-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rgh/QGCtY+IWP+awcT64WxA/A2ER/XID7AYhJt7SshwQ+U+rNOcmzmRdTruqtdJ4 n/pDClKaU8mC1j7uI7u09A== /in/edgar/work/0000827187-00-000007/0000827187-00-000007.txt : 20001115 0000827187-00-000007.hdr.sgml : 20001115 ACCESSION NUMBER: 0000827187-00-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SELECT COMFORT CORP CENTRAL INDEX KEY: 0000827187 STANDARD INDUSTRIAL CLASSIFICATION: [2510 ] IRS NUMBER: 410157886 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25121 FILM NUMBER: 767130 BUSINESS ADDRESS: STREET 1: 6105 TRENTON LANE NORTH CITY: MINNEAPOLIS STATE: MN ZIP: 55442 BUSINESS PHONE: (763) 551-7000 MAIL ADDRESS: STREET 1: 6105 TRENTON LANE NORTH CITY: MINNEAPOLIS STATE: MN ZIP: 55442 10-Q 1 0001.txt 10-Q 3RD QTR SELECT COMFORT CORPORATION 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 30, 2000 COMMISSION FILE NO. 0-25121 -------------------- SELECT COMFORT CORPORATION (Exact name of registrant as specified in its charter) MINNESOTA 41-1597886 (State or other jurisdiction of (I.R.S. Employer 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. X YES NO As of September 30, 2000, 17,883,212 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 30, 2000 and January 1, 2000............................. 3 Consolidated Statements of Operations for the Three Months and Nine Months ended September 30, 2000 and October 2, 1999................................................ 4 Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2000 and October 2, 1999................................................ 5 Notes to Consolidated Financial Statements......................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk......... 15 PART II: OTHER INFORMATION Item 1. Legal Proceedings................................................ 16 Item 2. Changes in Securities and Use of Proceeds........................ 16 Item 3. Defaults Upon Senior Securities.................................. 16 Item 4. Submission of Matters to a Vote of Security Holders.............. 16 Item 5. Other Information................................................ 16 Item 6. Exhibits and Reports on Form 8-K................................. 17 SELECT COMFORT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) SEPTEMBER 30, JANUARY 1, ASSETS 2000 2000 -------------- ------------- Current assets: Cash and cash equivalents $ 3,109 $ 7,441 Marketable securities 9,572 20,129 Accounts receivable, net of allowance for doubtful accounts of $208, and $305, respectively 648 1,056 Inventories (note 2) 12,030 11,451 Prepaid expenses 6,729 4,821 Income taxes 302 2,579 Deferred tax assets 6,676 6,639 -------------- ------------- Total current assets 39,066 54,116 Property and equipment, net 36,421 34,823 Deferred tax assets 11,094 4,248 Other assets 2,708 2,678 -------------- ------------- Total assets $ 89,289 $ 95,865 ============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 26 $ 51 Accounts payable 19,805 15,911 Accruals: Sales returns 5,104 5,880 Warranty costs 7,036 5,841 Compensation, taxes and benefits 6,020 6,678 Other 5,099 5,285 -------------- ------------- Total current liabilities 43,090 39,646 Long-term debt, less current maturities 52 36 Other liabilities 3,365 2,809 -------------- ------------- Total liabilities 46,507 42,491 -------------- ------------- Shareholders' equity: Undesignated preferred stock; 5,000,000 shares authorized, no shares issued and outstanding - - Common stock, $.01 par value; 95,000,000 shares authorized, 17,883,212 and 17,713,247 shares issued and outstanding, respectively 179 177 Additional paid-in capital 79,328 78,513 Accumulated deficit (36,725) (25,316) -------------- ------------- Total shareholders' equity 42,782 53,374 -------------- ------------- Total liabilities and shareholders' equity $ 89,289 $ 95,865 ============== ============= See accompanying notes to consolidated financial statements. 3 SELECT COMFORT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED ------------------------- ------------------------- SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2, 2000 1999 2000 1999 ------------- ----------- ------------- ----------- Net sales $ 68,056 $ 68,281 $ 206,002 $ 205,663 Cost of sales 24,871 23,944 73,903 71,053 ------------- ----------- ------------- ----------- Gross margin 43,185 44,337 132,099 134,610 ------------- ----------- ------------- ----------- Operating expenses: Sales and marketing 44,378 42,904 128,196 120,800 General and administrative 7,667 7,865 22,830 18,664 ------------- ----------- ------------- ----------- Total operating expenses 52,045 50,769 151,026 139,464 ------------- ----------- ------------- ----------- Operating