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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 1, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
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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.)
10400 VIKING DRIVE, SUITE 400
MINNEAPOLIS, MINNESOTA 55344
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (952) 918-3000
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 1, 2000, 17,756,216 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 $58,560,277.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of this Annual Report on Form 10-K incorporate by
reference information (to the extent specific pages are referred to herein) from
the Registrant's Annual Report to Shareholders for the fiscal year ended January
1, 2000 (the "1999 Annual Report"). 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 2000 Annual
Meeting to be held May 18, 2000 (the "2000 Proxy Statement").
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TABLE OF CONTENTS
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PART I............................................................................................................2
ITEM 1. BUSINESS...........................................................................................2
General.....................................................................................................2
Business and Growth Strategy................................................................................2
Products....................................................................................................4
Retail Stores...............................................................................................5
Direct Marketing Operations.................................................................................6
E-Commerce..................................................................................................7
Marketing and Advertising...................................................................................7
Consumer Education and Customer Service.....................................................................7
Manufacturing and Distribution..............................................................................8
Suppliers...................................................................................................8
Intellectual Property.......................................................................................9
Competition.................................................................................................9
Consumer Credit Arrangements...............................................................................10
Governmental Regulation....................................................................................10
Employees..................................................................................................10
Certain Important Factors..................................................................................10
ITEM 2. PROPERTIES........................................................................................15
ITEM 3. LEGAL PROCEEDINGS.................................................................................16
ITEM 4. EXECUTIVE OFFICERS OF THE COMPANY....................................................................17
PART II..........................................................................................................19
Number of Record Holders; Dividends........................................................................19
Use of Proceeds from Initial Public Offering...............................................................19
PART III.........................................................................................................21
Directors, Executive Officers, Promoters and Control Persons...............................................21
Section 16(a) Beneficial Ownership Reporting Compliance....................................................21
PART IV..........................................................................................................22
Consolidated Financial Statements..........................................................................22
Consolidated Financial Statement Schedules.................................................................22
Exhibits...................................................................................................23
Reports on Form 8-K........................................................................................23
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K......................................................................27
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Our fiscal year ends on the Saturday closest to December 31, and unless
the context otherwise requires, all references to years in this Form 10-K refer
to our fiscal years. All references to "Select Comfort," "the Company," "we" or
"us" herein include our wholly owned subsidiaries, Select Comfort
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Direct Corporation, Select Comfort Retail Corporation, Direct Call Centers,
Inc., Select Comfort SC Corporation and selectcomfort.com corporation.
Select Comfort(R), Sleep Number(R), Comfort Club(R), 90 Night Trial,
Better Night's Sleep Guarantee, Sleep Solutions, The Sleep Solutions Company,
Sleep Better on Air, The Air Bed Company and the Company's stylized logo are
trademarks and/or service marks of the Company.
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PART I
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This Form 10-K contains certain forward-looking statements. For this
purpose, any statements contained in this Form 10-K that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"estimate" or "continue" or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending on a
variety of factors, including those set forth under the heading below entitled
"Certain Important Factors."
ITEM 1. BUSINESS
GENERAL
Select Comfort is the leading manufacturer, specialty retailer and direct
marketer of premium quality, premium priced, innovative air beds and
sleep-related products. We believe we are revolutionizing the mattress industry
by offering a differentiated product through a variety of service-oriented
distribution channels.
Our products address broad-based consumer sleep problems, resulting in a better
night's sleep. Our proprietary technology allows our air beds to more naturally
contour to the body, thereby generally providing:
- - better spinal alignment,
- - reduced pressure points,
- - greater relief of lower back pain,
- - greater overall comfort, and
- - better quality sleep
in comparison with traditional mattress products. A firmness control system
allows customers to independently customize the firmness on each side of the
Select Comfort air bed to their optimal level of comfort and support.
Unlike traditional mattress manufacturers, we sell our products directly to
consumers through three controlled, complementary and service-oriented
distribution channels:
- - Retail, including company-operated retail stores and leased departments
within larger retail stores,
- - Direct Marketing, including company-operated call centers, and
- - E-commerce, through our website at www.selectcomfort.com.
At January 1, 2000, our retail operations included 341 stores in 45 states,
including 45 leased departments within larger retail stores. In 2000, we plan to
close approximately 22 under-performing retail locations, including 12 leased
departments, and to open approximately 20 new retail locations in markets we
believe can support additional stores.
Select Comfort was incorporated in Minnesota in February 1987. Our principal
executive office is located at 10400 Viking Drive, Suite 400, Minneapolis,
Minnesota 55344. Our telephone number is (952) 918-3000.
BUSINESS AND GROWTH STRATEGY
Our strategic plan adopted at the end of 1999 is designed to leverage our
competitive advantages and core strengths, which include:
- - Superior Products that Provide Real Benefits to Consumers. Our products
differ from traditional mattresses by addressing broad-based consumer sleep
problems through the greater comfort and support of sleeping on air and
through the ability to customize the firmness on each side of the mattress
at the touch of a button. Through continuous improvement of our innovative
air beds, we have led the growing air bed segment of the mattress industry.
- - Direct Contact with Our Customers. We maintain direct contact with our
customers
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through each of our controlled distribution channels and through our own
customer service representatives. This enables us to better understand
consumer desires, to respond to those desires with product improvements and
product line extensions, to enhance overall customer satisfaction and to
build brand loyalty through long-term relationships with customers. We have
an installed base of approximately 725,000 customers.
- - Multiple Complementary Distribution Channels. Our three complementary
distribution channels give consumers multiple, convenient opportunities to
purchase our product, and give us advantages that many of our competitors
do not have, including 341 retail stores across the continental United
States, two direct marketing call centers, e-commerce capability, the
ability to leverage advertising dollars across multiple channels, and a
database of approximately 5.5 million inquiries.
- - Dedicated, Highly Trained Employees throughout the Company. Employees
throughout our company firmly believe in the superiority of our products
and the real benefits provided to consumers, and are universally committed
to providing a better night's sleep. Sales professionals receive extensive
training in sleep research and in the features and benefits of our
proprietary products. We also maintain a customer service department of
over 40 employees who receive similar training and are prepared to respond
to consumer questions. Our senior management team has been substantially
enhanced in the last year and our new CEO, Bill McLaughlin, joined our
company in late March 2000.
Building on these advantages and strengths, our strategic plan includes the
following key elements:
- - Integrated Marketing. Our marketing messages will emphasize the
personalized sleep solutions provided by our products. These messages will
be consistent across our multiple distribution channels and focused on call
to action marketing, cross channel marketing and retail lead generation. We
are also planning to redesign our web site and introduce a catalog to our
customers.
- - Focus on Retail Store Profitability. We are generating marketing plans with
specific actions oriented to the circumstances in each individual retail
market. We will be closing approximately 22 under-performing retail
locations, including 12 leased departments, and plan to open approximately
20 retail locations in 2000. We have recently adopted a new retail store
design with an environment that is more consistent with our sleep solutions
oriented brand. We plan to remodel approximately 100 stores with the new
design in 2000.
- - In-Home Delivery, Assembly and Mattress Removal. We are developing plans to
ultimately provide in-home delivery, assembly and mattress removal
nationwide across each of our distribution channels. We believe that this
additional service will enhance customer satisfaction and demand for our
products.
- - Introduce Sofa Sleeper Product. We plan to introduce a sofa sleeper product
across all of our distribution channels in 2000. The sofa sleeper features
an easy slide-out mechanism, rather than a heavy, folding metal frame, an
11-inch thick, fully adjustable air mattress that inflates in about one
minute, and no metal bar.
- - Continuous Improvement of Our Core Product Line. In order to improve
customer satisfaction and strengthen our leadership position in the growing
air bed segment of the mattress industry, we intend to focus
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our product development efforts on our core line of air beds.
- - Reduced General and Administrative Expenses and Operating Costs. In early
2000, we eliminated our Roadshow distribution channel and approximately 15%
of our corporate and administrative positions. The Roadshow channel sold to
smaller markets without a retail presence and accounted for a small and
diminishing percentage of our sales as our retail presence and e-commerce
capabilities have grown. We will continue our event marketing efforts
through home shows, state fairs and similar events. We intend to continue
to look for opportunities to create operating efficiencies.
