10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark one)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2016

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________.

Commission File No. 0-25121

SELECT COMFORT CORPORATION

(Exact name of registrant as specified in its charter)

MINNESOTA	41-1597886
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

9800 59th Avenue North
Minneapolis, Minnesota	55442
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (763) 551-7000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, par value $0.01 per share	The NASDAQ Stock Market LLC
	(NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. YES ý NO o

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o   NO ý

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 ý   NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	ý		Accelerated filer o
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO ý

The aggregate market value of the common stock held by non-affiliates of the Registrant as of July 2, 2016, was $747,344,000 (based on the last reported sale price of the Registrant’s common stock on that date as reported by NASDAQ).

As of January 28, 2017, there were 42,950,000 shares of the Registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement to be furnished to shareholders in connection with its 2017 Annual Meeting of Shareholders are incorporated by reference in Part III, Items 10-14 of this Annual Report on Form 10-K.

As used in this Form 10-K, the terms “we,” “us,” “our,” the “Company,” and “Select Comfort” mean Select Comfort Corporation and its subsidiaries and the term “common stock” means our common stock, par value $0.01 per share.

As used in this Form 10-K, the term “bedding” includes mattresses, box springs and foundations.

Sleep Number^®, Select Comfort^®, SleepIQ^®, the Double Arrow logo, AirFit^®, Bam LABS^®, the “B” logo, Comfortaire^®,ComfortFit^®, Comfort.Individualized.^®, the DualTemp logo, the DualAir Technology Inside logo, FlexTop^®, IndividualFit^®, Individualized Sleep Experiences^®, Know Better Sleep^®, Pillow[ology]^®, PillowFit^®, Probably the Best Bed in the World^®, Sleep Number Inner Circle^®, Tech-e^®, Smart Bed Technology^®, The Only Bed That Knows You^®, We Make BedsSmart^®, What’s Your Sleep Number?^®, SleepIQ Kids™, SleepIQ LABS™, Sleep For The Future^SM, Smart Bed For Smart Kids™, It™, The It Bed™, The Only Bed That Grows With Them™, Tonight Bedtime. Tomorrow The World™, ActiveComfort™, Auto Snore™, CoolFit™, DualAir™, DualTemp™, Firmness Control™, FlexFit™, In Balance™, PartnerSnore™, Rapid Sleep Onset™, Responsive Air™, Sleep Number 360™, The Bed Reborn™, the SleepIQ LABS logo, The Bed That Moves You™, our bed model names, and our other marks and stylized logos are trademarks and/or service marks of Select Comfort. This Form 10-K may also contain trademarks, trade names and service marks that are owned by other persons or entities.

Our fiscal year ends on the Saturday closest to December 31, and, unless the context otherwise requires, all references to years in this Form 10-K refer to our fiscal years. Our fiscal year is based on a 52- or 53-week year. All years presented in this Form 10-K are 52 weeks, except for the 2014 fiscal year ended January 3, 2015, which is a 53-week year.

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TABLE OF CONTENTS

PART I			2
	Item 1.	Business	2
	Item 1A.	Risk Factors	12
	Item 1B.	Unresolved Staff Comments	17
	Item 2.	Properties	18
	Item 3.	Legal Proceedings	19
	Item 4.	Mine Safety Disclosures	19
PART II			20
	Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	20
	Item 6.	Selected Financial Data	22
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	34
	Item 8.	Financial Statements and Supplementary Data	35
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	61
	Item 9A.	Controls and Procedures	61
	Item 9B.	Other Information	61
PART III			62
	Item 10.	Directors, Executive Officers and Corporate Governance	62
	Item 11.	Executive Compensation	62
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	62
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	62
	Item 14.	Principal Accounting Fees and Services	62
PART IV			63
	Item 15.	Exhibits, Financial Statement Schedules	63

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PART I

This Annual Report on Form 10-K contains or incorporates by reference certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in or incorporated by reference into this Annual Report on Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements, including but not limited to projections of revenues, results of operations, financial condition or other financial items; any statements of plans, strategies and objectives of management for future operations; any statements regarding proposed new products, services or developments; any statements regarding future economic conditions, prospects or performance; statements of belief and any statement or assumptions underlying any of the foregoing. In addition, we or others on our behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or Webcasts open to the public, in press releases or reports, on our Internet Website or otherwise. We try to identify forward-looking statements in this report and elsewhere by using words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,” “potential,” “continue” or the negative of these or similar terms.

Our forward-looking statements speak only as of the date made and by their nature involve substantial risks and uncertainties. Our actual results may differ materially depending on a variety of factors, including the items discussed in greater detail below under the caption “Risk Factors.” These risks and uncertainties are not exclusive and further information concerning the Company and our business, including factors that potentially could materially affect our financial results or condition, may emerge from time to time, including factors that we may consider immaterial or do not anticipate at this time.

We wish to caution readers not to place undue reliance on any forward-looking statement and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. We assume no obligation to update forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. We advise you, however, to review and consider any further disclosures we make on related subjects in our quarterly reports on Form 10-Q and current reports on Form 8-K that we file with or furnish to the Securities and Exchange Commission.

ITEM 1. BUSINESS

Overview

Select Comfort Corporation, based in Minneapolis, Minnesota, was founded in 1987. In 1998, Select Comfort became a publicly traded company. We are listed on The NASDAQ Stock Market LLC (NASDAQ Global Select Market) under the symbol “SCSS.” When used herein, the terms “Select Comfort,” “Company,” “we,” “us” and “our” refer to Select Comfort Corporation, including consolidated subsidiaries.

Our mission is to improve lives by individualizing sleep experiences. Our vision is to become one of the world's most beloved brands by delivering an unparalleled sleep experience. We plan to achieve this by offering benefit-driven, innovative sleep solutions to our customers through an unmatched retail experience and a carefree ownership experience.

We offer consumers high-quality, individualized sleep solutions and services, which include a complete line of Sleep Number beds, bases and bedding accessories. Our business has three significant competitive advantages: proprietary sleep innovations, ongoing customer relationships and exclusive retail distribution.

We have a vertically integrated business model and are the exclusive designer, manufacturer, marketer, retailer and servicer of a complete line of Sleep Number beds. We are the pioneer in biometric sleep tracking and adjustability. Only the Sleep Number bed offers SleepIQ technology - proprietary sensor technology that works directly with the bed’s DualAir system to track each individual’s sleep. SleepIQ technology communicates how you slept and what adjustments you can make to optimize your sleep and improve your daily life. Select Comfort also offers FlextFit adjustable bases, and Sleep Number pillows, sheets and other bedding products. As a specialty mattress retailer with stores across the nation, we offer consumers a unique, value-added retail experience at one of the more than 540 Sleep Number stores across the country, online at SleepNumber.com or via phone at (800) 753-3768.

We are committed to delivering superior shareholder value through three primary drivers of earnings per share growth: increasing demand, leveraging our business model and deploying our capital efficiently. We are the sleep innovation leader and drive growth through effective brand marketing and a differentiated retail experience.

