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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________.
COMMISSION FILE NO. 0-25121
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SELECT COMFORT CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1597886
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6105 TRENTON LANE NORTH
MINNEAPOLIS, MINNESOTA 55442
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (763) 551-7000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 22, 2002, 18,449,096 shares of Common Stock of the Registrant
were outstanding, and the aggregate market value of the Common Stock of the
Registrant as of that date (based upon the last reported sale price of the
Common Stock at that date as reported by the Nasdaq National Market System),
excluding outstanding shares beneficially owned by directors and executive
officers, was $40,001,430.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific sections are referred to herein) from the
Registrant's Proxy Statement for its 2002 Annual Meeting (the "2002 Proxy
Statement").
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES. THIS DISCUSSION CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY THOSE THAT ARE NOT
HISTORICAL IN NATURE, PARTICULARLY THOSE THAT USE TERMINOLOGY SUCH AS "MAY,"
"WILL," "SHOULD," "EXPECTS," "ANTICIPATES," "CONTEMPLATES," "ESTIMATES,"
"BELIEVES," "PLANS," "PROJECTS," "PREDICTS," "POTENTIAL" OR "CONTINUE" OR THE
NEGATIVE OF THESE OR SIMILAR TERMS. THESE STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
DEPENDING ON A VARIETY OF FACTORS INCLUDING THOSE SET FORTH ABOVE IN PART I,
ITEM 1 UNDER THE HEADING TITLED "CERTAIN RISK FACTORS."
OVERVIEW
Select Comfort(R) is the leading manufacturer and retailer of premium quality,
innovativE adjustable-firmness air-beds and other sleep related products.
We generate revenue by selling our products through four complementary
distribution channels. Three of these channels, retail, direct marketing and
e-commerce, are company owned and sell directly to consumers, while our
wholesale channel sells to leading furniture retailers and the QVC shopping
channel. We record revenue at the time product is shipped to the customer,
except when mattresses are delivered and set up by our home delivery employees,
in which case revenue is recorded at the time the mattress is delivered and set
up in the home. We reduce sales at the time revenue is recognized for estimated
returns. This estimate is based on historical return rates, which are reasonably
consistent from period to period. If actual returns vary from expected rates,
revenue in future periods is adjusted, which could have a material adverse
effect on future results of operations.
The proportion of our total net sales, by dollar volume, from each of these
channels during the last three fiscal years is summarized as follows:
YEAR ENDED
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DEC. 29, DEC. 30, JAN. 1,
2001 2000 2000
--------- --------- ---------
Stores 78% 78% 72%
Direct Call Center 15% 18% 27%
E-commerce 3% 3% 1%
Wholesale 4% - -
Our Company-owned retail store locations during the last three fiscal years are
summarized as follows:
YEAR ENDED
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DEC. 29, DEC. 30, JAN. 1,
2001 2000 2000
--------- --------- ---------
Beginning of period 333 341 264
Opened 11 19 79
Closed (16) (27) (2)
--------- --------- ---------
End of period 328 333 341
========= ========= =========
Company-owned stores include leased space within 22 Bed, Bath & Beyond stores as
of December 29, 2001, 25 at December 30, 2000 and 45 at January 1, 2000. We
anticipate that the number of stores open will not change significantly in 2002.
Comparable store sales (decreased) increased by (3.8)%, 0.2% and 4.7% in 2001,
2000 and 1999, respectively. Sales volumes and comparable store sales were
negatively affected by the downturn in economic conditions during 2001 as
reflected by consumer confidence measures and lower volumes of mall traffic, and
by world events late in the year. Sales are subject to some seasonal influences,
with lower sales levels in the second quarter and heavier concentrations of
sales during the fourth quarter holiday season due to increased mall traffic.
Cost of sales consists of costs associated with purchasing materials and
manufacturing our
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products. Cost of sales also includes estimated costs to service warranty claims
of customers. This estimate is based on historical claim rates during the
warranty period. Because this estimate covers an extended period of time, a
revision of estimated claim rates could result in a significant adjustment of
estimated future costs of fulfilling warranty commitments, which could have a
material adverse effect on future results of operations. Our gross margins are
dependent on a number of factors, and may fluctuate from quarter to quarter.
These factors include the mix of products sold, the level to which we offer
promotional discounts to purchase our products, the cost of materials and
manufacturing and the mix of sales between wholesale and company owned
distribution channels. Sales directly to consumers through company owned
channels generally generate higher gross margins than sales through our
wholesale channels because we capture both the manufacturer and retailer
margins.
