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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 September 28, 2002
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
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
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 September 28, 2002, 29,664,326 shares of Common Stock of the Registrant
were outstanding.
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
INDEX
Page No.
--------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 28, 2002 and December 29, 2001......................... 3
Consolidated Statements of Operations
for the Three Months and Nine Months ended
September 28, 2002 and September 29, 2001................ ....... 4
Consolidated Statements of Cash Flows
for the Nine Months ended September 28, 2002
and September 29, 2001........................................... 5
Notes to Consolidated Financial Statements................ ...... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 16
Item 4. Disclosure Controls and Procedures............................... 16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 17
Item 2. Changes in Securities and Use of Proceeds...................... 17
Item 3. Defaults Upon Senior Securities................................ 17
Item 4. Submission of Matters to a Vote of Security Holders............ 17
Item 5. Other Information.............................................. 17
Item 6. Exhibits and Reports on Form 8-K............................... 18
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SELECT COMFORT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 28, DECEMBER 29,
2002 2001
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 24,400 $ 16,375
Marketable securities - current (note 2) 12,681 -
Accounts receivable, net of allowance for doubtful
accounts of $311 2,763 2,623
Inventories (note 3) 9,163 8,086
Prepaid expenses 4,737 3,588
Deferred tax assets (note 5) 11,749 -
----------------- -----------------
Total current assets 65,493 30,672
Marketable securities - non-current (note 2) 2,877 -
Property and equipment, net 29,094 30,882
Deferred tax assets (note 5) 5,777 -
Other assets (note 4) 3,674 5,882
----------------- -----------------
Total assets $ 106,915 $ 67,436
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 11 $ 28
Accounts payable 19,905 15,216
Accruals:
Sales returns 3,538 3,624
Compensation and benefits 10,953 7,179
Taxes and withholding 2,623 3,032
Customer prepayments 3,833 1,263
Other 5,478 4,069
----------------- -----------------
Total current liabilities 46,341 34,411
Long-term debt, less current maturities (note 4) 7,385 17,109
Accrued warranty costs 3,088 5,030
Other liabilities 3,999 4,114
----------------- -----------------
Total liabilities 60,813 60,664
----------------- -----------------
Shareholders' equity: (note 4)
Undesignated preferred stock; 5,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, $.01 par value; 95,000,000 shares authorized,
29,664,326 and 18,302,307 shares issued and outstanding, respectively 297 183
Additional paid-in capital 91,492 81,687
Accumulated deficit (45,687) (75,098)
----------------- -----------------
Total shareholders' equity 46,102 6,772
----------------- -----------------
Total liabilities and shareholders' equity $ 106,915 $ 67,436
================= =================
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 NINE MONTHS ENDED
----------------------------------- -----------------------------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
2002 2001 2002 2001
----------------- ----------------- ----------------- -----------------
Net sales $ 85,056 $ 64,148 $ 243,532 $ 192,346
Cost of sales 25,539 21,192 76,610 67,231
----------------- ----------------- ----------------- -----------------
Gross margin 59,517 42,956 166,922 125,115
----------------- ----------------- ----------------- -----------------
Operating expenses:
Sales and marketing 44,575 37,048 130,183 118,616
General and administrative 9,085 5,285 24,320 18,252
Store closings and asset impairments 24 20 233 508
----------------- ----------------- ----------------- -----------------
Total operating expenses 53,684 42,353 154,736 137,376
----------------- ----------------- ----------------- -----------------
Operating income (loss) 5,833 603 12,186 (12,261)
----------------- ----------------- ----------------- -----------------
Other income (expense):
Interest income 178 59 407 174
Interest expense (278) (422) (1,401) (774)
Other, net (20) (13) (20) (155)
----------------- ----------------- ----------------- -----------------
Other income (expense), net (120) (376) (1,014) (755)
----------------- ----------------- ----------------- -----------------
Income (loss) before income taxes 5,713 227 11,172 (13,016)
Income tax (benefit) expense (note 5) (17,891) - (18,239) 115
----------------- ----------------- ----------------- -----------------
Net income (loss) $23,604 $ 227 $ 29,411 $(13,131)
================= ================= ================= =================
Net income (loss) per share (note 6 and 7) - basic $ 0.80 $ 0.01 $ 1.30 $ (0.72)
================= ================= ================= =================
Weighted average shares - basic 29,634 18,179 22,570 18,118
================= ================= ================= =================
Net income (loss) per share (note 6 and 7 - diluted $ 0.69 $ 0.01 $ 0.88 $(0.72)
================ ================= ================= =================
Weighted average shares - diluted 34,203 18,953 33,941 18,118
================ ================= ================= =================
See accompanying notes to consolidated financial statements.