In fiscal 2016 we generated net sales of $1.3 billion with $77 million of operating income. In 2012, 2013, 2014 and 2015, we generated operating income of $120 million, $91 million, $102 million and $75 million, respectively. We have transformed the

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business with $427 million of capital investments over five years through 2016. This effort positions us for accelerated profits and cash generation long-term.

In September 2015, we completed the acquisition of BAM Labs, Inc. (now operating as SleepIQ LABS), the leading provider of biometric sensor and sleep monitoring for data-driven health and wellness. The addition of SleepIQ LABS strengthens Sleep Number’s leadership in sleep innovation, adjustability and individualization. The acquisition broadens and deepens electrical, biomedical, software and backend capabilities - API (application program interface) and bio-signal analysis. Our ownership and control of biometric data advances smart, connected products that empower our customers to experience quality sleep.

In the fourth quarter of 2015, we replaced our nearly 20-year-old legacy computer systems with a new vertically integrated Enterprise Resource Planning (ERP) system. We completed our ERP implementation by the end of the first quarter of 2016. Implementation issues negatively affected fourth-quarter 2015 net sales and profits, and to a lesser degree, first-quarter and second-quarter 2016 net sales and profits. The new operating platform enables operational efficiencies, improved customer convenience and supports the growth of our business.

Proprietary Sleep Innovations

Sleep Number® Bed

Unlike the “one-size-fits-all” solution offered by other mattress brands, the Sleep Number bed offers individualized comfort that is adjustable on each side of the bed. Our proprietary DualAir technology, which features two independent air chambers, allows couples to adjust firmness to their own individual preference at the touch of a button. Sleepers can each enjoy their ideal firmness, support and pressure-relieving comfort - their Sleep Number setting - for deep, restful sleep.

The benefits of our proprietary Sleep Number bed have been validated through clinical sleep research, which has shown that participants who slept on a Sleep Number bed generally fell asleep faster, experienced more deep sleep with fewer disturbances and experienced greater relief from back pain than those sleeping on a traditional innerspring mattress.

We offer Sleep Number beds in good, better and best price ranges within the premium mattress category, and in a broad range of sizes, including twin, full, queen, eastern king and California king.

• The Classic Series offers Sleep Number adjustability starting at $799 for a queen mattress. The series includes the Sleep Number c2 and c4 beds.

• The Performance Series includes our most popular mattresses with a perfect balance of softness and pressure-relieving support. The series includes the Sleep Number p5 and p6 beds.

• The Memory Foam Series is breathable and contouring. The series includes the Sleep Number m7 bed.

• The Innovation Series is the ultimate in individualized comfort and temperature-balancing innovation. The series includes the Sleep Number i8 and i10 beds.

In November 2016, J.D. Power announced that Sleep Number ranked highest in customer satisfaction with mattresses for the second consecutive year. The reports measured customer satisfaction with mattress purchases based on seven factors: comfort, price, support, durability, warranty, features and customer service. In 2016 Sleep Number achieved an overall satisfaction index score of 887, which is 32 points above the industry average of 855. In addition, Sleep Number achieved the highest score in the warranty and features study factors.

SleepIQ® Technology

SleepIQ technology is a touchless, biometric sensor technology that tracks sleep during the night. Launched by Select Comfort in 2014, SleepIQ technology tracks the user's sleep by gathering hundreds of readings per second continuously (heart rate, motion and breathing). Based on that data, a proprietary algorithm delivers a personal SleepIQ score, from 1 to 100, to consumers each morning. The Sleep Number bed is the only bed that lets you track and optimize your sleep with SleepIQ technology. SleepIQ also connects with leading health, fitness and sleep environment apps - including FitBit^®, Nest Learning Thermostat™, MapMyRun™ and Withings Health Mate™ - to show a holistic view of how lifestyle choices may affect sleep. It empowers the sleeper to achieve their best possible sleep each night. SleepIQ technology is included on our Memory Foam and Innovation series, and available for purchase on all other Sleep Number beds. In addition, SleepIQ can be added to Sleep Number beds purchased after 2008.

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SleepIQ Kids™ Bed

In 2015, we introduced the SleepIQ Kids bed, which extends Sleep Number’s core DualAir adjustability and SleepIQ technology to the children’s mattress market. It is the only bed that adjusts with children as they grow. Through a combination of sleep knowledge powered by SleepIQ technology and adjustability powered by Sleep Number DualAir technology, the SleepIQ Kids bed empowers parents or children to adjust the bed for individualized comfort.

The it™ bed

In September 2016 our latest innovation, the "it bed," became available for sale. The "it bed" is compressed into a sleek box and delivered directly to the customer's doorsteps. Designed for today's connected lifestyles, the "it bed" is adjustable on each side and features SleepIQ technology. The "it bed" received four technology and innovation awards at CES in 2016.

Select Comfort developed the new "it bed" brand for first-time bed buyers and tech-savvy individuals who recognize that quality sleep is essential to their life. It effortlessly quantifies your sleep, connects to select applications and has predictive modeling that makes suggestions to improve your sleep. The "it bed" is exclusive to Select Comfort and is available online at itbed.com and in select Sleep Number stores priced at $1,099 for a queen mattress. The "it bed" features the latest release of SleepIQ technology, which uses adaptive algorithms and predictive modeling to recommend adjustments to daily habits and sleep environment. It also features ActiveComfort technology - the "it bed" has dual, foam-filled air chambers that respond to individuals’ constantly changing needs and adjusts to an ideal level of comfort, firmness and support.

The Sleep Number 360™ smart bed product line

In January 2017 at CES, Select Comfort introduced the Sleep Number 360 smart bed product line, one of the most significant innovations in our 30-year history. The Sleep Number 360 smart bed won 13 awards at CES, including being named the Best of Innovation Honoree in the Home Appliances category. Powered by SleepIQ technology, the Sleep Number 360 smart beds will intuitively sense and automatically adjust comfort to keep both partners sleeping soundly all night. The SleepIQ technology platform integrates hardware, software and design to deliver effortless adjustability, sleep tracking and connectivity.

The new Sleep Number 360 smart mattresses and adjustable bases will include these new features:

• Self-adjusting comfort throughout the night. As sleep positions change during the night, Responsive Air technology will adjust the bed’s comfort in real time via the two air chambers inside the mattress.

• Foot-warming feature to fall asleep faster. It’s clinically proven that people fall asleep faster when their feet are warmed. SleepIQ technology knows the sleepers’ bedtime routines and warms the foot of the bed automatically before bedtime with Rapid Sleep Onset technology.

• Auto Snore detection and adjustment. Responding to SleepIQ biometrics, the 360 Smart Bed will automatically adjust to each sleeper’s ideal position.

• Smart alarm feature will awaken sleepers at the optimal moment. SleepIQ technology knows each sleeper's desired wake-up window and an alarm will sound when they are in their lightest stage of sleep during this window.

The Sleep Number 360 smart bed line will replace the current Sleep Number line. The phased implementation is planned to begin in the second quarter of 2017 and will be exclusively available in all Sleep Number stores and online.

