-----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, LxyPHQEVZ0BwELWBiiFU9NkKFlsQFB3UZuwxvPSlPhOv87/JWcVX1r/aIt3VQwIR bOA3Af8FNGnJ5/eIkl9qHw== 0000827187-01-500042.txt : 20020410 0000827187-01-500042.hdr.sgml : 20020410 ACCESSION NUMBER: 0000827187-01-500042 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20010929 FILED AS OF DATE: 20011109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SELECT COMFORT CORP CENTRAL INDEX KEY: 0000827187 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 410157886 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25121 FILM NUMBER: 1780025 BUSINESS ADDRESS: STREET 1: 6105 TRENTON LANE NORTH CITY: MINNEAPOLIS STATE: MN ZIP: 55344 BUSINESS PHONE: 7635517000 10-Q 1 a2001_3rdqtr-10q.txt 2001 3RD QUARTER 10-Q 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 29, 2001 COMMISSION FILE NO. 0-25121 -------------------- SELECT COMFORT CORPORATION (Exact name of registrant as specified in its charter) MINNESOTA 41-1597886 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6105 TRENTON LANE NORTH MINNEAPOLIS, MINNESOTA 55442 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (763) 551-7000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of September 29, 2001, 18,190,634 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 29, 2001 and December 30, 2000............................ 3 Consolidated Statements of Operations for the Three Months and Nine Months ended September 29, 2001 and September 30, 2000........................... 4 Consolidated Statements of Cash Flows for the Nine Months ended September 29, 2001 and September 30, 2000.............................................. 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.......... 14 PART II: OTHER INFORMATION Item 1. Legal Proceedings................................................... 15 Item 2. Changes in Securities and Use of Proceeds........................... 15 Item 3. Defaults Upon Senior Securities..................................... 15 Item 4. Submission of Matters to a Vote of Security Holders................. 15 Item 5. Other Information................................................... 17 Item 6. Exhibits and Reports on Form 8-K.................................... 17 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SELECT COMFORT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) SEPTEMBER 29, DECEMBER 30, ASSETS 2001 2000 ------------- ------------- Current assets: Cash and cash equivalents $ 15,435 $ 1,498 Marketable securities - 3,950 Accounts receivable, net of allowance for doubtful accounts of $273, and $264, respectively 683 2,693 Inventories (note 2) 7,615 11,083 Prepaid expenses 5,199 4,741 ------------- ------------- Total current assets 28,932 23,965 Property and equipment, net 33,410 37,063 Other assets 4,637 3,644 ------------- ------------- Total assets $ 66,979 $ 64,672 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 33 $ 38 Accounts payable 18,633 17,271 Accruals: Sales returns 3,489 5,284 Compensation, taxes and benefits 6,125 6,238 Other 6,877 7,565 ------------- ------------- Total current liabilities 35,157 36,396 Long-term debt, less current maturities (note 3) 16,942 2,322 Accrued warranty costs 5,252 5,745 Other liabilities 4,009 3,609 ------------- ------------- Total liabilities 61,360 48,072 ------------- ------------- 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, 18,190,634 and 17,962,689 shares issued and outstanding, respectively 182 180 Additional paid-in capital 81,600 79,452 Accumulated deficit (76,163) (63,032) ------------- ------------- Total shareholders' equity 5,619 16,600 ------------- ------------- Total liabilities and shareholders' equity $ 66,979 $ 64,672 ============= =============
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 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Net sales $ 64,148 $ 68,056 $192,346 $206,002 Cost of sales 21,192 24,871 67,231 73,903 ------------- ------------- ------------- ------------- Gross margin 42,956 43,185 125,115 132,099 ------------- ------------- ------------- ------------- Operating expenses: Sales and marketing 37,048 43,638 118,616 127,454 General and administrative 5,285 7,054 18,252 22,286 Store closings and asset impairments 20 1,387 508 1,424 ------------- ------------- ------------- ------------- Total operating expenses 42,353 52,079 137,376 151,164 ------------- ------------- ------------- ------------- Operating income (loss) 603 (8,894) (12,261) (19,065) ------------- ------------- ------------- ------------- Other income (expense): Interest income 59 253 174 937 Interest expense (422) (2) (774) (6) Equity in loss of affiliate - (214) - (642) Other, net (13) (32) (155) (80) ------------- ------------- ------------- ------------- Other income (expense), net (376) 5 (755) 209 ------------- ------------- ------------- ------------- Income (loss) before income taxes 227 (8,889) (13,016) (18,856) Income tax expense (benefit) - (3,197) 115 (6,701) ------------- ------------- ------------- ------------- Net income (loss) $ 227 $ (5,692) $(13,131) $(12,155) ============= ============= ============= ============= Net income (loss) per share (note 4) - basic $ 0.01 $ (0.32) $ (0.72) $ (0.68) ============= ============= ============= ============= Weighted average shares - basic 18,179 17,874 18,118 17,815 ============= ============= ============= ============= Net income (loss) per share (note 4) - diluted $ 0.01 $ (0.32) $ (0.72) $ (0.68) ============= ============= ============= ============= Weighted average shares - diluted 18,953 17,874 18,118 17,815 ============= ============= ============= =============
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 29, SEPTEMBER 30, 2001 2000 ------------- ------------- Cash flows from operating activities: Net loss $(13,131) $(12,155) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 7,522 6,075 Loss on disposal of assets 539 1,970 Deferred tax assets - (6,872) Change in operating assets and liabilities: Accounts receivable, net 2,104 408 Inventories 3,468 (579) Prepaid expenses 412 (1,908) Income taxes - 2,277 Accounts payable 1,362 3,894 Accrued sales returns (1,795) (776) Accrued warranty costs (616) 1,195 Accrued compensation, taxes and benefits (113) (391) Other accrued liabilities (443) (24) Other assets (1,096) 696 Other liabilities 400 556 ------------- ------------- Net cash used in operating activities (1,387) (5,634) ------------- ------------- Cash flows from investing activities: Purchases of property and equipment (3,918) (9,741) Sales of marketable securities 3,950 10,557 ------------- ------------- Net cash provided by investing activities 32 816 ------------- ------------- Cash flows from financing activities: Principal payments on debt (29) (53) Proceeds from issuance of common stock 281 539 Net proceeds from issuance of long-term debt 15,040 - ------------- ------------- Net cash provided by financing activities 15,292 486 ------------- ------------- Increase (decrease) in cash and cash equivalents 13,937 (4,332) Cash and cash equivalents, at beginning of period 1,498 7,441 ------------- ------------- Cash and cash equivalents, at end of period $ 15,435 $ 3,109 ============= =============
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 29, 2001 and September 30, 2000 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 29, 2001 and December 30, 2000 and the results of operations and cash flow for the periods presented. The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and other commitments in the normal course of business. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary if the company is unable to continue as a going concern. The Company's continuation as a going concern is dependent, among other things, upon sustaining positive cash flow from operations or, if necessary, on its ability to raise additional working capital. Certain prior year financial statement amounts have been reclassified to conform to the current year presentation. Specifically, accrued warranty costs have been divided between current liabilities and long-term liabilities. The resulting respective accrued warranty cost balances are based on the expected timing of when warranty claims will be satisfied. The warranty claims expected to be satisfied within the following 12 month period have been included in other current liabilities. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although management believes the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the Company's most recent audited consolidated financial statements and related notes included in the Company's Annual Report to Shareholders and its Form 10-K for the fiscal year ended December 30, 2000. Operating results for the Company on a quarterly basis may not be indicative of operating results for the full year. During July 2001 the Financial Accounting Standards Board issued statement SFAS 142 "Goodwill and Other Intangible Assets." Statement 142 replaces the requirement to amortize goodwill and intangible assets with indefinite lives with a requirement for an annual impairment test. The Company must adopt SFAS 142 at the beginning of fiscal 2002. The Company is analyzing the impact of SFAS 142, but its implementation 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 29, DECEMBER 30, 2001 2000 ------------- ------------- Raw materials $2,528 $ 5,507 Work in progress 38 60 Finished goods 5,049 5,516 -------------- -------------- $7,615 $11,083 ============== ============== 6 SELECT COMFORT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) LONG-TERM DEBT In June 2001, the Company issued $11 million in principal amount of its senior secured notes (the "Notes") in a private placement. The Notes have a five-year maturity, bear interest at 8% per annum payable annually in cash and are convertible into shares of the Company's common stock at the rate of $1.00 per share. The Notes are secured by a lien on substantially all of the Company's assets. In addition, the holders of the Notes received warrants to purchase 4.4 million shares of the Company's common stock for $1.00 per share. The warrants have a five-year term. The Note conversion price and warrant exercise price are subject to standard anti-dilution protections. The net proceeds from the Notes approximated $10.4 million after deduction of placement fees and expenses. The warrants were valued at $1.1 million and have been recorded as debt discount to be amortized as interest expense over the 5-year note term. In September 2001, the Company obtained $5 million of senior secured debt financing (the "Debt"), as provided for under the terms of the Company's Notes issued in June 2001. The Debt has a five-year maturity, bears interest at 12% per annum payable monthly in cash and calls for payment of interest only for years one and two of the term and payment of interest and principal for years three through five. The Debt is secured by a first lien on substantially all of the Company's assets. In addition, the holders of the Debt received warrants to purchase 922,819 shares of the Company's common stock for $1.02 per share. The warrants have a five-year term and are subject to standard anti-dilution protections. The net proceeds from the Debt approximated $4.8 million after deducting fees and expenses. The warrants were valued at $0.6 million and have been recorded as debt discount to be amortized as interest expense over the 5-year term. The Debt is subject to certain financial covenants consisting primarily of achieving minimum EBITDA levels. The Company was in compliance with the financial covenants at September 29, 2001. (4) NET LOSS PER COMMON SHARE The following computations reconcile net income (loss) with net income (loss) per common share-basic and diluted (in thousands, except per share amounts). THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 29, 2001 SEPTEMBER 29, 2001 ------------------------------- ------------------------------- NET PER SHARE NET PER SHARE INCOME SHARES AMOUNT LOSS SHARES AMOUNT --------- --------- --------- --------- --------- --------- Net income (loss) $ 227 $(13,131) BASIC EPS Net income (loss) attributable to common shareholders $ 227 18,179 $0.01 $(13,131) 18,118 $(0.72) --------- --------- ========= --------- --------- ========= EFFECT OF DILUTIVE SECURITIES Warrants - 497 - - Options - 277 - - --------- --------- --------- --------- DILUTED EPS Net income (loss) attributable to common shareholders plus assumed conversions $ 227 18,953 $0.01 $(13,131) 18,118 $(0.72) ========= ========= ========= ========= ========= ========= THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2000 SEPTEMBER 30, 2000 ------------------------------- ------------------------------- NET PER SHARE NET PER SHARE INCOME SHARES AMOUNT LOSS SHARES AMOUNT --------- --------- --------- --------- --------- --------- BASIC AND DILUTED EPS Net loss attributable to common shareholders $(5,692) 17,874 $(0.32) $(12,155) 17,815 $(0.68) ========= ========= ========= ========= ========= =========
7 (5) LITIGATION In June of 1999, the Company and certain of its former officers and directors were named as defendants in a class action lawsuit filed in U.S. District Court in Minnesota. The suit, filed on behalf of purchasers of the Company's common stock between December 4, 1998 and June 7, 1999, alleges that the Company and the named former directors and officers failed to disclose or misrepresented certain information concerning the Company in violation of federal securities laws. In March of 2000, the same defendants were named in another class action lawsuit asserting factual allegations identical to the first suit. Neither of the suits specified an amount of damages claimed. The U.S. District Court consolidated the two class actions in July of 2000. In September of 2001, the consolidated case was certified to proceed as a class action on behalf of purchasers of the Company's common stock issued under or traceable to the Company's initial public offering prospectus dated December 4, 1998 and purchasers of the Company's common stock in the open market during the period from December 4, 1998 through June 7, 1999. The Company believes that the suit is without merit and intends to vigorously defend the claims. Discovery has begun. The Company is a party to other various claims, legal actions, sales tax disputes, and other complaints arising in the ordinary course of business. In the opinion of management, any losses that may occur from these other matters are adequately covered by insurance or are provided for in the consolidated financial statements and the ultimate outcome of these other matters will not have a material effect on the consolidated financial position or results of operations of the Company. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED HEREIN. THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY THOSE THAT ARE NOT HISTORICAL IN NATURE, PARTICULARLY THOSE THAT USE TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECTS," "ANTICIPATES," "CONTEMPLATES," "ESTIMATES," "BELIEVES," "PLANS," "PROJECTS," "PREDICTS," "POTENTIAL" OR "CONTINUE" OR THE NEGATIVE OF THESE OR SIMILAR TERMS. THESE STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S HISTORICAL EXPERIENCE AND ITS PRESENT EXPECTATIONS OR PROJECTIONS. IMPORTANT FACTORS KNOWN TO SELECT COMFORT THAT COULD CAUSE SUCH MATERIAL DIFFERENCES ARE IDENTIFIED AND DISCUSSED IN PART I, ITEM 1 OF OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000, WHICH DISCUSSION IS INCORPORATED HEREIN BY REFERENCE. THESE IMPORTANT FACTORS INCLUDE: o THE COMPANY'S ABILITY TO CREATE PRODUCT AND BRAND NAME AWARENESS. o THE EFFICIENCY AND EFFECTIVENESS OF THE COMPANY'S MARKETING AND ADVERTISING. o THE ABILITY OF THE COMPANY TO EFFECTIVELY AND EFFICIENTLY PURSUE NEW CHANNELS OF DISTRIBUTION. o THE PERFORMANCE OF THE COMPANY'S EXISTING AND NEW STORES. o THE ABILITY OF THE COMPANY TO CONTINUE TO ATTRACT AND RETAIN KEY PERSONNEL, INCLUDING QUALIFIED SALES PROFESSIONALS. o THE ABILITY OF THE COMPANY TO REALIZE THE BENEFITS OF ITS COST SAVING INITIATIVES. o THE LEVELS OF CONSUMER ACCEPTANCE OF THE COMPANY'S PRODUCT LINES. o THE ABILITY OF THE COMPANY TO CONTINUOUSLY IMPROVE ITS EXISTING PRODUCT LINES AND TO INTRODUCE NEW PRODUCTS. o THE ABILITY OF THE COMPANY TO EFFICIENTLY IMPLEMENT NATIONWIDE HOME DELIVERY AND ASSEMBLY. o ECONOMIC TRENDS AND CONSUMER CONFIDENCE. o INDUSTRY COMPETITION. o THE ABILITY OF THE COMPANY TO MAINTAIN SUFFICIENT LEVELS OF WORKING CAPITAL TO SUPPORT OPERATING NEEDS AND GROWTH INITIATIVES. o THE ABILITY OF THE COMPANY TO MAINTAIN COMPLIANCE WITH THE LISTING REQUIREMENTS OF NASDAQ. o THE RISKS AND UNCERTAINTIES DETAILED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE SEC, INCLUDING THE COMPANY'S ANNUAL REPORT ON FORM 10-K AND OTHER PERIODIC REPORTS FILED WITH THE SEC. THE COMPANY HAS NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q. OVERVIEW Select Comfort is the leading manufacturer and retailer of adjustable-firmness air beds that are clinically proven to improve sleep and relieve back pain. The Company's mission is to improve people's lives by providing a better night's sleep. Our operations are vertically integrated, including product design, domestic manufacturing and assembly (supported by a global supply chain), dedicated nationwide sales channels and dedicated customer service operations. Our Company-owned sales channels include mall-based retail stores, a direct marketing call center and e-commerce capability. We value our direct contact with our customers because it fosters continuous improvement and innovation. For 2001, our goal has been to return to profitability, driven by the following strategic priorities: o Rightsizing our cost structure, o Building consumer awareness, o Improving our sales conversion effectiveness, o Expanding profitable distribution, and o Improving product quality, innovation and service levels. As we move into 2002 we will maintain our focus on profitability and our cost structure, but expect to more heavily prioritize growth initiatives. 9 BUSINESS STRUCTURE SALES DISTRIBUTION/POINTS OF SALE Our growth strategies are focused on building brand awareness for our products and increasing the number of points of sale at which consumers can purchase our products. We currently sell through four sales channels. We began selling through our direct marketing call center in 1991, through our company-owned retail stores in 1992, over the internet in 1999 and through wholesale opportunities in 2000. The proportion of our total net sales, by dollar volume, from each of these channels is as follows: Three Months Ended Nine Months Ended ------------------ ------------------ 9/29/01 9/30/00 9/29/01 9/30/00 -------- -------- -------- -------- Stores 79% 80% 78% 78% Direct Call Center 15% 16% 15% 19% E-commerce 4% 4% 3% 3% Wholesale 2% - 4% - Our Company-owned retail store locations are summarized as follows: Three Months Ended Nine Months Ended ------------------ ------------------ 9/29/01 9/30/00 9/29/01 9/30/00 -------- -------- -------- -------- Beginning of period 327 333 333 341 Opened 2 5 7 16 Closed (2) - (13) (19) -------- -------- -------- -------- End of period 327 338 327 338 Our Company-owned stores include leased space within 24 Bed, Bath & Beyond stores as of September 29, 2001. In addition to our Company-owned stores, internally managed call center and web site, our adjustable-firmness beds and sleep-related products are sold wholesale to selected independent furniture retailers consisting of four retail stores as of September 29, 2001 and over the QVC shopping network. Sales volumes to date in the wholesale channels have been driven primarily by the number and size of QVC shows. We do not have plans to open or close a significant number of Company-owned stores in the near future. We are evaluating the relative economic benefits of selling through our own stores versus wholesale distribution through independently owned furniture/mattress retailers and are considering the initiation of larger-scale wholesale tests in specific markets. MARKETING DRIVERS We utilize advertising, sales promotions and public relations efforts to build consumer awareness of our brand, products and the locations of our points of sale. Advertising spending is summarized as follows (in 000's): Three Months Ended Nine Months Ended ------------------ ------------------ 9/29/01 9/30/00 9/29/01 9/30/00 -------- -------- -------- -------- Advertising $6,690 $9,943 $24,118 $25,482 Future advertising expenditures will depend on the effectiveness and efficiency of the advertising in creating awareness of our products and brand name, generating consumer inquiries and driving consumer traffic to our points of sale. We have begun, and expect to continue, to spend an increasing percentage of our marketing budget on advertising designed to attract consumers to retail stores. We anticipate that full year advertising spend levels in 2001 will be slightly lower than in 2000 due in part to the deferral of plans to introduce a sofa sleeper product, against which the Company invested approximately $2 million of advertising support in the third quarter of 2000. In addition to the factors noted above, sales results are influenced by a variety of factors, including general economic conditions and consumer confidence, levels of retail mall traffic, the maturation of our store base, the timing and effectiveness of promotional events and advertising expenditures, the timing and success of new product introductions and product line extensions, the quality and tenure of store-level managers and sales professionals, and the amount of competitive activity. Our business is also subject to some seasonal influences, with lower sales levels in the second quarter and heavier concentrations of sales during the fourth quarter holiday season due to increased mall 10 traffic. Comparable store sales (decreased) increased for the three months ended September 29, 2001 and September 30, 2000 by (7.7)% and 3.7%, respectively. Comparable store sales (decreased) increased for the nine months ended September 29, 2001 and September 30, 2000 by (6.0)% and 0.0%, respectively. Sales volumes and comparable store sales were negatively affected by consumer purchasing patterns after the September 11 terrorist attacks. While sales trends improved near the end of September, we anticipate that sales levels in the near term will continue to be affected by changes in consumer confidence, general economic conditions and consumer purchasing levels in response to recent and future world events. OPERATING STRUCTURE A substantial portion of operating expenses is related to sales and marketing expenses, including costs associated with operating existing stores, advertising expenditures, supporting our store infrastructure and opening new stores. These costs are relatively fixed in nature, and spending cannot be adjusted quickly in response to shortfalls in customer inquiries or net sales. We believe historical operating losses have been primarily the result of an aggressive retail store opening strategy, significant marketing, advertising and product development expenditures, and the development of a substantial corporate infrastructure to support future growth. In the second half of 2000, we began to implement initiatives designed to bring our cost structure in line with our sales volumes, with the ultimate objective of making our core bed business profitable at sales volumes equal to those achieved in 2000. To date we have implemented programs designed to reduce our total annual fixed and variable costs by approximately $35 million, reducing our sales breakeven point by 17%. These cost reduction measures have included: o Closing one of three manufacturing plants, one of two call centers and consolidating two administrative offices, o Closing over 30 under-performing stores, o Reducing overall staffing, including approximately 20% of field sales support and approximately 12% of administrative staffing, o Discontinuing our catalog sales channel and deferring the rollout of our sofa sleeper product, o Restructuring our promotional programs and developing more efficient programs to utilize in-store signage and customer fulfillment materials, and o Developing a program to resell returned products to targeted markets. We believe we have taken steps that can return us to profitability in the second half of 2001 and our third quarter results are indicative of these efforts. 