STAGE COMPNAY)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE
PERIOD AUGUST 13, 1997 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
- --------------------------------------------------------------------------------
PERIOD FROM
AUGUST 13, 1997
(DATE OF
INCORPORATION)TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1999
NET SALES $ 267,385 $ 267,385
COST OF GOOD SALES 588,985 588,985
------------ ------------
Gross loss 321,600 321,600
EXPENSES:
Sales and marketing 1,106,264 749,571
Engineering 1,274,285 485,059
General and administrative 2,671,552 1,821,598
Depreciation and amortization 419,010 302,000
------------ ------------
Total expenses 5,471,111 3,358,228
OTHER INCOME (EXPENSE):
Interest income 110,155 65,549
Interest expense (5,644) -
------------ ------------
Net other income (expense) 104,511 65,549
NET LOSS $ 5,688,200 $ 3,614,279
============ ============
See notes to financial statements.
3
SLEEPTEC, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD AUGUST 13, 1997 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C
CONVERTIBLE CONVERTIBLE CONVERTIBLE ACCUMULATED
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK DEFICIT DURING
----------------- --------------- --------------- --------------- PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL
BALANCE - August 13, 1997 - $ - - $ - - $ - - $ - $ - $ - $ -
Issuance of common stock,
August 21, 1997
($.10 per share) 10,000 1,000 1,000
Issuance of common stock,
November 20, 1997
($.10 per share) 290,000 29,000 29,000
Issuance of preferred stock,
December 1, 1997
($1.00 per share) 1,510,000 15,100 1,494,900 1,510,000
Stock issuance costs,
December 1, 1997 (18,298) (18,298)
Net loss, August 13, 1997 to
December 31, 1997 (303,069) (303,069)
----------------- --------------- --------------- --------------- --------- --------- -----------
BALANCE - December 31, 1997 1,510,000 15,100 300,000 30,000 1,476,602 (303,069) 1,218,633
Common stock options
exercised, January 15, 1998
($.15 per share) 2,500 250 125 375
Issuance of preferred stock,
March 1, 1998
($1.00 per share) 60,000 600 59,400 60,000
Issuance of preferred stock,
October 2, 1998
($3.10 per share) 725,806 7,258 2,242,741 2,249,999
Stock issuance costs,
October 2, 1998 (5,461) (5,461)
Issuance of preferred stock,
December 17, 1998
($3.10 per share) 4,194 42 12,959 13,001
Common stock options exercised
December 17, 1998
($.15 per share) 1,750 175 88 263
Net loss for the year ended
December 31, 1998 (1,770,852) (1,770,852)
----------------- --------------- --------------- --------------- --------- ----------- -----------
(Continued)
See notes to financial statements.
4
SLEEPTEC, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD AUGUST 13, 1997 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C
CONVERTIBLE CONVERTIBLE CONVERTIBLE ACCUMULATED
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK DEFICIT DURING
---------------- --------------- ---------------- --------------- PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL
BALANCE-December 31, 1998 1,570,000 $15,700 730,000 $7,300 304,250 $30,425 $3,786,454 $(2,073,921) $ 1,765,958
Common stock options
exercised, April 7, 1999
($.15 per share) 19,700 1,970 985 2,955
Issuance of preferred stock,
May 20, 1999
($3.50 per share) 686,275 6,863 3,493,151 3,500,014
Stock issuance costs,
May 20, 1999 (13,608) (13,608)
Common stock options
exercised August 30, 1999
($.15 per share) 1,200 120 60 180
Common stock options
exercised October 29, 1999
($.15 per share) 67 7 3 10
Common stock options
exercised December 4, 1999
($.15 per share) 8,382 838 419 1,257
Preferred C stock split
(1.45714 to 1),
December 29, 1999 313,729 3,137 (3,137)
Net loss for the year ended (3,614,279) (3,614,279)
December 31, 1999
----------------- --------------- ----------------- --------------- ---------- ----------- ----------
BALANCE-December 31, 1999 1,570,000 $15,700 730,000 $7,300 1,000,004 $10,000 333,599 $33,360 $ 7,264,32 $(5,688,200) $1,642,487
================= =============== ================= =============== ========== =========== ==========
See notes to financial statements.