FlexFit™ Adjustable Base Technology

We offer a full line of exclusive FlexFit adjustable bases that enable customers to raise the head or foot of the bed, and to experience the comfort of massage. Our PartnerSnore technology lets a user gently raise their partner’s head to relieve common snoring.

In conjunction with the 360 smart beds, we will introduce a new line of FlexFit adjustable bases in 2017. This new series will replace our existing FlexFit models and will integrate with SleepIQ technology to deliver the new features and functionality.

Sleep Number® Bedding Collection

Our exclusive Sleep Number bedding collection comprises a full line of sleep products that are designed to solve sleep issues. Select Comfort has a wide assortment of pillows designed to fit each individual's size, shape and sleeping position for more comfortable sleep. Our innovative bedding features make it easier to make your bed: our SmartFit design keeps sheets securely in place and Logic Label takes the guesswork out of making your bed. We also offer a wide assortment of temperature-balancing products.

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In 2013, we introduced the DualTemp layer, a new sleep innovation that addresses one of the most significant sleep issues experienced by customers: sleeping too hot or sleeping too cold. The DualTemp layer features active air technology that allows each person to select his or her ideal temperature at the simple touch of a button. The DualTemp layer can be used with any mattress brand or adjustable base.

Exclusive Distribution

Unlike traditional mattress manufacturers, which primarily sell through third-party retailers, nearly 98% of our net sales are direct to consumers through our Sleep Number stores, online at SleepNumber.com or via phone.

Since 2012, we rebuilt our store portfolio and expanded our national footprint. This strategy has included repositioning a large percentage of our mall stores to stronger off-mall locations, improving the size and positioning within malls and adding stores in both existing and new trade areas. Going forward, we anticipate a total store count of 600 to 650 stores by 2019. We are well positioned with a retail store portfolio that is healthy and productive. As of year-end 2016, approximately 80% of our stores are less than five years old.

We target high-quality, convenient, visible store locations based on several factors, including each market’s overall sales potential, store geographic location, demographics and proximity to other specialty retail stores. As the exclusive distributor of Sleep Number products, we target one store per 350,000 - 500,000 people. This places our stores within an average radius of 10 miles, or 20-minute drive times, for most of our target customers.

Our award-winning store design and improved real estate locations support our value-added retail experience, which results in high store productivity and profitability. Our sales-per-square-foot productivity ranks in the top 10 of U.S. specialty retail brands, at nearly $1,000 per foot and we average approximately $650,000 in annual net sales per full-time retail employee. Since 2011, we have increased our average store size by more than 66% to 2,538 square feet.

As of December 31, 2016, we had 540 retail stores in 49 U.S. states, 53% of which were in non-mall locations. We expect to grow our retail store portfolio by 3% to 4% during 2017.

In addition, we have a robust online experience that helps customers easily engage in relevant content, research our products and solutions, transact online and find post-sales support. Our online experience expands our digital brand and connections with consumers, driving deeper awareness, consideration and engagement.

We have adopted an agile development approach to our online initiatives. This means we deploy rapid experimentation and iterations of our digital experiences. Results include faster time-to-market of online improvements to drive store traffic and online conversion. All Sleep Number products are available exclusively at SleepNumber.com or Sleep Number stores.

Our retail stores accounted for 91% of our net sales in 2016. Average annual net sales per comparable store were $2.4 million in 2016, $2.4 million in 2015 and $2.3 million in 2014. In 2016, 98% of our stores open for a full year generated net sales over $1.0 million and 61% of our stores open for a full year generated net sales over $2.0 million. We now have more than 20% of our store base delivering greater than $3 million in annual net sales. Our online and phone sales accounted for 7% of our net sales in 2016.

Marketing

We use a variety of marketing and advertising vehicles to drive customer traffic to our brand, to educate and to acquire new customers. Our marketing efforts target a broad customer demographic: 30-54 years old with greater than $75,000 household income for our core line of products. Our customers care about their own and their family's health and well-being, and know that quality sleep is a key factor.

Marketing drives growth in our business by building consumer awareness and consideration of our sleep innovations, and increasing traffic to our website and stores, while building our brand image. Our advertising communications target our existing customers for repeat and referral purchases and potential new customers through a mix of national and local marketing. Television is our most efficient media, followed by digital. We continue to build our in-house digital capabilities and data-driven tools to make deeper connections with our customers, increase demand and improve media efficiency. In 2016, media expense represented 14.5% of net sales.

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Operations

Manufacturing and Distribution

We have two manufacturing plants located in Irmo, South Carolina and Salt Lake City, Utah, which distribute Sleep Number products. The manufacturing operations in South Carolina and Utah consist of quilting and sewing of the fabric covers for our beds, and final assembly and packaging of mattresses and bases. In addition, our electrical Firmness Control systems are assembled in our Utah plant.

We obtain all of the raw materials and components used to produce our beds from outside sources. A number of components, including our proprietary air chambers, our proprietary blow-molded foundations, our adjustable foundations, various components for our Firmness Control systems, as well as fabrics and zippers, are sourced from suppliers who currently serve as our sole or primary source of supply for these components. We believe we can obtain these raw materials and components from other sources of supply, although we could experience some short-term disruption in our ability to fulfill orders in the event of an unexpected loss of supply from one of the primary suppliers. We utilize dual sourcing on targeted components when effective.

We have taken, and continue to take, various measures to mitigate the potential impact of an unexpected disruption in supply from any sole-source suppliers, including increasing safety stocks and identifying potential secondary sources of supply. All of the suppliers that produce unique or proprietary products for us have in place either contingency or disaster recovery plans or redundant production capabilities in other locations in order to safeguard against any unforeseen disasters. We review these plans and sites on a regular basis to ensure the supplier's ability to maintain an uninterrupted supply of materials and components.

Historically, we manufactured beds primarily on a just-in-time basis to fulfill orders rather than stocking inventory, which enabled us to maintain lower levels of finished goods inventory and operate with limited regional warehousing. Over the last two years, we have migrated our fulfillment process to a hybrid "make-to-stock" model, wherein our best selling products are forward stocked in distribution centers closer to customers. Together with our new ERP system, this hybrid model will enable us to improve our customer experience with shorter delivery times. Products are generally received by the customer within five to 14 days from the date of order.

Home Delivery Service

We offer Comfort Service^SM home delivery and setup, which includes assembly and mattress removal. In selected markets, we provide home delivery, assembly and mattress removal services through third-party providers. Over 80% of beds sold are delivered by our full-service home delivery team or by our third-party service providers.

Customer Service

We have an in-house customer service department staffed by teams of specialists that provide service and support via phone, email, “live chat” and social media. Direct access to our customers is a unique advantage that also provides insights and identifies emerging trends as we strive to continuously improve our product and service quality and advance our product innovation.