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, net sales contributed by new stores, competitive factors, any disruptions in third-party delivery services and general economic conditions and consumer confidence. Furthermore, a substantial portion of net sales is often realized in the last month of a quarter with such net sales frequently concentrated in the last weeks or days of a quarter, due in part to our promotional schedule. As a result, we may be unable to adjust spending in a timely manner and our business, financial condition and operating results may be materially adversely affected. Our historical results of operations may not be indicative of the results that may be achieved for any future fiscal period. At September 29, 2001, we had net operating loss carryforwards ("NOLs") for federal income tax purposes of approximately $43.8 million expiring between the years 2003 and 2021. We expect that approximately $1.4 million of these NOLs will expire unutilized due to an Internal Revenue Code (IRC) Section 382 limitation resulting from a prior ownership change. Through the third quarter of 2000, the Company's Consolidated Statement of Operations reflected an income tax benefit from net operating losses. Beginning in the fourth quarter of 2000 and in 2001 the Company has not recorded any value in its Consolidated Balance Sheet for the potential future benefit of NOL's. FISCAL 2001 - THIRD QUARTER RESULTS Net sales during the third quarter of 2001 were $64.1 million, or 5.9% lower than the prior year. Lower sales volumes were net of two contrasting factors: 11 o An increase in sales volumes associated primarily with QVC shows and sales from new product introductions (European pillowtop and refurbished returned beds), partially offset by o Slowing economic conditions reflected in consumer confidence measures and lower volumes of mall traffic and direct-marketing response. Sales were negatively affected immediately following the September 11 terrorist attacks. While sales have improved significantly since that time, ongoing affects of these events on our sales is uncertain. Operating income for the third quarter of 2001 totaled $0.6 million compared to operating losses of $8.9 million for the third quarter of 2000. The improvement in profitability is a direct result of successful execution of cost restructuring efforts. Specific improvements included: o Increased gross margin percentages from improved product quality and restructured promotional programs. These improvements in gross margins combined with efficiencies in the sales and marketing programs have contributed $3.1 in operating margins, o Reductions of general and administrative expenses of $1.8 million, o Reductions of advertising costs of $3.3 million, and o Reductions of store closings and asset impairment charges of $1.4 million 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 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 33.0 36.5 35.0 35.9 ------------- ------------- ------------- ------------- Gross margin 67.0 63.5 65.0 64.1 ------------- ------------- ------------- ------------- Operating expenses: Sales and marketing 57.8 64.1 61.7 61.9 General and administrative 8.2 10.4 9.5 10.8 Store closings/impairments 0.0 2.0 0.3 0.7 ------------- ------------- ------------- ------------- Total operating expenses 66.0 76.5 71.4 73.4 ------------- ------------- ------------- ------------- Operating income (loss) 0.9 (13.1) (6.4) (9.3) Other income (expense), net (0.6) 0.0 (0.4) 0.1 ------------- ------------- ------------- ------------- Income (loss) before income taxes 0.4 (13.1) (6.8) (9.2) Income tax expense (benefit) 0.0 (4.7) 0.1 (3.3) ------------- ------------- ------------- ------------- Net income (loss) 0.4% (8.4)% (6.8)% (5.9)% ============== ============= ============= =============
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 29, 2001 WITH THREE MONTHS ENDED SEPTEMBER 30, 2000 NET SALES Net sales decreased 5.9% to $64.1 million for the three months ended September 29, 2001 from $68.1 million for the three months ended September 30, 2000, due primarily to a decrease in mattress unit sales. The decrease in net sales resulted from (i) a $4.2 million decrease in sales from Company-owned retail stores, including a decrease in comparable store sales of $4.0 million, (ii) a $0.7 million decrease in direct marketing sales, (iii) a $0.2 million decrease in the Company's e-commerce channel, offset by an increase of $1.4 million in net sales from the Company's wholesale channel. GROSS MARGIN Gross margin increased to 67.0% for the three months ended September 29, 2001 from 63.5% for the three months ended September 30, 2000, primarily due to lower cost promotional offerings, and reductions in manufacturing costs through product improvements and savings in processing returned product. 12 SALES AND MARKETING Sales and marketing expenses decreased 15.1% to $37.0 million for the three months ended September 29, 2001 from $43.6 million for the three months ended September 30, 2000, and decreased as a percentage of net sales to 57.8% from 64.1% for the comparable prior-year period. This decrease was primarily due to reduced advertising expenditures and other promotional costs resulting from more efficient and effective deployment of these funds, and reduced sales support costs. GENERAL AND ADMINISTRATIVE General and administrative expenses decreased 25.4% to $5.3 million for the three months ended September 29, 2001 from $7.1 million for the three months ended September 30, 2000, and decreased as a percentage of net sales to 8.2% from 10.4% for the comparable prior year period. The decrease in general and administrative expenses was primarily due to staffing reductions and reduced occupancy expense resulting from the consolidation of our two corporate offices. OTHER INCOME (EXPENSE), NET Other income (expense) changed $381,000 to approximately $376,000 in other expense for the three months ended September 29, 2001 from $5,000 in other income for the three months ended September 30, 2000. The decrease is primarily due to interest expense from long-term debt and lower cash levels affecting interest income in 2001. INCOME TAX EXPENSE (BENEFIT) Income tax expense increased $3.2 million to $0 for the three months ended September 29, 2001 from a $3.2 million benefit for the three months ended September 30, 2000 due to recognizing an income tax benefit for operating losses incurred in the three months ended September 30, 2000. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 29, 2001 WITH NINE MONTHS ENDED SEPTEMBER 30, 2000 NET SALES Net sales decreased 6.7% to $192.3 million for the nine months ended September 29, 2001 from $206.0 million for the nine months ended September 30, 2000, due primarily to a decrease in mattress unit sales. The decrease in net sales resulted from (i) a $10.7 million decrease in direct marketing sales, (ii) an $8.7 million decrease in sales from Company-owned retail store sales, including a decrease in comparable store sales of $9.1 million and a decrease of $2.8 million from the elimination of our roadshow distribution channel partially offset by a net increase of $3.3 million from stores opened in the past 12 months and (iii) a $1.0 million decrease in net sales from the Company's e-commerce channel, offset by an increase of $7.0 million in net sales from the Company's wholesale channel. GROSS MARGIN Gross margin increased to 65.0% for the nine months ended September 29, 2001 from 64.1% for the nine months ended September 30, 2000, primarily due to lower cost promotional offerings and reductions in manufacturing costs through product improvements and savings in processing returned product. SALES AND MARKETING Sales and marketing expenses decreased 7.0% to $118.6 million for the nine months ended September 29, 2001 from $127.5 million for the nine months ended September 30, 2000, and decreased as a percentage of net sales to 61.7% from 61.9% for the comparable prior-year period. The decrease in the dollar amount of sales and marketing expenses was primarily due to reduced expenses from promotional and fulfillment materials, lower selling expenses associated with lower retail sales volumes and reduced sales support staffing, partially offset by increases in media and media production expense. The slight reduction in sales and marketing expenses as a percentage of net sales was primarily due to reduced sales support staffing partially offset by increased media and media production expenses. GENERAL AND ADMINISTRATIVE General and administrative expenses decreased 17.9% to $18.3 million for the nine months ended September 29, 2001 from $22.3 million for the nine months ended September 30, 2000, and decreased as a percentage of net sales to 9.5% from 10.8% for the comparable prior year period. The decrease in general and administrative expenses was primarily due to staffing reductions and reduced occupancy expense resulting from the consolidation of our two corporate offices and severance costs associated with a reduction in force in 2000. 13 OTHER INCOME (EXPENSE), NET Other income (expense) changed $964,000 to approximately $755,000 in other expense for the nine months ended September 29, 2001 from $209,000 in other income for the nine months ended September 30, 2000. The decrease is due to interest expense from long-term debt and lower average cash levels affecting interest income in 2001. INCOME TAX EXPENSE (BENEFIT) Income tax expense increased $6.8 million to $115,000 for the nine months ended September 29, 2001 from a $6.7 million benefit for the nine months ended September 30, 2000 due to not recognizing an income tax benefit from operating losses in the nine months ended September 29, 2001. LIQUIDITY AND CAPITAL RESOURCES Our primary source of liquidity has been the sale of securities. Our most recent source of capital has been from the completion of our $11.0 million convertible debt offering in June 2001 and $5.0 million senior secured term debt financing completed in September 2001. In addition, we generated cash from operations in the third quarter of 2001. Net cash used in operating activities for the nine months ended September 29, 2001 was approximately $1.4 million and consisted primarily of the net loss adjusted for non-cash expenses and decreases in accrued sales returns and accrued warranty costs, partially offset by decreases in inventories and accounts receivable and increases in accounts payable. Net cash used in operating activities for the nine months ended September 30, 2000 was approximately $5.6 million and consisted primarily of the net loss adjusted for non-cash expenses and increases in inventory and prepaid expenses partially offset by increases in accounts payable and receipt of an income tax refund. Net cash provided by investing activities was approximately $32,000 for the nine months ended September 29, 2001 and $816,000 for the nine months ended September 30, 2000. Investing activities consisted primarily of purchases of property and equipment for new retail stores and information technology system development costs in 2001 and purchases of property and equipment for new retail stores, information technology systems and manufacturing facilities in 2000. In 2001 we liquidated $4.0 million of marketable securities to support continuing operations, while in 2000 we liquidated $10.6 million. Net cash provided by financing activities was approximately $15.3 million for the nine months ended September 29, 2001 which consisted primarily of net proceeds from issuance of long-term debt and $486,000 for the nine months ended September 30, 2000 from the issuance of common stock. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments. The counterparties to the agreements consist of government agencies and various major corporations of high credit standing. The Company does not believe there is significant risk of non-performance by these counterparties because the Company limits the amount of credit exposure to any one financial institution and any one type of investment. The Company had negative working capital of approximately $6.2 million at September 29, 2001, and $12.4 million at December 30, 2000. The Company has incurred negative cash flows and has incurred pretax losses from operations of $26.0 million for the year ended December 30, 2000. Based on these factors, among others, the Company's auditors have included an emphasis paragraph in their opinion regarding the Company's fiscal 2000 financial statements to express substantial doubt about the Company's ability to continue as a going concern. As a result of the completion of $16.0 million of long-term debt financing during June and September of 2001 and improvements in operating results, we believe the Company has adequate capital and liquidity to meet near-term and long-term operating needs. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK During the nine months ended September 29, 2001, the Company issued $11 million in principal amount of senior secured notes that bear interest at 8% and $5 million of senior secured notes that bear interest at 12%. Both of these instruments bear interest at a fixed rate over the life of the instruments. The Company does not believe it has significant exposure to interest rate risk. 14 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In June of 1999, the Company and certain of its former officers and directors were named as defendants in a class action lawsuit filed in U.S. District Court in Minnesota. The suit, filed on behalf of purchasers of the Company's common stock between December 4, 1998 and June 7, 1999, alleges that the Company and the named former directors and officers failed to disclose or misrepresented certain information concerning the Company in violation of federal securities laws. In March of 2000, the same defendants were named in another class action lawsuit asserting factual allegations identical to the first suit. Neither of the suits specified an amount of damages claimed. The U.S. District Court consolidated the two class actions in July of 2000. In September of 2001, the consolidated case was certified to proceed as a class action on behalf of purchasers of the Company's common stock issued under or traceable to the Company's initial public offering prospectus dated December 4, 1998 and purchasers of the Company's common stock in the open market during the period from December 4, 1998 through June 7, 1999. The Company believes that the suit is without merit and intends to vigorously defend the claims. Discovery has begun. 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 $4,591 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 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 Our Annual Meeting of Shareholders was held on July 17, 2001. The following individuals were elected at the Annual Meeting as Directors of the Company to serve for terms of three years expiring at the 2004 Annual Meeting of Shareholders or until their successors are elected and qualified. Shares voted in favor of these Directors and shares withheld were as follows: Thomas J. Albani Shares For 16,228,041 Shares Withheld 684,428 David T. Kollat Shares For 16,228,295 Shares Withheld 684,174 William R. McLaughlin Shares For 16,333,548 Shares Withheld 578,921 15 In addition to the Directors named above, the following Directors' terms continued after the Annual Meeting and will expire at the Annual Meeting of Shareholders in the year indicated below: Name Term Expires ---- ------------ Christopher P. Kirchen 2002 Jean-Michel Valette 2002 Patrick A. Hopf 2003 Ervin R. Shames 2003 Shareholders approved the granting of full voting rights to The St. Paul Companies, Inc. and its affiliates related to the acquisition of shares of common stock of the Company under the Minnesota Control Share Acquisition Act, with shares voted as follows: Shares For 12,754,345 Shares Withheld 734,518 Shares Abstaining 8,459 Broker Non-Vote 3,415,147 Vote results excluding interested parties were as follows: Shares For 6,590,999 Shares Withheld 734,518 Shares Abstaining 8,459 Broker Non-Vote 3,415,147 Shareholders approved the issuance by the Company of its Senior Secured Convertible Notes in the aggregate principal amount of up to $12 million together with warrants to purchase up to an aggregate of 4,800,000 shares of the common stock of the Company in a private placement, with shares voted as follows: Shares For 12,872,325 Shares Withheld 619,032 Shares Abstaining 5,965 Broker Non-Vote 3,415,147 Shareholders approved an amendment of the Company's 1997 Stock Incentive Plan to increase the number of shares of common stock reserved for issuance by 3,000,000 shares from 3,500,000 shares to 6,500,000 shares, with shares voted as follows: Shares For 12,563,083 Shares Withheld 926,237 Shares Abstaining 8,002 Broker Non-Vote 3,415,147 Shareholders approved an amendment of the Company's 1999 Employee Stock Purchase Plan to increase the number of shares of common stock reserved for issuance by 500,000 shares from 500,000 shares to a total of 1,000,000 shares, with shares voted as follows: Shares For 13,273,074 Shares Withheld 220,596 Shares Abstaining 3,652 Broker Non-Vote 3,415,147 16 Shareholders approved the material terms of the performance goals under the Company's Executive and Key Employee Incentive Plan, with shares voted as follows: Shares For 13,258,241 Shares Withheld 229,758 Shares Abstaining 9,323 Broker Non-Vote 3,415,147 Shareholders ratified the appointment of KPMG LLP as the Company's independent auditor for the fiscal year ending December 29, 2001, with shares voted as follows: Shares For 16,860,443 Shares Withheld 48,302 Shares Abstaining 3,724 ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. EXHIBIT NUMBER DESCRIPTION --------- ------------- 10.1 Loan Agreement dated September 28, 2001 by and among Select Comfort Corporation, Select Comfort Retail Corporation, Select Comfort Direct Corporation, Select Comfort SC Corporation, Direct Call Centers, Inc., selectcomfort.com corporation and Medallion Capital, Inc. 10.2 Promissory Note issued to Medallion Capital, Inc. under the Loan Agreement of September 28, 2001. 10.3 Common Stock Purchase Warrant issued to Medallion Capital, Inc. under the Loan Agreement of September 28, 2001. 10.4 Security Agreement dated September 28, 2001 by and among Select Comfort Corporation, Select Comfort Retail Corporation, Select Comfort Direct Corporation, Select Comfort SC Corporation, Direct Call Centers, Inc., selectcomfort.com corporation and Medallion Capital, Inc. 10.5 Patent and Trademark Security Agreement dated September 28, 2001 by and among Select Comfort Corporation, Select Comfort Retail Corporation, Select Comfort Direct Corporation, Select Comfort SC Corporation, Direct Call Centers, Inc., selectcomfort.com corporation and Medallion Capital, Inc. 10.6 Subordination Agreement dated September 28, 2001 by and among Select Comfort Corporation, each of its subsidiary corporations, Medallion Capital, Inc. and the Subordinated Lenders named therein. 17 (b) REPORTS ON FORM 8-K During the quarter ended September 29, 2001, the Company filed three Current Reports on Form 8-K. The Reports consisted of the following: (i) Current Report filed July 16, 2001, announcing comments on unaudited results for the second quarter ended June 30, 2001. (ii) Current Report filed October 9, 2001, announcing securing of additional financing. (iii)Current Report filed October 16, 2001, announcing comments on unaudited results for the third quarter ended September 29, 2001. 18 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SELECT COMFORT CORPORATION /s/ William R. McLaughlin ------------------------------------------- November 9, 2001 William R. McLaughlin President and Chief Executive Officer (principal executive officer) /s/ James C. Raabe ------------------------------------------- James C. Raabe Chief Financial Officer (principal financial and accounting officer) 19 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION LOCATION -------------- ------------------------------------- ------------------------------- 10.1 Loan Agreement dated September 28, Filed herewith electronically 2001 by and among Select Comfort Corporation, Select Comfort Retail Corporation, Select Comfort Direct Corporation, Select Comfort SC Corporation, Direct Call Centers, Inc., selectcomfort.com corporation and Medallion Capital, Inc. 10.2 Promissory Note issued to Medallion Filed herewith electronically Capital, Inc. under the Loan Agreement of September 28, 2001. 10.3 Common Stock Purchase Warrant Filed herewith electronically issued to Medallion Capital, Inc. under the Loan Agreement of September 28, 2001. 10.4 Security Agreement dated September Filed herewith electronically 28, 2001 by and among Select Comfort Corporation, Select Comfort Retail Corporation, Select Comfort Direct Corporation, Select Comfort SC Corporation, Direct Call Centers, Inc., selectcomfort.com corporation and Medallion Capital, Inc. 10.5 Patent and Trademark Security Filed herewith electronically Agreement dated September 28, 2001 by and among Select Comfort Corporation, Select Comfort Retail Corporation, Select Comfort Direct Corporation, Select Comfort SC Corporation, Direct Call Centers, Inc., selectcomfort.com corporation and Medallion Capital, Inc. 10.6 Subordination Agreement dated Filed herewith electronically September 28, 2001 by and among Select Comfort Corporation, each of its subsidiary corporations, Medallion Capital, Inc. and the Subordinated Lenders named therein.