Sales and marketing costs include advertising and media production, other
marketing and selling materials such as brochures, videos, customer mailings and
in-store signage, sales compensation and store occupancy costs, and customer
service and shipping and delivery costs to customers. Store opening costs are
expensed as incurred and advertising costs are expensed at the time the
advertising is run. We evaluate our long-lived assets, including store
leaseholds and fixtures, based on expected cash flows through the remainder of
the lease term after considering the potential impact of planned operational
improvements and marketing programs. Expected cash flows may not be realized,
which could cause long-lived assets to become impaired in future periods and
could have a material adverse effect on future results of operations. Store
assets are written off when we believe these costs will not be recovered through
future operations.
Advertising spending during the last three fiscal years is summarized as follows
(in 000's):
YEAR ENDED
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DEC. 29, DEC. 30, JAN. 1,
2001 2000 2000
--------- --------- ---------
Advertising $36,516 $36,111 $44,446
Future advertising expenditures will depend on the effectiveness and efficiency
of the advertising in creating awareness of our products and brand name,
generating consumer inquiries and driving consumer traffic to our points of
sale. We anticipate that full year advertising spend levels in 2002 will be
slightly higher than in 2001.
General and administrative costs include all other costs not directly related to
manufacturing, selling or marketing.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, our results of
operations expressed as percentages of net sales. Percentage amounts may not
total due to rounding.
PERCENTAGE OF NET SALES
YEAR ENDED
DEC. 29, DEC. 30, JAN. 1,
2001 2000 2000
-------- -------- --------
Net sales 100.0% 100.0% 100.0%
Cost of sales 34.4 36.6 34.7
-------- -------- --------
Gross margin 65.6 63.4 65.3
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Operating expense:
Sales and marketing 59.4 61.4 59.4
General and administrative 9.5 10.8 10.7
Store closing/impairments 0.7 0.7 0.5
-------- -------- --------
Total operating expenses 69.6 73.0 70.7
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Operating loss (4.0) (9.6) (5.4)
Other income (expense), net (0.6) 0.1 0.6
-------- -------- --------
Loss before income taxes (4.6) (9.5) (4.8)
Income tax expense (benefit) 0.0 4.3 (1.8)
-------- -------- --------
Net loss (4.6)% (13.8)% (3.0)%
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For 2001, our goal was to return to profitability, driven by the following
strategic priorities:
- - Building consumer awareness,
- - Rightsizing our cost structure,
- - Expanding profitable distribution, and
- - Improving product quality, innovation and service levels.
During 2001 we implemented initiatives designed to bring our cost structure in
line with our sales volumes, with the ultimate objective of
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making our core bed business profitable at sales volumes equal to those achieved
in 2000.
These cost reduction measures included:
- - Closing one of three manufacturing plants, one of two call centers and
consolidating two administrative offices,
- - Closing over 40 under-performing stores,
- - Reducing overall staffing, including approximately 20% of field sales
support and approximately 12% of administrative staffing,
- - Discontinuing our catalog sales channel and deferring the rollout of our
sofa sleeper product,
- - Restructuring our promotional programs and developing more efficient
programs to utilize in-store signage and customer fulfillment materials,
and
- - Developing a program to resell returned products to targeted markets.
The successful implementation of these measures is a key reason why we returned
to profitability in the second half of 2001.
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 sales return rates or warranty experience, the timing of new store
openings and related expenses, net sales contributed by new stores, competitive
factors, any disruptions in supplies or third-party delivery services and
general economic conditions and consumer confidence. Furthermore, a substantial
portion of net sales is often realized in the last month of a quarter with such
net sales frequently concentrated in the last weeks or days of a quarter, due in
part to our promotional schedule. As a result, we may be unable to adjust
spending in a timely manner and our business, financial condition and operating
results may be materially adversely affected. Our historical results of
operations may not be indicative of the results that may be achieved for any
future fiscal period.
COMPARISON OF FISCAL 2001 AND FISCAL 2000
NET SALES
Net sales in 2001 decreased 3.1% to $261.7 million from $270.1 million in 2000
due primarily to a decrease in mattress unit sales. The average selling price
per mattress set declined slightly as a result of lower selling prices for
products sold to QVC and wholesale customers, slightly offset by higher average
selling prices in our core product line. The components of the decrease in net
sales dollars were (i) an $8.5 million decrease in sales from Company-owned
retail stores, including a decrease in comparable store sales of $7.7 million,
(ii) an $8.6 million decrease in direct marketing sales, offset by (iii) a $9.1
million increase in net sales from the Company's wholesale channel and (iv) $0.1
million increase from the Company's e-commerce channel.
GROSS MARGIN
Gross margin in 2001 increased to 65.6% from 63.4% in 2000 primarily due to
lower cost promotional offerings and reductions in manufacturing costs resulting
from reduced warranty costs and savings in processing returned product.