Research and Development

As a consumer-driven innovation company, Select Comfort conducts extensive research to understand consumer needs. This research informs the design and delivery of our sleep innovations and our customer experience. We have a robust product development organization that fuels our innovations, and in 2015 we acquired BAM Labs, Inc. (now operating as SleepIQ LABS), a leading provider of biometric sensor and sleep monitoring for data-driven health and wellness. This is significant as consumers are rapidly adopting new digital tools and using their personal data to improve health and wellness. Technology that improves the quality of sleep and overall wellness will continue to be a top priority for Select Comfort. Our research and development expenses were $28.0 million in 2016, $16.0 million in 2015 and $8.2 million in 2014.

Management Information Systems

We use information technology systems to operate, analyze and manage our business, to reduce operating costs and to enhance our customers' experience. Our major systems include an in-store order entry system, a retail portal system, a payment processing system, in-bound and out-bound telecommunications systems for direct marketing, delivery scheduling and customer service, e-commerce systems, a data warehouse system and an enterprise resource planning system. These systems are primarily comprised of packaged applications licensed from various software vendors plus a limited number of internally developed programs. In October 2015, we completed a multi-year project to upgrade our core information technology systems. Please refer to the information set forth in "Part I, Item 1A. Risk Factors" for a discussion of certain risks that may be encountered in connection with the our management information systems.

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Intellectual Property

We hold various U.S. and foreign patents and patent applications regarding certain elements of the design and function of our products, including air control systems, remote control systems, air chamber features, mattress construction, foundation systems, sensing systems, as well as other technology. We have numerous U.S. patents, expiring at various dates between July 2017 and February 2035, and numerous U.S. patent applications pending. We also have numerous foreign patents and patent applications pending. Notwithstanding these patents and patent applications, we cannot ensure that these patent rights will provide substantial protection or that others will not be able to develop products that are similar to or competitive with our products.

We have a number of trademarks and service marks registered with the U.S. Patent and Trademark Office, including Sleep Number®, Select Comfort®, SleepIQ®, the Double Arrow logo, AirFit®, Bam LABS®, the “B” logo, Comfortaire®, ComfortFit®, Comfort.Individualized.®, the DualTemp logo, the DualAir Technology Inside logo, FlexTop®, IndividualFit®, Individualized Sleep Experiences®, Know Better Sleep®, Pillow[ology]®, PillowFit®, Probably the Best Bed in the World®, Sleep Number Inner Circle®, Tech-e®, Smart Bed Technology®, The Only Bed That Knows You®, We Make Beds Smart®, and What’s Your Sleep Number?®. We have several trademarks that are the subject of pending applications, including SleepIQ Kids™, SleepIQ LABS™, Sleep for the Future^SM, Smart Bed For Smart Kids™, It™, The It Bed™, The Only Bed That Grows With Them™, and Tonight Bedtime. Tomorrow The World™.  Each registered mark is renewable indefinitely as long as the mark remains in use and/or is not deemed to be invalid or canceled. We also have a number of common law trademarks, including ActiveComfort™, Auto Snore™, CoolFit™, DualAir™, DualTemp™, Firmness Control™, FlexFit™, In Balance™, PartnerSnore™, Rapid Sleep Onset™, Responsive Air™, Say Hello to It™, Sleep Number 360™, the SleepIQ LABS logo, The Bed Reborn™, The Bed That Moves You™ and our bed model names. Several of our trademarks have been registered, or are the subject of pending applications for registration, in various foreign countries. We also have other intellectual property rights related to our products, processes and technologies, including trade secrets, trade dress and copyrights. We protect and enforce our intellectual property rights, including through litigation as necessary.

Industry and Competition

The U.S. bedding industry is a mature and generally stable industry. According to the International Sleep Products Association (ISPA), the industry has grown by approximately 5% over last 20 years and at an estimated 6%, on average, over the past six years. We believe that industry unit growth has been primarily driven by population growth, an increase in the number of homes (including secondary residences) and the increased size of homes. We believe growth in average wholesale prices resulted from a shift to both larger and higher-quality beds, which are typically more expensive. According to ISPA, industry wholesale shipments of mattresses and foundations (excluding adjustable bases) were estimated to be $8.2 billion in 2016 compared to $8.0 billion in 2015. We estimate that traditional innerspring mattresses represent approximately 73% of total U.S. bedding sales (based on 2015 sales). Furniture/Today, a furniture industry trade publication, has ranked Select Comfort as the 5th largest mattress manufacturer and 3rd largest U.S. bedding retailer for 2015, with a 5.0% market share of industry revenue.

Manufacturers in the bedding industry compete on price, quality, brand name recognition, product availability and product performance, including the perceived levels of comfort and support provided by a mattress. There is a high degree of concentration among manufacturers, who produce innerspring, memory foam and hybrid beds, under nationally recognized brand names, including Tempur Sealy, Stearns & Foster, Serta and Simmons. Recently, numerous (greater than 50) direct-to-consumer companies have entered the market, offering “bed-in-a-box” products to consumers primarily through the Internet. These companies market directly to consumers, competing primarily on convenience of online shopping and speed of delivery. Their products are generally foam-based and undifferentiated in terms of sleep benefits. Select Comfort is differentiated from competitors through its consumer innovation strategy and direct-to-consumer model with 540 Sleep Number stores nationwide. We compete with our proprietary innovations, including our signature Sleep Number adjustability and SleepIQ Technology, that provide meaningful sleep benefits for our customers.

The retail bedding industry is fragmented and also highly competitive. Our Company-Controlled distribution channel is exclusive, and we compete against regional and local specialty bedding retailers, home furnishing stores, mass merchants, national discount stores and online marketers. Our exclusive distribution is highly differentiated, and offers a retail-leading customer experience.

Governmental Regulation and Compliance

As a vertically integrated manufacturer and retailer, we are subject to extensive federal, state and local laws and regulations affecting all aspects of our business.

As a manufacturer, we are committed to product quality and safety, including adherence to all applicable laws and regulations affecting our products. Compliance with federal fire retardant standards developed by the U.S. Consumer Product Safety Commission, including rigorous and costly testing, has increased the cost and complexity of manufacturing our products and may adversely impact the speed and cost of product development efforts. Further, our manufacturing and other business operations and facilities are or may

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become subject to additional federal, state or local laws or regulations relating to supply chain transparency, conflict minerals sourcing and disclosure, end-of-life disposal and recycling requirements and other laws or regulations relating to environmental protection and health and safety requirements. We are not aware of any national or local environmental laws or regulations that may require material capital expenditures or which may materially affect our competitive position or our operational results, financial position or cash flows.

As a retailer, we are subject to additional laws and regulations that apply to retailers generally and govern the marketing and sale of our products and the operation of both our retail stores and our e-commerce activities. Many of the statutory and regulatory requirements which impact our retail and e-commerce operations are consumer-focused and pertain to activities such as the advertising and selling of credit-based promotional offers, truth-in-advertising, privacy, “do not call/mail” requirements, warranty disclosure, delivery timing requirements, accessibility and similar requirements.

All of our operations are or may become subject to federal, state and local labor laws including, but not limited to, those relating to occupational health and safety, employee privacy, wage and hour, overtime pay, harassment and discrimination, equal opportunity and employee leaves and benefits. We are also subject to existing and emerging federal and state laws relating to data security.