20 EX-10 3 ex10-1loanagreement.txt LOAN AGREEMENT - SEPTEMBER 28, 2001 EXHIBIT 10.1 LOAN AGREEMENT among Select Comfort Corporation (the "Company"), Select Comfort Retail Corporation Select Comfort Direct Corporation Select Comfort SC Corporation Direct Call Centers, Inc. selectcomfort.com corporation (collectively, the "Subsidiaries") (collectively, the "Loan Parties") and Medallion Capital, Inc. (the "Lender") SEPTEMBER 28, 2001 1 LOAN AGREEMENT This Agreement is entered into September 28, 2001, among MEDALLION CAPITAL, INC., a Minnesota corporation and a Licensee under the Small Business Investment Act of 1958, whose address is 7831 Glenroy Road, Suite 480, Minneapolis, Minnesota 55439-3132, (the "Lender"), SELECT COMFORT CORPORATION, a Minnesota corporation (the "Company") and SELECT COMFORT RETAIL CORPORATION, SELECT COMFORT DIRECT CORPORATION, SELECT COMFORT SC CORPORATION, DIRECT CALL CENTERS, INC., AND SELECTCOMFORT.COM CORPORATION, all of which are Minnesota corporations, (the "Subsidiaries") (the Company and the Subsidiaries being each a "Loan Party" and collectively the "Loan Parties"), whose address is 6105 Trenton Lane North, Minneapolis, Minnesota 55442. The Lender and the Loan Parties agree as follows: ARTICLE ONE THE LOAN 1.1 NOTE Subject to the terms of this Agreement, the Lender agrees to loan the Company $5,000,000.00 (the "Loan"). The Loan will be evidenced by and be repayable in accordance with a Promissory Note issued by the Company to the Lender in the amount of the Loan (the "Note") which is attached as Exhibit 1.1. 1.2 WARRANT With the Note the Company will issue to the Lender a Warrant in the form attached as Exhibit 1.2 (the "Warrant"). 1.3 SECURITY The Company's obligations under the Note, this Agreement, and the other documents delivered to the Lender pursuant to this Agreement (all of the foregoing being collectively the "Loan Documents") are subject to or secured by the Security Agreement and Patent and Trademark Security Agreement attached as Exhibit 1.3. (collectively, the "Security Agreements"). 1.4 CLOSING Subject to fulfillment of the terms of this Agreement, the Loan shall be made to the Company (the "Closing") on September 28, 2001 (the "Closing Date"). 1.5 FEES At the Closing, the Company shall pay Lender a commitment and closing fee in the total amount of $75,000.00, which is in addition to the application fee of $25,000.00 previously paid to 2 Lender. At the Closing, the Company shall also pay the Lender's out of pocket expenses (including reasonable attorney's fees and costs advanced) incurred in the analysis of the Loan, the preparation of the Loan Documents and the Closing, and the other fees and expenses due hereunder. 1.6 SUBORDINATION 1.6.1 SUBORDINATION OF CONVERTIBLE NOTES At or prior to the Closing, the Company shall deliver to Lender a Subordination Agreement in the form attached as Exhibit 1.5 (the "Subordination Agreement") under which (a) the holders of the Senior Secured Convertible Notes (the "Convertible Notes") issued by the Company pursuant to the Note Purchase Agreement dated June 1, 2001 (the "Note Purchase Agreement") subordinate their rights under the Notes, the Note Purchase Agreement and the agreements securing the Notes to the rights of the Lender, and (b) St. Paul Venture Capital VI, LLC subordinates its rights under the Convertible Subordinated Debenture, dated November 10, 2000, to the rights of the Lender. 1.6.2 FUTURE SUBORDINATION TO NEW BANK AGREEMENT In the event that after the date of this Agreement the Company proposes to enter into an agreement (a "New Bank Agreement") with a bank or other financial institution under which the Company would incur, or has the right to incur, indebtedness for borrowed money or obtain letters of credit or similar financial accommodations, and (a) Profitability: the Company has reported in its quarterly or annual filings with the Securities and Exchange Commission consolidated net income (excluding any income from extraordinary items) of $1 or more in the two most recently reported fiscal quarters; (b) Leverage: the ratio, for the then four most recently reported fiscal quarters, of the sum of (1) Debt as of the date the determination is being made and (2) the maximum principal amount of indebtedness to be extended or available under the New Bank Agreement, to Consolidated EBITDA would be less than 3.0 to 1.0; and (c) Debt Service: the ratio of Consolidated EBITDA for the then four most recently reported fiscal quarters to the sum of (1) Interest Expense, scheduled principal payments of Debt and Capital Expenditures during the then four most recently reported fiscal quarters, and (2) the estimated Interest Expense and scheduled principal payments of Debt under the New Bank Agreement which will be due in the next four fiscal quarters, would be greater than 1.2 to 1.0; then Lender agrees that it will execute and deliver to such bank or financial institution a subordination agreement reasonably satisfactory to such bank or financial institution and to Lender providing for the subordination of (I) the indebtedness of the Loan Parties under the Note, this Agreement and the Security Agreements to the indebtedness of the Loan Parties under the New Bank Agreement, and (II) the Lender's security interest in the Company and the 3 Subsidiaries' accounts receivable, inventory, cash and cash equivalents (but not Lender's security interest in their equipment or intellectual property or any proceeds thereof) to the security interest granted or to be granted to secure the New Bank Agreement. The terms of such subordination shall include a standstill period of 180 days after which Lender shall be entitled to enforce its rights in the event of a default under this Agreement or the Loan Documents, and shall include a right on the part of Lender (but not any obligation) to cure defaults by the obligors under the New Bank Agreement to the extent such defaults are capable of being cured by Lender. As used in this Section 1.5, the terms "Capitalized Lease," "Capital Expenditures," "Consolidated EBITDA," "Debt," and "Interest Expense" have the meanings provided in Section 3.14 below. ARTICLE TWO REPRESENTATIONS AND WARRANTIES To induce the Lender to make the Loan, each of the Loan Parties jointly and severally represents and warrants to the Lender that, except as expressly stated to the contrary in the Disclosure Schedule which has been marked as such and separately delivered by the Loan Parties (the "Disclosure Schedule"): 2.1 GOOD STANDING Each of the Loan Parties is a corporation duly organized, validly existing and in good standing under the laws of Minnesota, is authorized to engage in the business now carried on by it, and is qualified as a foreign corporation to do business in each state where the nature of the business done by it requires qualification and the failure to be so qualified would have a material adverse effect on the Loan Parties taken as a whole. Those states are listed on 2.1 of the Disclosure Schedule. 2.2 CAPITAL STOCK The authorized and outstanding capital stock of each Loan Party is as described on 2.2 of the Disclosure Schedule. 2.3 SUBSIDIARIES; BENEFIT FROM THE LOAN The Loan Parties have only the Subsidiaries listed in 2.3 of the Disclosure Schedule. As used in this Agreement, "Subsidiary" means any corporation, partnership, limited liability entity or other entity in which a Loan Party owns, directly or indirectly, equity securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions. The Loan Parties and the Subsidiaries are part of an integrated economic operation and each of the Loan Parties will directly and indirectly benefit from the Loan being made by the Lender. 2.4 FINANCIAL STATEMENTS 4 The Company has delivered to the Lender the audited consolidated financial statements of the Company and its consolidated subsidiaries as of December 31, 1998, 1999 and 2000, and for the fiscal years then ended, and the unaudited consolidated and consolidating financial statements of the Company and subsidiaries as of June 30, 2001, and for the six month period then ended. All of the foregoing financial statements of the Company and subsidiaries are referred to collectively as the "Financial Statements" and are attached hereto as Exhibit 2.4. The Financial Statements were prepared in accordance with generally accepted accounting principles, consistently applied (except, with respect to interim financial statements, for the absence of footnotes and for year-end adjustments), and fairly present the financial condition of the Company and its subsidiaries as of the dates of the balance sheets included in the Financial Statements and the results of their operations for the periods then ended. 2.5 USE OF PROCEEDS The proceeds from the Loan shall be used for working capital and general corporate purposes. 2.6 ABSENCE OF MATERIAL CHANGES Except as stated in Section 2.6 of the Disclosure Schedule, since the date of the most recent of the Financial Statements, there have been no material adverse changes in the condition, financial or otherwise, of any of the Loan Parties or their respective businesses or properties, nor does any Loan Party know of any which may occur; and since the date of the most recent of the Financial Statements none of the Loan Parties have issued, sold or acquired any of the outstanding shares of any class of its capital stock, nor are there any contingent obligations, liability for taxes or commitments not disclosed or subject to reserve in the Financial Statements, other than the Loan under this Agreement, or which were incurred in the ordinary course of business. 2.7 SHAREHOLDERS, OFFICERS AND DIRECTORS The information furnished by each of the Loan Parties relative to its management, shareholders (including the number of shares of any class of stock held by each), officers and directors of each Loan Party in Section 2.7 of the Disclosure Schedule is true and correct. 2.8 PROPERTY OWNERSHIP; LEASES Except as indicated on Section 2.8 of the Disclosure Schedule, each of the Loan Parties has good title, free and clear of all liens and encumbrances (other than liens for taxes not delinquent) to all of its real and personal property reflected on the Financial Statements other than as disposed of in the ordinary course of business since the date of the Financial Statements. All property or assets not owned by one of the Loan Parties and used in the operation of its business, if any, are subject to valid leases held by the Loan Party covering their use or occupancy, which leases are not in default. A list of all real estate owned or leased by any of the Loan Parties and all liens or encumbrances on the real estate or assets are listed on Section 2.8 of the Disclosure Schedule. 2.9 OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS 5 Each of the Loan Parties possesses all patents, licenses, trademarks, trademark rights, trade names, trade name rights, trade secrets, copyrights and the like ("Intellectual Property") necessary or appropriate to conduct its business as now conducted without conflict with those of any other person. All of the foregoing are listed in Section 2.9 of the Disclosure Schedule. Section 2.9 of the Disclosure Schedule lists all patents, registered trademarks, registered copyrights, licenses and/or royalty agreements relating to the Intellectual Property of each Loan Party. 2.10 LITIGATION All of the litigation or proceedings pending or, to the knowledge of any of the Loan Parties or their respective officers, threatened against any of the Loan Parties or any of their respective properties in any court or by or before any governmental agency or arbitrator are listed in Section 2.10 of the Disclosure Schedule. 2.11 TAXES All Federal, State and other tax returns and reports of any Loan Party required by law to be filed have been filed and all Federal, State and other material taxes, assessments, fees and other governmental charges (other than those presently payable without penalty) imposed upon any Loan Party or the properties, assets or payroll of any Loan Party which are due and payable have been paid except as disclosed in Section 2.11 of the Disclosure Schedule. The Loan Parties have separately delivered to the Lender a copy of their consolidated federal income tax returns for the two most recent fiscal years. 2.12 ABSENCE OF PROHIBITION OR LIENS There is no provision in any Loan Party's current Articles or Certificate of Incorporation or Bylaws, or in any indenture or agreement to which any Loan Party is a party, nor any law, rule, regulations, contract, statute of any governmental authority, which limits or prohibits, or which may in the future limit or prohibit, the execution, delivery or fulfillment by any Loan Party of this Agreement or its Exhibits or of any of the acts or agreements contemplated by this Agreement or the other Loan Documents or which results or which may in the future result in the creation of a lien or encumbrance on any asset of either of the Loan Parties. 2.13 AUTHORIZATION The execution and delivery of this Agreement and the other Loan Documents have been duly authorized by the Board of Directors (and to the extent necessary, the stockholders) of each Loan Party. The officers of each Loan Party are authorized to execute and deliver this Agreement and the other Loan Documents to which it is a party and perform the same in accordance with their respective terms. Copies of the authorizing resolutions are attached to the Secretary's Certificate referred to in Section 7.2. 6 2.14 ENVIRONMENTAL MATTERS Each Loan Party has obtained all material permits, licenses and other authorizations which are required under federal, state and local laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, hazardous or toxic materials, or wastes into ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants or hazardous or toxic materials or wastes ("Environmental Laws"). Each Loan Party and all activities of the Loan Parties comply in all material respects with all Environmental Laws and with all terms and conditions of any required permits, licenses and authorizations applicable to the Loan Parties. Each Loan Party is also in material compliance with all limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in the Environmental Laws or contained in any plan, order, decree, judgment or notice. None of the Loan Parties are aware of, nor have any of them received notice of, any events, conditions, circumstances, activities, practices, incidents, actions or plans which may interfere with or prevent continued compliance with, or which may give rise to any material liability under, any Environmental Laws or the common law concerning environmental matters except as disclosed in Section 2.14 of the Disclosure Schedule. 2.15 FINDER'S OR BROKER'S FEES None of the Loan Parties has entered into any agreement to pay or has any obligation to pay any commission, finder's fee, brokerage fee or other such fees to any person (other than Lender) as a result of the transactions in or contemplated by this Agreement. 2.16 SMALL BUSINESS CONCERN Each of the Loan Parties is a "Small Business Concern" as that term is defined by the Small Business Administration. No officer or director of any of the Loan Parties is, or has been within six months prior to the Closing Date, an officer, director, agent or employee of Lender or an "Associate", as that term is defined in Part 107 of Title 13 of the Code of Federal Regulations, of Lender. No portion of the proceeds of the Loan will be used for any purpose in contravention of any of the provisions of Part 107 of Title 13 of the Code of Federal Regulations. None of the Loan Parties has ever been debarred from contracts with any governmental unit and no debarment proceedings are currently underway or threatened by any governmental unit. 2.17 CRIMINAL OFFENSES None of the officers or directors of any Loan Party has been convicted of a felony within the past 10 years, except as disclosed in 2.17 of the Disclosure Schedule. 2.18 SOLVENCY After giving effect to the execution and delivery of the Loan Documents and the making of the Loan, none of the Loan Parties will be "insolvent" within the meaning of that term as defined in (a) Section 101 of the United States Bankruptcy Code, (b) Section 2 of the Uniform Fraudulent Transfer Act, or (c) any other applicable state law pertaining to fraudulent transfers valuing the 7 assets of any of the Loan Parties on a "going concern" basis, as each may be amended from time to time, or be unable to pay its debts generally as such debts become due, or have an unreasonably small capital to engage in any business or transaction, whether current or contemplated. 2.19 DISCLOSURE OF MATERIAL FACTS No representation or warranty by any of the Loan Parties in this Agreement or any of the other Loan Documents, nor any statement, document or certificate furnished or to be furnished by any Loan Party or its representatives to the Lender or its representatives in connection with this Agreement or any of the other Loan Documents, contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact necessary to make the facts stated therein not misleading. ARTICLE THREE AFFIRMATIVE COVENANTS OF THE LOAN PARTIES The Loan Parties jointly and severally agree that, so long as the Note is outstanding or any other amounts remain owing to the Lender under any of the Loan Documents: 3.1 PROMPT PAYMENT OF TAXES AND CLAIMS Each Loan Party will pay when due all taxes, lawful claims for labor, materials, supplies, rents, lease payments and other debts and liabilities which if unpaid would by law be a lien or charge upon the property of the Loan Party, except to the extent being contested in good faith by appropriate proceedings and with reserves established therefor in accordance with generally accepted accounting principles. 3.2 INSURANCE Each Loan Party shall maintain insurance policies in such types and amounts as are appropriate for its business, including but not limited to comprehensive property and liability insurance policies. Lender shall be listed on all insurance policies as a mortgagee, loss payee and additional insured, as its interest may appear. The policies shall require the insurer to provide Lender with written notice at least 30 days prior to cancellation. The policies in force on the Closing Date are listed in 3.2 of the Disclosure Schedule. In the event a policy lapses, is modified or replaced, the affected Loan Party shall immediately notify the Lender and send evidence of the new policies. 3.3 REPAIRS Each Loan Party shall maintain in good repair and working order all assets used in its business and will replace or repair any items of damaged or worn-out property in accordance with good management practices. 8 3.4 BOARD OF DIRECTORS The Company's Board of Directors shall meet at least quarterly and consist of at least three people. The Company shall furnish Lender at least 10 days prior to each Board meeting written notice and an agenda of the meeting and shall provide the Lender promptly a copy of the minutes of all meetings of the Board and all other actions and other reports of or given to the Board or any committee thereof. A representative of the Lender shall have the right to attend all Board meetings and have the full rights of a Board member at the meeting except the right to vote on Board resolutions. The Company shall reimburse the Lender and such representatives for their actual, reasonable, documented out-of-pocket expenses for attending meetings with the Company that occur outside the Minneapolis / St. Paul metropolitan area. Lender and all such representatives, and all other employees and agents of Lender, will keep confidential all information received pursuant to this Section 3.4, except for information which enters the public domain through no fault of Lender or such representative, employee or agent, or information which Lender is required to disclose by law, but only to the extent such disclosure is legally required. 3.5 DELIVERY OF FINANCIAL AND OTHER DOCUMENTS The Company shall deliver to Lender: 3.5.1 As soon as available and in any event within 90 days after the close of each fiscal year (a) an audited consolidated balance sheet of the Company as of the close of the fiscal year and consolidated statements of income and retained earnings and changes in financial position for the year then ended, accompanied by an unqualified opinion of the Company's independent certified public accountants acceptable to the Lender, and (b) a letter from such accountants stating whether the Company is in compliance with the provisions of Section 3.14. 3.5.2 Within 10 days after the Loan Party's issuance or filing, copies of all filings submitted by the Loan Party to the Securities and Exchange Commission, any listing application filed with any stock exchange, and each annual report and all other reports, including proxy solicitations, which the Loan Party shall send to its shareholders, in each case promptly after it is requested by Lender. 3.5.3 Within 25 days after the end of each month, consolidated balance sheets of the Company and the Subsidiaries as of the end of such month, and statements of income and retained earnings for the portion of the fiscal year then ended, prepared in conformity with Section 3.6. Upon request by the Lender, the Company shall also provide to Lender a monthly aging report of the Loan Parties' accounts receivable and accounts payable, a copy of the reconciliation of the Financial Statements to the cash accounts, any off balance sheet liabilities assumed by any Loan Party, and any unbudgeted capital expenditures in excess of $10,000. 9 3.6 FORM OF FINANCIAL DOCUMENTS For purposes of this Agreement: 3.6.1 Except as provided in subsection 3.6.2, all financial statements of a Loan Party provided under this Agreement shall be prepared in conformity with generally accepted accounting principles (except, with respect to interim financial statements, for the absence of footnotes and for year-end adjustments) applied on a consistent basis. 3.6.2 If any accounting principle, method of valuation or governmental regulations followed in the preparation of financial statements is required to be modified by the Financial Accounting Standards Board, the Loan Parties shall so notify the Lender, and the financial statements may be modified to such extent. 3.6.3 All fiscal year-end financial statements delivered to the Lender shall be accompanied by a letter from the certified public accountant who prepared them stating that such statements have been prepared in compliance with the provisions of Section 3.6. All other financial statements and reports delivered to the Lender pursuant to this Agreement shall be accompanied by a certificate signed by the Company's President, Treasurer or Chief Financial Officer, certifying that they have been prepared in compliance with the provisions of Section 3.6, that they fairly and accurately state the current financial condition of the Company and its subsidiaries, that the financial statements have been reconciled with the cash accounts, and that all payroll withholding taxes were paid when due, and that no Default existed during the accounting period covered by the financial statements. A copy of the form of the certification is attached as Exhibit 3.6.3. In the event the President, Treasurer or Chief Financial Officer cannot certify the above, a detailed disclosure of those items which cannot be certified together with a detailed explanation for each item shall be given to Lender, together with the financial statements. Disclosure of non-certified matters shall not cure any Default. 3.7 BUDGET At least 30 days prior to the close of each fiscal year, the Company's Board of Directors shall review the budget and the Board shall adopt an operating and capital expenditures budget for the next succeeding fiscal year. A copy of the budget with underlying assumptions shall be delivered to the Lender not later than 10 days after approval by the Board. 3.8 INFORMATION ON REQUEST; DISCLOSURE Each Loan Party shall furnish promptly, at the Lender's request, such information as may be reasonably necessary to determine whether the Loan Party is in compliance with the terms of this Agreement or as may be needed by the Lender to prepare any required reports to shareholders or appropriate federal and state regulatory authorities. Lender shall keep such information 10 confidential, except that the Loan Parties consent to reasonable disclosure by the Lender of the Loan Parties' information, including financial information, to the shareholders of the Lender on a confidential basis and appropriate federal and state regulatory authorities. 3.9 CORPORATE EXISTENCE Each Loan Party shall maintain its corporate existence and conduct its business in an orderly and regular manner, except to the extent otherwise permitted under Section 4.6 and the other provisions of the Loan Documents. 3.10 LITIGATION Each Loan Party shall immediately notify the Lender of all actual or threatened litigation asserting damages which may exceed $50,000 or more, and of all actual of threatened proceedings before any governmental or regulatory body or arbitrator to which it is a party and which may affect its business. 3.11 INSPECTIONS Each Loan Party shall permit, at such times as will not unreasonably interfere with the conduct of its business, the Lender's representatives to visit and inspect any property of the Loan Party and shall make available to the representatives for inspection or copying any of the Loan Party's books and records. Each officer of the Loan Party and the Loan Party's independent accountants will discuss with the Lender's representatives any of the Loan Party's affairs, finances and accounts at such times and as often as the Lender may reasonably request. 3.12 CORPORATE FUNDS Cash funds of any Loan Party in excess of needs reasonably necessary for its day-to-day operations shall be invested in accordance with the Company's investment policy, a copy of which has been furnished to Lender. 3.13 CIVIL RIGHTS Each Loan Party shall comply with the provisions of the Civil Rights Acts of 1964 and file with or make available to Lender such information as may be necessary to enable Lender to meet their reporting requirements to the Small Business Administration. 