SALES AND MARKETING
Sales and marketing expenses in 2001 decreased 6.2% to $155.6 million from
$166.0 million in 2000, and decreased as a percentage of net sales to 59.4% in
2001 from 61.4% in 2000. The $9.4 million decrease was primarily due to lower
sales, reductions in media expenditures and promotional and fulfillment
materials, and reduced sales support staffing, partially offset by increases in
media production expense. The reduction in sales and marketing expenses as a
percentage of net sales was primarily due to reduced promotion and fulfillment
expenses and reduced sales support staffing, partially offset by increased media
production expenses.
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GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 15.1% to $24.8 million in 2001
from $29.2 million in 2000. The $4.4 million decrease was primarily due to
staffing reductions, reduced occupancy expense resulting from the consolidation
of our two corporate offices, and severance costs associated with a reduction in
force in 2000.
STORE CLOSINGS AND ASSET IMPAIRMENTS
Store closing and asset impairment expense in 2001 was $1.8 million compared to
$2.0 million in 2000. In 2001, the expense included $1.0 million related to
store closures and $0.8 million related primarily to the write-off of unusable
fixtures for merchandising of our sleeper sofa products and for unusable leased
space. In 2000, this expense included $1.4 million related to the relocation of
our headquarter offices and web development costs and $0.6 million related to
store closures.
OTHER INCOME (EXPENSE), NET
Other income (expense) changed $1.8 million to approximately $1.5 million of
other expense in 2001 from $0.3 million in other income in 2000. The change is
primarily due to $1.4 million of interest expense from long-term debt and lower
interest income due to lower cash levels in 2001.
INCOME TAX EXPENSE (BENEFIT)
Income tax expense decreased $11.6 million to $0 in 2001 from $11.6 million in
2000. Income tax expense decreased as a result of not recognizing an income tax
benefit from operating losses in 2001 and from the write off of net deferred tax
assets in 2000.
COMPARISON OF FISCAL 2000 AND FISCAL 1999
NET SALES
Net sales in 2000 decreased 1.3% to $270.1 million from $273.8 million in 1999.
The components of the decrease in net sales were (i) a $22.0 million increase
from the opening of 19 new retail stores during 2000 and the full year impact of
77 stores opened in 1999, (ii) a $0.4 million increase from a 0.2% increase in
comparable store sales, (iii) a $5.2 million increase in net sales from the
Company's e-commerce channel, offset by (iv) a $24.3 million decrease in direct
marketing sales and (v) a $7.0 million decrease due to the elimination of our
road show distribution channel.
GROSS MARGIN
Gross margin in 2000 decreased to 63.4% from 65.3% in 1999 primarily due to
larger discounts on promotional offerings, increased costs from processing
returned product and increased costs from the rollout of our new foundation
product, partially offset by a price increase for some of our products.
SALES AND MARKETING
Sales and marketing expenses in 2000 increased 2.0% to $166.0 million from
$162.7 million in 1999, and increased as a percentage of net sales to 61.4% in
2000 from 59.4% in 1999. The $3.3 million increase was primarily due to (i)
higher occupancy expense related primarily to rent and depreciation expense,
(ii) higher wages and compensation expense and (iii) higher freight costs. 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 and the expenses associated with the
rollout of our sofa sleeper product, partially offset by (iii) a decrease in
media spending.
GENERAL AND ADMINISTRATIVE
General and administrative expenses in 2000 were $29.2 million, equal to the
1999 expense level. Slight increases in wages and benefits expense were offset
by reductions in the use of outside services and consultants.
STORE CLOSINGS AND ASSET IMPAIRMENTS
Store closing and asset impairment expense in 2000 was $2.0 million, up from
$1.5 million in 1999. In 2000, this expense included $1.4 million related to the
relocation of our headquarter offices and web development costs and $0.6 million
related to store closures. The expense of $1.5 million in 1999 relates almost
exclusively to store closures.
OTHER INCOME (EXPENSE), NET
Other income decreased $1.4 million to approximately $0.3 million of other
income in
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2000 from $1.7 million in other income in 1999. The decrease is due to lower
cash levels affecting interest income in 2000. In addition, the recognition of
an equity loss in SleepTec following our acquisition of this business reduced
other income by $0.6 million.
INCOME TAX EXPENSE (BENEFIT)
Income tax expense increased to $11.6 million for 2000 from a benefit of $4.8
million for 1999. Income tax expense increased as a result of the establishment
of an additional $21.1 million deferred tax asset valuation allowance in the
fourth quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary source of liquidity has been the sale of securities.
Our most recent source of capital has been from the issuance of our $11.0
million convertible notes (the "Notes") in June 2001 and $5.0 million senior
secured term debt financing (the "Debt") completed in September 2001. In
addition to these financings, we generated cash from operations during 2001, and
in particular during the third and fourth quarters of 2001. As all of our assets
are pledged as collateral for the Debt and the Notes, the Company presently has
little or no ability to obtain additional debt financing. We expect current cash
balances on hand and cash generated from operations to be sufficient to meet our
liquidity needs for the foreseeable future.