4
SELECT COMFORT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
-----------------------------------
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
----------------- ----------------
Cash flows from operating activities:
Net income (loss) $ 29,411 $ (13,131)
Adjustments to reconcile net income (loss) to net cash
provided by (used in ) operating activities:
Depreciation and amortization 7,220 7,522
Loss on disposal of assets 249 539
Deferred tax assets (17,526) -
Change in operating assets and liabilities:
Accounts receivable, net (140) 2,104
Inventories (1,077) 3,468
Prepaid expenses (1,149) 412
Other assets 1,503 (1,096)
Accounts payable 4,689 1,362
Accrued sales returns (86) (1,795)
Accrued compensation and benefits 3,774 (78)
Accrued taxes and withholding (409) (114)
Accrued consumer prepayments 2,570 (531)
Other accrued liabilities 756 167
Accrued warranty costs (1,289) (616)
Other liabilities (115) 400
----------------- ----------------
Net cash provided by (used in) operating activities 28,381 (1,387)
----------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (5,203) (3,918)
Investments in marketable securities (23,605) -
Proceeds from maturity of marketable securities 8,047 3,950
----------------- ----------------
Net cash (used in) provided by investing activities (20,761) 32
----------------- ----------------
Cash flows from financing activities:
Principal payments on debt (22) (29)
Proceeds from issuance of common stock 427 281
Net proceeds from issuance of long-term debt - 15,040
----------------- ----------------
Net cash provided by financing activities 405 15,292
----------------- ----------------
Increase in cash and cash equivalents 8,025 13,937
Cash and cash equivalents, at beginning of period 16,375 1,498
----------------- ----------------
Cash and cash equivalents, at end of period $ 24,400 $ 15,435
================= ================
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 and nine months ended
September 28, 2002 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
September 28, 2002 and December 29, 2001 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 accounting principles generally accepted
in the United States of America 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
December 29, 2001. Operating results for the Company on a quarterly basis may
not be indicative of operating results for the full year. No new accounting
pronouncements have been issued that are expected to have a material effect on
the Company's financial statements.
(2) MARKETABLE SECURITIES
The Company invests its cash in investment grade highly liquid debt instruments
issued by the US government and related agencies, municipalities and in
commercial paper issued by companies with investment grade ratings. The
Company's investments have an original maturity of up to 24 months with an
average time to maturity of 130 days as of September 28, 2002. Investments with
an original maturity of greater than 90 days are classified as marketable
securities. Marketable securities with a remaining maturity of greater than one
year are classified as long-term. The Company's debt and marketable equity
securities are classified as held-to-maturity and are carried at amortized cost.
Securities held at September 28, 2002 carried an amortized cost of $15.6 million
and a fair value of $15.6 million.
(3) INVENTORIES
Inventories consist of the following (in thousands):
SEPTEMBER 28, DECEMBER 29,
2002 2001
----------------- -----------------
Raw materials $2,493 $1,824
Work in progress 116 26
Finished goods 6,554 6,236
----------------- -----------------
$9,163 $8,086
================= =================
(4) LONG-TERM DEBT
In June 2001, the Company issued $11 million in principal amount of its senior
secured notes (the "Notes") in a private placement. In addition, at the time of
the original issuance of the Notes, the holders of the Notes received warrants
to purchase 4.4 million shares of the Company's common stock for $1.00 per
share. The warrants expire in June 2006 and are subject to standard
anti-dilution protections. On June 22, 2002 the Notes were converted into 11
million shares of common stock under mandatory conversion provisions of the Note
agreement. As a result of this conversion, $9.5 million ($11 million in debt net
of $1.5 million of unamoritized deferred costs associated with debt issuance
classified as other assets on the Company's Consolidated Balance Sheet) has been
reclassified as common stock and additional paid-in capital.
6
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's debt includes $5 million of senior secured debt financing (the
"Debt"). The Debt has a five-year maturity and bears interest at 12% per annum.
The Debt is subject to certain financial covenants consisting primarily of fixed
charge coverage ratios. The Company has remained in full compliance with the
financial covenants from the time of issuance of the Debt through September 28,
2002. The Company, as of September 28, 2002, had unamortized discount and debt
issuance costs associated with the Debt totaling $518,927 and $129,730,
respectively. The Company is considering prepayment of the Debt, in which case
the remaining unamortized discount and debt issuance costs would be expensed as
an extraordinary item in the transaction period.
The Company has outstanding, a non-interest bearing subordinated convertible
debenture ("debenture") with a principal amount of $4 million, and a current
unamortized cost of $1.1 million. The debenture is due November 10, 2005 and is
convertible at any time at $5.50 per share, which would result in the issuance
of 727,272 shares of the Company's common stock.
(5) INCOME TAXES
During the three month period ended September 28, 2002, the Company recorded an
income tax benefit of $17.9 million dollars which was the result of a reduction
in the valuation allowance for deferred tax assets. The reduction in the
valuation allowance follows the Company's return to profitability as a result of
cost restructuring efforts in 2000 and 2001 and increase in sales in 2002. The
Company believes that it is more likely than not that it will generate
sufficient taxable income to utilize its deferred tax assets, including net
operating loss carryforwards, within any applicable carryover periods.