loss (8,860) (6,432) (18,927) (4,854) ------------- ----------- ------------- ----------- Other income (expense): Interest income 253 537 937 1,496 Interest expense (2) (10) (6) (61) Other, net (31) 35 (114) (12) ------------- ----------- ------------- ----------- Other income, net 220 562 817 1,423 ------------- ----------- ------------- ----------- Loss before income taxes (8,640) (5,870) (18,110) (3,431) Income tax benefit (3,197) (2,172) (6,701) (1,269) ------------- ----------- ------------- ----------- Net loss $ (5,443) $ (3,698) $ (11,409) $ (2,162) ============= =========== ============= =========== Net loss per share (note 4) - basic and diluted $ (0.30) $ (0.20) $ (0.64) $ (0.12) ============= =========== ============= =========== Weighted average shares - basic and diluted 17,874 18,148 17,815 18,348 ============= =========== ============= =========== 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 30, OCTOBER 2, 2000 1999 ------------- ------------ Cash flows from operating activities: Net loss $ (11,409) $ (2,162) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 6,075 4,616 Loss on disposal of assets and impaired assets 1,970 - Deferred tax assets (6,872) (1,305) Change in operating assets and liabilities: Accounts receivable, net 408 9,046 Inventories (579) (1,028) Prepaid expenses (1,908) 250 Income taxes 2,277 (3,428) Accounts payable 3,894 5,018 Accrued sales returns (776) (775) Accrued warranty costs 1,195 1,159 Accrued compensation, taxes and benefits (391) 340 Other accrued liabilities (24) 26 Other assets (50) 150 Other liabilities 556 550 ------------- ------------ Net cash provided by (used in) operating activities (5,634) 12,457 ------------- ------------ Cash flows from investing activities: Purchases of property and equipment (9,741) (10,663) Investment in marketable securities 10,557 (24,250) Investment in affiliate - (2,000) ------------- ------------ Net cash provided by (used in) investing activities 816 (36,913) ------------- ------------ Cash flows from financing activities: Principal payments on debt (53) (664) Repurchase of common stock - (10,438) Proceeds from issuance of common stock 539 3,318 ------------- ------------ Net cash provided by (used in) financing activities 486 (7,784) ------------- ------------ Decrease in cash and cash equivalents (4,332) (32,240) Cash and cash equivalents, at beginning of period 7,441 45,561 ------------- ------------ Cash and cash equivalents, at end of period $ 3,109 $ 13,321 ============= ============
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 30, 2000 and October 2, 1999 of Select Comfort Corporation and subsidiaries ("Select Comfort" or the "Company"), have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the financial position of the Company as of September 30, 2000 and January 1, 2000 and the results of operations and cash flow for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with 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 January 1, 2000. Operating results for the Company on a quarterly basis may not be indicative of operating results for the full year. During 1999 the Securities and Exchange Commission issued Staff Accounting Bulletin No 101, "Revenue Recognition in Financial Statements" (SAB 101). The SEC has delayed the implementation date of SAB 101 until the Company's fiscal 2000 fourth quarter. In October 2000, the SEC issued additional guidance with respect to SAB 101. The Company is analyzing the impact of SAB 101, but it is not expected to have a material impact on the Company's consolidated financial statements. (2) INVENTORIES Inventories consist of the following (in thousands): September 30, January 1, 2000 2000 --------------- --------------- Raw materials $ 4,878 $ 5,753 Work in progress 88 59 Finished goods 7,064 5,639 --------------- --------------- $ 12,030 $ 11,451 =============== =============== (3) NONRECURRING CHARGES During the third quarter of fiscal 2000, the Company incurred certain one-time charges of $1.4 million as the result of a review focused on reducing costs and increasing the efficiency of its operations. The charges are primarily comprised of costs to relocate the Company's corporate headquarters ($.6 million) and asset impairment costs related to software design ($.7 million). As of September 30, 2000 and January 1, 2000 there were no significant balance sheet accruals related to nonrecurring charges. There are no significant future cash requirements as a result of this charge. 6 (4) NET LOSS PER COMMON SHARE The following computations reconcile net loss with net loss per common share-basic and diluted (in thousands except per share amounts).