PRODUCTS
Air Beds
Every Select Comfort air bed has a patented air chamber as its functioning core
and comes with a patented firmness control system that allows the customer to
easily and instantly customize the firmness of the mattress at the touch of a
button. All of our air beds, except twin size mattresses, are available with
independent air chambers for each side of the mattress, allowing customized
firmness for each sleep partner. Our Imperial and Ultra Series of air beds
feature a wireless remote control with a digital display of the user's "Sleep
Number," which reflects the level of firmness and allows the customer to more
easily adjust and readjust the firmness level to the customer's personal
preference. Our air beds feature either a traditional cover or a pillowtop style
cover that includes zoned foam and provides extra cushioning. The covers are
constructed with sanitized and hypoallergenic Damask ticking made from blends of
polyester/polypropylene or cotton/rayon, or from 100% rayon. Our air beds are
manufactured in a broad array of sizes and styles, including all standard bed
sizes and a waterbed replacement size that fits into a customer's existing
waterbed frame. Our Ultra and Imperial models feature a "whisper quiet" air
pump.
Our air beds can be assembled by customers in a simple process requiring no
tools and can be moved more easily than a traditional mattress and box spring.
Furthermore, because air is the primary support material of the mattress, Select
Comfort air beds do not lose their shape or support over time like traditional
mattresses and box springs. Each air bed is accompanied with instructional
product brochures and easy to follow assembly instructions, is certified by
Underwriter's Laboratories and is backed by a 20-year limited warranty and our
90 Night Trial and Better Night's Sleep Guarantee.
Foundations and Accessory Products
In addition to air beds, we offer matching foundations and a line of accessory
products, including a line of bed frames and high quality mattress pads with
zoned heating and specialty pillows, all of which are hypoallergenic and
designed to provide comfort and better quality sleep.
We maintain an active engineering department that continuously seeks to enhance
our knowledge of sleep science and to improve current product performance and
benefits. Through customer surveys and consumer focus groups, we seek feedback
on a regular basis to help enhance our products.
Since the introduction of our first air bed, we have continued to improve and
expand our product line, including quieter firmness control systems, remote
control gauges with digital settings, more luxurious fabrics and covers, new
generations of foams and foundation systems and enhanced border walls. Our
research and development expenses were $1.9 million for 1999, $1.6 million for
1998 and $1.8 million for 1997.
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RETAIL STORES
Since our first retail stores were opened in 1992, an increasing percentage of
our net sales has occurred at our retail stores, and retail store sales now
account for a majority of our net sales. At January 1, 2000, we had 341 stores
in 45 states, including 45 leased departments. In 2000, we plan to close
approximately 22 under-performing retail locations, including 12 leased
departments, and to open approximately 20 retail stores.
Store Environment. Our currently most prevalent store design, including novel
visual images on the walls, was intended to command attention to our innovative
products. We have recently adopted a new store design with a bedroom-like
setting intended to convey a sense of sophistication and quality that reinforces
Select Comfort's brand image as synonymous with sleep solutions. We plan to
remodel approximately 100 of our stores with this updated retail store design in
2000. Our retail stores are principally showrooms, averaging approximately 900
square feet, with several display models from our line of air beds and a full
display of our branded accessories.
Our sales professionals play an important role in creating an inviting and
informative retail environment. These professionals receive extensive training
regarding the features and benefits of our proprietary technology and products
as well as on the overall importance of sleep quality. This enables them to more
effectively introduce consumers to our products, emphasize the features and
benefits that distinguish Select Comfort air beds from traditional mattresses,
determine the consumers' needs, encourage consumers to experience the comfort
and support of the air beds and answer questions regarding our products.
Site Selection. In selecting new store sites, we generally seek high-traffic
mall locations of approximately 800 to 1,200 square feet within malls in major
metropolitan and regional areas. We conduct extensive analyses of potential
store sites and base our selection on a number of factors, including the
location within the mall, demographics of the trade area, the specifications of
the mall (including size, age, sales per square foot and the location of the
nearest competitive mall), the perceived strength of the mall's anchor stores,
the performance of other specialty retail tenants in the mall, the number of
direct marketing inquiries received from the area surrounding the mall, store
density of existing stores and marketing and advertising plans in the respective
markets. Clustering of retail stores within a metropolitan retail market is a
key consideration in order to leverage our advertising.
Marketing and Advertising. We historically have supported some of our multiple
store markets with media primarily focused on the use of radio personalities.
During 1999 we expanded this media focus to include newspaper advertising and
spot radio. We expect to continue this marketing focus in 2000 to support those
markets that generate the majority of our retail sales. In addition, our
integrated marketing efforts will more closely align the advertising directed
toward our direct marketing customers with that in the retail channel and will
include national print media which is designed to increase product and store
awareness.
We also support new store openings with mailings to direct response inquiries
and potential prospects in the market, and in some cases with print and radio
advertisements. We use local radio and print advertisements and promotional
offers during high mall traffic periods, such as three-day holiday weekends, and
in-store events, including live remote broadcasts and promotional contests.
Management and Employees. Our stores are currently organized into eight regional
areas and 46 geographic districts, with approximately eight stores in each
district. Each regional sales director oversees approximately six geographic
districts. Each district has a district sales manager who is responsible for the
sales and operations and who reports to a regional sales director. The district
sales managers frequently visit stores to review merchandise presentation, sales
force product knowledge, financial performance and compliance with operating
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standards. The typical staff of a Select Comfort store consists of one store
manager and two full-time sales professionals. In order to maintain high
operating standards, we recruit store managers who typically have one to four
years of experience as a store manager in specialty retailing. The sales
professionals devote substantially all of their efforts to sales and customer
service, which includes helping customers and generating and responding to
inquiries. In addition, to promote consumer education, ensure customer
satisfaction and generate referrals, the sales professionals place follow-up
calls to customers who have made recent purchases or inquiries.
Training and Compensation. All store personnel receive comprehensive on-site
training on our technology and sleep expertise, the features and benefits of our
air beds, sales and customer service techniques and operating policies and
guidelines. Initial training programs are reinforced through detailed product
and operating manuals and periodic performance appraisals. All store sales
professionals receive base compensation and are entitled to commissions based on
individual and store-wide performance. Regional sales directors, district sales
managers and store managers are eligible to receive, in addition to their base
compensation, incentive compensation for the achievement of performance
objectives by the stores within their responsibility.
Event Marketing Group. Our retail organization also manages an event marketing
group that sells our products at home shows and consumer product shows, state
fairs and similar events. Select Comfort sales professionals, supported by
advance mailings to direct marketing inquiries, travel to such events to
demonstrate our products in temporary showrooms or in booths and educate
consumers about the benefits of our products.
DIRECT MARKETING OPERATIONS
Many consumers' initial exposure to the Select Comfort air bed is through our
direct marketing operations. Typically, an interested consumer will respond to
one of our advertisements by calling our toll-free number. On this call, one of
our direct marketing sales professionals captures information from the consumer,
begins the consumer education process, takes orders, or, if appropriate, directs
the consumer to our other distribution channels. The direct marketing operations
are conducted by knowledgeable and well-trained sales professionals, including a
group of over 40 sales professionals who field incoming direct marketing
inquiries, and over 35 sales professionals who make outbound calls to consumers
who have previously contacted the Company. The direct marketing operations also
include a database marketing department that is responsible for mailings of
product and promotional information to direct response inquiries. We maintain a
database of information on approximately 5.5 million inquiries, including
customers who have purchased an air bed from us.
In the direct marketing channel, our advertising message is communicated through
targeted print and radio advertisements, as well as through product brochures,
videos and other product and promotional materials mailed in response to
consumer inquiries at various intervals. As our advertising budget has expanded
over the last few years, the direct marketing channel has relied heavily on
nationally syndicated radio personalities, such as Paul Harvey and Rush
Limbaugh, and has expanded print and direct mail expenditures. Our direct
marketing operations continually monitor the effectiveness and efficiency of our
advertising through tracking the cost per inquiry and cost per order of our
advertising, using focus groups to evaluate the effectiveness of our advertising
messages and using sophisticated media buying techniques.