Net cash provided by (used in) operating activities in 2001, 2000 and 1999 was
$0.4 million, ($10.3) million and $7.7 million. Net cash provided by operating
activities in 2001 consisted primarily of a decrease in inventories and prepaid
expenses, partially offset by the net loss adjusted for non-cash expenses and a
decrease in accounts payable and accrued sales returns. Inventory levels were
reduced in 2001 as a result of two primary activities: 1) the closure of one of
our manufacturing plants and 2) a focus on reducing supplier lead-times
resulting in lower in-stock raw material levels required at our manufacturing
plants. Prepaid expenses were reduced in 2001 as a result of lower prepaid
advertising levels, consistent with the timing and form of media placements at
the end of 2001 vs. those in place at the end of 2000. The decrease in accounts
payable in 2001 was due primarily to a decrease in the number of stores open at
the end of 2001 and due to extended payment terms being in place with some of
our key suppliers at the end of fiscal 2000. The terms with those key suppliers
had normalized at the end of 2001. The balance in our accrued sales returns in
2001 has decreased as a result of the change in our sales return policy from
90-days at the end of 2000 to 30-days at the end of 2001. The shorter return
period results in a smaller balance of sales that had not yet been returned at
the end of 2001.
Net cash used in 2000 operating activities consisted primarily of the net loss
adjusted for non-cash expenses and an increase in accounts receivable, partially
offset by a decrease in income taxes receivable and an increase in accounts
payable. The increase in accounts receivable at the end of 2000 was primarily
due to the timing of credit card settlements. Income taxes receivable decreased
as a result of the write-off of our current and deferred tax assets at the end
of 2000. Payables increased at the end of 2000 due to additional retail stores
being open as of year-end and extended payment terms with supplier, as discussed
earlier.
Net cash provided by 1999 operating activities consisted primarily of net loss
adjusted for non-cash expenses, decreases in accounts receivable and increases
in accounts payable and accrued liabilities, partially offset by increases in
inventories and income taxes receivable. The decrease in accounts receivable at
the end of 1999 was a result of a change to our consumer credit financing
program. At the end of 1998, certain cash balances were retained by the credit
provider, whereas at the end of 1999, after a new credit financing agreement was
in place, these retention amounts were no longer required and resulted in a
decrease to accounts receivable. Increases in accounts payable, accrued
liabilities and inventory balances was due primarily to an increase in the
number of retail stores open at the end of 1999 vs. 1998. Increases in income
taxes receivable was due
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primarily to a federal tax refund and the utilization of NOL carrybacks.
Net cash provided by (used in) investing activities for 2001, 2000 and 1999 was
($0.9) million, $3.7 million and ($35.8). Investing activities consisted of
purchases of property and equipment for new retail stores in all periods, and
for 1999 also included the opening of our Utah production facility. In 2001 and
2000 we liquidated $4.0 million and $16.2 million, respectively, of marketable
securities to support our continuing operations, while in 1999 we purchased
$20.1 million of marketable securities for the investment of excess cash on
hand.
Net cash provided by (used in) financing activities for 2001, 2000 and 1999 was
$15.4 million, $0.6 million and ($10.0) million, respectively. Net cash provided
by financing activities in 2001 resulted from the issuance of common stock and
from the financing of $11.0 million of convertible debt and $5.0 million of
senior secured term debt. Fees and expenses of $1.0 million were netted against
the proceeds from debt issuances. Net cash provided by financing activities in
2000 resulted from cash received from the issuance of common stock. Net cash
used in financing activities for 1999 was due to repurchases of common stock and
debt repayments, partially offset by cash received from issuance of common
stock. During 1999, the Company repurchased 1,220,000 shares of common stock for
approximately $12.7 million.
Our liquidity is impacted by minimum cash payment commitments resulting from
long-term debt outstanding and operating leases. The table below outlines those
minimum cash commitments, during the periods indicated (in thousands):
PAYMENTS DUE BY PERIOD
------------------------------------------------
LESS GREATER
THAN 1 1 - 2 3 - 4 THAN 4
TOTAL YEAR YEARS YEARS YEARS
-------- -------- -------- -------- --------
Long-term debt $ 20,033 28 49 4,598 15,358
Operating leases 82,605 15,103 14,523 25,518 27,461
-------- -------- -------- -------- --------
Total $102,638 15,131 14,572 30,116 42,819
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At December 29, 2001, we had net operating loss carryforwards ("NOLs") for
federal income tax purposes of approximately $41.2 million expiring between the
years 2003 and 2021. We have not recorded any value in our Consolidated Balance
Sheet for the potential future benefit of NOL's.
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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: April 18, 2002 By /s/ Mark A. Kimball
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Title: Senior Vice President
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