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------------- ----------------------------------- NET PER SHARE NET PER SHARE SEPTEMBER 30, 2000 LOSS SHARES AMOUNT LOSS SHARES AMOUNT ------------------ ---------- ---------- ---------- ---------- --------- ----------- Net loss $ (5,443) $ (11,409) BASIC AND DILUTED EPS Net loss available to common shareholders $ (5,443) 17,874 $ (0.30) $ (11,409) 17,815 $ (0.64) ========== ========== =========== ========== ========= ===========
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------------ ----------------------------------- NET PER SHARE NET PER SHARE OCTOBER 2, 1999 LOSS SHARES AMOUNT LOSS SHARES AMOUNT --------------- ---------- ---------- ----------- ---------- --------- ----------- Net loss $ (3,698) $ (2,162) BASIC AND DILUTED EPS Net loss available to common shareholders $ (3,698) 18,148 $ (0.20) $ (2,162) 18,348 $ (0.12) ========== ========== =========== ========== ========= ===========
(5) LITIGATION The Company and certain of its former officers and directors have been named as defendants in a consolidated class action lawsuit filed on behalf of Company shareholders in U.S. District Court in Minnesota. The named plaintiffs, who purport to act on behalf of a class of purchasers of the Company's common stock during the period from December 4, 1998 to June 7, 1999, charge the defendants with violations of federal securities laws. The suit alleges that the Company and the named directors and officers failed to disclose or misrepresented certain information concerning the Company during the class period. The complaint does not specify an amount of damages claimed. The Company believes that the complaint is without merit and intends to vigorously defend the claims. The Company and the individual defendants brought a motion to dismiss all claims on November 10, 1999. The motion was heard by a magistrate judge on December 21, 1999. On January 27, 2000, the magistrate recommended that the claims based on Section 11 of the federal securities laws be dismissed. The magistrate recommended that the motion to dismiss be denied with respect to the claims based on Rule 10b-5 of the federal securities laws. In February 2000, both the plaintiffs and the defendants formally objected to the magistrate's recommendation. The objection was made to the United States District Court in Minnesota. On May 12, 2000, the United States District Court in Minnesota adopted the recommendation of the magistrate and denied the defendants' motion to dismiss the Rule 10b-5 claims. The Court also adopted the recommendation of the magistrate and dismissed the plaintiff's Section 11 claims without prejudice and with leave to amend. On March 31, 2000, the Company and certain of its former officers and directors were named as defendants in a class action lawsuit filed on behalf of the Company's shareholders in U.S. District Court in Minnesota asserting identical factual allegations as the consolidated complaint described above. The suit alleges claims based on Sections 11 and 12(a)(2) of the federal securities laws. The complaint does not specify an amount of damages claimed. The Company believes this complaint is without merit and intends to vigorously defend the claims. The above two class actions were consolidated by the United States District Court Magistrate on July 24, 2000. 7 The Company is subject to various other claims, legal actions, sales tax disputes and other complaints arising in the ordinary course of business. In the opinion of management, any losses that may occur from these other matters are adequately covered by insurance or are provided for in the consolidated financial statements, and the ultimate outcome of these other matters will not have a material effect on the consolidated financial position or results of operations of the Company. 8 PART I: FINANCIAL INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED HEREIN. THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY THOSE THAT ARE NOT HISTORICAL IN NATURE, PARTICULARLY THOSE THAT USE TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECTS," "ANTICIPATES," "CONTEMPLATES," "ESTIMATES," "BELIEVES," "PLANS," "PROJECTED," "PREDICTS," "POTENTIAL" OR "CONTINUE" OR THE NEGATIVE OF THESE OR SIMILAR TERMS. THESE STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S HISTORICAL EXPERIENCE AND ITS PRESENT EXPECTATIONS OR PROJECTIONS. IMPORTANT FACTORS KNOWN TO SELECT COMFORT THAT COULD CAUSE SUCH MATERIAL DIFFERENCES ARE IDENTIFIED AND DISCUSSED IN PART I, ITEM 1 OF OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 1, 2000, WHICH DISCUSSION IS INCORPORATED HEREIN BY REFERENCE. THESE IMPORTANT FACTORS INCLUDE OUR ABILITY TO ACHIEVE THE OBJECTIVES OF OUR STRATEGIC PLAN, THE LEVEL OF CONSUMER ACCEPTANCE OF OUR PRODUCTS, OUR ABILITY TO CREATE PRODUCT AND BRAND NAME AWARENESS, THE EFFECTIVENESS AND EFFICIENCY OF OUR MARKETING AND ADVERTISING PROGRAMS, THE PERFORMANCE OF OUR EXISTING AND NEW RETAIL STORES, OUR ABILITY TO SUCCESSFULLY IDENTIFY AND RESPOND TO EMERGING TRENDS IN THE MATTRESS INDUSTRY, THE LEVEL OF COMPETITION IN THE MATTRESS INDUSTRY, OUR ABILITY TO MAINTAIN COST-EFFECTIVE PRODUCTION AND DELIVERY OF PRODUCTS, CERTAIN SALES TAX CONSIDERATIONS AND GENERAL ECONOMIC CONDITIONS AND CONSUMER CONFIDENCE. OVERVIEW Select Comfort is the leading vertically integrated manufacturer, specialty retailer and direct marketer of innovative air beds and sleep-related products. Since the introduction of our first air bed product in 1987, management has focused on improving our product, expanding our product line, building manufacturing and distribution systems and growing our three distribution channels: retail, direct marketing and e-commerce. Vertically integrated operations and control over these complementary distribution channels gives us direct contact with our customers and gives our customers multiple opportunities to purchase our products. Sales generation is driven primarily by targeted print, radio, television, and