3.14 FINANCIAL COVENANTS (a) The Company's Consolidated EBITDA less the sum of Interest Expense, scheduled principal payments on Debt, and Capital Expenditures will be not less than the amount indicated below for the respective periods indicated (i.e. since the limitations below are expressed as negative numbers, if the result of the computation above is a negative number it will not be a larger negative number than the amount indicated below for the applicable period): Three months ended September 29, 2001: $(1,000,000) 11 Six months ended December 29, 2001 $(2,500,000) Nine months ended March 30, 2002 $(4,000,000) Twelve months ended June 29, 2002 $(4,000,000) (b) As of the end of each fiscal quarter ending on or after September 28, 2002, the Company will: (i) Maintain a ratio of Consolidated EBITDA to Interest Expense, in each case during the twelve months ended on or immediately prior to the date of determination, of not less than 1.2 to 1.0. (ii) Maintain a ratio of Consolidated EBITDA to the sum of Interest Expense, scheduled principal payments on Debt and Capital Expenditures, in each case during the twelve months ended on or immediately prior to the date of determination, of not less than 1.05 to 1.00. (c) For purposes of this Agreement: "Capitalized Lease" shall mean any lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with generally accepted accounting principles. "Capital Expenditures" means, for any period of determination, the aggregate amount of all expenditures during such period by the Company or any Subsidiary that would be classified as capital expenditures in accordance with generally accepted accounting principles, or made in property that is subject to a synthetic lease to which the Borrower becomes a lessee during such period, including without limitation, any amount debited to the fixed asset account on the balance sheet of the Company or any Subsidiary in respect of (i) the acquisition, including, without limitation, acquisition by entry into a Capitalized Lease, construction, improvement, replacement or betterment of land, buildings, machinery, equipment or of any other fixed assets or leaseholds, and (ii) to the extent related to and not included in clause (i), materials, contract labor and direct labor (excluding expenditures properly chargeable to repairs or maintenance in accordance with generally accepted accounting principles). "Consolidated EBITDA" means, for any period of determination, the consolidated net income of the Company and the Subsidiaries before provision for interest expense (including implicit interest expense on Capitalized Leases), income taxes, depreciation and amortization of intangible assets, non-cash losses or gains on assets existing as of the Closing Date, all as determined in accordance with generally accepted accounting principles. "Debt" as to any party shall mean, without duplication, (a) all obligations for borrowed 12 money or which are evidenced by promissory notes, bonds, debentures or similar instruments; (b) any obligation secured by any mortgage, pledge, security interest, lien, charge or other encumbrance existing on property owned or acquired subject thereto, whether or not such obligation is the obligation of the owner or another party; (c) any obligation on account of deposits or advances received by such party; (d) any obligation for the deferred purchase price of any property or services, except accounts payable arising in the ordinary course of business not unpaid for a period of more than 90 days past the due date; (e) any obligation as lessee under any Capitalized Lease; (f) any guaranty, endorsement or other contingent obligation in respect to indebtedness of others, except for endorsements for collection in the ordinary course of business; (g) any undertaking or agreement to reimburse or indemnify issuers of letters of credit; and (h) the Debt of any partnership or joint venture in which the person or entity as to which the determination is being made is a general partner or a joint venturer. "Interest Expense" means, for any period of determination, the interest expense (including implicit interest expense on Capitalized Leases) of the Company and the Subsidiaries, determined in accordance with generally accepted accounting principles, excluding prepaid interest and interest paid in kind. ARTICLE FOUR NEGATIVE COVENANTS OF THE LOAN PARTIES The Loan Parties jointly and severally agree that, so long as the Note is outstanding, or any other amounts remain owing to the Lender under any of the Loan Documents, none of the Loan Parties shall: 4.1 CHANGE OF OPERATIONS Permit a substantial change in the present nature of the business operations of the Loan Parties, taken as a whole. 4.2 DIVIDENDS Directly or indirectly purchase, acquire, redeem or retire any shares of its capital stock outstanding nor pay any dividends, except dividends paid by a Subsidiary to the Company or paid in the common stock of the Company or pursuant to any employee benefit or compensation plan or agreement. 4.3 EXPENSE REIMBURSEMENT Reimburse out-of-pocket expenses which do not meet the Internal Revenue Service test as a business expense deduction and then only upon submission of an expense report meeting the business expense documentation requirements of the Internal Revenue Service. 4.4 TRANSACTIONS WITH INSIDERS 13 Purchase or sell any asset or service to or from any director or officer, or any person who owns or controls, directly or indirectly, 5% or more of the voting capital stock of any Loan Party, or any relative of any of the foregoing, or any organization in which any one or more of the foregoing, together, hold, directly or indirectly, an ownership interest of 5% or more ("Affiliate"), or rent or lease property to or from an Affiliate, except with the prior written approval of the Lender or as set forth in 4.4 of the Disclosure Schedule. 4.5 APPLICATION OF FUNDS Invest in or otherwise divert any of its funds to an individual, other corporation or business entity other than the Loan Parties, it being the intent of this Agreement that the Loan Parties will apply their full capital and resources to their own corporate business and purposes. 4.6 MERGERS AND ACQUISITIONS Consolidate or merge with, or purchase all or a substantial part of the assets of, any other business or entity (except that any Loan Party may merge into or consolidate with, and any Loan Party may purchase the assets of, any other Loan Party), or sell, lease or otherwise transfer any assets other than in the normal course of its present business, or enter into any franchising agreements, or create any new Subsidiaries (other than new wholly-owned Subsidiaries the investment by the Loan Parties in which does not exceed $50,000). 4.7 GUARANTIES Guarantee or endorse any obligation of others, or assume any contingent liability with respect to the obligations of others, except (a) obligations of any Loan Party as may be appropriate for purposes of their obtaining usual and normal open account and short-term credit of the type normally and necessarily outstanding in the operation of the business, (b) guaranties of the Subsidiaries in favor of the holders of the Convertible Notes, (c) any contingent obligation owing under the Revolving Credit Program Agreement between Conseco Bank, Inc. and the Company dated as of May 17, 1999, as amended to date (the "Program Agreement") and (d) any obligation incurred under any New Bank Agreement to the financial institution providing credit or financial accommodations under the New Bank Agreement. 4.8 INDEBTEDNESS Incur any indebtedness in addition to that existing at the Closing Date, except (i) for usual and normal unsecured open account and short-term credit of the type normally and necessarily outstanding in the operation of the business, (ii) as provided in Section 4.9, (iii) the subordinated indebtedness under the Subordination Agreement, (iv) purchase money indebtedness incurred to acquire any machinery or equipment in a principal amount not in excess of the cost thereof and as to which the lien does not extend beyond the machinery and equipment so acquired, (v) unsecured indebtedness not in excess of a total of $100,000 which is subordinated in writing to obligations to the Lender, and (vi) guarantees not prohibited by Section 4.7 above. 4.9 ENCUMBRANCES; CONDITIONAL SALES 14 Create, incur, assume or suffer to exist any mortgage, pledge, lien or other encumbrance of any kind on any of its properties now owned or hereafter acquired, nor acquire or agree to acquire property under any conditional sales agreement or title retention contract, nor engage in any sale-and-leaseback transaction, except for those encumbrances and liens which (i) are disclosed in 4.9 of the Disclosure Schedule, (ii) are subject to the terms and conditions of the Subordination Agreement, or (iii) secure purchase money indebtedness permitted under Section 4.8 of this Agreement. Lender acknowledges that its security interest in the accounts of the Loan Parties is subordinate to the security interest of Conseco Bank, Inc. granted under the Program Agreement in the funds contributed to and deposited in the Reserve Account provided for in the Program Agreement. 4.10 CAPITAL EXPENDITURES Incur or make any Capital Expenditures in any fiscal year which would cause the aggregate Capital Expenditures in any such year to exceed by more than $250,000 the budgeted amount in the budget delivered pursuant to Section 3.7 for such fiscal year. A summary of all Capital Expenditures shall be presented to each meeting of the Board of Directors relating to the period subsequent to the preceding Board meeting. 4.11 AMEND ARTICLES OR BYLAWS Amend or change its Articles or Certificate of Incorporation or By-Laws, or violate or breach any provisions thereof. ARTICLE FIVE DEFAULTS Any of the following acts or conditions shall constitute a default ("Default"): 5.1 FAILURE TO PAY INTEREST OR PRINCIPAL If the Company fails to pay when due any installment of interest or principal owed under the Note. 5.2 UNTRUE REPRESENTATION OR WARRANTY If any representation or warranty made by any Loan Party to the Lender subsequently proves to have been incomplete or untrue in any material respect as of the Closing Date, or any statement, certificate or data furnished by any Loan Party to the Lender under this Agreement or its Exhibits proves to have been incomplete or untrue in any material respect or materially misleading under the circumstances in which it was provided as of the date on which the information is stated or certified. 15 5.3 CONTRACTUAL DEFAULT If any Loan Party breaches, or a default exists under, any provision of this Agreement, the Note, or any of the other Loan Documents, and such breach or default is not cured within 15 days of the date such breach or default occurs. 5.4 BANKRUPTCY OR INSOLVENCY If any Loan Party is insolvent, or admits in writing its inability to pay its debts as they mature, or makes an assignment for the benefit of creditors; or applies for or consents to appointment of any receiver, trustee, or similar officer for it or for all or any substantial part of its property; such receiver, trustee or similar officer is appointed without the application or consent of any Loan Party and such appointment shall continue undischarged for a period of 60 days; or any Loan Party shall institute (by petition, application, answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition, application or otherwise) against any Loan Party and shall remain undismissed for a period of 60 days; or any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against a substantial part of the property of any Loan Party and such judgment, writ, or similar process shall not be released, vacated or fully bonded within 30 days after its issue or levy. 5.5 JUDGMENT If there is rendered against any Loan Party a final judgment, decree or order for the payment of money in excess of $250,000 and the continuance of such judgment, decree or order unsatisfied and in effect for any period of 30 consecutive days without a stay of execution. 5.6 DEFAULT ON OTHER OBLIGATIONS If there is a default or event of default under any material (as defined below) bond, debenture, note or other evidence of indebtedness of any Loan Party (other than the Note) or under any indenture or other instrument under which any such evidence of indebtedness has been issued or by which it is governed and the expiration of the applicable period of grace, if any, specified in such evidence of indebtedness, indenture or other instrument entitling the holder of such indebtedness to accelerate such indebtedness, provided, that if such default or event of default under such bond, debenture, note or other evidence of indebtedness shall be cured by the Loan Party or waived by the holder(s) of such indebtedness, then the Default hereunder by reason of such default or event of default shall be deemed likewise to have been thereupon cured or waived. For purposes of this Section, "material" means involving $100,000 in indebtedness under any single bond, debenture, note or other evidence or indebtedness, or involving an aggregate of $100,000 under more than one bond, debenture, note or other evidence of indebtedness of any amount. 16 5.7 CHANGE IN CONTROL If (a) any person or two or more persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended) of 20% or more of the outstanding shares of the voting stock of the Company, or (b) a majority of the Board of Directors of the Company as of any date shall consist of individuals who were not (A) directors of the Company as of the corresponding date of the previous year, (B) selected or nominated to become directors by the Board of Directors of the Company of which a majority consisted of individuals described in clause (A), or (C) selected or nominated to become directors by the Board of Directors of the Company of which a majority consisted of individuals described in clause (A) or individuals described in clause (B). ARTICLE SIX REMEDIES 6.1 ACCELERATION In the event of any Default, Lender may, by notice in writing to the Loan Parties, declare the entire principal amount and accrued interest of any Loan Party's debt held by Lender immediately due and payable without presentment, demand, protest, notice of protest or other notice of dishonor of any kind, all of which are waived by any Loan Party. This remedy shall not be exclusive of any other remedy in law or equity. 6.2 OTHER REMEDIES In the event of any Default, the Lender shall be entitled to exercise any or all of its remedies under any of the Loan Documents or under applicable law. In the event of any Default which continues for 90 consecutive days, the unpaid principal balance shall bear interest at a rate equal to the lesser of 19% per annum of the maximum amount permitted by law from the date of such Default until the Default is waived by the Lender in writing or cured to the satisfaction of Lender. 6.3 NO WAIVER; REMEDIES CUMULATIVE No failure or delay on the part of the Lender in exercising any right, power or remedy under this Agreement, or any of the other Loan Documents, shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy under this Agreement or any of the other Loan Documents. The remedies herein and in the other Loan Documents are cumulative and not exclusive of any remedies provided by law. 17 ARTICLE SEVEN ADDITIONAL ACTIONS TAKEN BY THE LOAN PARTIES At or before the Closing, the Loan Parties shall take the actions described below and execute and deliver, as appropriate, to the Lender the following documents, in each case in form and substance satisfactory to the Lender: 7.1 OPINION OF COUNSEL TO THE LOAN PARTIES An opinion of counsel for the Loan Parties, addressed to the Lender, dated the Closing Date, including the statements of opinion referred to in Exhibit 7.1. 7.2 SECRETARY'S CERTIFICATE A certificate executed by the Secretary of each Loan Party certifying as to an attached true, correct and complete copy for each Loan Party of: its Articles of Incorporation, Bylaws and the resolutions of its Board of Directors authorizing its entry into this Agreement and the various Loan Documents. The form of this Secretary's Certificate is attached as Exhibit 7.2. 7.3 GOOD STANDING CERTIFICATES Certificates of Good Standing for each Loan Party issued by the Secretary of State of Minnesota, and in the case of the Company by the Secretary of State of Utah, and in the case of Select Comfort SC Corporation by the Secretary of State of South Carolina. 7.4 SBA FORMS An executed copy of SBA Form 480, SBA Form 652, Debarment certification, and Statement of Qualification. 7.5 FINANCING STATEMENTS Financing Statements executed where required by each Loan Party for filing in each jurisdiction where such filings are necessary to perfect the security interests granted by the Security Agreements. 7.6 CONTRACTS If requested by Lender, copies of all written employment contracts, contracts with any officer, director or stockholder or their relatives, all plans pursuant to which benefits are paid to any employee of the Company or its Subsidiaries, and all material contracts with brokers or others for services relating to this Agreement or the financing hereunder, and a brief written description of any such agreements that are not in writing. 18 ARTICLE EIGHT GENERAL PROVISIONS 8.1 EXHIBITS The attached exhibits are by reference made an integral part of this Agreement: Exhibit Title 1.1 Promissory Note 1.2 Warrant 1.3 Security Agreements 1.5 Subordination Agreement 2 Disclosure Schedule 2.4 Financial Statements 3.6 Form of Certification 7.1 Opinion of Counsel 7.2 Secretary's Certificates 8.2 APPLICABLE LAW This Agreement is to be interpreted in conformity with the Small Business Investment Act of 1958, as amended, and is otherwise governed by the laws of the State of Minnesota. The provisions of this Agreement shall be severable. 8.3 ASSIGNMENT None of the rights of the Loan Parties under this Agreement or any of the other Loan Documents shall be assigned by any of the Loan Parties except with the written consent of the Lender. In the event that the Lender determines to assign the Note or any interest therein or thereunder to any party not affiliated with Lender, Lender agrees (a) to give the Company prior written notice of such intended transfer, and (b) that if within 30 days after such notice is given the Company delivers to the Lender written notice and payment of an amount equal to the entire remaining principal balance of the Note, all accrued interest and any unpaid expenses due under the Note, then the Lender will assign all its rights under the Note to the Company or to a third party in accordance with the Company's instructions. If notice and payment are not delivered to the Lender within such period as aforesaid, then the Lender shall be entitled, for a period 120 days from the date of Lender's initial notice to the Company, to transfer or assign the Note, free and clear of any rights of the Company under this Section 8.3. Subject to the preceding, the rights and obligations of this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. 8.4 JOINT AND SEVERAL LIABILITY All of the obligations and agreements of the Loan Parties under this Agreement and each of the other Loan Documents are joint and several and may be enforced by the Lender against any or 19 all of the Loan Parties, as determined by the Lender, without any need to join all of the Loan Parties in any such action. 8.5 HEADINGS The headings used in this Agreement are intended for informational purposes only and shall not affect its interpretation. 8.5 AMENDMENTS, ETC. No amendment, modification, termination or waiver of any provision of this Agreement or any of the other Loan Documents or consent to any departure therefrom shall be effective unless the same shall be in writing and signed by the Lender and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand given to any Loan Party in any case shall entitle any of the Loan Parties to any other or further notice or demand in similar or other circumstances. 8.6 ADDRESSES FOR NOTICES, ETC. Except as otherwise expressly provided herein, all notices, requests, demands and other communications provided for hereunder and under any of the other Loan Documents shall be in writing and mailed or personally delivered to the applicable party at its address indicated below: If to Lender: Medallion Capital, Inc. 7831 Glenroy Road, Suite 480 Minneapolis, Minnesota 55439-3132 Attention: President If to any or all of the Loan Parties: Select Comfort Corporation 6105 Trenton Lane North Minneapolis, Minnesota 55442 Attention: Chief Financial Officer with a copy to: Select Comfort Corporation 6105 Trenton Lane North Minneapolis, Minnesota 55442 Attention: General Counsel 20 or, as to each party, at such other address as shall be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section. All notices, requests, demands and other communications shall be effective when personally delivered or two days after the date when mailed. 8.7 INDEMNIFICATION The Loan Parties jointly and severally agree to indemnify the Lender, and any other holders of the Note, and their respective officers, directors, employees, agents and representatives from any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever, including but not limited to the fees and expenses of the Lender's legal counsel, incurred by or asserted against the Lender or any holder of the Note in any way relating to or arising out of this Agreement, the Note or the other Loan Documents or the enforcement of any of the terms hereof or thereof, except where there has been a final judicial determination that the Lender was grossly negligent or engaged in willful misconduct. The obligations of the Loan Parties under this Section shall survive payment of the Note. 8.8 PUBLIC NOTICES The Loan Parties agree that the Lender shall have the right after the Closing to place advertisements or public notices in financial and other newspapers at Lender's expense describing the financing provided by the Lender under this Agreement. The Lender shall submit a copy of the form of such proposed advertisements or notices to the Company for its prior approval, which approval will not be unreasonably withheld or delayed. 8.9 ENFORCEMENT EXPENSES The Loan Parties shall be jointly and severally obligated to pay or reimburse the Lender for paying all out-of-pocket expenses incurred by the Lender in connection with the enforcement of the Loan Documents and the other instruments and documents to be delivered hereunder or thereunder, including the reasonable fees and out-of-pocket expenses of legal counsel to the Lender with respect to thereto. 8.10 CONSENT TO JURISDICTION AT THE OPTION OF THE LENDER, THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS DELIVERED PURSUANT TO THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN MINNEAPOLIS OR ST. PAUL, MINNESOTA; AND EACH LOAN PARTY AND THE LENDER CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT ANY LOAN PARTY COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE LENDER AT ITS OPTION SHALL BE ENTITLED TO HAVE THE 21 CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE. 8.11 WAIVER OF TRIAL BY JURY EACH LOAN PARTY AND THE LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREIN OR THEREIN, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. In Witness Whereof, the parties have executed this Agreement as of the date first written above. SELECT COMFORT CORPORATION By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President SELECT COMFORT RETAIL CORPORATION By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President SELECT COMFORT DIRECT CORPORATION By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President SELECT COMFORT SC CORPORATION By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President DIRECT CALL CENTERS, INC. By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President 22 SELECTCOMFORT.COM CORPORATION By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President MEDALLION CAPITAL, INC. By: /s/ Dean R. Pickerell ------------------------------------------ Dean R. Pickerell, Executive Vice President 23 EX-10 4 ex10-2promissorynote.txt PROMISSORY NOTE - SEPTEMBER 28, 2001 EXHIBIT 10.2 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, OFFERED FOR SALE OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THIS NOTE UNDER THE ACT OR AN OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT. SELECT COMFORT CORPORATION NOTE DUE SEPTEMBER 28, 2006 Amount: $5,000,000.00 Date: September 28, 2001 Rate: 12% Maturity: September 28, 2006 FOR VALUE RECEIVED, the undersigned, SELECT COMFORT CORPORATION, a Minnesota corporation (the "Company"), and SELECT COMFORT RETAIL CORPORATION, SELECT COMFORT DIRECT CORPORATION, SELECT COMFORT SC CORPORATION, DIRECT CALL CENTERS, INC., AND SELECTCOMFORT.COM CORPORATION, all of which are Minnesota corporations, (the "Subsidiaries") (the Company and the Subsidiaries being each a "Loan Party" and collectively the "Loan Parties"), hereby jointly and severally promise to pay to MEDALLION CAPITAL, INC. ("Lender"), a Minnesota corporation and a licensee under the Small Business Investment Act of 1958, at its office at 7831 Glenroy Road, Suite 480, Minneapolis, Minnesota 55439-3132, the principal amount of Five Million Dollars ($5,000,000) together with interest on the unpaid principal balance from the date hereof at the rate of 12% per annum, provided that in the event of a Default as defined in the Loan Agreement referred to below which continues for 90 consecutive days, the unpaid principal balance shall bear interest at a rate equal to the lesser of 19% per annum or the maximum amount permitted by law from the date of such Default until the Default is waived by the Lender in writing or cured to the satisfaction of the Lender. Interest calculations shall be based on a 360-day year and a 10 year amortization schedule. Interest shall accrue without payment until October 1, 2001. Thereafter, principal and interest shall be due and payable as provided in the attached amortization schedule, with the final installment of principal and interest due on September 28, 2006, in the amount necessary to repay in full the unpaid principal and interest. All payments received will be first applied to unpaid interest with any remainder being applied toward principal reduction. This Note has been delivered in conjunction with a Loan Agreement dated September 28, 2001, by and among the Company, the Lender and the Loan Parties referred to therein. Any capitalized terms in this Note shall have the same meaning as set forth in the Loan Agreement. This Note is subject to prepayment in whole or part at any time at the option of the Company. In the case of any prepayment of less than the total principal amount outstanding on the Note, the prepayment shall be applied first to the interest owed and then to installments of 1 principal in the inverse order of their maturity. In the event of prepayment of principal, the following prepayment fees shall apply: Percent of Prepaid Principal Prepayment Date Due as Prepayment Penalty ------------------------ ----------------------------- September 28, 2002 5% September 28, 2003 4% September 28, 2004 3% September 28, 2005 2% July 28, 2006 1% Notwithstanding the foregoing, Lender agrees to waive the prepayment fee (i) if the closing sale price of the Company's common stock (as reported on NASDAQ) is $4.00 or more per share for the 90 consecutive calendar day period immediately prior to such prepayment, or (ii) if all of the shares obtained upon exercise of the Warrant have actually been sold for an average price of $4.00 per share (without deduction for selling costs). Upon the occurrence of any Default (as defined in the Loan Agreement) the Lender shall have all the rights and remedies provided in the Loan Agreement and the other agreements securing this Note. The Company agrees, if this Note is placed in the hands of an attorney for collection after the occurrence of a Default, to pay reasonable attorneys' fees and other costs as permitted by law. The Company waives demand for payment, presentment, notice of dishonor, notice of non-payment, diligence in collecting, grace, notice and protest. No release of any security for this Note or extension of time for payment of this Note shall release or modify the liability of the Company under this Note. This Note shall be governed by the laws of the State of Minnesota and shall be binding upon the Company, its successors and assigns, and shall inure to the benefit of the holder hereof, its successors and assigns. SELECT COMFORT CORPORATION By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President SELECT COMFORT RETAIL CORPORATION By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President SELECT COMFORT DIRECT CORPORATION By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President 2 SELECT COMFORT SC CORPORATION By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President DIRECT CALL CENTERS, INC. By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President SELECTCOMFORT.COM CORPORATION By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President 3 09/26/2001 Page 1 - ------------------------------------------------------------------------------------------------- Select Comfort - ------------------------------------------------------------------------------------------------- Compound Period......: Monthly Nominal Annual Rate..: 12.000 % Effective Annual Rate: 12.683 % Periodic Rate........: 1.0000 % Daily Rate...........: 0.03333 % CASH FLOW DATA - ------------------------------------------------------------------------------------------------- Event Start Date Amount Number Period End Date - ------------------------------------------------------------------------------------------------- 1 Loan 09/28/2001 5,000,000.00 1 2 Payment 11/01/2001 Interest Only 24 Monthly 10/01/2003 3 Payment 11/01/2003 71,735.47 36 Monthly 10/01/2006 4 Payment 10/01/2006 4,063,703.80 1 AMORTIZATION SCHEDULE - Normal Amortization, 360 Day Year