The tax effects of temporary differences that give rise to deferred tax assets
at September 28, 2002 are as follows (in thousands):
Deferred tax assets:
Current:
Net operating loss carryforwards $8,949
Inventory, warranty, and returns reserves 3,298
Allowance for doubtful accounts 129
Other 2,274
Long term:
Net operating loss carryforwards 2,056
Other 4,362
---------------
Total gross deferred tax assets 21,068
Valuation allowance (3,542)
---------------
Total net deferred tax assets $17,526
===============
At September 28, 2002, the Company had net operating loss carryforwards ("NOLs")
for federal income tax purposes of approximately $29.0 million, $0.1 million
expiring between the years 2003 and 2006, the remainder expiring between 2020
and 2021.
7
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) 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):
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------------- -------------------------------------
WEIGHTED WEIGHTED
SEPTEMBER 28, 2002 NET AVERAGE PER SHARE NET AVERAGE PER SHARE
------------------
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------------ ----------- ----------- ----------- ------------ -----------
Net income $ 23,604 $ 29,411
BASIC EPS
Net income attributable to common shareholders 23,604 29,634 $ 0.80 29,411 22,570 $ 1.30
------------ ----------- =========== ----------- ------------ ===========
EFFECT OF DILUTIVE SECURITIES
Options - 1,743 - 1,654
Common stock warrants - 2,826 - 2,765
Convertible debt - - 563 6,952
------------ ----------- ----------- ------------
DILUTED EPS
Net income attributable to common shareholders
plus assumed conversions $ 23,604 34,203 $ 0.69 $ 29,974 33,941 $ 0.88
============ =========== =========== =========== ============ ===========
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- ------------------------------------
WEIGHTED WEIGHTED
SEPTEMBER 29, 2001 NET AVERAGE PER SHARE NET AVERAGE PER SHARE
------------------ INCOME SHARES AMOUNT LOSS SHARES AMOUNT
------------ ----------- ----------- ---------- ----------- ------------
Net income/(loss) $ 227 $(13,131)
BASIC EPS
Net income/(loss) attributable to common
shareholders 227 18,179 $0.01 $(13,131) 18,118 $(0.72)
------------ ----------- ============ ----------- ------------ ============
EFFECT OF DILUTIVE SECURITIES
Options - 277 - -
Common stock warrants - 497 - -
Convertible debt - - - -
------------ ----------- ----------- ------------
DILUTED EPS
Net income/(loss) attributable to common
shareholders plus assumed conversions $ 227 18,953 $0.01 $(13,131) 18,118 $(0.72)
============ =========== =========== ========== =========== ============
Additional potentially dilutive securities ("securities") totaling 3,208 and
3,283 for the three-and nine-month periods ended September 28, 2002, have been
excluded from diluted EPS because the securities' exercise price was greater
than the average market price of the Company's common shares.
8
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) PRO FORMA NET INCOME AND NET INCOME PER DILUTED SHARE
During the three-month period ended September 28, 2002, the Company recorded a
non-recurring, non-operating, non-cash addition to earnings of $17.9 million.
The addition to earnings reflects the expected future tax benefits from net
operating loss carry-forwards and other deferred tax assets. Due to the
non-recurring nature of this transaction, and to aid in comparability of the
Company's financial results on a going-forward basis, presented below is a
reconciliation of net income as reported under Generally Accepted Accounting
Principles (GAAP) and pro forma net income adjusted for the restoration of
deferred tax assets and other non-recurring income tax benefits and adjusting
for estimated income taxes utilizing an effective tax rate of 38 percent.
Pro-forma net income compared to GAAP net income for the three- and nine-month
periods ended September 28, 2002 are as follows (in thousands, except per share
amounts):
PRO FORMA GAAP
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 28, 2002 SEPTEMBER 28, 2002
------------------------- ------------------------
Income before income taxes $ 5,713 $ 5,713
Pro forma income taxes at 38% (2,171) -
Restoration of deferred tax assets and
other income tax benefits - 17,891
------------------------- ------------------------
Net income $ 3,542 $ 23,604
========================= ========================
Weighted average shares - diluted 34,203 34,203
========================= ========================
Net income per diluted share $ 0.10 $ 0.69
========================= ========================
PRO FORMA GAAP
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 28, 2002 SEPTEMBER 28, 2002
------------------------- ------------------------
Income before income taxes $11,172 $ 11,172
Pro forma income taxes at 38% (4,245) -
Restoration of deferred tax assets and
other income tax benefits - 18,239
------------------------- ------------------------
Net income $ 6,927 $ 29,411
------------------------- ------------------------
Income effect of dilutive securities 563 563
Net income attributable to common shareholders $ 7,490 $ 29,974
========================= ========================
Weighted average shares - diluted 33,941 33,941
========================= ========================
Net income per diluted share $ 0.22 $ 0.88
========================= ========================
(8) LITIGATION
In June of 1999, the Company and certain of its former officers and directors
were named as defendants in a class action lawsuit filed in U.S. District Court
in Minnesota. The suit, filed on behalf of purchasers of the Company's common
stock between December 4, 1998 and June 7, 1999, alleges that the Company and
the named former directors and officers failed to disclose or misrepresented
certain information concerning the Company in violation of federal securities
laws. The Company believes that the suit is without merit and has vigorously
defended the matter.