internet media that generate customer inquiries, as well as by our retail store and internet presence. Retail operations included 338 stores at September 30, 2000, including 33 leased departments within larger stores and 341 stores at January 1, 2000, including 45 leased departments. We opened 16 retail stores during 2000 and plan to open approximately 3 additional retail stores for the remainder of the year. From inception through September 30, 2000, we have closed a total of 26 stores, of which 19 were closed in the first nine months of 2000 (7 mall based stores, 12 leased departments). During the fourth quarter of 2000, we plan to close 8 additional underperforming retail stores (all leased departments). In addition, we have identified 6 mall based stores to be closed in the first half of 2001. A significant portion of the costs associated with the store closings in 2000 was accrued in 1999. Comparable store sales growth for the three months ended September 30, 2000 and October 2, 1999 was 3.7% and 3.6%, respectively. Comparable store sales growth for the nine months ended September 30, 2000 and October 2, 1999 was 0.0% and 7.9%, respectively. Comparable store sales results have been and will continue to be influenced by a variety of factors, including levels of awareness of our products and brand name, levels of consumer acceptance of our existing and new products, our ability to successfully introduce new products and product line extensions, comparable store sales performance in prior periods, the maturation of our store base, the amount, effectiveness and efficiency of retail advertising expenditures and promotional activity, the amount of competitive activity, our ability to effectively integrate our multiple distribution channels, the evolution of store operations, including improvements in store design, the quality and tenure of store-level managers and sales professionals, and general economic conditions and consumer confidence. Annual advertising expenditures increased from $9.0 million in 1995 to $43.4 million in 1999. Advertising costs are expensed as incurred as a component of sales and marketing expenses, although we believe that advertising expenditures provide significant benefits beyond the period in which they are expensed. Future advertising expenditures will depend on the effectiveness and efficiency of the advertising in creating awareness of our products 9 and brand name, generating consumer inquiries and driving consumer traffic to retail stores. Pre-opening costs associated with new retail stores are also expensed as incurred. We believe historical operating losses have been primarily the result of an aggressive retail store opening strategy, a relatively immature store base, significant marketing, advertising and product development expenditures, and the development of a substantial corporate infrastructure to support anticipated growth. Future increases in net sales and the achievement of long-term profitability will depend upon greater consumer awareness and acceptance of our air bed products, improved effectiveness and efficiency of our marketing and advertising expenditures, the opening and successful performance of new retail stores, improvement in the performance of current stores and our ability to execute our stated strategic initiatives. There can be no assurance that we will be able to achieve or sustain historical sales growth rates or profitability in the future, on a quarterly or annual basis. Quarterly and annual operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in comparable store sales, the timing, amount and effectiveness of advertising expenditures, any changes in return rates, the timing of new store openings and related expenses, competitive factors, net sales contributed by new stores, any disruptions in third-party delivery services and general economic conditions and consumer confidence. Our business is also subject to some seasonal influences, with heavier concentrations of sales during the fourth quarter holiday season due to increased mall traffic. A substantial portion of operating expenses is related to sales and marketing expenses, including costs associated with opening new stores, operating existing stores and advertising expenditures. The level of this spending cannot be adjusted quickly and is based, in significant part, on expectations of future customer inquiries and net sales. Furthermore, a substantial portion of net sales is often realized in the last month of a quarter with such net sales frequently concentrated in the last weeks or days of a quarter, due in part to our promotional schedule. Should the Company experience a shortfall in expected net sales or in the conversion rate of customer inquiries, we may be unable to adjust spending in a timely manner and our business, financial condition and operating results may be materially adversely affected. Our historical results of operations may not be indicative of the results that may be achieved for any future fiscal period. At September 30, 2000, the Company had net operating loss carryforwards for federal income tax purposes of approximately $26.3 million expiring between the years 2003 and 2020. The Company expects that approximately $1.4 million of these carryforwards will expire unutilized due to an Internal Revenue Code (IRC) Section 382 limitation resulting from a prior ownership change and has, therefore, provided a valuation allowance for this portion of the carryforwards. The Company has not provided a valuation allowance for any other deferred tax assets because it believes that it is more likely than not that they will be realized. The realization of net deferred tax assets ($17.8 million at September 30, 2000) is evaluated on a quarterly basis. Realization of these assets is dependent on the Company achieving profitability levels sufficient to utilize its net operating loss carryforwards. The write-off of this asset may be required if we determine that we are unable to utilize the net operating