It is our policy and practice to comply with all legal and regulatory requirements and our procedures and internal controls are designed to promote such compliance.

Customers

No single customer accounts for 10% or more of our net sales.

Seasonality

Our business is modestly impacted by seasonal influences inherent in the U.S. bedding industry and general retail shopping patterns. The U.S. bedding industry generally experiences lower sales in the second quarter of the calendar year and increased sales during selected holiday or promotional periods.

Working Capital

We are able to operate with minimal working capital requirements because we sell directly to customers, utilize a primarily hybrid "make-to-stock" production process and operate retail stores that serve mainly as showrooms. We have historically generated sufficient cash flows to self-fund operations through an accelerated cash-conversion cycle. As of December 31, 2016, we had $150 million net aggregate availability under our $150 million credit facility. Our credit facility contains an accordion feature that allows us to increase the amount of the line up to $200 million in total availability, subject to lender approval.

Qualified customers are offered revolving credit to finance purchases through a private-label consumer credit facility provided by Synchrony Bank. Approximately 45% of our net sales in 2016 were financed by Synchrony Bank. Our current agreement with Synchrony Bank expires December 31, 2020, subject to earlier termination upon certain events and subject to automatic extensions. We pay Synchrony Bank a fee for extended credit promotional financing offers. Under the terms of our agreement, Synchrony Bank sets the minimum acceptable credit ratings, the interest rates, fees and all other terms and conditions of the customer accounts, including collection policies and procedures. As the receivables are owned by Synchrony Bank, at no time are the receivables purchased or acquired from us. We are not liable to Synchrony Bank for our customers' credit defaults. In connection with all purchases financed under these arrangements, Synchrony Bank pays us an amount equal to the total amount of such purchases, net of promotional related discounts, upon delivery to the customer. Customers that do not qualify for credit under our agreement with Synchrony Bank may apply for credit under a secondary program that we offer through another provider.

Employees

At December 31, 2016, we employed 3,768 persons, including 2,033 retail sales and support employees, 293 customer service employees, 969 manufacturing and logistics employees, and 473 management and administrative employees. Approximately 110 of our employees were employed on a part-time or temporary basis at December 31, 2016. Except for managerial employees and professional support staff, all of our employees are paid on an hourly basis (plus commissions for sales professionals). Additionally, we provide various broad-participation incentive compensation programs tied to various performance objectives. None of our employees are represented by a labor union or covered by a collective bargaining agreement. In recent periods, we have focused on improving our employee engagement levels, which we believe are important to driving both organizational productivity and customer satisfaction.

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Executive Officers of the Registrant

SHELLY R. IBACH, 57

President and Chief Executive Officer (Joined the Company in April 2007 and was promoted to President and CEO in June 2012)

Shelly R. Ibach, Sleep Number^® setting 40, serves as the President and Chief Executive Officer (CEO) for Select Comfort (NASDAQ: SCSS). From June 2011 to June 2012, Ms. Ibach served as the company’s Executive Vice President and Chief Operating Officer and from October 2008 to June 2011, she served as Executive Vice President, Sales & Merchandising. Ms. Ibach joined the company in April 2007 as Senior Vice President of U.S. sales for company-owned channels. Before joining the company, Ms. Ibach was Senior Vice President and General Merchandise Manager for Macy’s home division. From 1982 to 2005, Ms. Ibach held various leadership and executive positions within Department Stores at Target Corporation.

MELISSA BARRA, 45

Senior Vice President, Chief Strategy and Customer Relationship Officer (Joined the Company in 2013 and was promoted to current role in January 2015)

Melissa Barra, Sleep Number^® setting 30, serves as the Senior Vice President, Chief Strategy and Customer Relationship Officer. Ms. Barra was Vice President, Consumer Insights and Strategy from February 2013 to January 2015. Prior to joining Select Comfort in February 2013, Ms. Barra was Vice President, Process Reengineering Officer for Best Buy Co., Inc. from 2011 to 2012. In a dual role, she also served as Vice President, Finance, New Business Customer Solutions Group from 2010 to 2012. From 2005 to 2010, she held leadership positions in Strategic Alliances and Corporate Development for Best Buy. Prior to Best Buy, Ms. Barra held corporate finance and strategy leadership roles in companies in the U.S. and internationally, including Grupo Futuro S.A., Citibank and GE Capital.

ANNIE L. BLOOMQUIST, 47

Senior Vice President and Chief Product Officer (Joined the Company in 2008 and was promoted to current role in June 2012)

Annie L. Bloomquist, Sleep Number^® setting 25, serves as the Senior Vice President and Chief Product Officer for Select Comfort and leads product innovation including product management, development, merchandise buying, planning and R&D for all Sleep Number products, including SleepIQ Labs. Ms. Bloomquist was the Chief Product and Merchandising Officer from June 2011 to June 2012. Ms. Bloomquist joined Select Comfort in May 2008 as Vice President and General Merchandise Manager. Prior to joining Select Comfort, Ms. Bloomquist held leadership positions in product and merchandising at Macy’s and Marshall Field’s Department Stores for Target Corporation from 1996 to 2008.

KEVIN K. BROWN, 48

Senior Vice President and Chief Marketing Officer (Joined the Company in 2013)

Kevin K. Brown, Sleep Number^® setting 35, serves as the Senior Vice President and Chief Marketing Officer for Select Comfort. Prior to joining Select Comfort in January 2014, Mr. Brown served as Group Vice President, Chief Marketing Officer for Meijer, Inc., a regional chain of retail supercenters, from 2011 to 2013. From 2007 to 2011, Mr. Brown held executive marketing leadership roles at Sears Holdings Corporation, including Vice President, Chief Marketing Officer for the home appliances business unit. Previously, Mr. Brown held the position of Senior Vice President, Marketing for Jo-Ann Stores, Inc., from 2004 to 2006. Prior to Jo-Ann Stores, he was an associate partner for Accenture.

DAVID R. CALLEN, 50

Senior Vice President and Chief Financial Officer (Joined the Company in 2014)

David R. Callen, Sleep Number^® setting 40, serves as the Senior Vice President and Chief Financial Officer for Select Comfort. Prior to joining Select Comfort in April 2014, Mr. Callen served as the Principal Financial Officer, Vice President, Finance and Treasurer for Ethan Allen Interiors, Inc., from 2007 to 2014. Previously, Mr. Callen served for more than 15 years in increasingly responsible international financial management positions, emphasizing brand support and manufacturing across industries including automotive, dental, outdoor recreational products, high tech and public accounting.

ANDY P. CARLIN, 53

Senior Vice President and Chief Sales and Services Officer (Joined the Company in 2008 and was promoted to current role in April 2016)

Andy P. Carlin, Sleep Number^® setting 55, serves as the Executive Vice President and Chief Sales and Service Officer for Select Comfort and leads all sales channels, real estate and home delivery operations. From June 2012 to April 2016, Mr. Carlin was Senior Vice President and Chief Sales Officer; from May 2011 to June 2012, Mr. Carlin was the Vice President and Chief Sales Officer; and from January 2009 to May 2011, he was the Vice President of U.S. Retail Sales. Mr. Carlin joined Select Comfort in January 2008 as Regional Vice President, East Region. Prior to joining Select Comfort, Mr. Carlin spent more than 20 years in sales leadership roles for companies including Senior Vice President of Store Operations at Gander Mountain from 2003 to 2008, Kohl’s Department Stores from 1995 to 2003 and the department store division of Target Corporation from 1986 to 1995.