5
SLEEPTEC, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE
PERIOD AUGUST 13, 1997 (DATE OF INCORPORATION)
TO DECEMBER 31, 1999
- --------------------------------------------------------------------------------
PERIOD FROM
AUGUST 13, 1997
(DATE OF
INCORPORATION) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1999
OPERATING ACTIVITIES:
Net loss $(5,688,200) $(3,614,279)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 419,134 302,000
Loss on disposal of equipment 27,860 27,860
Changes in assets and liabilities:
Trade receivables (87,666) (87,666)
Inventories (386,985) (309,079)
Other current assets (93,460) (23,003)
Other assets (121,455) (41,290)
Accounts payable 150,521 48,172
Accrued expenses 183,551 40,217
------------- ------------
Net cash used in operating activities (5,596,700) (3,657,068)
INVESTING ACTIVITIES:
Acquisition of property and equipment (987,670) (409,807)
------------- ------------
Net cash used in investing activities (987,670) (409,807)
FINANCING ACTIVITIES:
Proceeds from notes payable issued to stockholders 250,000 -
Repayment of notes payable to stockholders (250,000) -
Net proceeds from issuance of Series A
convertible preferred stock 1,551,702 -
Net proceeds from issuance of Series B
convertible preferred stock 2,257,539 -
Net proceeds from issuance of Series C
convertible preferred stock 3,486,406 3,486,406
Proceeds from stock options exercised 5,040 4,402
Proceeds from issuance of common stock 30,000 -
------------- ------------
Net cash provided by financing activities 7,330,687 3,490,808
------------- ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS 746,317 (576,067)
CASH AND CASH EQUIVALENTS:
Beginning of period - 1,322,384
------------- ------------
End of period $ 746,317 $ 746,317
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid during the period for interest $ 5,644 $ -
See notes to financial statements.
6
SLEEPTEC, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE
PERIOD AUGUST 13, 1997 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE COMPANY
ORGANIZATION - SleepTec, Inc. (the "Company") was originally incorporated
in Delaware on August 13, 1997 as Airgonomics, Inc. On November 4, 1998,
the Board adopted a resolution to change the Company name to SleepTec,
Inc., which was officially registered on January 22, 1999. The Company is
in the business of manufacturing and selling its own line of high-quality
upholstered sleeper sofas and complementary pieces. The Company has been in
the development stage since its formation. It has primarily been engaged in
research and development activities to develop, produce, and market
proprietary applications of various air chamber, pump, and valve
technology. As of December 31, 1999, the Company has developed the SleepTec
system, a proprietary design for a sleeper sofa that offers an
11-inch-thick air chamber mattress in an easy-to-use system. The Company
has developed a premier product line around the SleepTec system marketed
under the LUXFOR brand name, a popular-priced product line marketed under
the Belador brand name and a private label program marketed under the
SELECT COMFORT brand name.
2. DEVELOPMENT STAGE COMPANY
The Company is in the development stage and, to date, operations have
commenced but there has been no significant revenue, and the Company has
incurred expenses and has sustained losses. Consequently, its operations
are subject to all of the risks inherent in the establishment of a new
business enterprise. For the period August 13, 1997 (date of incorporation)
through December 31, 1999, the Company has accumulated a deficit of
$5,688,200. These factors raise substantial doubt about the Company's
ability to continue as a going concern without additional financing. The
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
The Company had $746,317 of cash and cash equivalents at December 31, 1999.
Additionally, on February 24, 2000, the Company received a $1,000,000
convertible promissory note, with interest payable at 10% per year, from a
shareholder. The note is due upon the closing of the offering by the
Company of Series D Convertible Preferred Stock resulting in a net receipt
of cash proceeds of at least $5 million.
The Company is actively seeking to raise an additional $6 million through
issuance of Series D Convertible Preferred Stock by May 2000. The Company's
strategy is to continue to build retail distribution primarily through
traditional furniture retailers and private label programs and to license
its technology for distribution outside the United States. The Company will
introduce a third product line at the April Furniture Show in High Point,
North Carolina, which will expand its product offering to achieve lower
retail price points. The Company is also opening a facility to assemble
SleepTec systems to reduce product cost, improve product quality, and
ensure adequate capacity to meet the expectations of its customers.
However, there can be no assurance that these efforts will be successful
and bring the Company to the point of profitability.
3. SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR - The Company's fiscal year ends on December 31.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of income and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS - Cash equivalents are short-term investments
with original maturities of three months or less. Cash equivalents at
December 31, 1999 include an overnight sweep investment in U.S.-backed
securities that matured on January 3, 2000 with a carrying value (which
approximates fair value) of $728,243.
TRADE RECEIVABLES - The Company provides an allowance for doubtful debts
for all receivables outstanding greater than 90 days as of year-end.
INVENTORIES - Inventories are carried at the lower of cost or market under
the first-in, first-out method. All inventories maintained at the Company's
headquarters and showrooms have been fully reserved.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed using the straight-line
method (midyear convention rules) over the estimated useful lives of the
related assets, principally two to five years.
The Company has purchased tooling that consists primarily of molds used to
manufacture its products, which is being depreciated over an estimated
useful life of two years. Amortization of leasehold improvements is
computed using the straight-line method over the primary lease term.
REVENUE RECOGNITION - Revenue is recognized at the time of product shipment
to customers.
RESEARCH AND DEVELOPMENT - Research and development costs are charged to
operations as incurred.
INCOME TAXES - Deferred income taxes reflect the impact of temporary
differences between the amounts of assets and liabilities recognized for
financial reporting purposes and the amounts recognized for tax purposes as
well as loss carryforwards. These deferred income taxes are measured using
the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. A valuation allowance reduces deferred tax assets
when it is "more likely than not" that some portion or all of the deferred
tax assets will not be realized.
STOCK OPTIONS - Statement of Financial Accounting Standards No. 123 ("SFAS
No. 123"), ACCOUNTING FOR STOCK-BASED COMPENSATION, defines a
fair-value-based method of accounting for an employee stock option or
similar equity instrument. This statement gives entities a choice of
recognizing related compensation expense by adopting the fair value method
or to measure compensation using the intrinsic value approach under
Accounting Principles Board ("APB") Opinion 25. The Company has elected to
use the measurement method prescribed by APB Opinion 25 for employee stock
options.
8
NEWLY ISSUED ACCOUNTING STANDARDS - In June 1998, the FASB issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This
statement establishes accounting and reporting standards for derivative
instruments. In June 1999, the FASB issued SFAS No. 137, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE
DATE OF FASB STATEMENT NO. 133. This statement changed the effective date
for SFAS No. 133 to be for fiscal years beginning after June 15, 2000. This
statement will be implemented in fiscal 2001.
4. INVENTORIES
Inventories at December 31, 1999 consisted of the following:
1999
Raw Materials $ 399,366
Finished Goods 96,796
----------
496,162
Less: Inventory valuation reserves (109,177)
----------
$ 386,985
==========
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 consisted of the following:
1999
Tooling $ 531,625
Computer and telephone equipment 127,593
ERP software 82,001
CAD software 37,662
Furniture and equipment 66,315
Leasehold improvements 40,267
----------
885,463
Less accumulated depreciation and amortization 344,787
----------
$ 540,676
==========
9
6. OTHER ASSETS
Other assets at December 31, 1999 consisted of the following:
1999
Current:
Prepaid rent $ 63,286
Insurance 12,915
Rent deposits 9,500
Marketing materials -
Supplier deposits 7,759
----------
$ 93,460
==========
Long-term:
Prepaid rent $ 121,455
Deposits -
----------
$ 121,455
==========
7. ACCRUED EXPENSES
Accrued expenses at December 31, 1999 consisted of the following:
1999
Salaries and bonus expenses $ 57,464
Goods received, not invoiced 48,233
Relocation expense -
Professional fees 44,405
Customer deposits 33,214
Other 235
----------
$ 183,551
==========
8. INCOME TAXES
Due to the Company's operating losses, a benefit for income taxes for the
year ended December 31, 1999, was fully offset by a valuation allowance. At
December 31, 1999, the Company has available for federal and state income
tax purposes net operating loss ("NOL") carryforwards of approximately
$5,013,394 and $4,894,073, respectively, which begin to expire in 2012.