The Company has consented to a settlement of this litigation negotiated by the
Company's insurance carrier. The settlement is covered by insurance and involves
no cash or other payment obligation by the Company, and no admission of
liability or wrongdoing by the Company. The settlement is not expected to have
any impact on the Company's results of operations or financial condition. The
settlement will be submitted to the Court for preliminary approval on December
13, 2002. The Company expects the Court will then set a schedule for notice to
the class and a hearing date for final approval of the settlement. At the
hearing for final approval, the Court will hear any objections to the settlement
or its terms. The Company expects the final hearing on the settlement to occur
within six months of the date the Court grants preliminary approval of the
settlement.
9
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is involved in other various 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.
(9) RISKS AND UNCERTAINTIES
The Company has supplier relationships with Conseco and WorldCom, which are
experiencing liquidity concerns. If these liquidity concerns create a
significant disruption in the business of these suppliers, there is potential
for significant negative impact on the Company's business from any disruption or
discontinuation of service. The Company is currently developing contingency
plans to mitigate the risks associated with these supplier relationships.
The Company offers qualified customers an unsecured revolving credit arrangement
to finance purchases through a private label consumer credit facility provided
by Conseco Bank, Inc. (the "Bank"). The Bank's parent, Conseco Inc., has
experienced financial and liquidity issues which could jeopardize the ability of
the Bank to continue to provide consumer credit financing for the Company's
customers. Termination of the agreement with the Bank, or any material change to
the terms of the agreement with the Bank or in the availability or terms of
credit for the Company's customers from the Bank, or any delay in securing
replacement credit sources, could have a material adverse effect on the
Company's business, sales, results of operations and financial condition.
The Company has an agreement with WorldCom to provide the long distance service
for the Company's direct selling channel and customer service lines as well as
communication between the Company's stores, manufacturing facilities and
corporate offices. On July 21, 2002 WorldCom filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. Any disruption,
discontinuation of service, delay in establishing an alternative provider at a
time of disruption, or material change in rates could have a material adverse
effect on the Company's business, sales, customer service, results of operations
and financial condition.
The Company acquires certain components for its products from companies that are
normally imported through the West Coast. To date, the Company has been able to
avoid any disruption of production which might result from work stoppages by the
U.S. West Coast port workers by arranging for its components to be imported
through alternative shipping methods. However, a long work stoppage involving
West Coast port workers, or a similar work stoppage involving East Coast port
workers, could increase the cost of obtaining materials or result in delays in
receiving materials, which could materially and adversely affect the Company's
results of operations and financial condition.
10
ITEM 2. 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,"
"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 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 DECEMBER 29, 2001, WHICH DISCUSSION IS INCORPORATED HEREIN
BY REFERENCE. THESE IMPORTANT FACTORS INCLUDE:
o GENERAL AND INDUSTRY ECONOMIC TRENDS,
o CONSUMER CONFIDENCE AND SPENDING,
o THE EFFECTIVENESS AND EFFICIENCY OF OUR ADVERTISING AND PROMOTIONAL
EFFORTS, o ADVERTISING RATES,
o CONSUMER ACCEPTANCE OF OUR PRODUCTS AND SLEEP TECHNOLOGY,
o INDUSTRY COMPETITION,
o OUR DEPENDENCE ON SIGNIFICANT SUPPLIERS OR SINGLE SOURCES OF SUPPLY,
o OUR SUPPLIER RELATIONSHIPS WITH CONSECO, AND WORLDCOM, WHICH ARE
EXPERIENCING LIQUIDITY CONCERNS, AND THE POTENTIAL FOR SIGNIFICANT NEGATIVE
IMPACT ON OUR BUSINESS IN THE EVENT OF ANY DISRUPTION OR DISCONTINUATION OF
SERVICE,
o GOVERNMENTAL REGULATION, INCLUDING ANTICIPATED FUTURE REGULATION OF DIRECT
MARKETING TELEPHONE SOLICITATIONS AND BEDDING FLAMMABILITY STANDARDS, AND
o RISKS AND UNCERTAINTIES DETAILED FROM TIME TO TIME IN THE COMPANY'S FILINGS
WITH THE SEC, INCLUDING THE COMPANY'S ANNUAL REPORT ON FORM 10-K AND OTHER
PERIODIC REPORTS FILED WITH THE SEC.
THE COMPANY HAS NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY OF THE
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q.
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 bedding retailers and the QVC shopping
channel. 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. For wholesale and
Company-owned sales, we record revenue at the time product is shipped to our
customer, except when mattresses are delivered and set up by our home delivery
employees, in which case revenu is recorded at the time the mattress is
delivered and set up in the home. Shipping and handling costs are reported as a
component of sales and marketing expenses. We reduce sales at the time revenue
is recognized for estimated returns.