Our direct marketing operations also support our other distribution channels
through referrals, as well as mailings to direct marketing inquiries in selected
markets in advance of retail store openings and events. As our base of retail
stores has expanded, our direct marketing sales professionals have increasingly
been able to refer direct marketing inquiries to a convenient
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retail store location, improving the process of converting inquiries into sales
and providing the consumer with a choice of service venues.
E-COMMERCE
Our web site at www.selectcomfort.com provides consumers with a wide array of
useful information as well as the convenience to order our products online.
Since building the capability to take online orders in May 1999, our e-commerce
channel has continued to add functionality and content to educate consumers
regarding:
- - sleep research and science,
- - our products and the benefits they provide,
- - store locations and other means to contact us and experience our products,
- - customer testimonials,
- - customer service information, and
- - current sales and promotional events.
Our e-commerce channel has also focused on developing relationships with online
shopping malls and other sales portals and affiliates.
We plan to launch our redesigned web site in the second quarter of 2000 with an
updated look and feel that is attractive, professional and reinforces the Select
Comfort brand image. The redesigned site will also allow greater functionality
to provide more personalization, guided selling, dynamic content and promotions
and a more robust online shopping experience. Ultimately, we plan to have
real-time keyboard to keyboard interaction between customers and our sales and
customer service representatives. In the future, the site may be maintained
through a remote content management system to ease maintenance and the ability
to add content from outside sources. We also intend to integrate the web site
with our fulfillment systems to enhance operational efficiency.
MARKETING AND ADVERTISING
The primary objective of our marketing and advertising strategy is to increase
awareness of the Select Comfort brand and become recognized as the leader in
sleep solutions, sleep expertise and superior quality products. Our integrated
approach to marketing will emphasize consistent messages across our distribution
channels with a greater emphasis on call to action and cross channel marketing.
In the past, we have spent the majority of our advertising budget on direct
marketing, which indirectly drove traffic to our expanding base of retail
stores. In recent periods more of our advertising dollars have been, and in the
future will be, dedicated to retail store lead generation.
The majority of our advertising budget is devoted to print ads in newspapers and
magazines and to radio advertising with well-known national personalities, as
well as local radio personalities in selected retail markets. In 2000, we intend
to reduce our use of long and short-form television advertising. As our
e-commerce channel expands, more advertising dollars may be devoted to
Internet-based marketing programs. We also plan to launch our own catalog to our
customers and inquiries. Our catalog will include an expanded selection of sleep
solution oriented products including our core line of air beds and accessories,
the new line of Select Comfort sofa sleepers, bedroom furnishings and a variety
of other bedroom and sleep related products for the entire family.
CONSUMER EDUCATION AND CUSTOMER SERVICE
We are committed to achieving our goal of world class customer satisfaction and
service. We intend to achieve this goal through a variety of means designed to:
- - educate consumers on the benefits of Select Comfort products,
- - deliver superior quality products,
- - maximize our direct relationship with consumers,
- - maximize convenience for the consumer, and
- - respond quickly to consumer needs and inquiries.
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We believe that educating consumers about the features and benefits of our
products is critical to the success of our marketing and sales efforts, and we
devote considerable time and resources to training programs for our sales
professionals. Our retail stores and our web site also provide customers with
the latest information on sleep research and science and the benefits of our
products.
Our controlled distribution channels optimize our direct contact with customers
and allow us to respond quickly to customer service inquiries and enhance
customer satisfaction. Our multiple distribution channels also enhance the
convenience for the consumer to purchase products through a variety of venues.
In addition, we have been testing the offering of in-home delivery, assembly and
mattress removal services in selected markets through national providers. We are
developing plans to ultimately provide these services nationwide across all of
our distribution channels in order to increase overall sales and enhance
customer satisfaction.
We maintain an in-house customer service department of over 40 customer service
representatives who receive extensive training in sleep technology and all
aspects of our products and operations. Our customer service representatives
field customer calls and also interact with each of our retail stores to address
customer questions and concerns raised with retail sales professionals. The
customer service department makes outbound calls to new customers during the 90
Night Trial phase to answer questions and provide solutions to possible problems
in order to enhance customer education, build customer satisfaction and reduce
returns.
MANUFACTURING AND DISTRIBUTION
Our manufacturing operations are located in Minneapolis, Minnesota, Columbia,
South Carolina, and Salt Lake City, Utah (opened in May 1999). These operations
consist of quilting and sewing of the fabric covers for our air beds, assembly
of firmness control systems (only in Minneapolis) and final assembly and
packaging of air beds and foundations from contract manufactured components. Our
Minneapolis and Columbia plants operate on two shifts and our Salt Lake City
plant operates on one shift. We believe we have sufficient capacity to meet
anticipated increases in demand through the next 12 months.
We manufacture air beds to meet orders rather than to stock inventory, which
enables us to maintain lower levels of inventory. As we expand our home delivery
and assembly services, we may use regional distribution centers that would stock
inventory to fill orders on a more timely basis. Orders are currently shipped
from one of our three distribution centers, primarily via UPS, typically within
48 hours following order receipt, and are usually received by the customer
within five to seven business days after shipment. We are continually evaluating
alternative carriers on a national and regional basis, as well as testing
providers of in-home assembly services in selected markets.
SUPPLIERS
We currently obtain all of the materials and components used to produce our air
beds from outside sources. Components for the firmness control systems are
obtained from a variety of domestic sources. Quilting and ticking materials are
obtained from a supplier that produces both in Belgium and in the United States
and components for foundation systems are obtained primarily from two domestic
sources.
Our proprietary air chambers are produced to our specifications by one Eastern
European supplier under a supply contract expiring in August 2000 (subject to
automatic renewal if neither party gives 90 days' notice of non-renewal),
pursuant to which we are obligated to purchase certain minimum quantities. We
expect to continue the relationship with the Eastern European supplier for the
foreseeable future. We believe that we would be able to procure an adequate
supply of air chambers from other sources on a timely basis if the
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supply contract is terminated or the Eastern European supplier is otherwise
unable to supply air chambers.
INTELLECTUAL PROPERTY
Certain elements of the design and function of our air beds are the subject of
United States and foreign patents and patent applications owned by us. We have
18 issued U.S. patents and six U.S. patent applications pending. We also held 13
foreign patents and had 19 foreign patent applications pending as of January 1,
2000.
The name "Select Comfort" and our logo are trademarks registered with the United
States Patent and Trademark Office. We have a number of other registered marks,
including the trademarks "Comfort Club" and "Sleep Number," the service marks
"Comfort Club" and "Sleep Better on Air," and a number of unregistered marks,
including the trademarks "90 Night Trial," "Better Night's Sleep Guarantee,"
"Sleep Solutions," "The Sleep Solutions Company" and "The Air Bed Company." We
have registered several of these trademarks in numerous foreign countries and
have approximately 45 trademarks registered, or the subject of pending
applications, in foreign countries. Each federally registered mark is renewable
indefinitely if the mark is still in use at the time of renewal. We are not
aware of any material claims of infringement or other challenges to our right to
use our marks.
In November 1999, we initiated a patent infringement suit against Simmons
Company and Price Manufacturing Inc. alleging that Simmons-branded air beds
manufactured by Price Manufacturing infringed three of our patents. In February
2000, we settled our suit against Simmons after Simmons terminated its license
agreement with Price Manufacturing, effectively ending Simmons' involvement with
the manufacture and sale of air beds with a hand control that are the subject of
the suit. Price Manufacturing was not a part of the settlement and we intend to
continue to prosecute our suit against Price Manufacturing.
COMPETITION
The mattress industry is highly competitive. Participants in the mattress
industry compete primarily on price, quality, brand name recognition, product
availability and product performance, including the perceived levels of comfort
and support provided by a mattress. Our air beds compete with a number of
different types of mattress alternatives, including innerspring mattresses,
waterbeds, futons and other air-supported mattresses that are sold through a
variety of channels, including furniture stores, bedding specialty stores,
department stores, mass merchants, wholesale clubs, telemarketing programs,
television infomercials and catalogs. We believe that our success depends in
part on increasing consumer acceptance of our existing products and the
continuing introduction of products that have qualities and benefits which
differentiate our products from those offered by other manufacturers.