10
The tax effects of temporary differences that give rise to deferred tax
assets at December 31, 1999 are as follows:
1999
Net operating losses $1,980,030
Deferred start-up and organizational costs 150,505
Accrued liabilities 10,670
Depreciation 46,577
Inventory 51,060
Allowance for bad debt 3,567
-----------
Total gross deferred assets 2,242,409
Less valuation allowance (2,242,409)
-----------
Net deferred tax assets $ -
===========
9. LEASE COMMITMENT
The Company entered into a five-year lease for its corporate offices and
operating facilities in October 1998 with the lease commencing in January
1999. The lease provides for escalating monthly rental payments ("step
rent") throughout the term of the lease. The Company prepaid rent of
$200,000, which is being amortized over the life of the lease. Rent expense
under this lease during 1999 was $189,391 ($150,687 prior to amortization).
Future minimum payments under this lease are $159,937, $164,312, $168,909,
$173,626, and $6,209 for the years 2000 through 2004, respectively.
The Company has a 37-month renewable lease for its former corporate offices
and operating facilities, which terminates in November 2000. The lease
provided for a one-month rent holiday at inception and escalating monthly
rental payments throughout the term of the lease. Rent expense under this
lease for the year ended December 31, 1999 was $53,234. Beginning March 15,
1999, the Company entered into an agreement to sublease this property for
the remainder of the lease term. Rental income under the lease was $39,519
in 1999. Future minimum lease income under the sublease is $47,600 in 2000,
while future minimum lease payments are $49,379 through November 2000.
The Company entered into a three-year lease for showroom space at the
International Home Furnishings Market in High Point, North Carolina. Future
minimum payments under this lease are $18,643 for each of 2000 and 2001.
Additionally, the Company entered into a three-year lease in December 1999
for a manufacturing facility in Randleman, North Carolina, with the lease
commencing in April 2000. The lease provides for monthly rent of $5,875
throughout the term of the lease.
11
Future minimum payments under all such leases are as follows:
2000 $ 298,984
2001 253,455
2002 239,409
2003 191,251
2004 6,209
-----------
$ 989,308
===========
10. RELATED PARTY TRANSACTIONS
On May 11, 1999, a Director of the Company purchased 24,510 shares (35,715
post-split - see Note 11) of Series C Preferred Stock for $125,001.
A shareholder of the Company is a primary customer of the Company under a
private label program. During the year ended December 31, 1999, the Company
had revenues of $72,724 from this shareholder. As of December 31, 1999,
trade receivables due from the shareholder totaled $5,631.
11. STOCKHOLDERS' EQUITY
STOCK AGREEMENT - The Series A, Series B, and Series C Preferred Stock
carries voting rights equal to the shares of common stock that such
Preferred Stock would be convertible into at the time of conversion. The
Preferred Stock has liquidation rights and preferences to the common
stockholders, currently accrues no dividend, has no rights of redemption,
nor is it subject to mandatory redemption. Under the Stock Agreement, no
dividends may be paid to the common stockholders.
The holders of Series A, Series B, and Series C Preferred Stock have
certain optional and automatic conversion rights as follows:
o Under the optional conversion provisions, the Preferred Stockholder
may convert, with no additional consideration and at the complete
discretion of the Preferred Stockholder, preferred shares into common
shares at a predetermined conversion ratio, which has been initially
established at a 1-for-1 rate, subject to antidilution adjustments,
and as adjusted from time to time by the Company.
o Under the automatic conversion provisions, if at any time the Company
completes a qualified initial public offering (as defined), then
effective upon the closing of such offering by the Company, all
outstanding shares of Preferred Stock are automatically converted to
common stock at a 1-for-1 rate, subject to antidilution adjustments,
and as adjusted from time to time by the Company.
REGISTRATION AGREEMENT - Under the terms of a registration agreement, the
Company has granted certain registration rights with respect to its common
stock to the holders of the Company's Series A, Series B, and Series C
Convertible Preferred Stock.
STOCK SPLIT - The Series C Convertible Preferred Stock originally consisted
of 686,275 shares valued at $5.10 per share. On December 29, 1999, the
Board approved a 1.45714-to-1 stock split, which resulted in 1,000,004
shares.