Date Payment Interest Principal Balance - ------------------------------------------------------------------------------------------------- Loan 09/28/2001 5,000,000.00 1 11/01/2001 55,050.00 55,050.00 0.00 5,000,000.00 2 12/01/2001 50,000.00 50,000.00 0.00 5,000,000.00 2001 Totals 105,050.00 105,050.00 0.00 5,000,000.00 3 01/01/2002 50,000.00 50,000.00 0.00 5,000,000.00 4 02/01/2002 50,000.00 50,000.00 0.00 5,000,000.00 5 03/01/2002 50,000.00 50,000.00 0.00 5,000,000.00 6 04/01/2002 50,000.00 50,000.00 0.00 5,000,000.00 7 05/01/2002 50,000.00 50,000.00 0.00 5,000,000.00 8 06/01/2002 50,000.00 50,000.00 0.00 5,000,000.00 9 07/01/2002 50,000.00 50,000.00 0.00 5,000,000.00 10 08/01/2002 50,000.00 50,000.00 0.00 5,000,000.00 11 09/01/2002 50,000.00 50,000.00 0.00 5,000,000.00 12 10/01/2002 50,000.00 50,000.00 0.00 5,000,000.00 13 11/01/2002 50,000.00 50,000.00 0.00 5,000,000.00 14 12/01/2002 50,000.00 50,000.00 0.00 5,000,000.00 2002 Totals 600,000.00 600,000.00 0.00 15 01/01/2003 50,000.00 50,000.00 0.00 5,000,000.00 16 02/01/2003 50,000.00 50,000.00 0.00 5,000,000.00 17 03/01/2003 50,000.00 50,000.00 0.00 5,000,000.00 18 04/01/2003 50,000.00 50,000.00 0.00 5,000,000.00 19 05/01/2003 50,000.00 50,000.00 0.00 5,000,000.00 20 06/01/2003 50,000.00 50,000.00 0.00 5,000,000.00 21 07/01/2003 50,000.00 50,000.00 0.00 5,000,000.00 22 08/01/2003 50,000.00 50,000.00 0.00 5,000,000.00 23 09/01/2003 50,000.00 50,000.00 0.00 5,000,000.00 24 10/01/2003 50,000.00 50,000.00 0.00 5,000,000.00 25 11/01/2003 71,735.47 50,000.00 21,735.47 4,978,264.53 26 12/01/2003 71,735.47 49,782.65 21,952.82 4,956,311.71 2003 Totals 643,470.94 599,782.65 43,688.29 09/26/2001 Page 2 - ------------------------------------------------------------------------------------------------- Select Comfort - ------------------------------------------------------------------------------------------------- Date Payment Interest Principal Balance - ------------------------------------------------------------------------------------------------- 27 01/01/2004 71,735.47 49,563.12 22,172.35 4,934,139.36 28 02/01/2004 71,735.47 49,341.39 22,394.08 4,911,745.28 29 03/01/2004 71,735.47 49,117.45 22,618.02 4,889,127.26 30 04/01/2004 71,735.47 48,891.27 22,844.20 4,866,283.06 31 05/01/2004 71,735.47 48,662.83 23,072.64 4,843,210.42 32 06/01/2004 71,735.47 48,432.10 23,303.37 4,819,907.05 33 07/01/2004 71,735.47 48,199.07 23,536.40 4,796,370.65 34 08/01/2004 71,735.47 47,963.71 23,771.76 4,772,598.89 35 09/01/2004 71,735.47 47,725.99 24,009.48 4,748,589.41 36 10/01/2004 71,735.47 47,485.89 24,249.58 4,724,339.83 37 11/01/2004 71,735.47 47,243.40 24,492.07 4,699,847.76 38 12/01/2004 71,735.47 46,998.48 24,736.99 4,675,110.77 2004 Totals 860,825.64 579,624.70 281,200.94 39 01/01/2005 71,735.47 46,751.11 24,984.36 4,650,126.41 40 02/01/2005 71,735.47 46,501.26 25,234.21 4,624,892.20 41 03/01/2005 71,735.47 46,248.92 25,486.55 4,599,405.65 42 04/01/2005 71,735.47 45,994.06 25,741.41 4,573,664.24 43 05/01/2005 71,735.47 45,736.64 25,998.83 4,547,665.41 44 06/01/2005 71,735.47 45,476.65 26,258.82 4,521,406.59 45 07/01/2005 71,735.47 45,214.07 26,521.40 4,494,885.19 46 08/01/2005 71,735.47 44,948.85 26,786.62 4,468,098.57 47 09/01/2005 71,735.47 44,680.99 27,054.48 4,441,044.09 48 10/01/2005 71,735.47 44,410.44 27,325.03 4,413,719.06 49 11/01/2005 71,735.47 44,137.19 27,598.28 4,386,120.78 50 12/01/2005 71,735.47 43,861.21 27,874.26 4,358,246.52 2005 Totals 860,825.64 543,961.39 316,864.25 51 01/01/2006 71,735.47 43,582.47 28,153.00 4,330,093.52 52 02/01/2006 71,735.47 43,300.94 28,434.53 4,301,658.99 53 03/01/2006 71,735.47 43,016.59 28,718.88 4,272,940.11 54 04/01/2006 71,735.47 42,729.40 29,006.07 4,243,934.04 55 05/01/2006 71,735.47 42,439.34 29,296.13 4,214,637.91 56 06/01/2006 71,735.47 42,146.38 29,589.09 4,185,048.82 57 07/01/2006 71,735.47 41,850.49 29,884.98 4,155,163.84 58 08/01/2006 71,735.47 41,551.64 30,183.83 4,124,980.01 59 09/01/2006 71,735.47 41,249.80 30,485.67 4,094,494.34 60 10/01/2006 71,735.47 40,944.94 30,790.53 4,063,703.81 61 10/01/2006 4,063,703.80 0.01 4,063,703.81 0.00 2006 Totals 4,781,058.50 422,811.98 4,358,246.52 Grand Totals 7,851,230.72 2,851,230.72 5,000,000.00
EX-10 5 ex10-3warrant.txt PURCHASE WARRANT - SEPTEMBER 28, 2001 EXHIBIT 10.3 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (1) REGISTRATION IN COMPLIANCE WITH SUCH ACT AND SUCH STATE LAWS OR (2) AN EXEMPTION FROM SUCH REGISTRATION. COMMON STOCK WARRANT To Purchase 922,819 Shares of Common Stock of SELECT COMFORT CORPORATION September 28, 2001 THIS CERTIFIES THAT, for good and valuable consideration, the receipt of which is hereby acknowledged, MEDALLION CAPITAL, INC. is entitled to subscribe for and purchase from SELECT COMFORT CORPORATION, a Minnesota corporation (herein called the "Company"), at any time from and after the date hereof through and including September 28, 2006 (the "Expiration Date") 922,819 fully paid and nonassessable shares of the Company's common stock at an exercise price of $1.02 per share, subject to adjustment as provided below. This Warrant is subject to the following provisions, terms and conditions: 1. EXERCISE. (a) CASH EXERCISE. The rights represented by this Warrant may be exercised by the holder hereof, in whole or in part (but not as to a fractional share of common stock), by written notice of exercise delivered to the Company on or before the Expiration Date and by the surrender of this Warrant (properly endorsed if required) at the principal office of the Company and upon payment to it by certified or cashier's check of the purchase price for such shares. (b) NET EXERCISE. In lieu of paying the exercise price to exercise this Warrant pursuant to paragraph 1(a) above, the holder may elect to receive shares of common stock equal to the value of this Warrant (or of any portion thereof remaining unexercised) by surrender of this Warrant at the principal office of the Company together with notice of such election, in which event the Company shall issue to the holder a number of shares of the Company's common stock computed using the following formula: X = Y (A-B) ------- A 1 Where X = the number of shares of common stock to be issued to the holder. Y = the number of shares of common stock purchasable under this Warrant (at the date of such calculation). A = the fair market value of one share of the Company's common stock (at the date of such calculation). B = Warrant exercise price (as adjusted to the date of such calculation). For purposes of this paragraph 1(b), fair market value of one share of the Company's common stock shall mean: (i) The average of the closing bid and asked prices of the common stock on the over-the-counter market or the closing price quoted on any exchange on which the common stock is listed, whichever is applicable, as published in The Wall Street Journal or any other reputable publication, for the ten (10) trading days prior to the date of determination of fair market value; or (ii) If the common stock is not traded over-the-counter or on an exchange, the per share fair market value of the common stock shall be as determined by agreement of the Company and the holder of this Warrant, or if they cannot agree, by an independent appraiser appointed in good faith by the Company's Board of Directors. The cost of such appraisal shall be borne by the Company. 2. ISSUANCE OF SHARES. The Company agrees that the shares purchased hereby shall be and are deemed to be issued to the record holder hereof as of the close of business on the date on which this Warrant shall have been surrendered and the payment made for such shares as aforesaid. Certificates for the shares of stock so purchased shall be delivered to the holder hereof within a reasonable time, not exceeding ten (10) days after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant representing the number of shares, if any, with respect to which this Warrant shall not then have been exercised shall also be delivered to the holder hereof within such time. 3. COVENANTS OF COMPANY. The Company covenants and agrees that all shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized and issued, fully paid, nonassessable and free from all liens and charges with respect to the issue thereof, and without limiting the generality of the foregoing, the Company covenants and agrees that it will from time to time take all such action as may be required to assure that the par value per share of the common stock is at all times equal to or less than the then effective purchase price per share of the common stock issuable pursuant to this Warrant. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of issue or transfer upon exercise of the subscription 2 rights evidenced by this Warrant, a sufficient number of shares of its common stock to provide for the exercise of the rights represented by this Warrant. 4. ANTI-DILUTION ADJUSTMENTS. The above provisions are, however, subject to the following: (a) In case the Company shall at any time hereafter subdivide or combine the outstanding shares of common stock or declare a dividend payable in common stock, the exercise price of this Warrant in effect immediately prior to the subdivision, combination or record date for such dividend payable in common stock shall forthwith be proportionately increased, in the case of combination, or decreased, in the case of subdivision or dividend payable in common stock, and each share of common stock purchasable upon exercise of the Warrant shall be changed to the number determined by dividing the then current exercise price by the exercise price as adjusted after the subdivision, combination, or dividend payable in common stock. (b) In case the Company shall at any time after the original issuance of this Warrant, but prior to the expiration date of this Warrant, issue any shares of common stock for an issuance price per share (or any rights, options, warrants, convertible notes or other instruments exercisable or exchangeable for or convertible into shares of common stock for an exercise, exchange or conversion price per share) which is less than the then current exercise price per share under this Warrant, then the exercise price per share of this Warrant shall be immediately reduced to an amount equal to (i) the exercise price then in effect, multiplied by (ii) a fraction, the numerator of which shall be: an amount equal to the sum of (a) the number of shares of the Company's common stock outstanding immediately prior to such issuance or sale multiplied by the exercise price then in effect, and (b) the total consideration payable to the Company upon such issuance of sale of such shares and such purchase rights and upon the exercise of such purchase rights, and the denominator of which shall be the amount determined by multiplying (aa) the number of shares of common stock outstanding immediately after such issuance or sale plus the number of the shares of common stock issuable upon-the exercise of any purchase rights thus issued, by (bb) the exercise price then in effect. If any options, warrants, conversion or purchase rights that are taken into account in any such adjustment of the exercise price subsequently expire without exercise, the exercise price shall be recomputed by deleting such options or purchase rights. In connection with any such reduction in the exercise price of this Warrant, the number of shares purchasable under this Warrant shall be proportionately increased, such that each share of common stock purchasable upon exercise of this Warrant shall be changed to the number determined by dividing the exercise price prior to such reduction by the exercise price as adjusted. The adjustments provided for in this paragraph shall not apply to: (i) the exercise or 3 conversion after the date of this Warrant of any option, warrant, convertible note or other security or right which was issued by the Company prior to the issuance of this Warrant, and (ii) the grant of options to purchase common stock to employees or directors of the Company, or to consultants to the Company, or pursuant to the Company's employee stock purchase plan, and the issuance of shares of common stock pursuant to the exercise of such options. (c) For the purposes of paragraph (b), the following provisions (A) to (E), inclusive, shall also be applicable: (A) Except as provided in paragraph (b) above, in case at any time the Company shall grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, (1) common stock or (2) any obligations or any shares of stock of the Company which are convertible into or exchangeable for common stock (any of such obligations or shares of stock being hereinafter called "Convertible Securities") whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which common stock is issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined by dividing (aa) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of such rights or options, plus, in the case of such rights or options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (bb) the total maximum number of shares of common stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options) shall be less than the exercise price of this Warrant in effect immediately prior to the time of the granting of such rights or options, then the total maximum number of shares of common stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to have been issued for such price per share. Except as provided in paragraph (d) below, no further adjustments of the exercise price of this Warrant shall be made upon the actual issue of such common stock or of such Convertible Securities upon exercise of such rights or options or upon the actual issue of such common stock upon conversion or exchange of such Convertible Securities. (B) In case the Company shall issue or sell (whether directly or by assumption in a merger or otherwise) any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which common stock is issuable upon such conversion or exchange (determined by dividing (aa) the total amount received or receivable by the 4 Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (bb) the total maximum number of shares of common stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the exercise price of this Warrant in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of common stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, provided that (1) except as provided in paragraph (d) below, no further adjustments of the exercise price of this Warrant shall be made upon the actual issue of such common stock upon conversion or exchange of such Convertible Securities, and (2) if any such issue or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the exercise price of this Warrant have been or are to be made pursuant to other provisions of this paragraph (c), no further adjustment of the exercise price of this Warrant shall be made by reason of such issue or sale. (C) In case any shares of common stock or Convertible Securities or any rights or options to purchase any such common stock or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor, without deduction therefrom of any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed by the Company in connection therewith. In case any shares of common stock or Convertible Securities or any rights or options to purchase any such common stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration as determined by the Board of Directors of the Company, without deducting therefrom of any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed by the Company in connection therewith. In case any shares of common stock or Convertible Securities or any rights or options to purchase such common stock or Convertible Securities shall be issued in connection with any merger or consolidation in which the Company is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value as determined by the Board of Directors of the Company of such portion of the assets and business of the non-surviving corporation or corporations as such Board shall determine to be attributable to such common stock, Convertible Securities, rights or options, as the case may be. In the event of any consolidation or merger of the Company in which the Company is not the surviving corporation or in the event of any sale of all or substantially all of the assets of the Company for stock or other securities of any other corporation, the Company shall be deemed to have issued a number of shares of its common stock for stock or securities of the other corporation computed on the basis of the actual exchange ratio on which the transaction was predicated and for a 5 consideration equal to the fair market value on the date of such transaction of such stock or securities of the other corporation, and if any such calculation results in adjustment of the exercise price of this Warrant, the determination of the number of shares of common stock issuable upon exercise of this Warrant immediately prior to such merger, conversion or sale, for purposes of paragraph (f) below, shall be made after giving effect to such adjustment of the exercise price of this Warrant. (D) In case the Company shall take a record of the holders of its common stock for the purpose of entitling them (1) to receive a dividend or other distribution payable in common stock or in Convertible Securities, or in any rights or options to purchase any common stock or Convertible Securities, or (2) to subscribe for or purchase common stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of common stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such rights of subscription or purchase, as the case may be. (E) The number of shares of common stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of common stock for the purposes of this paragraph (c). (d) If (A) the purchase price provided for in any right or option referred to in clause (A) of paragraph (c) above, or (B) the additional consideration, if any, payable upon the conversion or exchange of Convertible Securities referred to in clause (A) or (B) of paragraph (c) above, or (C) the rate at which any Convertible Securities referred to in clause (A) or (B) of paragraph (c) above are convertible into or exchangeable for common stock shall change at any time (other than under or by reason of provisions designed to protect against dilution), the exercise price of this Warrant then in effect shall forthwith be increased or decreased to such exercise price of this Warrant which would have obtained had the adjustments made upon the issuance of such rights, options or Convertible Securities been made upon the basis of (1) the issuance of the number of shares of common stock theretofore actually delivered upon the exercise of such options or rights or upon the conversion or exchange of such Convertible Securities, and the total consideration received therefor, and (2) the issuance at the time of such change of any such options, rights or Convertible Securities then still outstanding for the consideration, if any, received by the Company therefor and to be received on the basis of such changed price; and on the expiration of any such option or right or the termination of any such right to convert or exchange such Convertible Securities, the exercise price of this Warrant then in effect hereunder shall forthwith be increased to such exercise price of this Warrant which would have obtained had the adjustments made upon the issuance of such rights or options or Convertible Securities been made upon the basis of the issuance of the shares of common stock theretofore actually delivered (and the total consideration received therefor) upon the exercise of such rights or options or upon the conversion or exchange of such Convertible Securities. If the purchase price provided for in any such right or option referred to in clause (A) of paragraph (c) above or the rate at which any Convertible Securities referred to in clause (A) or (B) of paragraph (c) above are convertible into or exchangeable for 6 common stock shall decrease at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of common stock upon the exercise of any such right or option or upon conversion or exchange of any such Convertible Security, the exercise price of this Warrant then in effect hereunder shall forthwith be decreased to such exercise price of this Warrant as would have obtained had the adjustments made upon the issuance of such right, option or Convertible Securities been made upon the basis of the issuance of (and the total consideration received for) the shares of common stock delivered as aforesaid. (e) No fractional shares of common stock are to be issued upon the exercise of the Warrant, but the Company shall pay a cash adjustment in respect of any fraction of a share which would otherwise be issuable in an amount equal to the same fraction of the market price per share of common stock on the day of exercise as determined in good faith by the Company. (f) If any merger, capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of common stock shall be entitled to receive stock, securities or assets with respect to or in exchange for common stock then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holder hereof shall hereafter have the right to purchase and receive upon the basis and upon the terms and conditions specified in this Warrant and in lieu of the shares of the common stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such common stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the holder of this Warrant to the end that the provisions hereof (including without limitation provisions for adjustments of the Warrant purchase price and of the number of shares purchasable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger, or the corporation purchasing such assets, shall assume by written instrument executed and mailed to the registered holder hereof at the last address of such holder appearing on the books of the Company, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. (g) Upon any adjustment of the warrant purchase price, then and in each such case, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the registered holder of this Warrant at the address of such holder as shown on the books of the Company, which notice shall state the warrant purchase price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price 7 upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 5. COMMON STOCK. As used herein, the term "common stock" shall mean and include the Company's presently authorized shares of common stock and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company. 6. NO VOTING RIGHTS. This Warrant shall not entitle the holder hereof to any voting rights or other rights as a stockholder of the Company. 