The traditional mattress industry is characterized by a high degree of
concentration among the four largest manufacturers of innerspring mattresses
with nationally recognized brand names, including Sealy, which also owns the
Stearns & Foster brand name, Serta, Simmons and Spring Air. The balance of the
mattress market is served by over 700 manufacturers, primarily operating on a
regional basis. Many of these competitors, and in particular the four largest
manufacturers named above, have greater financial, marketing and manufacturing
resources and better brand name recognition than us, and sell their products
through broader and more established distribution channels.
A number of companies have begun to offer air beds. There can be no assurance
that these or any other mattress manufacturer will not aggressively pursue the
air bed market. Any such competition by established manufacturers or new
entrants into the market could have a material adverse effect on our business,
financial condition and operating results. In addition, should any of our
competitors reduce
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prices on premium mattress products, we may be required to implement price
reductions in order to remain competitive, which could have a material adverse
effect on our business, financial condition and operating results.
CONSUMER CREDIT ARRANGEMENTS
We use a third-party bank to offer our qualified customers an unsecured
revolving credit arrangement to finance purchases from us. The bank sets the
rates, fees and all other terms and conditions of the customer accounts,
including collection policies and procedures, and is the owner of the accounts.
In connection with all purchases financed under these arrangements, the bank
pays us an amount equal to the total amount of such purchases, net of
promotional related discounts. Effective July 1999, we terminated our then
existing credit arrangement and entered into a new agreement with another
provider. The new provider purchased substantially all of the outstanding
customer receivables from the old provider. As a result of the purchase of this
portfolio, we received $9.8 million that had been retained by the previous
provider as security and included in our accounts receivable. The previous bank
had retained $11.4 million as of January 2, 1999 under terms of its agreement.
There are no retainage amounts as a part of the new agreement.
GOVERNMENTAL REGULATION
Our products and our marketing and advertising practices are subject to
regulation by various federal, state and local regulatory authorities, including
the Federal Trade Commission. The mattress industry also engages in advertising
self-regulation through certain voluntary forums, including the National
Advertising Division of the Better Business Bureau. We are also subject to
various other federal, state and local regulatory requirements, including
federal, state and local environmental regulation and regulations issued by the
U.S. Occupational Safety and Health Administration.
EMPLOYEES
At January 1, 2000, we employed 1,979 persons, including 1,187 retail store
employees, 117 direct marketing employees, 46 customer service employees, 18
road show sales professionals, 380 manufacturing and distribution employees and
277 management and administrative employees. Approximately 185 of our employees
were employed on a part-time basis at January 1, 2000. Except for managerial
employees and professional support staff, all of our employees are paid on an
hourly basis plus commissions for sales associates. None of our employees are
represented by a labor union or covered by a collective bargaining agreement. We
believe that our relations with our employees are good.
CERTAIN IMPORTANT FACTORS
There are several important factors that could cause our actual results to
differ materially from those anticipated by us or which are reflected in any of
our forward-looking statements. These factors, and their impact on the success
of our operations and our ability to achieve our goals, include the following:
History of Operating Losses; Uncertain Profitability
Since inception, we have incurred substantial operating losses and there can be
no assurance that we will achieve profitability on a quarterly or annual basis
in future periods. Our future operating results will depend upon a number of
factors, including:
- - our ability to achieve the objectives of our strategic plan,
- - the level of consumer acceptance of our products,
- - our ability to create product and brand name awareness,
- - the effectiveness and efficiency of our marketing and advertising,
- - the performance of our existing and new retail stores,
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- - our ability to successfully identify and respond to emerging trends in the
mattress industry,
- - the level of competition in the mattress industry,
- - general economic conditions and consumer confidence, and
- - our ability to maintain cost-effective production and delivery of products.
Uncertainty of Success of Strategic Plan
Until mid-1999, our net sales had grown significantly over several years,
primarily as a result of an aggressive retail store growth strategy and strong
comparable store sales increases. In late 1999 we adopted the new strategic plan
discussed above under "Business and Growth Strategy." The success of this
strategic plan to restore profitable sales growth, and the success of our
company as a whole, will be dependent on a variety of factors, including:
- - our ability to develop marketing programs and advertising messages that
increase awareness of our products and brand name, drive consumers to our
retail stores and increase sales,
- - our ability to develop and implement market by market action plans that
improve the performance of our retail stores,
- - the success of our new retail store design in attracting customers to our
stores,
- - our ability to hire, train, manage and retain qualified retail store
management and sales professionals,
- - our ability to successfully launch and commercialize the sofa sleeper
product across our distribution channels and in major markets,
- - the ability of the suppliers of the sofa sleeper product to deliver product
to specifications on a timely basis,
- - our ability to successfully launch and commercialize nationwide in-home
delivery, assembly and mattress removal services on a cost-effective basis,
- - the ability of third-party providers of regional warehousing, delivery,
assembly and mattress removal services to provide quality services on a
cost-effective basis,
- - our ability to use the Internet to drive sales, educate customers and
market our products,
- - our ability to successfully launch and commercialize a catalog to our
installed base of customers,
- - the level of consumer acceptance of our catalog products,
- - the ability of third-party catalog fulfillment providers to fulfill catalog
orders on a timely basis,
- - our ability to continue to improve our product line to enhance customer
acceptance and customer satisfaction, and
- - our ability to manage our general and administrative expenses and our
operating costs.
There can be no assurance that we will be successful in achieving this strategic
plan or that this strategic plan will restore our company to historical sales
growth rates or profitability. Failure to successfully execute any material part
of our strategic plan could have a material adverse effect on our business,
financial condition and operating results.
Sales Tax Considerations
In compliance with state and federal tax regulations, our direct marketing and
e-commerce channels have not historically collected sales tax from customers who
reside in certain states. Industry experts believe these regulations potentially
provide a competitive
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advantage to direct marketers and e-commerce companies over retailers located
within these states and who are required to collect sales tax. In connection
with our plans to provide in-home delivery and assembly of our products to
customers through all of our distribution channels, as well as the execution of
our integrated marketing plan, we will begin collecting sales tax on sales in
all states. While we believe the execution of these initiatives will positively
impact the overall performance of our company, the impact of this change could
negatively impact sales.
Effectiveness and Efficiency of Advertising Expenditures
Our advertising expenditures increased from $9.0 million in 1995 to $43.4
million in 1999, and are expected to continue to increase for the foreseeable
future. Our future growth and profitability will be dependent in part on the
effectiveness and efficiency of our advertising expenditures, including our
ability to:
- - create greater awareness of our products and brand name,
- - determine the appropriate creative message and media mix for future
advertising expenditures,
- - effectively manage advertising costs (including creative and media) in
order to maintain acceptable costs per inquiry, costs per order and
operating margins, and
- - convert inquiries into actual orders.
No assurance can be given that our planned increases in advertising expenditures
will result in increased sales, will generate sufficient levels of product and
brand name awareness or that we will be able to manage our advertising
expenditures on a cost effective basis.
Fluctuations in Comparable Store Sales Results
Our comparable store sales results have fluctuated significantly in the past and
these fluctuations are likely to continue. Stores enter the comparable store
calculation in their 13th full month of operation. Our comparable store sales
increases were 4.7% for 1999, 17.9% for 1998 and 34.6% for 1997.* Our comparable
store sales results have fluctuated significantly from quarter to quarter with
increases ranging from -2.8% to 36.0% on a quarterly basis for 1997 through
1999. There can be no assurance that our comparable store sales results will not
fluctuate significantly in the future.
A variety of factors affect our comparable store sales results, including:
- - the level of consumer awareness of our products and brand name,
- - the rate of consumer acceptance of our products,
- - the higher levels of sales in the first year of operations as each
successive class of new stores is opened,
- - the strong comparable store sales performance in prior periods,
- - the maturation of our store base,
- - the timing and relative success of promotional events, advertising
expenditures, new product introductions and product line extensions,
- - a change in the sales mix between our distribution channels, and
- - general economic conditions and consumer confidence.
Decreases in comparable store sales results could have a material adverse effect
on our business, financial condition and operating results.