12
STOCK OPTION PLAN - On November 20, 1997, the Company adopted the
Airgonomics, Inc. 1997 Stock Option Plan (the "Plan"). Under the terms of
the Plan, the Company is authorized to grant incentive stock options
("ISOs") and nonqualified options ("NSOs") to its employees, directors, and
third parties to acquire up to an aggregate of 615,000 shares of the
Company's common stock. ISOs granted to employees are subject to vesting
under a 48-month schedule and expire after 10 years. NSOs granted to other
third parties vest immediately and expire after one year. A summary of the
activity in the Company's stock option plan follows:
Weighted- Weighted-
Average Average
Exercise Contractual
Shares Price Life
Outstanding at December 31, 1998 515,500 0.16 9.4 years
Granted during the year 30,700 0.72
Exercised during the year (29,349) 0.15
Cancelled during the year (17,100) 0.35
---------
Outstanding at December 31, 1999 499,751 0.19 7.9 years
=========
Options exerciseable at December 31, 1999 237,767 $ 0.15 7.8 years
========= ========
All options in 1999 were granted at fair market value on the date of grant;
accordingly, no compensation expense was recorded for such grants. Had
compensation cost for the Company's employee stock options been determined
based on the fair value at the grant dates for awards under these plans
consistent with a method prescribed in SFAS No. 123, the Company's net loss
for the year ended December 31, 1999 would have increased by $39,890
resulting in net loss of $3,654,169. The weighted-average fair value of
options granted in 1999 was $0.07 per share, respectively, using the
Black-Scholes option-pricing model with the following assumptions:
Dividend yield 0%
Expected volatility 70%
Risk free interest rate 6.5%
Forfeiture rate 4.0%
Expected life, in years 5.1%
13
Exhibit 99.2
SLEEPTEC, INC.
Unaudited Condensed Balance Sheet
September 30, 2000
(In thousands)
Assets
--------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 118
Accounts receivable, net of allowance for doubtful 184
accounts
Inventories 961
Other current assets 132
--------------------------------------------------------------------------
Total current assets 1,395
Property and equipment - net 654
Other assets 91
--------------------------------------------------------------------------
Total assets $ 2,141
==========================================================================
Liabilities and Stockholders' Equity/(Deficit)
--------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 608
Short-term borrowings 3,600
Accrued expenses 412
--------------------------------------------------------------------------
Total current liabilities 4,620
--------------------------------------------------------------------------
Total liabilities 4,620
--------------------------------------------------------------------------
Stockholders' equity/(deficit):
Preferred stock, at par 33
Common stock, at par 37
Additional paid-in capital
Preferred Stock - PIC 7,228
Common Stock - PIC 2
Accumulated deficit (9,779)
--------------------------------------------------------------------------
Total stockholders' equity/(deficit) (2,479)
--------------------------------------------------------------------------
Total liabilities and stockholders' equity/(deficit) $ 2,141
==========================================================================
See notes to interim financial statements.
14
SLEEPTEC, INC.
Unaudited Condensed Statements of Operations
For the Nine Months Ended September 30, 2000 and 1999
(In thousands)
2000 1999
----------- -----------
Net sales $ 779 $ 120
Cost of sales 1,323 276
-------------------------------------------------------------
Gross loss (544) (156)
Operating expenses:
Sales and marketing 839 559
General and administrative 2,599 1,814
-------------------------------------------------------------
Total operating expenses 3,438 2,373
-------------------------------------------------------------
Operating loss (3,982) (2,529)
-------------------------------------------------------------
Other income (expense):
Interest income 20 43
Interest expense (128) -
Other - (3)
-------------------------------------------------------------
Other income (expense) (108) 40
-------------------------------------------------------------
Loss before income taxes (4,090) (2,489)
Income tax benefit - -
-------------------------------------------------------------
Net loss $ (4,090) $ (2,489)
=============================================================
See notes to interim financial statements.
15
SLEEPTEC, INC.