loss carryforwards. A write-off of this asset could have a material adverse affect on the Company's financial position and results of operations. LOOKING FORWARD We are continuing to execute our strategic plan which focuses on: o Roll out of an integrated approach to marketing including improved marketing messages that are consistent across our distribution channels; o Leveraging the profitability of our sales channels, with a particular emphasis on retail store profitability; o Development of cost effective in-home delivery, assembly and mattress removal across all of our distribution channels; o Continuous improvement of our core product line; o Launching the sofa sleeper product across all of our distribution channels; and o Improvement of our cost structure to more effectively leverage our infrastructure and store base. 10 During the third quarter of 2000 we introduced new integrated marketing messages. Third quarter advertising spending did not have a significant impact on sales volumes and, accordingly, we have reduced planned advertising for the remainder of 2000 as we develop our fully integrated marketing messages for a phased roll out beginning in January 2001. Marketing messages will focus on the unique benefits provided by our products and are intended to appeal to a broader consumer market than we have traditionally targeted. By spending advertising more evenly over our retail markets we believe we can improve the leverage of the largely fixed cost structure within our stores. We are developing market by market and store by store action plans focused on improving the profitability of our retail store operations. We closed 7 under performing retail stores and 12 leased department locations during the first nine months of 2000. During the fourth quarter we plan to close 8 additional underperforming leased department locations. In addition, we have identified 6 mall based stores to be closed in the first half of 2001. A significant portion of the costs associated with these 2000 closures was accrued in 1999. We opened 5 stores during the third quarter (a total of 16 during the first nine months of 2000) and expect to open approximately 3 stores in the remainder of 2000 in current markets where increased store density is required to leverage advertising expenditures. In addition, we have developed a new retail store design with a bedroom-like setting that is more consistent with our sleep solutions oriented brand. During the first nine months of 2000, 66 stores were remodeled to incorporate this new design. We are developing plans to remodel additional stores during 2001 to incorporate this new design and to correspond to integrated marketing messages. We have taken initial steps toward providing in-home delivery, assembly and mattress removal throughout the continental United States. To date, in-home delivery and assembly has been provided through our retail channel and represents approximately 8% of our business. The provider of our in-home assembly services discontinued this segment of its business effective August 20, 2000. We have reinitiated home delivery services in certain markets with internal and contracted services during the third and fourth quarter of 2000. We plan to begin testing mattress removal during the fourth quarter. Our product development efforts will focus primarily on continuous improvement of our products performance and value and will extend to other sleeping surfaces to offer consumers a best nights sleep. We intend to continue to lead the industry in innovation. We launched our sofa sleeper product in 13 markets (49 additional stores) during the third quarter. Our Sofa Sleepaire(R) represents a significant advancement in the sofa sleeper market, and is attracting customers to our retail stores. On October 16, 2000 we announced our intent to acquire certain assets of SleepTec, Inc., the manufacturer of our sofa sleeper product. Manufacturing of this product will be integrated into our Columbia, S.C. plant during the fourth quarter. Administration of these operations will be absorbed into our existing general and administrative functions. We anticipate this acquisition will have a positive effect on operating results following the fourth quarter integration of the SleepTec business. Once we have integrated operations and secured quality, we plan to expand the distribution of Sofa Sleepaire(R). Early in the third quarter, we tested a catalog through a mailing to our installed base of customers. Based on results of this initial catalog mailing, we will not mail a Fall catalog. However, we will continue to offer catalog items on our new web site, and will evaluate catalog opportunities going forward. The success of our strategy will depend on many factors including (i) the effectiveness and efficiency of our integrated marketing strategy in creating awareness of our products and brand name and in generating sales, (ii) our ability to enhance the profitability of our retail stores and leased departments, (iii) our ability to manage operating costs, (iv) our ability to successfully launch in-home delivery, assembly and mattress removal services nationally on a cost-effective basis, (v) our ability to successfully launch the sofa sleeper product nationally, (vi) the levels of consumer awareness and acceptance of the sofa sleeper product, (vii) our ability to continue to improve our core product line and differentiate our products from competitive products, (viii) competition in the mattress and sofa sleeper markets, (ix) our ability to successfully identify and respond to emerging trends in the mattress industry, and (x) general economic factors and consumer confidence. 11 The strategic initiatives described above are directed toward improving our long-term performance and are not expected to contribute significantly to growth in sales and earnings, and may negatively impact earnings in 2000. 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. Percentage amounts may not total due to rounding.