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PATRICIA A. DIRKS, 60

Senior Vice President and Chief Human Capital Officer (Joined the Company in 2014)

Patricia A. Dirks (Tricia), Sleep Number^® setting 35, serves as the Senior Vice President and Chief Human Capital Officer for Select Comfort and leads all human capital functions. Prior to joining Select Comfort in April 2014, Ms. Dirks served as Senior Vice President of Organizational Effectiveness for Target Corporation. From 2004 to 2011, Ms. Dirks was Vice President Human Resources for Target Corporation. Prior to 2004, Ms. Dirks held various human resources leadership positions at Marshall Field’s Department Stores for Target Corporation, including Senior Vice President of Human Resources.

MARK A. KIMBALL, 58

Senior Vice President and Chief Legal and Risk Officer and Secretary (Joined the Company in 1999)

Mark A. Kimball, Sleep Number^® setting 55, serves as the Senior Vice President, Chief Legal and Risk Officer and Secretary. From August 2003 to June 2011, Mr. Kimball held the position of Senior Vice President, General Counsel, Chief Administrative Officer and Secretary. From July 2000 to August 2003, Mr. Kimball served as Senior Vice President, Human Resources and Legal, General Counsel, Chief Administrative Officer and Secretary. From May 1999 to July 2000, Mr. Kimball served as the company’s Senior Vice President, Chief Administrative Officer, General Counsel and Secretary. For more than five years prior to joining Select Comfort, Mr. Kimball was a partner in the law firm of Oppenheimer Wolff & Donnelly LLP practicing in the area of corporate finance.

SURESH KRISHNA, 48

Senior Vice President and Chief Operations, Supply Chain and Lean Officer (Joined the Company in 2016)

Suresh Krishna, Sleep Number^® setting 40, serves as the Senior Vice President and Chief Operations, Supply Chain and Lean Officer of Select Comfort. Prior to joining Select Comfort, Mr. Krishna served as Vice President of Global Operations and Integration at Polaris from 2010 to 2014, leading a 6,500+ person operations organization and driving a culture change to embrace lean across the entire enterprise. In July 2014, he was promoted to Vice President and Business Unit Head of Europe Middle East & Africa (EMEA) for Polaris, where he was responsible for a full P&L with factories, R&D centers, subsidiaries, distributors and dealer networks across more than 60 countries. From 2007 to 2010, he served as Vice President Global Operations, Supply Chain and IT at a division of UTC Fire & Security. Krishna also served in a variety of roles for Diageo, including Vice President of Supply Chain, North America; as a Program Director for an ERP implementation; and as a Director of Strategic Planning and Finance. Earlier in his career he was an associate at Booz Allen & Hamilton.

J. HUNTER SAKLAD, 47

Senior Vice President, Chief Information Officer (Joined the Company in 2004 and was promoted to current role in December 2012)

Hunter Saklad, Sleep Number^® setting 50, serves as the Senior Vice President and Chief Information Officer at Select Comfort. From June 2011 to December 2012, he served as the Vice President, Consumer Insight and Strategy at Select Comfort. From March 2006 to June 2011, he was Vice President of Finance and held a variety of positions across Finance serving business partners in marketing, sales, supply chain, FP&A, investor relations and treasury. Mr. Saklad joined Select Comfort in October 2004 as Sr. Director of Finance. Prior to joining Select Comfort, Mr. Saklad held finance leadership roles at Ford Motor Company and Visteon.

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Available Information

We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the Securities and Exchange Commission (SEC). Copies of our reports, proxy statements and other information can be read and copied at:

SEC Public Reference Room

100 F Street NE

Washington, D.C. 20549

Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC’s home page at http://www.sec.gov.

Our corporate Internet website is www.SleepNumber.com. Through a link to a third-party content provider, our corporate website provides free access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after electronic filing with the SEC. These documents are posted on our website at www.SleepNumber.com — select the "About" link, the “Investor Relations” link and then the “SEC Filings” link. The information contained on our website or connected to our website is not incorporated by reference into this Form 10-K and should not be considered part of this report.

We also make available, free of charge on our website, the charters of the Audit Committee, Management Development and Compensation Committee, and Corporate Governance and Nominating Committee as well as our Code of Business Conduct (including any amendment to, or waiver from, a provision of our Code of Business Conduct) adopted by our Board. These documents are posted on our website — select the "About" link, the “Investor Relations” link and then the “Corporate Governance” link.

Copies of any of the above referenced information will also be made available, free of charge, upon written request to:

Select Comfort Corporation

Investor Relations Department

9800 59th Avenue North

Minneapolis, MN 55442

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ITEM 1A. RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the specific risks set forth below and other matters described in this Annual Report on Form 10-K before making an investment decision. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties, including risks and uncertainties not presently known to us or that we currently see as immaterial, may also harm our business. If any of these risks occur, our business, results of operations, cash flows and financial condition could be materially and adversely affected.

Current and future economic conditions could materiallyadversely affect our sales, profitability, cash flows and financial condition.

Our success depends significantly upon discretionary consumer spending, which is influenced by a number of general economic factors, including without limitation economic growth, consumer confidence, the housing market, employment and income levels, interest rates, inflation, taxation and the level of customer traffic in malls and shopping centers. Adverse trends in any of these economic factors may adversely affect our sales, profitability, cash flows and financial condition.

Our future growth and profitability depends upon the effectiveness and efficiency of our marketing programs.

We are highly dependent on the effectiveness of our marketing messages and the efficiency of our advertising expenditures in generating consumer awareness and sales of our products. We continue to evolve our marketing strategies, adjusting our messages, the amount we spend on advertising and where we spend it. We may not always be successful in developing effective messages, as the consumer and competition changes, and in achieving efficiency in our advertising expenditures.

Consumers are increasingly using digital tools as a part of their shopping experience. As a result, our future growth and profitability will depend in part on (i) the effectiveness and efficiency of our on-line experience including advertising and search optimization programs in generating consumer awareness and sales of our products, (ii) our ability to prevent confusion among consumers that can result from search engines that allow competitors to use or bid on our trademarks to direct consumers to competitors’ websites, (iii) our ability to prevent Internet publication of false or misleading information regarding our products or our competitors’ products; (iv) the nature and tone of consumer sentiment published on various social media sites; and (v) the stability of our website. In recent periods, a number of direct-to-consumer, Internet-based retailers have emerged and have driven up the cost of basic search terms, which has and may continue to increase the cost of our Internet-based marketing programs.