The proportion of our total net sales, by dollar volume, from each of these
channels is summarized as follows:
Three Months Ended Nine Months Ended
----------------------- -----------------------
9/28/02 9/29/01 9/28/02 9/29/01
----------- ---------- ----------- ----------
Stores 78% 79% 76% 78%
Direct Call Center 14% 15% 15% 15%
E-commerce 5% 4% 4% 3%
Wholesale 3% 2% 5% 4%
11
Our Company-owned retail store locations are summarized as follows:
Three Months Ended Nine Months Ended
---------------------- -----------------------
9/28/02 9/29/01 9/28/02 9/29/01
----------- ---------- ----------- ----------
Beginning of period 321 327 328 333
Opened 4 2 7 7
Closed (2) (2) (12) (13)
----------- ---------- ----------- ----------
End of period 323 327 323 327
=========== ========== =========== ==========
Company-owned stores include leased space within 20 Bed, Bath & Beyond stores as
of September 28, 2002 and 24 at September 29, 2001. We anticipate opening 8
stores and closing 6 stores during the last three months of 2002. Comparable
store sales increased (decreased) for the three months ended September 28, 2002
and September 29, 2001 by 32% and (7)%, respectively. Comparable store sales
increased (decreased) for the nine months ended September 28, 2002 and September
29, 2001 by 23% and (6)%, respectively.
In 2002 our goal is to deliver profitable full year results and re-establish
growth, driven by the following four strategic priorities:
o INCREASE BRAND AND PRODUCT AWARENESS - we plan to continue to build
awareness of our unique bed and Sleep Number(R) brand by expanding
advertising. In comparison to 2001, advertising spending in the first nine
months of 2002 increased 25%. We plan to spend over 50% more on advertising
in the fourth quarter of 2002 as compared to the fourth quarter of 2001,
which will include increases in national advertising and the number of
stores supported by local TV and radio.
o EXPANDING PROFITABLE DISTRIBUTION - we plan to continue to improve and
expand our distribution. Our plans include Company-owned retail store base
expansion through the addition of eight new stores (net addition of two
after closing six existing stores) in the fourth quarter and 20 to 30 new
stores in 2003. We completed remodeling seven stores in the third quarter
of 2002, and plan to remodel approximately 100 of our existing stores in
2003 to reinforce the Sleep Number(R)brand. We expanded wholesale
distribution with our relationship with Sleep America (13 stores in Phoenix
and Tucson) in the third quarter, after beginning our relationship with
Sleep Train (approximately 40 stores in San Francisco, Sacramento and San
Diego) in the second quarter of 2002. We plan to selectively investigate
new opportunities to partner with other retailers in key markets, as well
as continue our successful partnership with QVC.
o IMPROVING PRODUCT QUALITY AND ACCELERATING INNOVATION - we will continue to
improve our products. Our track record of continuous improvement and
innovation in beds will be continued in the fourth quarter of 2002 with the
October launch of the redesigned Sleep Number(R)7000 - the Company's luxury
model. Accessories both for the top of the bed and under bed use will be
expanded in the fourth quarter of 2002, with the introduction of the
Personalized Warmth CollectionTM of dual-weight comforters, blankets and
mattress pads, and an under-bed drawer system and proprietary leg system.
In 2003 we plan to introduce new Sleep Number(R)bed models, expand the
distribution of the Company's adjustable foundation nationally, and
reintroduce our sofa sleeper product.
o STRENGTHEN OUR FINANCIAL POSITION - we will continue to apply the cost
disciplines employed during our turnaround. Having achieved five
consecutive quarters of profitability, we are now focused on further
strengthening our financial position by leveraging fixed operating costs,
improving operating margins by identifying additional cost savings and
maintaining cost increases at rates well below sales growth rates, and
replacing our 12% coupon debt with a lower cost credit facility.
12
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's results
of operations expressed as percentages of net sales.
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------- -----------------------------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
2002 2001 2002 2001
----------------- ----------------- ----------------- ----------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 30.0 33.0 31.5 35.0
----------------- ----------------- ----------------- ----------------
Gross margin 70.0 67.0 68.5 65.0
----------------- ----------------- ----------------- ----------------
Operating expenses:
Sales and marketing 52.4 57.8 53.4 61.7
General and administrative 10.7 8.2 10.0 9.5
Store closings and asset impairments 0.0 0.0 0.1 0.3
----------------- ----------------- ----------------- ----------------
Total operating expenses 63.1 66.0 63.5 71.4
----------------- ----------------- ----------------- ----------------
Operating income (loss) 6.9 1.0 5.0 (6.4)
Other expense, net (0.2) (0.6) (0.4) (0.4)
----------------- ----------------- ----------------- ----------------
Income (loss) before income taxes 6.7 0.4 4.6 (6.8)
Income tax benefit (21.1) 0.0 (7.5) 0.0
----------------- ----------------- ----------------- ----------------
Net income (loss) 27.8% 0.4% 12.1% (6.8)%
================= ================= ================= ================
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 28, 2002 WITH THREE MONTHS ENDED
SEPTEMBER 29, 2001
Operating income for the third quarter 2002 totaled $5.8 million compared to
$0.6 million for the third quarter of 2001. The improvement in profitability was
a direct result of 33% higher sales and successful execution of cost
restructuring efforts. Net income for the three months ended September 28, 2002
was increased by a $17.9 million non-recurring, non-cash, non-operating income
tax benefit due to the expected realization of tax benefits from net operating
loss carry-forwards and other deferred tax assets.