Quarterly Fluctuations and Seasonality
Our quarterly operating results may fluctuate significantly as a result of a
variety of factors, including:
- - increases or decreases in comparable store sales,
- ------------------------------
* Fiscal 1997 was a 53-week year versus 52 weeks for 1999 and 1998. Comparable
store sales for 1998 and 1997, adjusted to 52 weeks, would be 27.3% and
26.1%, respectively.
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- - the timing, amount and effectiveness of advertising expenditures,
- - any increases in return rates,
- - the timing of new store openings and related expenses,
- - competitive factors,
- - net sales contributed by new stores,
- - any disruptions in third-party delivery services, and
- - general economic conditions and consumer confidence.
Our business is also subject to some seasonal influences, with heavier
concentrations of sales during the fourth quarter holiday season due to higher
mall traffic.
The level of spending related to sales and marketing expenses and new store
opening costs cannot be adjusted quickly and is based, in significant part, on
our expectations of future customer inquiries and net sales. If there is a
shortfall in expected net sales or in the conversion rate of customer inquiries,
we may be unable to adjust our spending in a timely manner and our business,
financial condition and operating results may be materially adversely affected.
Our results of operations for any quarter are not necessarily indicative of the
results that may be achieved for a full year or any future quarter.
Return Policy and Product Warranty
Part of our marketing and advertising strategy focuses on providing a 90 Night
Trial in which customers may return the air bed and obtain a refund of the
purchase price. An increase in return rates could have a material adverse effect
on our business, financial condition and operating results. We also provide our
customers with a limited 20-year warranty on our air beds. We have only been
selling air beds in significant quantities since 1992. There can be no assurance
that our warranty reserves will be adequate to cover future warranty claims, and
such failure could have a material adverse effect on our business, financial
condition and operating results.
Product Development and Enhancements
Our growth and future success will depend upon our ability to enhance our
existing products and to develop and market new products on a timely basis that
respond to customer needs and achieve market acceptance. There can be no
assurance that we will be successful in developing or marketing enhanced or new
products, or that any such products will be accepted by the market. Further,
there can be no assurance that the resulting level of sales of any of our
enhanced or new products will justify the costs associated with their
development and marketing.
Market Acceptance
The U.S. mattress market is dominated by four large manufacturers of innerspring
mattresses. Our air bed technology represents a significant departure from
traditional innerspring mattresses. The market for air beds is continuing to
evolve and the success of our products will be dependent upon both the continued
growth of this market and upon market acceptance of our air beds. The failure of
our air beds to achieve market acceptance for any reason would have a material
adverse effect on our business, financial condition and operating results.
Reliance Upon Vendors; Single Source of Supply of Air Chambers; Foreign Sources
of Supply
The inability of our suppliers to meet, for any reason, our requirements for any
components of our air bed products, or our requirements of sofa sleeper
products, could have a material adverse effect on our business, financial
condition and operating results. Our air chambers are currently obtained from a
single source of supply. If this supplier became unable or unwilling for any
reason to continue to supply us with air chambers, our operations could be
materially adversely affected. We currently have a supply agreement with this
single source of supply that expires in August 2000 (subject to automatic
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renewal if neither party gives 90 days' notice of non-renewal), but there can be
no assurance that this single source of supply will not be disrupted for any
reason. In addition, since our air chambers and certain other supplies are
manufactured outside the United States, our operations could be materially
adversely affected by the risks associated with foreign sourcing of materials,
including:
- - political instability resulting in disruption of trade,
- - existing or potential duties, tariffs or quotas that may limit the quantity
of certain types of goods that may be imported into the United States or
increase the cost of such goods, and
- - any significant fluctuation in the value of the dollar against foreign
currencies.
With the exception of our air chambers, we have no long-term purchase contracts
or other contractual assurances of continued supply, pricing or access to
components. The inability or failure of one or more key vendors to supply
components, the loss of one or more key vendors or a material change in our
purchase terms could have a material adverse effect on our business, financial
condition and operating results.
Reliance Upon Carriers
Historically, we have relied almost exclusively on UPS for delivery of our
products to customers. For a significant portion of the third quarter of 1997,
UPS was unable to deliver our products within acceptable time periods, causing
delays in deliveries to customers and requiring us to use alternative carriers.
No assurance can be given that UPS will not experience difficulties in meeting
our requirements in the future. We continue to evaluate alternative carriers on
a national and regional basis, as well as providers of in-home delivery and
assembly services. There can be no assurance that alternative carriers will be
able to meet our requirements on a timely or cost-effective basis. Any
significant delay in deliveries to customers or increase in freight charges may
have a material adverse effect on our business, financial condition and
operating results.
Intellectual Property Protection
No assurance can be given that our current pending patents will provide
substantial protection or that others will not be able to develop products that
are similar to or competitive with our air beds. In addition, there can be no
assurance that copyright, trademark, trade secret, unfair competition and other
intellectual property laws, nondisclosure agreements and other protective
measures will preclude competitors from developing products similar to our
products or otherwise competing with us. In addition, the laws of certain
foreign countries may not protect our intellectual property rights and
confidential information to the same extent as the laws of the United States.
Although we are unaware of any basis for an intellectual property infringement
or invalidity claim against us, there can be no assurance that third parties,
including competitors, will not assert such claims against us or that, if
asserted, such claims will not be upheld. Intellectual property litigation,
which could result in substantial cost to and diversion of effort by management,
may be necessary to enforce our patents, to protect our trade secrets and
proprietary technology or to defend us against claimed infringement of the
rights of others and to determine the scope and validity of the proprietary
rights of others. There can be no assurance that we would prevail in any such
litigation or that, if it is unsuccessful, we would be able to obtain any
necessary licenses on reasonable terms or at all.
Competition
The mattress industry is highly competitive. Our air beds compete with a number
of different types of mattress alternatives, including innerspring mattresses,
waterbeds, futons and other air-supported mattresses that are sold through a
variety of channels, including furniture stores, bedding specialty stores,
department stores, mass merchants, wholesale
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clubs, telemarketing programs, television infomercials and catalogs.
The traditional mattress industry is characterized by a high degree of
concentration among the four largest manufacturers of innerspring mattresses
with nationally recognized brand names, including Sealy, which also owns the
Stearns & Foster brand name, Serta, Simmons and Spring Air. Over 700
manufacturers, primarily operating on a regional basis serve the balance of the
mattress market. Many of these competitors, and in particular the four largest
manufacturers named above, have greater financial, marketing and manufacturing
resources and better brand name recognition than us, and sell their products
through broader and more established distribution channels.
A number of companies have begun to offer air beds. There can be no assurance
that these or any other mattress manufacturer will not aggressively pursue the
air bed market. Any such competition by the established manufacturers or new
entrants into the market could have a material adverse effect on our business,
financial condition and operating results. In addition, should any of our
competitors reduce prices on premium mattress products, we may be required to
implement price reductions in order to remain competitive, which could have a
material adverse effect on our business, financial condition and operating
results.
Shareholder Litigation
Select Comfort and certain former officers and directors have been named as
defendants in a class action lawsuit filed on behalf of shareholders in U.S.
District Court in Minnesota. The named plaintiffs, who purport to act on behalf
of a class of purchasers of our common stock during the period from December 4,
1998 to June 7, 1999, charge the defendants with violations of federal
securities laws. The suit alleges that we and the former directors and officers
failed to disclose or misrepresented certain information concerning our business
during the class period. The complaint does not specify an amount of damages
claimed. While we believe that the complaint is without merit and intend to
vigorously defend the claims, there can be no assurance that we will be
successful in defending the lawsuit. Defense of the suit could be expensive and
may create a distraction to the management team. If we are unsuccessful in
defending the suit, an adverse judgment could have a material adverse effect on
our consolidated financial condition or results of operations.
Volatility in Market Price of Common Stock
The market price of our common stock has fluctuated significantly in the past
and may do so in the future. The market price of our common stock may fluctuate
as a result of a variety of factors, many of which are outside of our control,
including without limitation the following factors:
- - variations in quarterly operating results;
- - changes in estimates by securities analysts;
- - announcements of significant events;
- - additions or departures of key personnel; and
- - changes in market valuations of companies in our industry.