If our marketing messages are ineffective or our advertising expenditures and other marketing programs, including digital programs, are inefficient in creating awareness and consideration of our products and brand name, in driving consumer traffic to our website or stores, our sales, profitability, cash flows and financial condition may be adversely impacted. In addition, if we are not effective in preventing the publication of confusing, false or misleading information regarding our brand or our products, or if there was significant negative consumer sentiment on social media regarding our brand or our products, our sales, profitability, cash flows and financial condition may be adversely impacted.

Our future growth and profitability depends on our ability to execute our Company-Controlled distribution strategy.

The vast majority of our sales occur through our Company-Controlled distribution channel, including our retail stores, and this Company-Controlled distribution channel represents our largest opportunity for growth in sales and improvement in profitability. Our retail stores carry significant fixed costs. We also make significant capital expenditures as we open new stores and remodel or reposition existing stores. We are highly dependent on our ability to maintain and increase sales per store to cover these fixed expenses, provide a return on our capital investments and improve our operating margins.

Many of our stores are mall-based. We depend on the continued popularity of malls as shopping destinations and the ability of mall anchor tenants and other attractions to generate customer traffic for our retail stores. Any decrease in mall traffic could adversely affect our sales, profitability, cash flows and financial condition.

Our Company-Controlled distribution strategy results in relatively few points of distribution, including 540 retail stores in 49 U.S. states as of the end of 2016. Several of the mattress manufacturers and retailers with which we compete have significantly more points of distribution than we do, which makes us highly dependent on our ability to drive consumers to our points of distribution in order to gain market share.

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Our longer term Company-Controlled distribution strategy is also dependent on our ability to renew existing store leases and to secure suitable locations for new store openings, in each case on a cost-effective basis. We may encounter higher than anticipated rents and other costs in connection with managing our retail store base, or may be unable to find or obtain suitable new locations.

Failure to achieve and maintain a high level of product quality could negatively impact our sales, profitability, cash flows and financial condition.

Our products are highly differentiated from traditional innerspring mattresses and from viscoelastic foam mattresses, which have little or no technology and do not rely on electronics and air control systems. As a result, our beds may be susceptible to failures that do not exist with traditional or viscoelastic foam mattresses. Failure to achieve and maintain acceptable quality standards could impact consumer acceptance of our products or could result in negative media and Internet reports or owner dissatisfaction that could negatively impact our brand image and sales levels.

In addition, a decline in product quality could result in an increase in return rates and a corresponding decrease in sales, or an increase in product warranty claims in excess of our warranty reserves. An unexpected increase in return rates or warranty claims could harm our sales, profitability, cash flows and financial condition.

As a consumer innovation company with differentiated products, we face an inherent risk of exposure to product liability claims if the use of our products is alleged to have resulted in personal injury or property damage. If any of our products proves to be defective, we may be required to recall or redesign such products. We have at times experienced increased returns and adverse impacts on sales, as well as product liability litigation, as a result of media reports related to the alleged propensity of our products to develop mold. We may experience additional adverse impacts on sales and additional litigation if any similar media reports were to occur in the future. We maintain insurance against some forms of product liability claims, but such coverage may not be adequate for liabilities actually incurred. A successful claim brought against us in excess of available insurance coverage, or any claim or product recall that results in significant adverse publicity against us, may have a material adverse effect on our sales, profitability, cash flows and financial condition.

Our future growth and profitability depends in part on our ability to continue to improve and expand our product line and to successfully execute new product introductions.

As described in greater detail below, the mattress industry, as well as the market for sleep monitoring products, are both highly competitive, and our ability to compete effectively and to profitably grow our market share depends in part on our ability to continue to improve and expand our product line of adjustable firmness air beds, SleepIQ technology and related accessory products. We incur significant research and development and other expenditures in the pursuit of improvements and additions to our product line. If these efforts do not result in meaningful product improvements or new product introductions, or if we are not able to gain widespread consumer acceptance of product improvements or new product introductions, our sales, profitability, cash flows and financial condition may be adversely affected. In addition, if any significant product improvements or new product introductions are not successful, our reputation and brand image may be adversely affected.

Beginning in 2017, we plan to introduce a new line of mattresses to replace our current line of mattresses. This new product launch will result in significant transition costs in our supply chain and retail stores. If we are not able to gain widespread consumer acceptance of this new product line, or if we do not successfully execute the new product introduction effectively and efficiently, our sales, profitability, cash flows and financial condition may be adversely affected.

Significant competition could adversely affect our business.

Because of the vertical integration of our business model, our products and distribution channels face significant competition from both manufacturers of different types of mattresses and a variety of retailers. Our SleepIQ technology also faces significant competition from various manufacturers and retailers of sleep tracking and monitoring products.

The mattress industry is characterized by a high degree of concentration among the largest manufacturers of innerspring mattresses and viscoelastic foam mattresses and one dominant national mattress retailer. Many newer competitors (approximately 50 to 100) in the mattress industry have begun to offer “bed-in-a-box” or similar products directly to consumers through the Internet and other distribution channels.

A variety of sleep tracking and monitoring products that compete with our SleepIQ technology have been introduced by various manufacturers and retailers, both within and outside of the traditional mattress industry.

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Some of the manufacturers that we compete with have substantially greater financial, marketing and manufacturing resources and greater brand name recognition than we do and sell products through broader and more established distribution channels. Our national, exclusive distribution competes with other retailers who generally provide a wider selection of mattress alternatives than we offer. A number of these retailers also have more points of distribution and greater brand name recognition than we do. In recent periods, a number of direct-to-consumer, Internet-based retailers have emerged and have driven up the cost of basic search terms, which has and may continue to increase the cost of our Internet-based marketing programs.

These manufacturing and retailing competitors, or new entrants into the market, may compete aggressively and gain market share with existing or new products, and may pursue or expand their presence in the adjustable firmness air bed segment of the market as well as in the market for sleep tracking and monitoring products. We have limited ability to anticipate the timing and scale of new product introductions, advertising campaigns or new pricing strategies by our competitors, which could inhibit our ability to retain or increase market share, or to maintain our product margins.

If we are unable to effectively compete with other manufacturers and retailers of mattress and sleep tracking and monitoring products, our sales, profitability, cash flows and financial condition may be adversely impacted.

Our intellectual property rights may not prevent others from using our technology or trademarks in connection with the sale of competitive products. We may be subject to claims that our products, processes or trademarks infringe intellectual property rights of others.

We own various U.S. and foreign patents and patent applications related to certain elements of the design and function of our beds and related products. We own numerous registered and unregistered trademarks and trademark applications, including in particular our Sleep Numberand SleepIQ trademarks, as well as other intellectual property rights, including trade secrets, trade dress and copyrights, which we believe have significant value and are important to the marketing of our products. These intellectual property rights may not provide sufficient protection against infringement or piracy, may not prevent competitors from developing and marketing products that are similar to or competitive with our beds or other products, and may be costly and time-consuming to protect and enforce. Our patents are also subject to varying expiration dates. In particular, one of our U.S. patents related to a firmness control system for use with an adjustable air mattress will expire in July of 2017. In addition, the laws of some foreign countries may not protect our intellectual property rights and confidential information to the same extent as the laws of the United States. If we are unable to protect and enforce our intellectual property, we may be unable to prevent other companies from using our technology or trademarks in connection with competitive products, which could adversely affect our sales, profitability, cash flows and financial condition.