NET SALES
Net sales increased 33% to $85.1 million for the three months ended September
28, 2002 from $64.1 million for the three months ended September 29, 2001, due
to an 18% increase in mattress unit sales and higher average selling prices
resulting primarily from improvements in product mix and lower return rates. The
increase in net sales by sales channel was attributable to (i) a $16.2 million
increase in sales from Company-owned retail stores, including an increase in
comparable store sales of $15.8 million, (ii) a $2.3 million increase in direct
marketing sales, (iii) a $1.4 million increase in sales through the Company's
e-commerce channel and (iv) a $1.0 million increase in sales from the Company's
wholesale channel.
GROSS MARGIN
Gross margin increased to 70.0% for the three months ended September 28, 2002
from 67.0% for the three months ended September 29, 2001, primarily due to
improved product sales mix, savings in processing returned product, reduced
warranty claim rates resulting from improved product quality and greater
manufacturing leverage. In addition, there was a non-recurring positive
improvement of approximately 0.7% on margin resulting from an adjustment of
warranty reserves following continued improvements in claim rates due to product
quality improvements.
SALES AND MARKETING
Sales and marketing expenses increased 21% to $44.6 million for the three months
ended September 28, 2002 from $37.0 million for the three months ended September
29, 2001 but decreased as a percentage of net sales to 52.4% from 57.8% for the
comparable prior-year period. The increase was primarily due to additional media
investments, sales- based compensation, and home delivery expenses. The decrease
as a percentage of net sales was attributable to greater leverage in fixed
selling expenses and lower cost promotional offerings. Shipping and handling
costs for the three months ended September 28, 2002 and September 29, 2001
totaled $5.4 million and $4.2 million, respectively.
13
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 72% to $9.1 million for the three
months ended September 28, 2002 from $5.3 million for the three months ended
September 29, 2001 and increased as a percentage of net sales to 10.7% from 8.2%
for the prior-year period. The increase in general and administrative expenses
in total and as a percentage of net sales was due primarily to accrued incentive
compensation as a result of Company performance, increased investment in
information technology, and accrued rent requirements for previously vacated
office space.
STORE CLOSINGS AND ASSET IMPAIRMENTS
Store closing and asset impairment expense increased $4,000 to $24,000 for the
three months ended September 28, 2002 from $20,000 for the three months ended
September 29, 2001. In 2002, the entire $24,000 represents impairments related
to store closures.
OTHER INCOME (EXPENSE), NET
Other expense decreased $256,000 to approximately $120,000 for the three months
ended September 28, 2002 from $376,000 for the three months ended September 29,
2001. The decrease is primarily due to reduced interest expense following the
conversion of $11 million from debt to equity in the second quarter of 2002, and
an increase in interest income from the Company's improved cash position.
INCOME TAX (BENEFIT) EXPENSE
Income tax (benefit) expense changed $17.9 million as compared to the three
months ended September 29, 2001. The $17.9 million income tax benefit for the
three months ended September 28, 2002 was the result of recording a
non-recurring, non-operating, non-cash addition to third quarter earnings, due
to the expected realization of tax benefits from net operating loss
carry-forwards and other deferred tax assets. The Company expects to record no
income tax expense in the fourth quarter of 2002 as a result of this
transaction. However, during fiscal 2003 the Company expects to begin recording
income tax expense at an estimated rate of 38 percent. There was no income tax
expense for the three months ended September 29, 2001.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 28, 2002 WITH NINE MONTHS ENDED
SEPTEMBER 29, 2001
Operating income for the nine months ended September 28, 2002 totaled $12.2
million compared to an operating loss of $12.3 million for the nine months ended
September 29, 2001. The improvement in profitability was a direct result of 27%
higher sales and successful execution of cost restructuring efforts. Net income
for the nine months ended September 28, 2002 was increased by a $17.9 million
non-recurring, non-cash, non-operating income tax benefit due to the expected
realization of tax benefits from net operating loss carry-forwards and other
deferred tax assets.
NET SALES
Net sales increased 27% to $243.5 million for the nine months ended September
28, 2002 from $192.3 million for the nine months ended September 29, 2001, due
to a 16% increase in mattress unit sales and higher average selling prices
resulting primarily from improvements in product sales mix and lower return
rates. The increase in net sales by sales channel was attributable to (i) a
$33.9 million increase in sales from Company-owned retail stores, including an
increase in comparable store sales of $33.2 million, (ii) a $7.4 million
increase in direct marketing sales, (iii) a $4.3 million increase in sales
through the Company's e-commerce channel and (iv) a $5.5 million increase in
sales from the Company's wholesale channel.