7. TRANSFER OF WARRANT OR SHARES. The holder acknowledges that it has obtained this Warrant for investment and not with the intention of making any resale or distribution. The holder further acknowledges (a) that neither this Warrant nor any of the shares of common stock obtainable under it have been registered under the Securities Act of 1933 or any state securities statutes, and (b) that neither this Warrant nor any shares of common stock obtained under it may be transferred without such registration or an opinion of legal counsel reasonably acceptable to the Company that such transfer may be made without registration. Subject to the foregoing, the Company agrees that this Warrant is transferable in whole or in part. 8. PIGGYBACK REGISTRATION RIGHT. (A) GRANT OF RIGHT. If the Company shall propose to file any registration statement (except for any registration on Forms S-4, S-8 or any other similarly inappropriate form and except for any registration statement with respect to an initial public offering by the Company in which there are no selling shareholders) under the Securities Act of 1933, as amended (the "Act"), for a public offering of the Company's common stock, the Company shall notify all holders (each, a "Holder") of this Warrant and of Registrable Shares (as defined below) at least twenty (20) days prior to each such filing and will include in the Registration Statement (to the extent permitted by applicable regulation), all or a portion of the Registrable Shares to the extent requested by any Holder within fifteen (15) days after receipt of any such notice from the Company. If the Registration Statement filed pursuant to such twenty (20) day notice has not become effective within six months following the date such notice is given to the Holders, the Company shall again notify such Holders in the manner provided above. "Registrable Shares" shall mean (i) any shares of common stock which have been issued or are issuable upon exercise of this Warrant, and (iii) any shares of common stock issued in exchange or substitution for, or in a stock split or reclassification of, or as a stock dividend or other distribution on, or otherwise in respect of, any Registrable Shares, other than any such shares that have been theretofore registered under the Securities Act and sold or are eligible to be sold pursuant to Rule 144 promulgated under the Securities Act. Nothing in this Agreement shall be deemed to require the Company to register this Warrant, it being understood that the registration rights granted by this Section 8 relate only to shares of common stock. 8 (b) UNDERWRITTEN OFFERINGS. If any registration pursuant to this Section 8 shall be underwritten in whole or in part, the Company may require that the Registrable Shares requested for inclusion pursuant to this Section 8 be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If an offering covered by a request for registration under this Section 8 is underwritten in whole or in part and the managing underwriter of such offering determines in good faith that the total number of securities proposed to be sold in such offering exceeds the maximum number of securities which can be marketed at a price reasonably related to the then current market value of such securities and without materially and adversely affecting such offering, then the number of securities to be sold by each prospective seller (including the Company) in the offering shall be reduced as follows: first, the number of securities proposed to be registered by persons other than the Company having no registration rights shall be reduced, pro rata, to zero, if necessary; second, the number of securities proposed to be registered for sale by the Company (if the Company is not the initiator of the registration) shall be reduced to zero, if necessary; third, the number of Registrable Shares and other securities having similar incidental registration rights proposed to be registered pursuant to this Section 8 or pursuant to the exercise of such similar registration rights shall be reduced, pro rata, to zero, if necessary; and fourth, the number of securities proposed to be registered by the Company (if the Company is the initiator of the registration) or by any other persons requesting such registration pursuant to the exercise of demand registration rights (if the Company is not the initiator of the registration), shall be reduced, pro rata. Those Registrable Shares which are thus excluded from the underwritten public offering shall be withheld from the market by the holders thereof for a period, not to exceed 90 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. (c) SUSPENSION OF RESALES. The Company shall be entitled to suspend for a period not in excess of 90 days the use of the prospectus forming the part of any registration statement which has theretofore become effective at any time if, in the good faith judgment of the Company, there is a material development relating to the condition (financial or other) of the Company that has not been disclosed to the general public and the Chief Executive Officer and Chief Financial Officer of the Company certifies in writing to the holders of the Registrable Shares included in such registration statement and not previously sold thereunder that, after consultation with counsel, such officers have reasonably concluded that under such circumstances it would be in the Company's best interest to suspend the use of such prospectus. The holders of the Registrable Shares included in any such registration statement and not previously sold thereunder agree that upon its receipt of such written certification, it shall immediately discontinue the sale of any Registrable Shares pursuant to such registration statement until such holder has received copies of the supplemented or amended prospectus or until such holder is advised in writing that the use of the prospectus forming a part of such registration statement may be resumed and has received copies of any additional or supplemental filings that are incorporated by reference in such prospectus (provided that in no event shall any such holder be precluded hereby from the sale of any Registrable Shares pursuant to such registration statement for longer than the period that the Company is permitted to suspend the use of the prospectus forming a part of such registration statement as provided above). In addition, such holder agrees that it will either (i) destroy any prospectuses, other than permanent file copies, then in such holder's possession which have been replaced by the Company with 9 more recently dated prospectuses or (ii) deliver to the Company all copies, other than permanent file copies, then in such holder's possession of the prospectus covering such Registrable Shares that was current at the time of receipt of the aforesaid written certification. (d) PROVISION BY HOLDERS OF CERTAIN INFORMATION IN CONNECTION WITH REGISTRATION STATEMENT. A Holder may not include any of its Registrable Shares in a registration statement pursuant to this Warrant unless and until such Holder furnishes to the Company in writing, within ten (10) days after receipt of a request therefor, the information specified in Item 507 or 508, as applicable, of Regulation S-K promulgated under the Act for use in connection with such registration statement or the prospectus or preliminary prospectus included therein. Each Holder agrees to promptly furnish additional information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. (e) EXPENSES. With respect to each inclusion of Registrable Shares in a registration statement pursuant to this Section 8, the Company shall bear the following fees, costs and expenses: all registration, filing and NASD fees, printing expenses, fees and disbursements of counsel and accountants for the Company, fees and disbursements of counsel for the underwriter or underwriters of such securities (if the Company and/or selling security holders are required to bear such fees and disbursements), all internal Company expenses, all legal fees and disbursements and other expenses of complying with state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered or qualified. Any other fees and disbursements of counsel and accountants for the selling security holders, and all underwriting discounts and commissions and transfer taxes relating to the shares included in the offering by the selling security holders, and any other expenses incurred by the selling security holders not expressly included above, shall be borne by the selling security holders. (f) MISCELLANEOUS. The Company will mail to each Holder, at his last known post office address, written notice of any exercise of the rights granted under this paragraph 8, by certified or registered mail, return receipt requested, and each Holder shall have twenty (20) days from the date of deposit of such notice in the U.S. Mail to notify the Company in writing whether such Holder wishes to join in such exercise. The Company will furnish to each Holder for whom a registration has been filed a reasonable number of copies of any prospectus included in such filings and will amend or supplement the same as required during the period of required use thereof; provided, that the expenses of any amendment or supplement made or filed more than three (3) months after the effective date of the registration statement, at the request of any Holder, shall be paid by such Holder. The Company will maintain the effectiveness of any registration statement filed by the Company, whether or not at the request of the Holder hereof, for at least nine (9) months following the effective date thereof. In the case of the filing of any registration statement, and to the extent permissible under the Act and controlling precedent thereunder, the Company and the Holder of Registrable Shares covered by such registration statement shall provide cross indemnification agreements to each other in customary scope covering the accuracy and completeness of the information furnished by each. Holders of this Warrant or Registrable Shares being so registered agree to cooperate with the Company in the preparation and filing of any such registration statement, and in the furnishing of information concerning the Holder for inclusion therein, or in any efforts by the Company to establish that the proposed sale is exempt under the Act as to any proposed distribution. 10 11 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officers and dated as of the date first written above. Select Comfort Corporation By: /s/ Mark A. Kimball --------------------------------------- Mark A. Kimball, Senior Vice President ATTEST: /s/ James C. Raabe - --------------------------------- Chief Financial Officer 12 EX-10 6 ex10-4securityaggrement.txt SECURITY AGREEMENT - SEPTEMBER 28, 2001 EXHIBIT 10.4 SECURITY AGREEMENT This Security Agreement is entered into as of September 28, 2001 by and among each of SELECT COMFORT CORPORATION, a Minnesota corporation (the "Company"), and SELECT COMFORT RETAIL CORPORATION, SELECT COMFORT DIRECT CORPORATION, SELECT COMFORT SC CORPORATION, DIRECT CALL CENTERS, INC., AND SELECTCOMFORT.COM CORPORATION, all of which are Minnesota corporations, (the "Subsidiaries") (the Company and the Subsidiaries being individually and collectively referred to herein as "Debtor"), and MEDALLION CAPITAL, INC. ("Secured Party"). Whereas, the execution and delivery of this Agreement is a condition to the Secured Party extending credit to Debtor; Now, therefore, each Debtor jointly and severally agree with Secured Party as follows: 1. DEFINITIONS. All terms defined in the Uniform Commercial Code of the State of Minnesota (the "UCC") and used herein, unless defined herein or in the Loan Agreement, shall have the same definitions herein as specified in the UCC. 2. SECURITY INTEREST. Debtor grants Secured Party a security interest in the following properties, assets and rights of the Debtor, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof and any additions, replacements, accessions and substitutions to or for the properties, assets and rights: all personal and fixture property of every kind and nature including without limitation all goods (including inventory, equipment and any accessions thereto), instruments (including promissory notes), documents, accounts (including health-care-insurance receivables), chattel paper (whether tangible or electronic), deposit accounts, letter-of-credit rights (whether or not the letter of credit is evidenced by a writing), commercial tort claims, securities and all other investment property (except for the common stock of the Subsidiaries), supporting obligations, any other contract rights or rights to the payment of money, insurance claims and proceeds, tort claims, and all general intangibles including, without limitation, all payment intangibles, patents, patent applications, trademarks, trademark applications, trade names, copyrights, copyright applications, software, engineering drawings, service marks, customer lists, goodwill, and all licenses, permits, agreements of any kind or nature pursuant to which the Debtor possesses, uses or has authority to possess or use property (whether tangible or intangible) of others or others possess, use or have authority to possess or use property (whether tangible or intangible) of the Debtor, and all recorded data of any kind or nature, regardless of the medium of recording including, without limitation, all software, writings, plans, specifications and schematics (all of the foregoing being hereinafter called the "Collateral"). The Secured Party acknowledges that the attachment of its security interest in any commercial tort claim as original collateral is subject to the Debtor's compliance with Section 7.4. 3. OBLIGATIONS SECURED. This security interest is given to secure (i) the indebtedness described in the Promissory Note dated September 28, 2001 issued by Debtor to the Secured Party (the "Note") and all extensions and renewals of that indebtedness, (ii) the performance and payment of Debtor of all its obligations to Secured Party under this Agreement 1 and any other agreement or instrument previously, now or hereafter entered into by Debtor with Secured Party or delivered by Debtor to Secured Party in connection with or related to the Loan Agreement pursuant to which the Note was issued and all agreements given by the Debtor to secure the Note (collectively "Obligations"). 4. AUTHORIZATION TO FILE FINANCING STATEMENTS. Subject to the Secured Party's agreement to release any financing statement which is broader than the scope of Lender's security interest under this Agreement, the Debtor hereby irrevocably authorizes the Secured Party at any time and from time to time to file in any Uniform Commercial Code jurisdiction any initial financing statements and amendments thereto that (a) indicate the Collateral (i) as all assets of the Debtor or words of similar effect, regardless of whether any particular asset comprised in the Collateral falls within the scope of Article 9 of the Uniform Commercial Code of the State of Minnesota or such jurisdiction, or (ii) as being of an equal or lesser scope or with greater detail, and (b) contain any other information required by Article 9 of the UCC. The Debtor agrees to furnish any such information to the Secured Party promptly upon request. The Debtor also ratifies its authorization for the Secured Party to have filed in any Uniform Commercial Code jurisdiction any financing statements or amendments thereto if filed prior to the date hereof. 5. OWNERSHIP. Debtor represents and warrants that (a) Debtor owns, and to the extent that the Collateral is to be acquired after the date hereof will own, the Collateral free from encumbrance except any encumbrances shown on Schedule 2 ("Permitted Encumbrances") and (b) Debtor does not own any commercial tort claims of which it is aware and has determined to assert, except as disclosed to the Secured Party in writing. Debtor will defend the Collateral against all claims of all persons at any time claiming the Collateral or any interest in the Collateral except Secured Party and holders of Permitted Encumbrances. 6. REPRESENTATIONS, WARRANTIES AND COVENANTS CONCERNING COLLATERAL. Debtor represents and warrants that no Financing Statement covering the Collateral is on file in any public office except those for Permitted Encumbrances. Debtor warrants that (a) its exact legal name is as stated on the first page of this Agreement, (b) the Debtor is an organization of the type and organized in the jurisdiction set forth on the first page of this Agreement, and (c) the Debtor's place(s) of business, its chief executive office, its mailing address and the locations where all of its Collateral is regularly kept, are set forth on Schedule 1. Company agrees that it will not change its name, any place of business, any location of its collateral, its mailing address or its chief executive office without giving at least 30 days prior written notice to Secured Party. The Collateral not constituting fixtures is and will remain personal property. Debtor will not change its type of organization, jurisdiction of organization or other legal structure without the prior written consent of Secured Party. Debtor will pay the cost of filing Financing Statements and Continuation Statements in all appropriate public offices and will deliver any subordinations or waivers of other liens deemed by Secured Party to be necessary. On demand by Secured Party, Debtor will deliver to Secured Party all items of Collateral in which Secured Party's security interest can be perfected only by taking possession, to the extent not constituting cash or cash equivalents. The Secured Party will hold those items of Collateral to perfect Secured Party security interest. If those items of Collateral are held by others to perfect another security interest, the others will be considered to be holding those items also as agent for Secured Party. Debtor hereby appoints Secured Party as its attorney-in-fact to do all acts and things which 2 Secured Party may deem necessary to perfect and to continue perfected the security interest created hereby and to protect and to preserve the Collateral. 7. OTHER ACTIONS. To further insure the attachment, perfection and, except to the extent stated on Schedule 2, first priority of, and the ability of the Secured Party to enforce, the Secured Party's security interest in the Collateral, the Debtor agrees, in each case at the Debtor's own expense, to take the following actions with respect to the following Collateral: 7.1. PROMISSORY NOTES AND TANGIBLE CHATTEL PAPER. If the Debtor shall at any time hold or acquire any promissory notes or tangible chattel paper, the Debtor shall forthwith endorse, assign and deliver the same to the Secured Party, accompanied by such instruments of transfer or assignment duly executed in blank as the Secured Party may from time to time specify. 7.2. COLLATERAL IN THE POSSESSION OF A BAILEE. If any goods are at any time in the possession of a bailee, the Debtor shall promptly notify the Secured Party thereof and, if requested by the Secured Party, shall promptly obtain an acknowledgment from the bailee, in form and substance satisfactory to the Secured Party, that the bailee holds such Collateral for the benefit of the Secured Party and shall act upon the instructions of the Secured Party, without the further consent of the Debtor. The Secured Party agrees with the Debtor that the Secured Party shall not give any such instructions unless an Event of Default has occurred and is continuing or would occur after taking into account any action by the Debtor with respect to the bailee. 7.3. ELECTRONIC CHATTEL PAPER AND TRANSFERABLE RECORDS. If the Debtor at any time holds or acquires an interest in any electronic chattel paper or any "transferable record," as that term is defined in Section 201 of the federal Electronic Signatures in Global and National Commerce Act, or in Section 16 of the Uniform Electronic Transactions Act as in effect in any relevant jurisdiction, the Debtor shall promptly notify the Secured Party thereof and, at the request of the Secured Party, shall take such action as the Secured Party may reasonably request to vest in the Secured Party control, under Section 9-105 of the UCC, of such electronic chattel paper or control under Section 201 of the federal Electronic Signatures in Global and National Commerce Act or, as the case may be, Section 16 of the Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of such transferable record. The Secured Party agrees with the Debtor that the Secured Party will arrange, pursuant to procedures satisfactory to the Secured Party and so long as such procedures will not result in the Secured Party's loss of control, for the Debtor to make alterations to the electronic chattel paper or transferable record permitted under UCC Section 9-105 or, as the case may be, Section 201 of the federal Electronic Signatures in Global and National Commerce Act or Section 16 of the Uniform Electronic Transactions Act for a party in control to make without loss of control, unless an Event of Default has occurred and is continuing or would occur after taking into account any action by the Debtor with respect to such electronic chattel paper or transferable record. 7.4. COMMERCIAL TORT CLAIMS. If the Debtor shall at any time hold or acquire a commercial tort claim, the Debtor shall immediately notify the Secured Party in a writing signed by the Debtor of the brief details thereof and grant to the Secured Party in 3 such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance satisfactory to the Secured Party. 7.5. OTHER ACTIONS AS TO ANY AND ALL COLLATERAL. Debtor further agrees to take any other action reasonably requested by the Secured Party to insure the attachment, perfection and priority of, and the ability of the Secured Party to enforce, the Secured Party's security interest in any and all of the Collateral. 8. USE. Until default, Debtor may use the Collateral at Debtor's places of business specified on Schedule 2, or any other place located in the United States which has been specified in a written notice given by Debtor to Secured Party at least 10 days in advance, in any lawful manner not inconsistent with this Security Agreement, but may not sell or transfer the Collateral except in the ordinary course of business. A sale or transfer of Collateral in the ordinary course of business does not include a sale or transfer (other than money or other cash equivalent) in partial or total satisfaction of a debt, or in bulk, but does include (i) a lease of the Collateral, (ii) a transfer of an item of Collateral for fair value when Debtor determines in good faith the item of Collateral should be replaced, or is no longer needed, and (iii) a disposition of an obsolete item of Collateral, but only if it is no longer needed or is replaced with an item of unencumbered equal or greater value which becomes Collateral. The Secured Party will acknowledge release of its security interest in Collateral which is sold in accordance with the preceding sentence. 9. PROTECTION. Debtor, at its expense, will keep items of Collateral in good condition and will replace and repair any items of damaged or worn-out Collateral in accordance with good management practices without allowing any lien or security interest to be created on the Collateral because of such replacement or repair. Secured Party may inspect the Collateral at any reasonable time. Debtor will pay when due all taxes and assessments on the Collateral and its use and operation (except as otherwise permitted under the Loan Agreement), and all indebtedness secured by encumbrances on the Collateral (subject to any applicable grace periods). 10. INSURANCE. Debtor, at its expense, will insure the items of Collateral with a reliable insurance company against loss or damage by fire, theft and the perils covered by extended coverage in an amount equal to the fair market value of the Collateral with loss payable to Secured Party as its interest may appear, and will deliver to Secured Party on demand evidence of such insurance. If a loss occurs and a Default is then existing, Secured Party may make the proof of loss and the insurer shall pay the Secured Party alone. Upon destruction of substantially all the destructible items of Collateral, the proceeds will be applied to restoration of the destroyed Collateral unless Secured Party otherwise directs. If the Collateral is not restored, the Secured Party may retain from the insurance proceeds and apply on the Obligations an amount equal to the unpaid balance of the Obligations, whether or not the Obligations are due. 11. COSTS. If Debtor fails to perform any of its duties hereunder, Secured Party may, but shall not be required to, do so on Debtor's behalf. If Debtor defaults under this Security Agreement, Debtor will pay the costs, including the reasonable actual attorneys fees, of the Secured Party incurred in enforcing this Agreement. Any amounts expended by Secured Party in performing Debtor's duties or enforcing this Security Agreement shall be payable by Debtor to 4 Secured Party on demand and shall bear interest at the rate applicable from time to time to the Note. 12. DEFAULT. Debtor will be in default under this Security Agreement and under the Obligations upon the happening of any of the following events: A. Debtor's failure to perform when due (after any applicable grace period) any of the Obligations required to be performed by Debtor; or B. The occurrence of any Default as defined in the Loan Agreement or the Note. C. Any representation or warranty made by Debtor herein is false in any material respect. 13. REMEDIES. This Agreement and Secured Party's rights under this Agreement or under applicable law may be enforced by Secured Party, at its discretion, against any one or more of the parties referred to above which are encompassed within the term Debtor, without any need to bring any enforcement action against the other parties who are encompassed within the term Debtor. Upon Debtor's default, Secured Party may at any time thereafter declare any or all monetary Obligations due and payable and all other Obligations immediately performable without notice to the Debtor of the exercise of such option, and shall have the remedies of Secured Party under the Uniform Commercial Code. Secured Party may take possession of the Collateral with or without judicial process. Secured Party may require Debtor to assemble the Collateral and make it available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both Party. Secured Party will give Debtor reasonable notice of the time and place of any public sale or of the time after which any private sale or any other intended disposition of the Collateral is to be made. The requirements of reasonable notice shall be met if the notice is mailed, postage prepaid, to Debtor at least 10 days before the time of the sale or disposition. 14. NO WAIVERS. No waiver by Secured Party of any default shall operate as a waiver of any other default or of the same default on a future occasion. The taking of this Security Agreement will not waive or impair any other security Secured Party may have or hereafter acquire for the Obligations, nor will the taking of any additional security waive or impair the rights granted in this Security Agreement. Secured Party may resort to any security it may have in any order it deems proper, and may apply any payments made on any part of the Obligations to any part of the Obligations, despite any directions of Debtor to the contrary. 15. INFORMATION. Debtor will at all reasonable times allow Secured Party and its agents, employees, attorneys or accountants to examine and inspect the Collateral and to examine, inspect and make extracts from Debtor's books and other records, and to verify under reasonable procedures directly with account debtors or by other methods accounts which are Collateral. Debtor will furnish to Secured Party upon request all documents evidencing any Collateral and any guarantees, security or other information relating thereto. 16. GOVERNING LAW; BINDING EFFECT. This Security Agreement shall be governed by the laws of the State of Minnesota and shall inure to the benefit of, and bind, the Debtor and his, 5 her or its heirs, personal representatives, successors and assigns. No provision of this Security Agreement shall be amended, modified or waived other than by a written instrument which refers to this Security Agreement and is signed on behalf of the Debtor. This Security Agreement may be executed in counterparts. 17. TERMINATION. This Security Agreement shall terminate upon the indefeasible satisfaction and payment of all obligations owed to Secured Party by the Debtor, but shall automatically be reinstated in the event any such payment is or is ordered to be returned by Secured Party. In Witness Whereof, the parties have executed this Security Agreement as of the date first written above. SELECT COMFORT CORPORATION MEDALLION CAPITAL, INC. By: /s/ Mark A. Kimball By: /s/ Dean R. Pickerell ------------------------------------------ ------------------------------------------- Mark A. Kimball, Senior Vice President Dean R. Pickerell, Executive Vice President SELECT COMFORT RETAIL CORPORATION By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President SELECT COMFORT DIRECT CORPORATION By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President SELECT COMFORT SC CORPORATION By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President DIRECT CALL CENTERS, INC. By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President SELECTCOMFORT.COM CORPORATION By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President