ITEM 2. PROPERTIES
We currently lease all of our existing retail store locations and expect that
our policy of leasing, rather than owning, will continue as we expand. Our store
leases generally provide for an initial lease term of 10 years with a mutual
termination option if we do not achieve certain minimum annual sales thresholds.
Generally, the store leases require us to pay minimum rent plus percentage rent
based on net sales in excess of certain thresholds, as well as certain operating
expenses.
We lease approximately 122,000 square feet of space in Minneapolis for one of
our
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manufacturing and distribution centers, one of our direct marketing call
centers, a customer service center and a research and development center, which
lease expires in 2004. We lease an additional 38,000 square feet of space in
Minneapolis for our corporate offices, which lease expires in 2004. We also
lease approximately 105,000 square feet of space in Columbia, South Carolina,
for our second manufacturing and distribution center and a direct marketing call
center, which lease expires in 2003. We have also leased approximately 100,800
square feet in Salt Lake City for a third manufacturing and distribution center
that opened in May of 1999, which lease expires in 2009.
ITEM 3. LEGAL PROCEEDINGS
Select Comfort and certain former officers and directors have been named as
defendants in a class action lawsuit filed on behalf of shareholders in U.S.
District Court in Minnesota. The named plaintiffs, who purport to act on behalf
of a class of purchasers of our common stock during the period from December 4,
1998 to June 7, 1999, charge the defendants with violations of federal
securities laws. The suit alleges that we and the named directors and officers
failed to disclose or misrepresented certain information concerning our business
during the class period. The complaint does not specify an amount of damages
claimed. We believe that the complaint is without merit and intend to vigorously
defend the claims.
We and the individual defendants brought a motion to dismiss all claims on
November 10, 1999. The motion was heard by the magistrate on December 21, 1999.
On January 27, 2000, the magistrate recommended dismissal of the claims based on
Section 11 of the Federal securities laws. The magistrate recommended that the
motion to dismiss be denied with respect to the claims based on Rule 10b-5 of
the Federal securities laws. On February 15, 2000, the parties formally objected
to the magistrate's recommendation. The objection was made to the United States
District Court in Minnesota who must issue the ruling on defendants' motion. The
Court has not yet issued its ruling.
We have agreed to indemnify the individual defendants and to advance reasonable
expenses of defense of the litigation to the individual defendants under
applicable Minnesota corporate law. To date, we have paid an aggregate of $2,326
to the law firm of Briggs & Morgan on behalf of defendant H. Robert Hawthorne.
We are 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 are adequately covered by insurance or are
provided for in the consolidated financial statements and the ultimate outcome
of these matters will not have a material effect on the consolidated financial
position or results of operations of the Company.
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ITEM 4. EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers, their ages and the offices held, as of March
31, 2000, are as follows:
NAME AGE TITLE
- ----------------------------- ---- -------------------------------------
William R. McLaughlin 43 President and Chief Executive Officer
Tracey T. Breazeale 33 Senior Vice President, Strategic
Planning and Branding
Renee M. Christensen 43 Senior Vice President, E-Commerce
James D. Gaboury 38 Vice President, Direct Marketing
Mark A. Kimball 41 Senior Vice President, Chief
Administrative Officer, General
Counsel and Secretary
Gregory T. Kliner 62 Senior Vice President of Operations
Ronald E. Mayle 42 Senior Vice President, Retail
James C. Raabe 40 Vice President and Chief Financial
Officer
Information regarding the business experience of our executive officers
is set forth below.
William R. McLaughlin joined Select Comfort in March 2000 as President and Chief
Executive Officer. From December 1988 to March 2000, Mr. McLaughlin served as an
executive of Pepsico Foods International in various capacities, including from
September 1996 to March 2000 as President of Frito Lay Europe, Middle East and
Africa, and from June 1993 to June 1996 as President of Grupo Gamesa, a cookie
and flour company based in Mexico.
Tracey T. Breazeale has served as Senior Vice President of Strategic Planning
and Branding of Select Comfort since July 1999. Ms. Breazeale was with the
Boston Consulting Group from October 1993 to July 1999, initially as a
consultant and the last three years as a manager, where she specialized on
strategic and marketing oriented projects for retail and consumer product
companies.
Renee M. Christensen has served as Senior Vice President of E-Commerce of Select
Comfort since August 1999 and President of selectcomfort.com corporation since
May 1999. From March 1999 to August 1999, Ms. Christensen served as Vice
President of E-Commerce of Select Comfort. From May 1998 to March 1999, Ms.
Christensen served as Senior Manager, Online Services for US Bancorp, a major
financial institution. From July 1997 to May 1998, Ms. Christensen served as
Business Development Manager, Electronic Bill Payment for Travelers Express, a
financial services company. From April 1995 to July 1997, Ms. Christensen served
as Vice President, Online Financial Services for Wells Fargo & Company, a major
financial institution. From June 1987 to April 1995, Ms. Christensen served in
various positions with Charles Schwab & Co., a brokerage firm.
James D. Gaboury was appointed Vice President, Direct Sales in December 1999. He
served as Director of Direct Sales from July 1993 to April 1997; Vice President,
Direct Sales from April 1997 to August 1998; and Vice President Customer
Satisfaction and Direct Sales from August 1998 to December 1999.
Mark A. Kimball joined Select Comfort in May 1999 as Senior Vice President,
Chief Administrative Officer, General Counsel and Secretary. For more than five
years prior to
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joining Select Comfort, Mr. Kimball was a partner in the law firm of Oppenheimer
Wolff & Donnelly LLP practicing in the area of corporate finance.
Gregory T. Kliner has served as Senior Vice President of Operations of Select
Comfort since August 1995. From October 1986 to August 1995, Mr. Kliner served
as Director of Operations of the Irrigation Division for The Toro Company, a
manufacturer of lawn care and snow removal products and irrigation systems.
Ronald E. Mayle has served as Senior Vice President of Retail of Select Comfort
and President of Select Comfort Retail Corporation since December 1997. From
October 1996 to December 1997, Mr. Mayle served as Managing Member of Management
& Capital, a retail consulting firm. From May 1995 to October 1996, Mr. Mayle
served as an independent retail marketing consultant, primarily to a variety of
privately owned, start-up retail enterprises, advising on infrastructure and
sales and marketing strategies. From April 1992 to May 1995, Mr. Mayle was Vice
President of Operations of Petstuff, Inc., a subsidiary of PetsMart Inc.
James C. Raabe was elected as Vice President and Chief Financial Officer of
Select Comfort in April 1999. From September 1997 to April 1999, Mr. Raabe
served as Controller of Select Comfort. From May 1992 to September 1997, Mr.
Raabe served as Vice President - Finance of ValueRx, Inc., a pharmacy benefit
management provider. Mr. Raabe held various positions with KPMG LLP from August
1982 to May 1992.
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PART II
--------------------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information under the caption "Common Stock" on the inside back cover of our
1999 Annual Report is incorporated herein by reference.
NUMBER OF RECORD HOLDERS; DIVIDENDS
As of March 1, 2000, there were 187 record holders of our common stock. We did
not declare or pay any cash dividends on the common stock during the fiscal
years ended January 2, 1999 or January 1, 2000.
USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
On September 3, 1998, we filed a Registration Statement on Form S-1 (File No.
333-62793) with the Securities and Exchange Commission, pursuant to which we
registered the offer and sale under the federal securities laws of 4,600,000
shares of common stock, including 1,677,650 shares sold by certain selling
shareholders. The SEC declared our Registration Statement effective on December
3, 1998, and the closing of the initial public offering was held on December 9,
1998. The managing underwriters were Hambrecht & Quist LLC, BankBoston Robertson
Stephens Inc., Piper Jaffray Inc. and Charles Schwab & Co., Inc.
The aggregate offering price of all shares sold in the offering was $78,200,000.
The net proceeds to Select Comfort from the sale of the shares of common stock
offered by Select Comfort was $44,643,353, after deducting the underwriting
discount of $3,477,597 and offering expenses of approximately $1,559,000. All of
the expenses incurred in connection with the initial public offering were paid
to unrelated parties or entities, except for the underwriting discount which was
given to, among others, Hambrecht & Quist LLC. Jean-Michel Valette, a director
of the Company, was a member of the general partner of H&Q Select Comfort
Investors, L.P., a related party to Hambrecht & Quist LLC.