Unaudited Condensed Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999
(In thousands)
2000 1999
------------ -------------
OPERATING ACTIVITIES:
Net loss $ (4,090) $ (2,489)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 338 214
Changes in assets and liabilities:
Accounts receivable (96) (53)
Inventories (574) (325)
Other current assets (40) 11
Other assets 30 (51)
Accounts payable 457 55
Accrued expenses 228 113
- ------------------------------------------------------------------------------------
Net cash used in operating activities (3,747) (2,525)
INVESTING ACTIVITIES:
Acquisition of property and equipment (451) (392)
- ------------------------------------------------------------------------------------
Net cash used in investing activities (451) (392)
FINANCING ACTIVITIES:
Proceeds from short-term borrowings 3,600 -
Net proceeds from issuance of Seried C
convertible preferred stock (37) 3,482
Proceeds from stock options exercised 7 3
- ------------------------------------------------------------------------------------
Net cash provided by financing activities 3,570 3,485
- ------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (628) 568
CASH AND CASH EQUIVALENTS:
Beginning of period 746 1,322
- ------------------------------------------------------------------------------------
End of period $ 118 $ 1,890
====================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid during the period for interest $ - $ -
====================================================================================
See notes to interim financial statements.
16
SLEEPTEC, INC.
Notes to Unaudited Condensed Interim Financial Statements
BASIS OF PRESENTATION
The accompanying condensed financial statements of SleepTec, Inc. as of
September 30, 2000 and for the nine months ended September 30, 2000 and 1999 are
unaudited. In the opinion of SleepTec management, these statements have been
prepared on the same basis as SleepTec's audited financial statements as of and
for the year ended December 31, 1999, and include all adjustments which are of a
normal and recurring nature, necessary for the fair presentation of financial
position, results of operations, and cash flows for the interim periods. The
results of operations for the nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the entire year.
The condensed financial statements should be read in conjuction with SleepTec's
financial statements and notes thereto for the year ended December 31, 1999
included elsewhere herein.
SUBSEQUENT EVENT
SleepTec's operating results though September 30, 2000 did not meet its
management's expectations. During October 2000 SleepTec's board of directors
decided to sell certain critical assets of SleepTec to Select Comfort
Corporation and wind down the remainder of SleepTec's operations. The sale of
assets to Select Comfort was completed in November 2000 and SleepTec's
operations were substantially wound down by the end of calender 2000. SleepTec
incurred costs and losses during the fourth quarter ended December 31, 2000
related to disposal of inventory, anticipated customer allowances, abandonment
fo certain assets, settlement of lease obligations, employee severance and other
wind down activities aggregating approximately $1.2 million.
SHORT-TERM BORROWINGS
From February through September 2000, SleepTec received an aggregate of $3.6
million under short term borrowing agreements with one of its stockholders. Such
indebtedness bore interest at 10% payable at maturity and was generally due on
demand. Amounts outstanding under these agreements were convertible, under
certain circumstances, into SleepTec preferred stock.
COMMON STOCK
During the nine months ended September 30, 2000, SleepTec issued additional
options covering 92,250 shares of its common stock (all at an exercise price of
$.85 per share) and sold 56,724 shares of its common stock for aggregate
proceeds of approximately $7,000 as a result of the exercise of stock options.
17
Exhibit 99.3
SELECT COMFORT CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Effective November 10, 2000, Select Comfort Corporation (the "Company" or the
"Registrant") completed the acquisition of SleepTec, Inc., a Delaware
corporation ("SleepTec"). The acquisition of SleepTec was accounted for as a
purchase. The aggregate purchase price payable by the Company for the assets of
SleepTec consists of (i) a non-interest-bearing subordinated convertible
debenture in the original principal amount of $4,000,000, due November 10, 2005
and convertible at any time into shares of the Company's common stock at the
rate of $5.50 per share of common stock; and (ii) $400,000 in cash. In addition,
the Company agreed to fund approximately $250,000 in a combination of cash and
equity (in the form of options to purchase shares of the Company's common stock)
payments to current and former employees of SleepTec for transition services and
severance compensation. The purchase price was determined through arm's-length
negotiations between the Company and representatives of SleepTec based primarily
upon the past and projected future stream of earnings of the SleepTec
operations. The source of the funds used to pay the purchase price was cash on
hand at the Company.
The Company made a previous $2,000,000 investment in SleepTec in May 1999 which
consisted of a 15.7% ownership stake. The investment noted in the previous
paragraph was accounted for as a step acquisition.
The following unaudited pro forma condensed combined financial statements are
based on the respective historical consolidated financial statements and the
notes thereto of the Company and SleepTec. For consistency of presentation the
year ended December 31, 1999 for SleepTec has been described as January 1, 2000.
The unaudited pro forma condensed combined balance sheet assumes that the
acquisition took place on September 30, 2000. The unaudited pro forma condensed
combined statements of operations assume that the acquisition took place on
January 3, 1999.