6 SCHEDULE 2.8(B) ENCUMBRANCES/LIENS - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | DEBTOR | | SECURED PARTY | |TYPE OF FILING| |FILING DATE| | JURISDICTION | | | | | | | | | | | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ |Select Comfort Corporation | |Pitney Bowes Credit Corporation | | UCC | | 5/6/97 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |St. Paul Venture Capital VI, LLC| | UCC | | 5/23/01 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |St. Paul Venture Capital VI, LLC| | UCC | | 6/13/01 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |St. Paul Venture Capital VI, LLC| | UCC | | 6/13/01 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |St. Paul Venture Capital VI, LLC| | UCC | | 5/4/01 | |Utah Secretary of State | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |St. Paul Venture Capital VI, LLC| | UCC | | 6/13/01 | |Utah Secretary of State | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | | | | | | | | | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ |Select Comfort SC Corporation | |St. Paul Venture Capital VI, LLC| | UCC | | 6/13/01 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |St. Paul Venture Capital VI, LLC| | UCC | | 6/13/01 | |Utah Secretary of State | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | | | | | | | | | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ |selectcomfort.com Corporation | |St. Paul Venture Capital VI, LLC| | UCC | | 6/13/01 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |St. Paul Venture Capital VI, LLC| | UCC | | 6/13/01 | |Utah Secretary of State | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | | | | | | | | | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ |Direct Call Centers Inc. | |St. Paul Venture Capital VI, LLC| | UCC | | 6/13/01 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |St. Paul Venture Capital VI, LLC| | UCC | | 6/13/01 | |Utah Secretary of State | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | | | | | | | | | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ |Select Comfort Retail Corporation| |Dell Financial Services, L.P. | | UCC | | 10/30/00 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |Comdisco, Inc. | | UCC | | 1/29/01 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |St. Paul Venture Capital VI, LLC| | UCC | | 5/23/01 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |St. Paul Venture Capital VI, LLC| | UCC | | 6/13/01 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |St. Paul Venture Capital VI, LLC| | UCC | | 5/4/01 | |Utah Secretary of State | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |St. Paul Venture Capital VI, LLC| | UCC | | 6/13/01 | |Utah Secretary of State | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | | | | | | | | | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ |Select Comfort Direct Corporation| |General Electric Capital | | UCC | | 7/23/96 | |Minnesota Secretary of State| | | |Computer Leasing Corporation | | | | (lapsed) | | | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |General Electric Capital | | UCC | | 8/9/96 | |Minnesota Secretary of State| | | |Computer Leasing Corporation | | | | lapsed) | | | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |General Electric Capital | | UCC | | 10/17/96 | |Minnesota Secretary of State| | | |Computer Leasing Corporation | | | | | | | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |Comdisco, Inc. | | UCC | | 4/7/97 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | DEBTOR | | SECURED PARTY | |TYPE OF FILING| |FILING DATE| | JURISDICTION | | | | | | | | | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |Comdisco, Inc. | | UCC | | 8/14/97 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |Forsythe/McArthur Associates, | | UCC | | 8/12/99 | |Minnesota Secretary of State| | | |Inc. | | | | | | | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |Pullman Bank & Trust Co. | | UCC | | 8/18/99 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |Pullman Bank & Trust Co. | | UCC | | 10/12/99 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |Pullman Bank & Trust Co. | | UCC | | 11/8/99 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |Pullman Bank & Trust Co. | | UCC | | 1/24/00 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |Pullman Bank & Trust Co. | | UCC | | 1/24/00 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |Conseco Finance Vendor Services | | UCC | | 5/16/00 | |Minnesota Secretary of State| | | |Corporation | | | | | | | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |Conseco Finance Vendor Services | | UCC | | 7/28/00 | |Minnesota Secretary of State| | | |Corporation | | | | | | | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |Conseco Finance Vendor Services | | UCC | | 1/12/01 | |Minnesota Secretary of State| | | |Corporation | | | | | | | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |St. Paul Venture Capital VI, LLC| | UCC | | 5/23/01 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |St. Paul Venture Capital VI, LLC| | UCC | | 6/13/01 | |Minnesota Secretary of State| - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |St. Paul Venture Capital VI, LLC| | UCC | | 5/4/01 | |Utah Secretary of State | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------ | | |St. Paul Venture Capital VI, LLC| | UCC | | 6/13/01 | |Utah Secretary of State | - ----------------------------------- ---------------------------------- ---------------- ------------- ------------------------------
SCHEDULE 2 The following are permitted liens: LIENS. (a) liens securing indebtedness permitted by Section 4.9, (b) the senior interest of Conseco Bank, Inc. in the Reserve Account (the "Reserve Account"), as defined in the Revolving Credit Program Agreement dated May 17, 1999, as amended as of February 20, 2001 and April 13, 2001, between the Company and Conseco Bank, Inc. (the "Revolving Credit Program Agreement"), (c) liens for taxes and assessments or governmental charges or levies not at the time due or which are being contested in good faith by appropriate proceedings promptly initiated and diligently conducted and for which adequate reserves have been established in accordance with generally accepted accounting principles, (d) liens in respect of pledges or deposits under worker's compensation laws or similar legislation, (e) carriers', warehousemen's, mechanics', laborers', materialmen's, landlord's and similar statutory liens securing obligations incurred in the ordinary course of business which are not yet due or which are being contested in good faith by appropriate proceedings promptly initiated and diligently conducted and for which adequate reserves have been established in accordance with generally accepted accounting principles, (f) encumbrances on real property in the nature of zoning restrictions, easements, rights of way, encroachments, restrictive covenants and other similar rights or restrictions, whether or not of record, on the use of real property, which encumbrances were not incurred in connection with the borrowing of money or the obtaining of advances or credits and do not in the aggregate materially detract from the value of the property subject thereto or materially impair the use thereof in the operation of the business of the Company or any Subsidiary, (g) liens securing the New Bank Agreement, (h) licenses, sublicenses, leases or subleases granted by any of the Company or its Subsidiaries to other persons in the ordinary course of business that do not materially interfere with the conduct of the business of any of the Company or its Subsidiaries, and (i) liens arising out of the existence of judgments or awards in respect of which any of the Company or its Subsidiaries shall in good faith be prosecuting an appeal or proceedings for review and in respect of which there shall have been secured a subsisting stay of execution pending such appeal or proceedings, provided that the aggregate amount of all cash and the fair market value of all other property subject to such liens does not at any time exceed $250,000. EX-10 7 ex10-5patenttrademark.txt PATENT AND TRADEMARK - SEPTEMBER 28, 2001 EXHIBIT 10.5 PATENT AND TRADEMARK SECURITY AGREEMENT This Patent and Trademark Security Agreement is entered into as of September 28, 2001 by and among each of SELECT COMFORT CORPORATION, a Minnesota corporation (the "Company"), AND SELECT COMFORT RETAIL CORPORATION, SELECT COMFORT DIRECT CORPORATION, SELECT COMFORT SC CORPORATION, DIRECT CALL CENTERS, INC., AND SELECTCOMFORT.COM CORPORATION, all of which are Minnesota corporations, (the "Subsidiaries") (the Company and the Subsidiaries being individually and collectively referred to herein as "Debtor"), and MEDALLION CAPITAL, INC. ("Secured Party"). Whereas, the execution and delivery of this Agreement is a condition to the Secured Party extending credit to Debtor; Now, therefore, each Debtor jointly and severally agrees with Secured Party as follows: 1. DEFINITIONS. All terms defined in the Loan Agreement of even date herewith between the Debtor and Secured Party (the "Loan Agreement") which are not otherwise defined herein shall have the meanings stated in the Loan Agreement. In addition, the following terms have the meanings set forth below: "Obligations" means each and every debt, liability and obligation of every type and description arising under or in connection with any Loan Document (as defined in the Loan Agreement) which the Debtor may now or at any time hereafter owe to the Secured Party, whether such debt, liability or obligation now exists or is hereafter created or incurred and whether it is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, independent, joint, several or joint and several. "Patents" means all of the Debtor's right, title and interest in and to patents or applications for patents, fees or royalties with respect to each, and including without limitation the right to sue for past infringement and damages therefor, and licenses thereunder, all as presently existing or hereafter arising or acquired, including without limitation the patents listed on Exhibit A and any divisions, continuations, continuations-in-part, reissues or corresponding foreign patents and patent applications. "Trademarks" means all of the Debtor's right, title and interest in and to trademarks, service marks, collective membership marks, any registrations or applications for registration therefor, together with the respective goodwill associated with each, fees or royalties with respect to each, including without limitation the right to sue for past infringement and damages therefor, and licenses thereunder, all as presently existing or hereafter arising or acquired, including, without limitation, the marks listed on Exhibit B and any divisions or renewals thereof or corresponding foreign trademark registrations and applications. 2. SECURITY INTEREST. The Debtor hereby irrevocably pledges and assigns to, and grants to the Secured Party a security interest, with power of sale to the extent permitted by law, (the "Security Interest") in the Patents and in the Trademarks to secure payment and performance of the Obligations. As set forth in greater detail in the Security Agreement, the Security Interest in the Trademarks is coupled with a security interest in substantially all of the assets (without regard to real property) of the Debtor. 3. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The Debtor hereby represents, warrants and agrees as follows: (a) EXISTENCE, AUTHORITY. The Debtor is a corporation, having full power to and authority to make and deliver this Agreement. The execution, delivery and performance of this Agreement by the Debtor have been duly authorized by all necessary action of the Debtor's board of directors, and if necessary its stockholders, and do not and will not violate the provisions of, or constitute a default under, any presently applicable law or its articles of incorporation or bylaws or any agreement presently binding on it. This Agreement has been duly executed and delivered by the Debtor and constitutes the Debtor's lawful, binding and legally enforceable obligation. The correct legal name of the Debtor is as set forth at the beginning of this Agreement. Except for any financing statement required to be filed under the applicable Uniform Commercial Code (the "UCC") and any filing or recording of this Agreement in the U.S. Patent and Trademark Office, the authorization, execution, delivery and performance of this Agreement do not require notification to, registration with, or consent or approval by, any federal, state or local regulatory body or administrative agency. (b) PATENTS. All of the Patents identified in Exhibit A are owned or controlled by the Debtor as of the date hereof and the information in Exhibit A accurately reflects the existence and status of the Patents listed therein as of the date hereof. (c) TRADEMARKS. All of the Trademarks identified in Exhibit B are owned or controlled by the Debtor as of the date hereof and the information in Exhibit B accurately reflects the existence and status of Trademarks listed therein as of the date hereof. (d) TITLE. Except as set forth in Exhibit C, the Debtor has absolute title to each Patent and each Trademark listed on Exhibits A and B, free and clear of all security interests, liens and encumbrances, except the Security Interest. Except as set forth in Exhibit C, the Debtor (i) will have, at the time the Debtor acquires ownership in Patents or Trademarks hereafter arising, absolute title to each such Patent or Trademark, free and clear of all security interests, liens and encumbrances, except the Security Interest, and (ii) except for licenses entered into hereafter in the ordinary course of business for fair consideration and which do not cause material harm to the Secured Party as holder of the Note, will keep all Patents and Trademarks free and clear of all security interests, liens and encumbrances except the Security Interest. 2 (e) NO SALE. The Debtor will not sell or otherwise dispose of the Patents or Trademarks, or any interest therein, without the Secured Party's prior written consent, except (i) as permitted in Section 3(d)(ii) above, and (ii) sale or disposition of Patents or Trademarks that provide no material continuing benefit to Debtor. (f) DEFENSE. The Debtor will at its own expense, and using its best efforts, protect and defend the Patents and Trademarks against all claims or demands of all persons other than the Secured Party, which would cause material harm to the Secured Party. (g) MAINTENANCE. The Debtor will at its own expense maintain the Patents and the Trademarks to the extent reasonably advisable in its business including, but not limited to, filing all applications to register or obtain letters patent, file all affidavits and renewals, and pay all annuities and maintenance fees possible with respect to issued registrations and letters patent. The Debtor covenants that it will not abandon nor fail to pay any maintenance fee or annuity due and payable on any Patent or Trademark (except for those that provide no material continuing benefit to Debtor), nor fail to file any required affidavit in support thereof, without first providing the Secured Party: (i) sufficient written notice to allow the Secured Party to timely pay any such maintenance fees or annuity or take such other action which may become due on any of said Patents or Trademarks, or to file any affidavit with respect thereto, and (ii) a separate written power of attorney or other authorization to pay such maintenance fees or annuities, or to file such affidavit, or take such other action, should such be necessary or desirable. (h) SECURED PARTY'S RIGHT TO TAKE ACTION. If the Debtor fails to perform or observe any of its covenants or agreements set forth in this Section 3, and if such failure continues for a period of ten (10) calendar days after the Secured Party gives the Debtor written notice thereof (or, in the case of the agreements contained in subsection (g), immediately upon the occurrence of such failure, without notice or lapse of time), or if the Debtor notifies the Secured Party that it intends to abandon a Patent or Trademark, the Secured Party may (but need not) perform or observe such covenant or agreement on behalf and in the name, place and stead of the Debtor (or, at the Secured Party's option, in the Secured Party's own name) and may (but need not) take any and all other actions which the Secured Party may reasonably deem necessary to cure or correct such failure. (i) COSTS AND EXPENSES. Except to the extent that the effect of such payment would be to render any loan or forbearance of money usurious or otherwise illegal under any applicable law, the Debtor shall pay the Secured Party on demand the amount of all moneys expended and all costs and expenses (including reasonable attorneys' fees) incurred by the Secured Party in connection with or as a result of the Secured Party's taking action under subsection (h) or exercising its rights under Section 6, together with interest thereon from the date expended or incurred by the Secured Party at the highest rate then applicable to any of the Obligations. 3 (j) POWER OF ATTORNEY. To facilitate the Secured Party's taking action under subsection (h) and exercising its rights under Section 6, the Debtor hereby irrevocably appoints (which appointment is coupled with an interest) the Secured Party, or its delegate, as the attorney-in-fact of the Debtor with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file, in the name and on behalf of the Debtor, any and all instruments, documents, applications, financing statements, and other agreements and writings required to be obtained, executed, delivered or endorsed by the Debtor under this Section 3, or, necessary for the Secured Party, after an Event of Default, to enforce or use the Patents or Trademarks or to grant or issue any exclusive or non-exclusive license under the Patents or Trademarks to any third party, or to sell, assign, transfer, pledge, encumber or otherwise transfer title in or dispose of the Patents or Trademarks to any third party. The Debtor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. The power of attorney granted herein shall terminate upon the payment and performance of all Obligations. 4. DEBTOR'S-USE OF THE PATENTS AND TRADEMARKS. The Debtor shall be permitted to control and manage the Patents and Trademarks, including the right to exclude others from making, using or selling items covered by the Patents and Trademarks and any licenses thereunder, in the same manner and with the same effect as if this Agreement had not been entered into, so long as no Event of Default occurs and remains unwaived or uncured. 5. EVENTS OF DEFAULT. Each of the following occurrences shall constitute an event of default under this Agreement (herein called "Event of Default"): (a) a Default, as defined in the Loan Agreement, shall occur; or (b) the Debtor shall fail promptly (including any applicable grace period) to observe or perform any covenant or agreement herein binding on it; or (c) any of the representations or warranties contained in Section 3 shall prove to have been incorrect in any material respect when made. 6. REMEDIES. Upon the occurrence of an Event of Default and at any time thereafter during its continuance, the Secured Party may, at its option, take any or all of the following actions: (a) The Secured Party may exercise any or all remedies available under the Loan Agreement. (b) The Secured Party may sell, assign, transfer, pledge, encumber or otherwise dispose of the Patents and Trademarks. (c) The Secured Party may enforce the Patents and Trademarks and any licenses thereunder, and if the Secured Party shall commence any suit for such enforcement, the Debtor shall, at the request of the Secured Party, do any and all lawful acts and execute any and all proper documents required by the Secured Party in aid of such enforcement. 4 7. MISCELLANEOUS. This Agreement and Secured Party's rights under this Agreement or under applicable law may be enforced by Secured Party, at its discretion, against any one or more of the parties referred to above which are encompassed within the term Debtor, without any need to bring any enforcement action against the other parties who are encompassed within the term Debtor. This Agreement has been duly and validly authorized by all necessary action, corporate or otherwise. This Agreement can be waived, modified, amended, terminated or discharged, and the Security Interest can be released, only explicitly in a writing signed by the Secured Party. A waiver signed by the Secured Party shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any of the Secured Party's rights or remedies. All rights and remedies of the Secured Party shall be cumulative and may be exercised singularly or concurrently, at the Secured Party's option, and the exercise or enforcement of any one such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. The Secured Party shall not be obligated to preserve any rights the Debtor may have against prior parties, to realize on the Patents and Trademarks at all or in any particular manner or order, or to apply any cash proceeds of Patents and Trademarks in any particular order of application. This Agreement shall be binding upon and inure to the benefit of the Debtor and the Secured Party and their respective participants, successors and assigns and shall take effect when signed by the Debtor and delivered to the Secured Party, and the Debtor waives notice of the Secured Party's acceptance hereof. The Secured Party may execute this Agreement if appropriate for the purpose of filing, but the failure of the Secured Party to execute this Agreement shall not affect or impair the validity or effectiveness of this Agreement. A carbon, photographic or other reproduction of this Agreement or of any financing statement signed by the Debtor shall have the same force and effect as the original for all purposes of a financing statement. This Agreement shall be governed by the internal law of Minnesota without regard to conflicts of law provisions. If any provision or application of this Agreement is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not affect other provisions or applications which can be given effect and this Agreement shall be construed as if the unlawful or unenforceable provision or application had never been contained herein or prescribed hereby. All representations and warranties contained in this Agreement shall survive the execution, delivery and performance of this Agreement and the creation and payment of the Obligations. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT. 5 In Witness Whereof, the parties have executed this Patent and Trademark Security Agreement as of the date first written above. SELECT COMFORT CORPORATION MEDALLION CAPITAL, INC. By: /s/ Mark A. Kimball By: /s/ Dean R. Pickerell ------------------------------------------ -------------------------------------- Mark A. Kimball, Senior Vice President Dean R. Pickerell, Executive Vice President SELECT COMFORT RETAIL CORPORATION By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President SELECT COMFORT DIRECT CORPORATION By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President SELECT COMFORT SC CORPORATION By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President DIRECT CALL CENTERS, INC. By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President SELECTCOMFORT.COM CORPORATION By: /s/ Mark A. Kimball ------------------------------------------ Mark A. Kimball, Senior Vice President