From December 9, 1998 to January 1, 2000, the net proceeds from the offering
have been used as follows:
Repayment of long-term debt........ $15,325,480
Repurchase of our common
stock.............................. 12,692,054
Fund the build-out, start-up and
leasing of our third manufacturing
and distribution facility.......... 1,712,306
Fund development of warranty and
inquiry system..................... 1,032,099
Fund expansion of our retail
store base......................... 8,135,520
-----------
$38,897,459
===========
ITEM 6. SELECTED FINANCIAL DATA
The financial information under the caption "Selected Consolidated Financial
Data" on page 8 of our 1999 Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 9 to 14 of our 1999
Annual Report is incorporated herein by reference.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information concerning disclosure about market risk set forth in Note 2 to our
Consolidated Financial Statements on page 21 of our 1999 Annual Report is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements and Independent Auditors' Report thereon
on pages 15 to 28 of our 1999 Annual Report are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
--------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The information under the captions "Election of Directors -- Information About
Nominees and Directors" and "Election of Directors -- Other Information About
Nominees and Directors" in our 2000 Proxy Statement is incorporated herein by
reference. The information concerning executive officers of Select Comfort is
included in this Report under Item 4a, "Executive Officers of the Company."
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The information under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in our 2000 Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Election of Directors -- Director
Compensation" and "Executive Compensation and Other Benefits" in our 2000 Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Principal Shareholders and Beneficial
Ownership of Management" in our 2000 Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Transactions" in our 2000 Proxy
Statement is incorporated herein by reference.
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PART IV
--------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements of Select
Comfort and its subsidiaries are incorporated herein by reference from
the pages indicated in Select Comfort's 1999 Annual Report:
Consolidated Financial Statements:
Independent Auditors' Report 15
Consolidated Balance Sheets as of January 1, 2000 and
January 2, 1999 16
Consolidated Statements of Operations for the years ended
January 1, 2000, January 2, 1999 and January 3, 1998 17
Consolidated Statements of Shareholders' Equity for the
years ended January 1, 2000, January 2, 1999 and
January 3, 1998 18
Consolidated Statements of Cash Flows for the years ended
January 1, 2000, January 2, 1999 and January 3, 1998 19
Notes to Consolidated Financial Statements 20-28
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Attached to this Report on page 26 is the Independent Auditors'
Report, together with Schedule II -- Valuation and Qualifying Accounts.
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3. EXHIBITS
The exhibits to this Report are listed in the Exhibit Index on
pages 28 to 32 below.
Select Comfort will furnish a copy of any of the exhibits
referred to above at a reasonable cost to any shareholder upon receipt
of a written request therefor. Requests should be sent to: Select
Comfort Corporation, 10400 Viking Drive, Suite 400, Minneapolis,
Minnesota 55344; Attn: Shareholder Information.
The following is a list of each management contract or
compensatory plan or arrangement required to be filed as an exhibit to
this Annual Report on Form 10-K pursuant to Item 13(a):
1. Form of Incentive Stock Option Agreement under the 1997 Stock
Incentive Plan
2. Form of Performance Based Stock Option Agreement under the 1997
Stock Incentive Plan
3. Employment Letter Agreement dated July 11, 1995 between the
Company and Gregory T. Kliner
4. Consulting Agreement and Stock Option Agreement dated April 1,
1996 between the Company and Ervin R. Shames
5. Employment Letter Agreement dated November 12, 1997 between the
Company and Ronald E. Mayle
6. Employment and Consulting Agreement by and between Select Comfort
Corporation and H. Robert Hawthorne
7. Select Comfort Profit Sharing and 401(K) Plan
8. Select Comfort Corporation 1999 Employee Stock Purchase Plan
9. Select Comfort Corporation 1990 Omnibus Stock Option Plan, as
amended and restated
10. Select Comfort Corporation 1997 Stock Incentive Plan, as amended
and restated
11. Employment Letter Agreement dated July 21, 1999 between the
Company and Tracey T. Breazeale
12. Employment Letter Agreement dated April 22, 1999 between the
Company and Mark A. Kimball
(B) REPORTS ON FORM 8-K
We did not file any Current Reports on Form 8-K during the quarter
ended January 1, 2000.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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
Dated: March 20, 2000 By: /s/ Patrick A. Hopf
---------------------------------------------
Patrick A. Hopf
Interim President and Chief Executive Officer
(principal executive officer)
By: /s/ James C. Raabe
---------------------------------------------
James C. Raabe
Chief Financial Officer
(principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
/s/ Patrick A. Hopf
- -------------------------- Interim President and March 20, 2000
Patrick A. Hopf Chief Executive Officer
and Chairman of the Board
/s/ Ervin R. Shames
- -------------------------- Director March 27, 2000
Ervin R. Shames
/s/ Thomas J. Albani
- -------------------------- Director March 27, 2000
Thomas J. Albani
/s/ Christopher P. Kirchen
- -------------------------- Director March 27, 2000
Christopher P. Kirchen
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/s/ David T. Kollat
- -------------------------- Director March 24, 2000
David T. Kollat
/s/ William J. Lansing
- -------------------------- Director March 23, 2000
William J. Lansing
/s/ Jean-Michel Valette
- -------------------------- Director March 30, 2000
Jean-Michel Valette
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INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Select Comfort Corporation:
Under date of January 26, 2000 we reported on the consolidated balance
sheets of Select Comfort Corporation and subsidiaries as of January 1, 2000 and
January 2, 1999 and the related statements of operations, stockholders' equity,
and cash flows for each of the years in the three-year period ended January 1,
2000, as contained in the Annual Report on Form 10-K for the year 1999. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule as listed
in the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material aspects, the information set forth therein.