The unaudited pro forma condensed combined financial statements are based on the
estimates and assumptions set forth in the notes to such statements. The pro
forma adjustments made in connection with the development of the pro forma
information are preliminary and have been made solely for the purposes of
developing such pro forma information. Although management does not expect that
the final allocation will be materially different from these estimates, there
can be no assurances that such differences, if any, will not be material. The
unaudited pro forma condensed combined financial statements do not purport to be
indicative of future results or the results that would have occurred had the
acquisition taken place at the beginning of the periods presented.
These unaudited pro forma condensed combined financial statements should be read
in conjunction with the historical consolidated financial statements and related
notes thereto of the Company included in the Company's Form 10-K for the year
ended January 1, 2000, and the quarterly report on Form 10-Q for the quarter
ended September 30, 2000 and the financial statements of SleepTec included
elsewhere in this report.
18
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Pro Forma Condensed Combined Balance Sheet
September 30, 2000
(In thousands)
(Unaudited)
Historical
----------------------------
Select
Comfort Pro Forma
Assets Corporation SleepTec Adjustments Combined
- ----------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 3,109 $ 118 $ (518) 2 $ 2,709
---
Marketable securities 9,572 - - 9,572
Accounts receivable, net of allowance 648 184 (275) 3 557
---
Inventories 12,030 961 (689) 1 12,302
---
Prepaid expenses 6,729 132 (132) 1 6,729
---
Income Taxes 302 - - 302
Deferred tax assets 6,676 - - 6,676
- ----------------------------------------------------------------------------------------------------------------
Total current assets 39,066 1,395 (1,614) 38,847
Property and equipment, net 36,421 654 (110) 1 36,965
---
Deferred tax assets 11,094 - - 11,094
Other assets 2,708 91 823 4 3,622
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 89,289 $ 2,141 $ (901) $ 90,529
================================================================================================================
Liabilities and Shareholders' Equity
- ----------------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt $ 26 $ - $ - $ 26
Accounts payable 19,805 608 (699) 5 19,714
---
Accruals:
Sales returns 5,104 - - 5,104
Warranty costs 7,036 - - 7,036
Compensation, taxes and benefits 6,020 - - 6,020
Other 5,099 4,012 (3,693) 1 5,418
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 43,090 4,620 (4,392) 43,318
Long-term debt, less current maturities 52 - 2,270 1 2,322
---
Other liabilities 3,365 - - 3,365
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 46,507 4,620 (2,122) 49,005
- ----------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, at par - 33 (33) 1 -
---
Common stock, at par 179 37 (37) 1 179
---
Additional paid-in capital
Preferred Stock - PIC - 7,228 (7,228) 1 -
---
Common Stock - PIC 79,328 2 (2) 1 79,328
---
Accumulated deficit (36,725) (9,779) 8,521 1,6 (37,983)
---
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 42,782 (2,479) 1,221 41,524
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 89,289 $ 2,141 $ (901) $ 90,529
================================================================================================================
See notes to pro forma financial statements.
19
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Pro Forma Condensed Combined Statement of Operations
For the Nine Months Ended September 30, 2000
(In thousands except share and per share amounts)
(Unaudited)
Historical
----------------------------
Select
Comfort Pro Forma
Corporation SleepTec Adjustments Combined
-------------- ----------- ------------- ------------
Net sales $ 206,002 $ 779 $ (377) 7 $ 206,404
---
Cost of sales 73,903 1,323 (377) 7 74,849
---
- ---------------------------------------------------------------------------------------------------------------
Gross margin 132,099 (544) - 131,555
Operating expenses:
Sales and marketing 128,196 839 - 129,035
General and administrative 22,830 2,599 219 8 25,648
- ----------------------------------------------------------------------------------------------------------------
Total operating expenses 151,026 3,438 219 154,683
- ----------------------------------------------------------------------------------------------------------------
Operating loss (18,927) (3,982) (219) (23,128)
- ----------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 937 20 - 957
Interest expense (6) (128) (260) 9 (394)
---
Other, net (114) - - (114)
- ----------------------------------------------------------------------------------------------------------------
Other income, net 817 (108) (260) 449
- ----------------------------------------------------------------------------------------------------------------
Loss before income taxes (18,110) (4,090) (479) (22,679)
Income tax benefit (6,701) - (168) 10 (6,869)
- ----------------------------------------------------------------------------------------------------------------
Net loss $ (11,409) $ (4,090) $ (311) $ (15,810)
================================================================================================================
Net loss per share:
Basic and Diluted $ (0.64) $ (0.89)
============== ============
Weighted average shares:
Basic and Diluted 17,715,000 17,715,000
============== ============
See notes to pro forma financial statements.