GROSS MARGIN
Gross margin increased to 68.5% for the nine months ended September 28, 2002
from 65.0% for the nine months ended September 29, 2001, primarily due to
improved product sales mix, reduced warranty claim rates resulting from improved
product quality, greater manufacturing leverage, and savings in processing
returned product.
SALES AND MARKETING
Sales and marketing expenses increased 10% to $130.2 million for the nine months
ended September 28, 2002 from $118.6 million for the nine months ended September
29, 2001 but decreased as a percentage of net sales to 53.4% from 61.7% for the
comparable prior-year period. The decrease as a percentage of net sales was
attributable primarily to greater leverage in media and media production costs.
In the first quarter 2001 we introduced the Sleep Number(R) ad campaign,
launching initial markets with heavy advertising spending, and developed the
creative material to support the ongoing campaign. The decrease as a percentage
of net sales was also a result of leveraging other fixed marketing, selling and
promotional costs across a higher sales base. Shipping and handling costs for
the nine months ended September 28, 2002 and September 29, 2001 totaled $14.6
million and $13.0 million, respectively.
14
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 33% to $24.3 million for the nine
months ended September 28, 2002 from $18.3 million for the nine months ended
September 29, 2001 and increased as a percentage of net sales to 10.0% from 9.5%
for the comparable prior-year period. The increase was primarily a result of
accrued incentive compensation based on Company performance.
STORE CLOSINGS AND ASSET IMPAIRMENTS
Store closing and asset impairment expense decreased $275,000 to $233,000 for
the nine months ended September 28, 2002 from $508,000 for the nine months ended
September 29, 2001. In 2002, the expense includes $174,000 related to store
closures and $59,000 related to the write-off of unusable fixtures due to store
remodels. In 2001, the expense included $170,000 related to store closures and
$338,000 related primarily to the write-off of unusable fixtures for
merchandising of our sleeper sofa products.
OTHER INCOME (EXPENSE), NET
Other expense increased $259,000 to approximately $1.0 million for the nine
months ended September 28, 2002 from $755,000 for the nine months ended
September 29, 2001. The increase is primarily due to interest expense from
long-term debt initiated in June and September of 2001.
INCOME TAX (BENEFIT) EXPENSE
Income tax (benefit) expense changed $18.4 million as compared to the nine
months ended September 29, 2001. The $18.4 million income tax benefit for the
nine months ended September 28, 2002 was primarily the result of recording a
$17.9 million non-recurring non-operating, non-cash addition to 2002 earnings,
due to the expected realization of tax benefits from net operating loss
carry-forwards and other deferred tax assets. The Company expects to record no
income tax expense in the fourth quarter of 2002 as a result of this
transaction. However, during fiscal 2003 the Company expects to begin recording
income tax expense at an estimated rate of 38 percent. The Company recorded
$115,000 of income tax expense in the nine months ended September 29, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of capital in recent periods has been from the completion of
our $11.0 million convertible debt offering in June 2001 and $5.0 million senior
secured term debt financing completed in September 2001. The $11.0 million in
convertible debt was converted to equity in the second quarter of 2002. In
addition, we generated cash from operations for the full year in 2001 and during
the first nine months of 2002. Barring any material changes in our financial
position or economic outlook, we anticipate paying off the senior secured debt
in the next three to six months. We do not anticipate incurring any early
payment penalties, however there will be a non-cash extraordinary expense
recorded to account for the unamortized discount and debt issuance costs
aggregating approximately $649,000. Substantially all of our assets are pledged
as collateral for the senior secured debt offering.
We are currently pursuing a bank revolving line of credit. While it is not
currently anticipated that this line will be necessary for short- or long-term
liquidity needs, the line would provide additional cash flexibility. Barring any
unexpected significant external or internal developments, we expect current cash
balances on hand and cash generated from operations to be sufficient to meet our
short-term and long-term liquidity needs.
Net cash provided by operating activities for the nine months ended September
28, 2002 was approximately $28.4 million and consisted primarily of our net
income adjusted for non-cash expenses, decreases in other assets and increases
in accrued compensation and benefits, accounts payable, and accrued customer
pre-payments. Cash increases were partially offset by increases in inventories
and prepaid expenses, and a decrease in accrued warranty costs. The increase in
accrued compensation is a result of increases in incentive pay accruals.