/s/ KPMG LLP
Minneapolis, Minnesota
January 26, 2000
SELECT COMFORT CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND FROM END OF
DESCRIPTION OF PERIOD EXPENSES RESERVES PERIOD
------------------------------------- ----------- ------------ ------------ ------------
Allowance for doubtful
accounts - 1999 $2,750 $1,193 $3,638 $ 305
- 1998 1,901 2,794 1,945 2,750
- 1997 200 2,101 400 1,901
Accrued warranty
costs - 1999 $4,486 $5,368 $4,013 $5,841
- 1998 3,257 4,807 3,578 4,486
- 1997 2,036 3,274 2,053 3,257
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SELECT COMFORT CORPORATION
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JANUARY 1, 2000
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
3.1 Restated Articles of Incorporation of the Company, as amended.. Filed electronically herewith
3.2 Restated Bylaws of the Company................................. Incorporated by reference to Exhibit
3.2 contained in the Select Comfort's
Registration Statement on Form S-1, as
amended (File No. 333-62793)
4.1 Form of Warrant issued in connection with the sale of Incorporated by reference to Exhibit
Convertible Preferred Stock, Series E.......................... 4.2 contained in Select Comfort's
Registration Statement on Form S-1, as
amended (File No. 333-62793)
4.2 Form of Warrant issued in connection with the November 1996 Incorporated by reference to Exhibit
Bridge Financing............................................... 4.3 contained in the Select Comfort's
Registration Statement on Form S-1, as
amended (File No. 333-62793)
4.3 Amended and Restated Registration Rights Agreement dated Incorporated by reference to Exhibit
December 28, 1995.............................................. 4.4 contained in the Select Comfort's
Registration Statement on Form S-1, as
amended (File No. 333-62793)
4.4 First Amendment to Series E Stock Purchase Agreement and Incorporated by reference to Exhibit
Amended and Restated Registration Rights Agreement dated 4.5 contained in Select Comfort's
April 25, 1996................................................. Registration Statement on Form S-1, as
amended (File No. 333-62793)
4.5 Second Amendment to Amended and Restated Registration Rights Incorporated by reference to Exhibit
Agreement dated as of November 1, 1996......................... 4.6 contained in Select Comfort's
Registration Statement on Form S-1, as
amended (File No. 333-62793)
4.6 Second (sic) Amendment to Amended and Restated Registration Incorporated by reference to Exhibit
Rights Agreement dated March 24, 1997.......................... 4.7 contained in Select Comfort's
Registration Statement on Form S-1, as
amended (File No. 333-62793)
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4.7 Series A Warrant effective as of March 31, 1998 issued to Incorporated by reference to Exhibit
General Electric Capital Corporation........................... 4.8 contained in Select Comfort's
Registration Statement on Form S-1, as
amended (File No. 333-62793)
10.1 Net Lease Agreement dated December 3, 1993 between the Company Incorporated by reference to Exhibit
and Opus Corporation........................................... 10.1 contained in Select Comfort's
Registration Statement on Form S-1, as
amended (File No. 333-62793)
10.2 Amendment of Lease dated August 10, 1994 between the Company and Incorporated by reference to Exhibit
Opus Corporation............................................... 10.2 contained in the Select Comfort's
Registration Statement on Form S-1, as
amended (File No. 333-62793)
10.3 Second Amendment to Lease dated May 10, 1995 between the Company Incorporated by reference to Exhibit
and Rushmore Plaza Partners Limited Partnership (successor to 10.3 contained in Select Comfort's
Opus Corporation).............................................. Registration Statement on Form S-1, as
amended (File No. 333-62793)
10.4 Letter Agreement dated as of October 5, 1995 between Incorporated by reference to Exhibit
the Company and Rushmore Plaza Partners 10.4 contained in Select Comfort's
Limited Partnership............................................ Registration Statement on Form S-1, as
amended (File No. 333-62793)
10.5 Third Amendment of Lease, Assignment and Assumption of Lease and Incorporated by reference to Exhibit
Consent dated as of January 1, 1996 among the Company, Rushmore 10.5 contained in Select Comfort's
Plaza Partners Limited Partnership and Select Comfort Direct Registration Statement on Form S-1, as
Corporation.................................................... amended (File No. 333-62793)
10.6 Sublease dated as of March 27, 1997 between Select Comfort SC Incorporated by reference to Exhibit
Corporation and Bellsouth Telecommunications, Inc.............. 10.6 contained in Select Comfort's
Registration Statement on Form S-1, as
amended (File No. 333-62793)
10.7 Master Lease Agreement dated August 27, 1996 between Incorporated by reference to Exhibit
Comdisco, Inc. and the Company and Equipment 10.7 contained in Select Comfort's
Schedules VL-1 dated August 27, 1996 and VL-2 and VL-3 Registration Statement on Form S-1,
dated November 11, 1996........................................ as amended (File No. 333-62793)
10.8 Supply Agreement dated August 23, 1994 between the Company and Incorporated by reference to Exhibit
Supplier (1)................................................... 10.8 contained in Select Comfort's
Registration Statement on Form S-1, as
amended (File No. 333-62793)
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10.9 Equipment Purchase and Software License Agreement dated Incorporated by reference to Exhibit
February 6, 1996 between the Company and Supplier (1).......... 10.9 contained in Select Comfort's
Registration Statement on Form S-1, as
amended (File No. 333-62793)
10.10 Major Merchant Agreement dated December 19, 1997 among First Incorporated by reference to Exhibit
National Bank of Omaha and the Company, Select Comfort SC 10.13 contained in Select Comfort's
Corporation, Select Comfort Retail Corporation and Select Registration Statement on Form S-1, as
Comfort Direct Corporation..................................... amended (File No. 333-62793)
10.11 Form of Incentive Stock Option Agreement under the 1997 Stock Incorporated by reference to Exhibit
Incentive Plan................................................. 10.16 contained in the Company's
Registration Statement on Form S-1, as
amended (File No. 333-62793)
10.12 Form of Performance Based Stock Option Agreement under the 1997 Incorporated by reference to Exhibit
Stock Incentive Plan........................................... 10.17 contained in Select Comfort's
Registration Statement on Form S-1, as
amended (File No. 333-62793)
10.13 Employment Letter Agreement dated July 11, 1995 between the Incorporated by reference to Exhibit
Company and Gregory T. Kliner.................................. 10.20 contained in Select Comfort's
Registration Statement on Form S-1, as
amended (File No. 333-62793)
10.14 Consulting Agreement and Stock Option Agreement dated April 1, Incorporated by reference to Exhibit
1996 between the Company and Ervin R. Shames................... 10.21 contained in Select Comfort's
Registration Statement on Form S-1, as
amended (File No. 333-62793)
10.15 Employment Letter Agreement dated November 12, 1997 between the Incorporated by reference to Exhibit
Company and Ronald E. Mayle.................................... 10.20 contained in Select Comfort's
Annual Report on Form 10-K for the
fiscal year ended January 2, 1999
(File No. 0-25121)
10.16 Lease Agreement dated September 30, 1998 between Incorporated by reference to Exhibit
the Company and ProLogis Development Services 10.28 contained in Select Comfort's
Incorporated................................................... Registration Statement on Form S-1, as
amended (File No. 333-62793)
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10.17 Employment and Consulting Agreement by and between Select Incorporated by reference to Exhibit
Comfort Corporation and H. Robert Hawthorne.................... 10.2 contained in Select Comfort's
Quarterly Report on Form 10-Q for the
quarter ended July 3, 1999
10.18 Revolving Credit Program Agreement by and between Green Tree Incorporated by reference to Exhibit
Financial Corporation and Select Comfort Corporation (1)....... 10.3 contained in Select Comfort's
Quarterly Report on Form 10-Q for the
quarter ended July 3, 1999
10.19 Letter of Agreement by and between Bed, Bath & Beyond Inc. and Incorporated by reference to Exhibit
Select Comfort Retail Corporation (1).......................... 10.4 contained in Select Comfort's
Quarterly Report on Form 10-Q for the
quarter ended July 3, 1999
10.20 Select Comfort Profit Sharing and 401(K) Plan.................. Incorporated by reference to Exhibit
10.5 contained in Select Comfort's
Quarterly Report on Form 10-Q for the
quarter ended July 3, 1999
10.21 Select Comfort Corporation 1999 Employee Stock Purchase Plan... Incorporated by reference to Exhibit
10.6 contained in Select Comfort's
Quarterly Report on Form 10-Q for the
quarter ended July 3, 1999
10.22 Select Comfort Corporation 1990 Omnibus Stock Option Plan, as Incorporated by reference to Exhibit
amended and restated........................................... 10.1 contained in Select Comfort's
Quarterly Report on Form 10-Q for the
quarter ended October 2, 1999
10.23 Select Comfort Corporation 1997 Stock Inventive Plan, as amended Incorporated by reference to Exhibit
and restated................................................... 10.2 contained in Select Comfort's
Quarterly Report on Form 10-Q for the
quarter ended October 2, 1999
10.24 Employment Letter Agreement dated July 21, 1999 Filed herewith electronically
between the Company and Tracey T. Breazeale....................
10.25 Employment Letter Agreement dated April 22, 1999 between the Filed herewith electronically
Company and Mark A. Kimball....................................
10.26 S-8 - Employee Benefit Plan.................................... Incorporated by reference to Select
Comfort's S-8(File No. 333-70493)
10.27 S-8 - Profit Sharing and 401(k) Plan........................... Incorporated by reference to Select
Comfort's S-8(File No. 333-79157)
10.28 S-8 - 1999 Employee Stock Purchase Plan........................ Incorporated by reference to Select
Comfort's S-8(File No. 333-80755)
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10.29 S-8 - 1997 Stock Incentive Plan................................ Incorporated by reference to Select
Comfort's S-8(File No. 333-84329)
13.1 Excerpts from the 1999 Annual Report to Shareholders........... Filed herewith electronically
21.1 Subsidiaries of the Company..................................... Filed herewith electronically
23.1 Independent Auditors' Consent.................................. Filed herewith electronically
27.1 Financial Data Schedule........................................ Filed herewith electronically
- -------------------
(1) Confidential treatment has been granted by the Securities and Exchange
Commission with respect to designated portions contained within document. Such
portions have been omitted and filed separately with the Securities and Exchange
Commission pursuant to Rule 24b-2 of the Securities and Exchange Act of 1934, as
amended.
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