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------- -------------------------- SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2, 2000 1999 2000 1999 ------------- ----------- ------------- ----------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 36.5 35.1 35.9 34.5 ------------- ----------- ------------- ----------- Gross margin 63.5 64.9 64.1 65.5 ------------- ----------- ------------- ----------- Operating expenses: Sales and marketing 65.2 62.8 62.2 58.7 General and administrative 11.3 11.5 11.1 9.1 ------------- ----------- ------------- ----------- Total operating expenses 76.5 74.4 73.3 67.8 ------------- ----------- ------------- ----------- Operating loss (13.0) (9.4) (9.2) (2.4) Other income, net 0.3 0.8 0.4 0.7 ------------- ----------- ------------- ----------- Loss before income taxes (12.7) (8.6) (8.8) (1.7) Income tax benefit (4.7) (3.2) (3.3) (0.6) ------------- ----------- ------------- ----------- Net loss (8.0)% (5.4)% (5.5)% (1.1)% ============= =========== ============= ===========
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 WITH THREE MONTHS ENDED OCTOBER 2, 1999 NET SALES Net sales decreased 0.3% to $68.1 million for the three months ended September 30, 2000 from $68.3 million for the three months ended October 2, 1999, primarily due to a decrease in mattress unit sales offset by increases in foundation and accessory units, pricing increases and product mix shift. The decrease in net sales was due primarily to (i) a $7.3 million decrease in direct marketing sales, (ii) a $1.5 million decrease in sales from the elimination of our roadshow distribution channel and (iii) a $.6 million decrease due to 19 closed stores in 2000, which decreases were partially offset by (i) a $3.5 million increase from increased store months in 2000 as compared to 1999, (ii) a $1.7 million increase in comparable store sales, (iii) a $2.1 million increase in net sales from the Company's newly developed e-commerce channel and (iv) a $1.4 million increase attributable to a higher per unit sales price and product mix over 1999. GROSS MARGIN Gross margin decreased to 63.5% for the three months ended September 30, 2000 from 64.9% for the three months ended October 2, 1999 primarily due to the use of higher discounted promotional offerings, increased costs of processing returned product, partially offset by a price increase for some of our products. SALES AND MARKETING Sales and marketing expenses increased 3.4% to $44.4 million for the three months ended September 30, 2000 from $42.9 million for the three months ended October 2, 1999, and increased as a percentage of net sales to 65.2% from 62.8% for the comparable prior-year period. The increase in the dollar amount of sales and marketing expenses during 2000 was primarily due to (i) 25 additional retail stores open in 2000, (ii) higher freight expenses, (iii) costs associated with the write off of certain assets ($.7 million); and (iv) investment in marketing and promotion of our sofa sleeper roll out ($1.9 million) partially offset by a decrease in media spending. Sales and marketing expenses increased as a percentage of net sales primarily due to (i) lower direct marketing sales, (ii) selling expenses in new stores increasing at a greater rate than net sales, and (iii) the third quarter impact of asset write offs and sofa sleeper rollout, partially offset by a decrease in media spending. GENERAL AND ADMINISTRATIVE General and administrative expenses decreased 2.5% to $7.7 million for the three months ended September 30, 2000 from $7.9 million for the three months ended October 2, 1999. The decrease in general and administrative expenses 13 was primarily due to a decrease in the use of outside services and consulting, partially offset by the write off of certain assets ($.6 million). OTHER INCOME, NET Other income decreased by $342,000 to approximately $220,000 for the three months ended September 30, 2000 from $562,000 in other income for the three months ended October 2, 1999. The decrease was primarily due to lower cash levels affecting interest income in 2000 following repurchases of stock and capital expenditures in 1999 and 2000. INCOME TAX BENEFIT Income tax benefit increased to $3.2 million for the three months ended September 30, 2000 from $2.2 million for the three months ended October 2, 1999 due to an increase in the pretax loss in 2000. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 WITH NINE MONTHS ENDED OCTOBER 2, 1999 NET SALES Net sales increased 0.2% to $206.0 million for the nine months ended September 30, 2000 from $205.7 million for the nine months ended October 2, 1999. The increase in net sales was due primarily to (i) a $20.7 million increase from increased store months in 2000 as compared to 1999 and (ii) a $6.3 million increase in net sales from the Company's newly developed e-commerce channel, which increases were partially offset by (i) a $19.7 million decrease in direct marketing sales, (ii) a $5.6 million decrease in sales from the elimination of our roadshow distribution channel, and (iii) a $1.4 decrease due to 19 store closings in 2000. GROSS MARGIN Gross margin decreased to 64.1% for the nine months ended September 30, 2000 from 65.5% for the nine months ended October 2, 1999 primarily due to the use of higher discounted promotional offerings, increased costs of processing returned product, partially offset by a price increase for some of our products. SALES AND MARKETING Sales and marketing expenses increased 6.1% to $128.2 million for the nine months ended September 30, 2000 from $120.8 million for the nine months ended October 2, 1999, and increased as a percentage of net sales to 62.2% from 58.7% for the comparable prior-year period. The increase in the dollar amount of sales and marketing expenses during 2000 was primarily due to (i) 25 additional retail stores open in 2000 and (ii) higher freight expense, (iii) costs associated with the write off of certain assets ($.7 million) and (iv) investment in marketing and promotion of our sofa sleeper roll out ($1.9 million) partially offset by a decrease in media spending. Sales and marketing expenses increased as a percentage of net sales primarily due to (i) lower direct marketing sales and (ii) selling expenses in new stores increasing at a greater rate than net sales, partially offset by a decrease in media spending. GENERAL AND ADMINISTRATIVE General and administrative expenses increased 22.3% to $22.8 million for the nine months ended September 30, 2000 from $18.7 million for the nine months ended October 2, 1999. The increase in general and administrative expenses was primarily due to increased spending on infrastructure associated with anticipated growth and approximately $1.0 million in costs associated with staffing reductions. OTHER INCOME, NET Other income decreased by $606,000 to approximately $817,000 for the nine months ended September 30, 2000 from $1.4 million in other income for the nine months ended October 2, 1999. The decrease was primarily due to lower cash levels in 2000 following repurchases of stock and capital expenditures in 1999 and 2000. INCOME TAX BENEFIT Income tax benefit increased to $6.7 million for the nine months ended September 30, 2000 from $1.3 million for the nine months ended October 2, 1999 due to an increase in the pretax loss in 2000. 14 LIQUIDITY AND CAPITAL RESOURCES Our primary source of liquidity has been the sale of equity securities. We completed our initial public offering in December 1998, resulting in net proceeds of $44.6 million, which have been partially used for (i) the repayment of $15.0 million of debt, (ii) expansion of retail stores, (iii) expansion of manufacturing capabilities, (iv) the repurchase of 1,220,000 shares of Company common stock for $12.7 million and (v) the development of information technology systems. The Company had negative working capital of approximately $4.0 million at September 30, 2000, and positive working capital of $14.5 million at January 1, 2000. Net cash used in operating activities for the nine months ended September 30, 2000 was approximately $5.6 million and consisted primarily of increases in inventory and prepaid expenses and the net loss adjusted for non-cash expenses partially offset by increases in accounts payable and receipt of an income tax refund. Net cash provided by operating activities for the nine months ended October 2, 1999 was approximately $12.5 million and consisted primarily of cash flows from operations before non-cash expenses, decreases in accounts receivable and increases in accounts payable partially offset by increases in inventory. Net cash provided by investing activities was approximately $0.8 million for the nine months ended September 30, 2000 and net cash used in investing activities was $36.9 million for the nine months ended October 2, 1999. Investing activities consisted of purchases of property and equipment for new retail stores and plant additions in both periods and investments in store remodels in 2000. In addition, investments in marketable securities with maturities in excess of 90 days increased in 1999 and decreased in 2000. Lastly, in 1999 the Company invested $2.0 million in a minority owned affiliate. Net cash provided by financing activities was approximately $486,000 for the nine months ended September 30, 2000 which consisted primarily of stock option exercises. Net cash used in financing activities for the nine months ended October 2, 1999 was approximately $7.8 million and consisted of $10.4 million used to repurchase Company common stock and $664,000 million used to repay debt, offset by stock option exercises. Financial instruments that potentially subject us to concentrations of credit risk consist principally of investments. The counterparties to the agreements consist of government agencies and various major corporations of high credit standing. We do not believe there is significant risk of non-performance by these counterparties because we limit the amount of credit exposure to any one financial institution and any one type of investment. We believe current plans for operating improvements, combined with existing cash balances will be sufficient to satisfy anticipated short-term working capital requirements. We are evaluating credit financing opportunities, in order to ensure access to funding, if necessary to execute short and long term plans. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company holds securities classified as held to maturity. These securities have maturities of less than one year that management has the ability and intent to hold to maturity, are carried at amortized cost and have average interest rates of 6.7%. 15 PART II: OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS The Company and certain of its former officers and directors have been named as defendants in a consolidated class action lawsuit filed on behalf of Company shareholders in U.S. District Court in Minnesota. The named plaintiffs, who purport to act on behalf of a class of purchasers of the Company's common stock during the period from December 4, 1998 to June 7, 1999, charge the defendants with violations of federal securities laws. The suit alleges that the Company and the named directors and officers failed to disclose or misrepresented certain information concerning the Company during the class period. The complaint does not specify an amount of damages claimed. The Company believes that the complaint is without merit and intends to vigorously defend the claims. The Company and the individual defendants brought a motion to dismiss all claims on November 10, 1999. The motion was heard by a magistrate judge on December 21, 1999. On January 27, 2000, the magistrate recommended that the claims based on Section 11 of the federal securities laws be dismissed. The magistrate recommended that the motion to dismiss be denied with respect to the claims based on Rule 10b-5 of the federal securities laws. In February 2000, both the plaintiffs and the defendants formally objected to the magistrate's recommendation. The objection was made to the United States District Court in Minnesota. On May 12, 2000, the United States District Court in Minnesota adopted the recommendation of the magistrate and denied the defendants' motion to dismiss the Rule 10b-5 claims. The Court also adopted the recommendation of the magistrate and dismissed the plaintiff's Section 11 claims without prejudice and with leave to amend. On March 31, 2000, the Company and certain of its former officers and directors were named as defendants in a class action lawsuit filed on behalf of the Company's shareholders in U.S. District Court in Minnesota asserting identical factual allegations as the consolidated complaint described above. The suit alleges claims based on Sections 11 and 12(a)(2) of the federal securities laws. The complaint does not specify an amount of damages claimed. The Company believes this complaint is without merit and intends to vigorously defend the claims. The above two class actions were consolidated by the United States District Court Magistrate on July 24, 2000. The Company is subject to various other claims, legal actions, sales tax disputes and other complaints arising in the ordinary course of business. In the opinion of management, any losses that may occur from these other matters are adequately covered by insurance or are provided for in the consolidated financial statements, and the ultimate outcome of these other matters will not have a material effect on the consolidated financial position or results of operations of the Company. ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5 - OTHER INFORMATION William J. Lansing tendered his resignation from the Board of Directors of the Company effective as of August 14, 2000 in order to devote more of his time to other business interests. The Board of Directors 16 and management of the Company express their gratitude to Mr. Lansing for his service to the Company as a member of our Board of Directors. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. -------- Exhibit Number Description --------- -------------- 27.1 Financial Data Schedule (b) Reports on Form 8-K ------------------- None. 17 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 November 14, 2000 /s/ William R. McLaughlin ---------------------------------------- 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) 18 EXHIBIT INDEX Exhibit Number Description Location ---------------- ------------- ----------- 27.1 Financial Data Schedule Filed herewith electronically 19 EX-27 2 0002.txt EXHIBIT 27.1
5 1,000 9-MOS DEC-30-2000 JAN-02-2000 SEP-30-2000 3,109 9,572 856 208 12,030 39,066 60,037 23,616 89,289 43,090 0 0 0 179 42,603 89,289 206,002 206,002 73,903 73,903 0 194 6 (18,110) (6,701) (11,409) 0 0 0 (11,409) (0.64) (0.64)
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