Accounts payable has increased as a result of timing and the additional
commitments made to advertising in 2002. The increase in accrued customer
prepayments is related to the timing of cash received on customer orders in
advance of customer shipments at the end of the quarter. Net cash used in
operating activities for the nine months ended September 29, 2001 was
approximately $1.4 million and consisted primarily of the net loss adjusted for
non-cash expenses, decreases in accrued sales returns, and an increase in other
assets. Cash decreases were partially offset by decreases in inventories and
accounts receivable, and increases in accounts payable. The increase in accounts
payable related primarily to the deferral of certain supplier payments during
the first half of 2001. These deferrals have subsequently been paid. Decreases
in inventory balances were a result of specific initiatives to reduce inventory
balances at our manufacturing locations.
Net cash used in investing activities was approximately $20.8 million for the
nine months ended September 28, 2002. The net investing activity for the nine
months ended September 29, 2001 was $0. Investing activities
15
consisted primarily of purchases of property and equipment for new retail stores
and development costs for information technology systems. In 2002 we made
investments of $23.6 million of cash in marketable securities and had $8.0
million of marketable securities mature, while in 2001 we liquidated $4.0
million of marketable securities to support continuing operations.
Net cash provided by financing activities was approximately $405,000 for the
nine months ended September 28, 2002 primarily from the issuance of common stock
and $15.3 million for the nine months ended September 29, 2001 which consisted
primarily of net proceeds from issuance of long-term debt.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's debt obligations at September 28, 2002 consisted of a $5 million
note at a fixed rate of 12% and a $4 million non-interest bearing subordinated
convertible debenture. As a result, the Company does not believe it has
significant exposure to interest rate risk.
Other 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 investment grade 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.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES.
(a) Within 90 days prior to the filing of this Quarterly Report on Form 10-Q,
the Company's President and Chief Executive Officer ("CEO") and the Company's
Chief Financial Officer ("CFO") carried out an evaluation of the effectiveness
of the Company's disclosure controls and procedures. Based upon this evaluation,
the CEO and CFO concluded that the Company's disclosure controls and procedures
are effective in:
o accumulating and communicating information to the Company's management,
including the CEO and CFO, to allow timely decisions regarding required
disclosure; and
o recording, processing, summarizing and reporting information required to be
included in the Company's periodic reports filed with the SEC in a timely
manner.
(b) There were no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of the evaluation described above.
16
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June of 1999, the Company and certain of its former officers and directors
were named as defendants in a class action lawsuit filed in U.S. District Court
in Minnesota. The suit, filed on behalf of purchasers of the Company's common
stock between December 4, 1998 and June 7, 1999, alleges that the Company and
the named former directors and officers failed to disclose or misrepresented
certain information concerning the Company in violation of federal securities
laws. The Company believes that the suit is without merit and has vigorously
defended the matter.
The Company has consented to a settlement of this litigation negotiated by the
Company's insurance carrier. The settlement is covered by insurance and involves
no cash or other payment obligation by the Company, and no admission of
liability or wrongdoing by the Company. The settlement is not expected to have
any impact on the Company's results of operations or financial condition. The
settlement will be submitted to the Court for preliminary approval on December
13, 2002. The Company expects the Court will then set a schedule for notice to
the class and a hearing date for final approval of the settlement. At the
hearing for final approval, the Court will hear any objections to the settlement
or its terms. The Company expects the final hearing on the settlement to occur
within six months of the date the Court grants preliminary approval of the
settlement.
The Company is involved in other various 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.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
Exhibit
Number Description
-------- -----------
99.1 Certification
99.2 Certification
(b) Reports on Form 8-K
--------------------
During the quarter ended September 28, 2002, the Company filed
three Current Reports on Form 8-K. The Report consisted of the
following:
(i) Current Report filed July 9, 2002, announcing net sales for
the second quarter ended June 29, 2002.
(ii) Current Report filed July 16, 2002, announcing comments on
unaudited results for the second quarter ended June 29,
2002.
(iii)Current Report filed September 16, 2002, announcing revised
third quarter guidance and authorization of a stock
repurchase program.
18
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
------------------------------------------------
November 12, 2002 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)
19
Certification by Chief Executive Officer
I, William R. McLaughlin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Select Comfort
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
----------------------------------------
William R. McLaughlin
President and Chief Executive Officer
20
Certification by Chief Financial Officer
I, James C. Raabe, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Select Comfort
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
------------------------------------------------
James C. Raabe
Senior Vice President and Chief Financial Officer
21
EXHIBIT INDEX
Exhibit Number Description Location
- -------------- ----------- --------
99.1 Certification.................... Filed herewith.
99.2 Certification.................... Filed herewith.
22
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Select Comfort Corporation (the
"Company") on Form 10-Q for the period ended September 28, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, William R. McLaughlin, Chief Executive Officer of the Company,
solely for the purposes of 18 U.S.C. ss.1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, does hereby certify that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ William R. McLaughlin
------------------------------
William R. McLaughlin
Chief Executive Officer
November 12, 2002
23
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Select Comfort Corporation (the
"Company") on Form 10-Q for the period ended September 28, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, James C. Raabe, Chief Financial Officer of the Company, solely for
the purposes of 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, does hereby certify that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ James C. Raabe
--------------------------
James C. Raabe
Chief Financial Officer
November 12, 2002
24