20
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Pro Forma Condensed Combined Statement of Operations
For the Year Ended January 1, 2000
(In thousands except share and per share amounts)
(Unaudited)
Historical
----------------------------
Select
Comfort Pro Forma
Corporation SleepTec Adjustments Combined
-------------- ------------ ------------ ------------
Net sales $ 273,767 $ 267 $ (23) 7 $ 274,011
---
Cost of sales 95,107 589 (23) 95,673
7
- --------------------------------------------------------------------------------------------------------------
Gross margin 178,660 (322) - 178,338
Operating expenses:
Sales and marketing 162,742 1,235 - 163,977
General and administrative 29,213 2,124 292 8 31,629
---
Store Closings 1,498 - - 1,498
- --------------------------------------------------------------------------------------------------------------
Total operating expenses 193,453 3,359 292 197,104
- --------------------------------------------------------------------------------------------------------------
Operating loss (14,793) (3,681) (292) (18,766)
- --------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 1,956 66 - 2,022
Interest expense (69) - (346) 9 (415)
---
Other, net (116) - - (116)
- --------------------------------------------------------------------------------------------------------------
Other income, net 1,771 66 (346) 1,491
- --------------------------------------------------------------------------------------------------------------
Loss before income taxes (13,022) (3,615) (638) (17,275)
Income tax benefit (4,818) - (223) 10 (5,035)
- --------------------------------------------------------------------------------------------------------------
Net loss $ (8,204) $ (3,615) $ (415) $ (12,240)
==============================================================================================================
Net loss per share:
Basic and Diluted $ (0.45) $ (0.67)
============== ==============
Weighted average shares:
Basic and Diluted 18,299,728 18,299,728
============== ==============
See notes to pro forma financial statements.
21
SELECT COMFORT CORPORATION
Notes to Unaudited Proforma Condensed Combined Financial Statements
(In thousands)
(1) The acquisition of SleepTec has been accounted for as a purchase. The
Company purchased only certain assets of SleepTec for a $4,000
non-interest-bearing subordinated convertible debenture and $400 in
cash. The debenture was valued based on its net cash flows using a 12%
discount rate and a five year term. As such, the total purchase price
has been allocated to those certain assets based on their relative fair
values as of the closing date.
Purchase cost of assets $2,670
Transaction costs 318
Remaining15.7% investment in SleepTec dated May 1999 742
--------
Total purchase cost $3,730
Value of net assets acquired 866
--------
Excess of purchase cost over net value of assets acquired $2,864
========
Allocated to:
Inventory $ 272
Property, plant & equipment 544
Patents/Trademarks 50
--------
Total $ 866
========
Represents valuation of assets acquired, elimination of asset, liability
and equity balances not acquired.
(2) Reflects $400 reduction in cash balance resulting from purchase.
SleepTec balance is eliminated.
(3) Reflects elimination of intercompany receivable balance ($91).
SleepTec balance is eliminated.
(4) Reflects elimination of previous investment in SleepTec ($2,000),
recording of patent/trademark balances ($50) and goodwill ($2,864).
SleepTec balance is eliminated.
(5) Reflects elimination of intercompany payable balance ($91).
SleepTec balance is eliminated.
(6) Represents Company's 15.7% portion of equity loss in SleepTec ($1,051)
occurring prior to this transaction and impact of amortization of
goodwill ($207).
(7) Elimination of intercompany sales and cost of sales.
(8) Amortization of goodwill ($215 and $287) and of patents/trademarks ($4
and $5) for the nine months ended September 30, 2000 and for the year
ended January 1, 2000, respectively.
22
(9) Amortization of debt discount related to convertible debenture.
(10) Reflects the tax effect of the pro forma adjustments at an incremental
tax rate of 35%.
23