6 STATE OF MINNESOTA ) ) COUNTY OF HENNEPIN ) The foregoing instrument was acknowledged before me this 28th day of September, 2001, by Mark A. Kimball, the Senior Vice President of each of the foregoing Minnesota corporations, on behalf of each such corporation. /s/ Laura L. Krenz ---------------------------------- Notary Public STATE OF MINNESOTA ) ) COUNTY OF HENNEPIN ) The foregoing instrument was acknowledged before me this 28th day of September, 2001, by Dean R. Pickerell, the Executive Vice President of Medallion Capital, Inc. /s/ Laura L. Krenz ---------------------------------- Notary Public 7 8 EX-10 8 ex10-6subordination.txt SUBORDINATION AGREEMENT - SEPTEMBER 28, 2001 EXHIBIT 10.6 SUBORDINATION AGREEMENT This Agreement is made as of September 28, 2001 by SELECT COMFORT CORPORATION (the "Company"), the parties named at the foot of this Agreement under the heading "Subsidiaries" (each a "Subsidiary" and collectively the "Subsidiaries"), MEDALLION CAPITAL, INC. ("Senior Lender"), and the other parties named at the foot of this Agreement under the heading "Subordinated Lenders" who have executed this Agreement (each a "Subordinated Lender" and collectively the "Subordinated Lenders"). WHEREAS, the Subordinated Lenders are all of the holders of (i) the Senior Secured Convertible Notes dated June 6, 2001 in the aggregate original principal amount of $11,000,000 (the "Senior Secured Convertible Notes") issued by the Company pursuant to the Note Purchase Agreement dated June 1, 2001 (the "Note Purchase Agreement"), and (ii) the Convertible Subordinated Debenture dated November 10, 2000 in the original principal amount of $4,000,000 issued by the Company (the "Convertible Subordinated Debenture" and, together with Senior Secured Convertible Notes, herein individually called a "Convertible Note" and collectively called the "Convertible Notes"); WHEREAS, the Senior Lender has been asked to loan $5,000,000 to the Company and is unwilling to do so unless the Subordinated Lenders enter into this Agreement; Now, therefore, the parties agree as follows: 1. CERTAIN DEFINITIONS. The following terms have the meanings specified: "Senior Indebtedness" means all of the currently existing and any future indebtedness, obligations and liabilities of the Company or the Subsidiaries to the Senior Lender under any of (i) the Promissory Note in the initial face amount of $5,000,000 issued by the Company to the Senior Lender (the "Note") and substitutions, amendments or extensions of the Note, (ii) the Loan Agreement dated September 28, 2001 (the "Loan Agreement") among the Company, the Subsidiaries and the Senior Lender pursuant to which the Note was issued, and (iii) the other agreements (the "Loan Documents") delivered by the Company or the Subsidiaries to the Senior Lender pursuant to the Loan Agreement; provided, however, that, notwithstanding anything to the contrary stated herein or elsewhere in this Agreement, the outstanding principal amount of the Senior Indebtedness shall at no time exceed $5,000,000. "Subordinated Indebtedness" shall mean all existing and hereafter arising indebtedness, obligations and liabilities of the Company or the Subsidiaries to the Subordinated Lenders, whether direct or contingent, under any of (i) the Convertible Notes, (ii) the Note Purchase Agreement, and (iii) the other agreements delivered by the Company or the Subsidiaries to the Subordinated Lenders pursuant to the Note Purchase Agreement or otherwise in connection with the Convertible Notes, and all claims, rights, causes of action, judgments and decrees in respect of the foregoing. Except as otherwise specified herein, capitalized terms used in this Agreement which are defined in the Loan Agreement have the same meanings. 2. REPRESENTATIONS AND WARRANTIES. (a) Each of the Subordinated Lenders severally represents and warrants to the Senior Lender that: (i) As of the date hereof, the outstanding principal amount of the Subordinated Indebtedness held by such Subordinated Lender is set forth opposite the name of such Subordinated Lender on Schedule 1 hereto. (ii) Such Subordinated Lender is the owner and holder of the Subordinated Indebtedness set forth opposite the name of such Subordinated Lender on Schedule 1 hereto, free and clear of all liens, claims and encumbrances, and such Subordinated Lender is not subject to any contractual limitations or restriction which would impair in any way its ability to execute or perform its respective obligations under this Agreement. (iii) Such Subordinated Lender consents to the Company and the Subsidiaries incurring the Senior Indebtedness. (b) The Company and the Subsidiaries jointly and severally represent and warrant to the Senior Lender that: (i) As of the date hereof, the aggregate outstanding principal amount of the Subordinated Indebtedness is $15,000,000. (ii) The Subordinated Lenders are the record owners and holders of the Subordinated Indebtedness. 3. TERMS OF SUBORDINATION. 3.1 NO TRANSFER. No Subordinated Lender will sell or otherwise dispose of any of the Subordinated Indebtedness held by it, except to a person who agrees in advance in writing to become a party to this Subordination Agreement. 3.2 PAYMENT SUBORDINATED. Anything in any agreement governing Subordinated Indebtedness notwithstanding, the payment of the Subordinated Indebtedness is and shall be expressly subordinate and junior in right of payment and exercise of remedies to the prior payment in full of the Senior Indebtedness to the extent and in the manner provided herein, and the Subordinated Indebtedness is so subordinated as a claim against the Company or the Subsidiaries, or any of the assets of, or ownership interests in, the Company or the Subsidiaries, whether such claim be: (a) in the event of any distribution of the assets of the Company or the Subsidiaries upon any voluntary or involuntary dissolution, winding-up, total or partial liquidation or reorganization, bankruptcy, insolvency, receivership or other similar statutory or -2- common law proceedings or arrangements involving the Company or the Subsidiaries or the readjustment of the liabilities of the Company or the Subsidiaries or any assignment by the Company or the Subsidiaries for the benefit of creditors or any marshaling of the assets or liabilities of the Company or the Subsidiaries (collectively called a "Reorganization"); or (b) other than in connection with a Reorganization. In furtherance of the foregoing, neither the Company nor the Subsidiaries shall make, and no holder of Subordinated Indebtedness will accept or receive, any payment of Subordinated Indebtedness until all the Senior Indebtedness has been paid in full; provided, however, the Company or the Subsidiaries may pay to any holder of Subordinated Indebtedness, and any such holder may accept and retain, regularly scheduled payments of principal and interest under the Subordinated Indebtedness unless there exists at the time of the payment, or the payment would give rise to, any Default under the terms governing the Senior Indebtedness. 3.3 DISTRIBUTION IN REORGANIZATION. In the event of any Reorganization of the Company or the Subsidiaries or their respective properties, all of the Senior Indebtedness shall be paid in full before any payment is made on the Subordinated Indebtedness, and in any such proceedings any payment or distribution of any kind or character, whether in cash or property or securities, which may be payable or deliverable in payment of the Subordinated Indebtedness (other than securities of the Company or any other entity provided for by a plan of reorganization or readjustment, the payment of which is subordinate, at least to the extent provided in this Agreement, to the payment in full of all Senior Indebtedness at the time outstanding and any securities issued in exchange for any Senior Indebtedness under any such plan of reorganization or readjustment) shall be paid or delivered directly to the Senior Lender for application to the Senior Indebtedness, until all the Senior Indebtedness shall have been paid in full. In the event that upon any Reorganization, any payment or distribution of assets of the Company or of the Subsidiaries of any kind or character, whether in cash, property or securities, shall be received by any holder of the Subordinated Indebtedness before all Senior Indebtedness is paid in full (other than securities of the Company or any other entity provided for by a plan of reorganization or readjustment, the payment of which is subordinate, at least to the extent provided in this Agreement, to the payment in full of all Senior Indebtedness at the time outstanding and any securities issued in exchange for any Senior Indebtedness under any such plan of reorganization or readjustment), the payment or distribution shall be immediately paid over to the holder of the Senior Indebtedness, for application to the payment of all Senior Indebtedness remaining unpaid until all Senior Indebtedness shall have been paid in full after giving effect to any concurrent payment or distribution to the holder of the Senior Indebtedness. 3.4 EFFECT OF PROVISIONS. The provisions hereof as to subordination are solely for the purpose of defining the relative rights of the holder of the Senior Indebtedness on the one hand, and the holders of the Subordinated Indebtedness on the other hand, and none of the provisions shall impair the obligations of the Company or the Subsidiaries to the Senior Lender or the Subordinated Lenders. 3.5 SUBROGATION, ETC. The holders of the Subordinated Indebtedness shall not be subrogated to the rights of the holder of the Senior Indebtedness with respect to payments or -3- distributions of assets of, or ownership interests in, the Company or the Subsidiaries on account of the Senior Indebtedness until the Senior Indebtedness shall have been paid in full in cash, whereupon the holders of the Subordinated Indebtedness shall be subrogated to such rights. For purposes of such subrogation, no payments or distributions to the holder of the Senior Indebtedness of any cash, properties or securities to which any holder of Subordinated Indebtedness would be entitled but for the provisions of this Agreement, and no payment to the holder of the Senior Indebtedness by any holder of Subordinated Indebtedness, shall, as between the Company, the Subsidiaries, their respective creditors (other than the holder of the Senior Indebtedness) and the holders of the Subordinated Indebtedness, be deemed to be a payment by the Company on account of the Senior Indebtedness. 4. AGREEMENT TO HOLD IN TRUST. If any holder of Subordinated Indebtedness shall receive any payment on the Subordinated Indebtedness at a time when the making or acceptance thereof is prohibited by the provisions of this Agreement, it shall hold the payment in trust for the benefit of the holder of the Senior Indebtedness and shall promptly pay it over to the holder of the Senior Indebtedness for application in payment of the Senior Indebtedness. If the Senior Lender shall receive any payments to which it is not entitled under this Subordination Agreement, such payment shall be held in trust for the benefit of the holders of the Subordinated Indebtedness and shall be promptly paid to the holders of the Subordinated Indebtedness. 5. LEGEND. The Company, the Subsidiaries and the Subordinated Lenders, for themselves and their respective successors and assigns, agree to add to each promissory note or debenture representing or evidencing any of the Subordinated Indebtedness the following legend: "This promissory note/debenture is subject to the Subordination Agreement among Select Comfort Corporation, various of its subsidiaries, various subordinated lenders to Select Comfort Corporation and Medallion Capital, Inc., a copy of which is available from any of the foregoing. By its acceptance of this instrument/agreement, the holder agrees to be bound by the provisions of the Subordination Agreement." 6. LIMIT ON RIGHT OF ACTION. Each of the Subordinated Lenders agrees that so long as the Senior Indebtedness remains outstanding, such Subordinated Lender will not, directly or indirectly, take any action to accelerate or demand payment by the Company or the Subsidiaries of the Subordinated Indebtedness, to exercise any of its remedies in respect of the Subordinated Indebtedness, to initiate any Reorganization of, or litigation in respect of the Subordinated Indebtedness against, the Company or the Subsidiaries, or to foreclose or otherwise realize on any security given by the Company or the Subsidiaries or any other person to secure the Subordinated Indebtedness; provided, however, that (i) upon acceleration of the Senior Indebtedness by the Senior Lender, the Subordinated Lenders may, in their discretion, accelerate all or any part of the Subordinated Indebtedness, (ii) in a Reorganization the holders of Subordinated Indebtedness may file, prosecute and defend a proof of claim as to the Subordinated Indebtedness, may file motions and objections to motions, may negotiate, vote on and object to any plan of reorganization, and may seek relief from the automatic stay provisions of bankruptcy law, in each case so long as such proof of claim or action does not contest the Senior Lender's priority and rights under this Agreement, and (iii) nothing herein shall prevent any director of the Company or any Subsidiary from voting, in the exercise of his or her -4- fiduciary duties, to approve the initiation by the Company or such Subsidiary of a Reorganization. 7. SUBORDINATION OF SECURITY INTERESTS. The Subordinated Lenders and the Senior Lender confirm that, regardless of the relative times and method of attachment or perfection or the order of filing of financing statements, mortgages or other security agreements or documents, or anything in the Subordinated Indebtedness or this Agreement or the Loan Agreement to the contrary, the security interests and liens granted to secure the Senior Indebtedness shall in all respects be first and senior security interests and liens, superior to any security interests and liens granted to the Subordinated Lenders. It is the express intention of the parties that, notwithstanding anything in this Agreement to the contrary, all liens and security interests granted to the Senior Lender to secure the Senior Indebtedness shall be prior and superior to any liens or security interests granted to the Subordinated Lenders to secure the Subordinated Indebtedness. 8. RELEASE OF COLLATERAL. Without limiting any of the rights (including any of the foreclosure rights) of the Senior Lender under the Loan Agreement or the Note, or any documents delivered to secure the obligations of the Company or the Subsidiaries to the Senior Lender in connection therewith or under the provisions of any applicable law, in the event that the Senior Lender releases or discharges its security interest in, or liens upon, any assets which are subject to a lien or security interest in favor of the Subordinated Lenders, such assets shall thereupon be deemed to have been released from all liens and security interests, provided that any released or discharged assets are being sold or transferred either (a) in the ordinary course of the Company's or the Subsidiary's business or (b) following the occurrence and during the continuance of a Default under the Senior Indebtedness and the giving of 10 days' prior written notice of any proposed release to the Subordinated Lenders, for consideration equivalent to the fair value of such assets, under circumstances in which the seller of such assets shall have agreed that the net proceeds of any sale under this clause shall be applied to the payment of the Senior Indebtedness and the Subordinated Indebtedness in the order of priority provided in this Agreement. 9. COMPANY'S AND SUBSIDIARIES' ADDITIONAL AGREEMENT. The Company and the Subsidiaries will not, without the Senior Lender's prior written consent, execute or deliver any negotiable instrument as evidence of the Subordinated Indebtedness or any part thereof, except as otherwise permitted by this Agreement. 10. RIGHTS OF SENIOR LENDER TO AMEND LOAN DOCUMENTS. Subject to the terms of this Subordination Agreement, the Senior Lender reserves the right, in its sole discretion, to modify, amend, waive or release any of the terms of the Loan Agreement, the Note, or any other Loan Document at any time executed by the Company, the Subsidiaries or any other person securing the Senior Indebtedness or any other document executed in connection with the Senior Indebtedness and to exercise or refrain from exercising any powers or rights which the Senior Lender may have thereunder, and such modification, amendment, waiver, release, exercise or failure to exercise shall not affect any of the Senior Lender's or Subordinated Lenders' rights under this Subordination Agreement. -5- 11. FURTHER ASSURANCES. Each of the Company, the Subsidiaries and the Subordinated Lenders (for itself and its successors and assigns as holders of Subordinated Indebtedness) agrees to execute and deliver to the Senior Lender any further instruments and documents and take any further actions as the Senior Lender may reasonably request, in each case for the purpose of carrying out the provisions and intent of this Agreement. 12. NOTICES. All notices and other communications relating to this Agreement shall be in writing and shall be delivered as follows: If to the Senior Lender to: Medallion Capital, Inc. 7831 Glenroy Road, Suite 480 Minneapolis, Minnesota 55439-3132 Attention: President If to the Company or the Subsidiaries to: Select Comfort Corporation 6105 Trenton Lane North Minneapolis, Minnesota 55442 Attention: President If to any of the Subordinated Lenders to: the address of such Subordinated Lender specified opposite its name on Schedule 1 hereto or to such other address as the party may have designated in writing to the other parties. Notices shall be deemed given upon the earlier to occur of (i) actual receipt by or delivery to the addressee, or (ii) the second day following deposit in the U. S. mail for delivery via certified or registered mail. 13. SUCCESSORS CONTINUING EFFECT, ETC. This Agreement is being entered into for the benefit of the holders of the Senior Indebtedness and the Subordinated Indebtedness and their respective successors and assigns. This Agreement shall be a continuing agreement and shall be irrevocable and shall remain in full force and effect so long as there are both Senior Indebtedness and Subordinated Indebtedness outstanding. The liability of the Subordinated Lenders shall be reinstated and revived, and the rights of the holder of the Senior Indebtedness shall continue, with respect to any amount paid on account of the Senior Indebtedness which shall be required to be restored or returned by the holder of the Senior Indebtedness in any Reorganization (including without limitation, any repayment made pursuant to any provision of Chapter 5 of Title 11, United States Code), all as though the amount had not been paid. 14. ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof, and no modification or waiver -6- of any provision of this Agreement shall be effective unless it is in writing signed by the Senior Lender, the Subordinated Lenders holding at least 67% of the aggregate principal amount of the Senior Secured Convertible Notes outstanding at the time of calculation, and the Subordinated Lender holding a majority of the aggregate principal amount of the Convertible Subordinated Debenture outstanding at the time of calculation (unless such amendment or modification shall impose any additional obligations upon the Company or the Subsidiaries, in which case the amendment or modification shall also require execution by them). 15. MISCELLANEOUS. This Agreement, which may be executed in any number of counterparts, shall be governed by the laws of the State of Minnesota. The headings in this Agreement are for reference only and shall not alter or otherwise affect the meaning. In the event of any conflict between the provisions of this Subordination Agreement and the provisions of the Subordinated Indebtedness or the Loan Agreement, the provisions of this Subordination Agreement shall control. The Company and the Subsidiaries shall be jointly and severally liable to reimburse the holders of the Senior and Subordinated Indebtedness upon demand for all reasonable costs and expenses (including reasonable attorney's fees and disbursements) paid or incurred by the holders of the Senior or Subordinated Indebtedness in connection with the preparation, negotiation, execution, delivery or enforcement of this Agreement. Nothing in this Agreement shall restrict or prevent the Subordinated Lenders from converting at any time and from time to time, at their sole discretion, all or any part of the Convertible Notes in accordance with their terms. The obligations of the Subordinated Lenders under this Agreement shall be several, and not joint or joint and several. 16. CONSENT TO JURISDICTION. AT THE OPTION OF THE SENIOR LENDER, THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN MINNEAPOLIS OR ST. PAUL, MINNESOTA; AND EACH PARTY HERETO CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT ANY PARTY COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE SENIOR LENDER AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE. 17. WAIVER OF TRIAL BY JURY. EACH PARTY TO THIS AGREEMENT HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING OUT OF, UNDER OF IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREIN, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. -7- In Witness Whereof, the parties have executed this Agreement as of the date first written above. THE COMPANY: SELECT COMFORT CORPORATION By: /s/ Mark A. Kimball --------------------------------------- Mark A. Kimball, Senior Vice President SUBSIDIARIES: SELECT COMFORT RETAIL CORPORATION By: /s/ Mark A. Kimball --------------------------------------- Mark A. Kimball, Senior Vice President SELECT COMFORT DIRECT CORPORATION By: /s/ Mark A. Kimball --------------------------------------- Mark A. Kimball, Senior Vice President SELECT COMFORT SC CORPORATION By: /s/ Mark A. Kimball --------------------------------------- Mark A. Kimball, Senior Vice President DIRECT CALL CENTERS, INC. By: /s/ Mark A. Kimball --------------------------------------- Mark A. Kimball, Senior Vice President SELECTCOMFORT.COM CORPORATION By: /s/ Mark A. Kimball --------------------------------------- Mark A. Kimball, Senior Vice President SENIOR LENDER: MEDALLION CAPITAL, INC. By: /s/ Dean R. Pickerell --------------------------------------- Dean R. Pickerell Executive Vice President -8- SUBORDINATED LENDERS: ST. PAUL VENTURE CAPITAL V, LLC By: /s/ Patrick A. Hopf --------------------------------------- Patrick A. Hopf Managing Member ST. PAUL VENTURE CAPITAL VI, LLC By: SPVC MANAGEMENT VI, LLC Its: Managing Member By: /s/ Patrick A. Hopf --------------------------------------- Patrick A. Hopf Managing Director PRINTWARE, INC. By: /s/ Mark G. Eisenschenk --------------------------------------- Name: Mark G. Eisenschenk Title: Chief Financial Officer /s/ Gary S. Kohler - -------------------------------------------- GARY S. KOHLER /s/ Andrew J. Redleaf - -------------------------------------------- ANDREW J. REDLEAF LIBERTY DIVERSIFIED By: /s/ David Lenzen --------------------------------------- Name: David Lenzen Title: Executive Vice President STANDARD FUSEE CORPORATION By: /s/ C. Jay McLaughlin --------------------------------------- Name: C. Jay McLaughlin Title: President and CEO /s/ K. H. Walker - -------------------------------------------- K. H. WALKER -9- /s/ Thomas J. Albani - -------------------------------------------- THOMAS J. ALBANI /s/ Ervin R. Shames - -------------------------------------------- ERVIN R. SHAMES /s/ Jean-Michel Valette JEAN-MICHEL VALETTE HSBC GLOBAL CUSTODY NOMINEE (UK) LIMITED, AS NOMINEE FOR BFSUS SPECIAL OPPORTUNITIES TRUST PLC By: /s/ Russell Cleveland --------------------------------------- Name: Russell Cleveland Title: Director FROST NATIONAL BANK CUSTODIAN FBO RENAISSANCE US G&I TRUST, PLC, AS NOMINEE FOR RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. By: /s/ Russell Cleveland --------------------------------------- Name: Russell Cleveland Title: Director BAYSTAR CAPITAL, L.P. By: /s/ Brian Stark --------------------------------------- Name: Brian Stark Title: Managing Member BAYSTAR INTERNATIONAL, LTD. By: /s/ Brian Stark --------------------------------------- Name: Brian Stark Title: Managing Member -10- SCHEDULE 1 - ------------------------------ -------------------- -------------------- -------------------- NAMES AND ADDRESSES OF ORIGINAL PRINCIPAL NUMBER OF SHARES PURCHASE PRICE PURCHASERS AMOUNT OF NOTES OF WARRANT STOCK - ------------------------------ -------------------- -------------------- -------------------- St. Paul Venture Capital VI, $4,100,000 1,640,000 $4,100,000 LLC 10400 Viking Drive Suite 550 Eden Prairie, MN 55344 Attention: Lisa Corbin Fax No.: (952) 995-7475 - ------------------------------ -------------------- -------------------- -------------------- Printware, Inc. $1,500,000 600,000 $1,500,000 c/o Mark Eisenschenk, CFO 1270 Eagan Industrial Road St. Paul, MN 55121 - ------------------------------ -------------------- -------------------- -------------------- Gary S. Kohler $100,000 40,000 $100,000 3033 Excelsior Boulevard Suite 300 Minneapolis, MN 55416 - ------------------------------ -------------------- -------------------- -------------------- Andrew J. Redleaf $100,000 40,000 $100,000 3033 Excelsior Boulevard Suite 300 Minneapolis, MN 55416 - ------------------------------ -------------------- -------------------- -------------------- Liberty Diversified $1,000,000 400,000 $1,000,000 5600 North Highway 169 Minneapolis, MN 55428 Attn: David Lenzen and Mike Fitterman, CFO - ------------------------------ -------------------- -------------------- -------------------- Standard Fusee Corporation $1,000,000 400,000 $1,000,000 28320 St. Michaels Road PO Box 1047 Easton, MD 21601 - ------------------------------ -------------------- -------------------- -------------------- K. H. Walker $50,000 20,000 $50,000 15 East 26th Street 12th Floor New York, NY 10010 - ------------------------------ -------------------- -------------------- -------------------- Thomas J. Albani $50,000 20,000 $50,000 Summer Address: Mail: 39 Wanoma Way P.O. Box 855 Siasconset, MA 02564 Overnight: 39 Wanoma Way Nantucket, MA 02554 - ------------------------------ -------------------- -------------------- -------------------- Ervin R. Shames $50,000 20,000 $50,000 35 Mollbrook Drive Wilton, CT 06897 - ------------------------------ -------------------- -------------------- -------------------- Jean-Michel Valette $50,000 20,000 $50,000 28 Maple Avenue Kentfield, CA 94905 -11- - ------------------------------ -------------------- -------------------- -------------------- HSBC Global Custody Nominee $500,000 200,000 $500,000 (UK) Limited, as nominee for BFSUS Special Opportunities Trust PLC 8080 North Central Expressway Suite 210-LB 59 Dallas, TX 75206 - ------------------------------ -------------------- -------------------- -------------------- Frost National Bank Custodian $500,000 200,000 $500,000 FBO Renaissance Capital Growth & Income Fund III, Inc. 8080 North Central Expressway Suite 210-LB 59 Dallas, TX 75206 - ------------------------------ -------------------- -------------------- -------------------- BayStar Capital, L.P. $1,500,000 600,000 $1,500,000 1500 West Market Street Suite 200 Mequon, WI 53092 - ------------------------------ -------------------- -------------------- -------------------- BayStar International, Ltd. $500,000 200,000 $500,000 1500 West Market Street Suite 200 Mequon, WI 53092 - ------------------------------ -------------------- -------------------- -------------------- St. Paul Venture Capital V, $4,000,000 -- $4,000,000 LLC 10400 Viking Drive, Suite 550 Eden Prairie, MN 55344 - ------------------------------ -------------------- -------------------- -------------------- TOTAL $15,000,000 4,400,000 $15,000,000 - ------------------------------ -------------------- -------------------- --------------------
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