We may be subject to claims that our products, processes or trademarks infringe the intellectual property rights of others. The defense of these claims, even if we are ultimately successful, may result in costly litigation, and if we are not successful in our defense, we could be subject to injunctions, liability for damages or royalty obligations and our sales, profitability, cash flows and financial condition could be adversely affected.

A reduction in the availability of credit to consumers generally or under our existing consumer credit programs could harm our sales, profitability, cash flows and financial condition.

A significant percentage of our sales are made under consumer credit programs through third parties. The amount of credit available to consumers may be adversely impacted by macroeconomic factors that affect the financial position of consumers and as suppliers of credit adjust their lending criteria. In addition, changes in federal regulations effective in 2010 placed additional restrictions on all consumer credit programs, including limiting the types of promotional credit offerings that may be offered to consumers.

Synchrony Bank provides credit to our customers through a private label credit card agreement that is currently scheduled to expire on December 31, 2020, subject to earlier termination upon certain events. Synchrony Bank has discretion to control the content of financing offers to our customers and to set minimum credit standards under which credit is extended to customers.

Reduction of credit availability due to changing economic conditions, changes in credit standards under our private label credit card program or changes in regulatory requirements, or the termination of our agreement with Synchrony Bank, could harm our sales, profitability, cash flows and financial condition.

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We utilize “just-in-time” manufacturing processes with minimal levels of inventory, which could leave us vulnerable to shortages in supply of components that may harm our ability to satisfy consumer demand and may adversely impact our sales and profitability.

A significant percentage of our products are assembled after we receive orders from customers utilizing “just-in-time” manufacturing processes with minimal levels of raw materials, work-in-process inventories and finished goods inventories. Lead times for ordered components may vary significantly. In addition, some components used to manufacture our products are provided on a sole source basis. Any unexpected shortage of materials caused by any disruption of supply or an unexpected increase in the demand for our products, could lead to delays in shipping our beds to customers. Any such delays could adversely affect our sales, customer satisfaction, profitability, cash flows and financial condition.

We rely upon several key suppliers that are, in some instances, the only source of supply currently used by us for particular materials, components or services. A disruption in the supply or substantial increase in cost of any of these products or services could harm our sales, profitability, cash flows and financial condition.

We currently obtain all of the materials and components used to produce our beds from outside sources including some who are located outside the United States. In several cases, including our proprietary air chambers, our proprietary blow-molded foundations, our adjustable foundations, various components for our Firmness Control systems, as well as fabrics and zippers, we have chosen to obtain these materials and components from suppliers who serve as the only source of supply, or who supply the vast majority of our needs of the particular material or component. While we believe that these materials and components, or suitable replacements, could be obtained from other sources, in the event of a disruption or loss of supply of relevant materials or components for any reason, we may not be able to find alternative sources of supply, or if found, may not be found on comparable terms. If our relationship with the primary supplier of our air chambers, the supplier of our blow-molded foundations or the supplier of our adjustable foundations is terminated, we could have difficulty in replacing these sources since there are relatively few other suppliers presently capable of manufacturing these components.

Similarly, we rely on UPS and other carriers to deliver some of our products to customers on a timely and cost-effective basis. Any significant delay in deliveries to our customers could lead to increased returns and cause us to lose sales. Any increase in freight charges could increase our costs of doing business and harm our sales, profitability, cash flows and financial condition.

Fluctuations in commodity prices could result in an increase in component costs and/or delivery costs.

Our business is subject to significant increases or volatility in the prices of certain commodities, including but not limited to fuel, oil, natural gas, rubber, cotton, plastic resin, steel and chemical ingredients used to produce foam. Increases in prices of these commodities or other inflationary pressures may result in significant cost increases for our raw materials and product components, as well as increases in the cost of delivering our products to our customers. To the extent we are unable to offset any such increased costs through value engineering and similar initiatives, or through price increases, our profitability, cash flows and financial condition may be adversely impacted. If we choose to increase prices to offset the increased costs, our sales volumes could be adversely impacted.

Our business is subject to risks inherent in global sourcing activities.

Our air chambers and some of our other components are manufactured outside the United States, and therefore are subject to risks associated with foreign sourcing of materials, including but not limited to:

• Political instability resulting in disruption of trade;

• Existing or potential duties, tariffs or quotas on certain types of goods that may be imported into the United States;

• Disruptions in transportation due to acts of terrorism, shipping delays, foreign or domestic dock strikes, customs inspections or other factors;

• Foreign currency fluctuations; and

• Economic uncertainties, including inflation.

These factors could increase our costs of doing business with foreign suppliers, lead to inadequate inventory levels or delays in shipping beds to our customers, which could harm our sales, customer satisfaction, profitability, cash flows and financial condition.

Disruption of operations in either of our two main manufacturing facilities could increase our costs of doing business or lead to delays in shipping our beds.

We have two main manufacturing plants, which are located in Irmo, South Carolina and Salt Lake City, Utah. A significant percentage of our products are assembled to fulfill orders rather than stocking finished goods inventory in our plants or stores. Therefore, the

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disruption of operations of either of our two main manufacturing facilities for a significant period of time may increase our costs of doing business and lead to delays in shipping our beds to customers. Such delays could adversely affect our sales, customer satisfaction, profitability, cash flows and financial condition.

Our business is subject to a wide variety of government laws and regulations. These laws and regulations, as well as any new or changed laws or regulations, could disrupt our operations or increase our compliance costs. Failure to comply with such laws and regulations could have further adverse impact.

We are subject to a wide variety of laws and regulations relating to the bedding industry or to various aspects of our business. Laws and regulations at the federal, state and local levels frequently change and we cannot always reasonably predict the impact from, or the ultimate cost of compliance with, future regulatory or administrative changes. Changes in law, the imposition of new or additional regulations or the enactment of any new or more stringent legislation that impacts employment and labor, trade, advertising and marketing practices, pricing, consumer credit offerings, product testing and safety, transportation and logistics, health care, tax, accounting, privacy and data security, health and safety or environmental issues, among others, could require us to change the way we do business and could have a material adverse impact on our sales, profitability, cash flows and financial condition. New or different laws or regulations could increase direct compliance costs for us or may cause our vendors to raise the prices they charge us because of increased compliance costs. Further, the adoption of a multi-layered regulatory approach to any one of the state or federal laws or regulations to which we are currently subject, particularly where the layers are in conflict, could require alteration of our manufacturing processes or operational parameters which may adversely impact our business.

Legislative or regulatory changes that impact our relationship with our workforce, such as minimum wage requirements or health insurance or other employee benefits mandates, could increase our expenses and adversely affect our operations.

While it is our policy and practice to comply with legal and regulatory requirements and our procedures and internal controls are designed to promote such compliance, we cannot assure that all of our operations will comply with all such legal and regulatory requirements. Further, laws and regulations change over time and we may be required to incur significant expenses and/or to modify our operations in order to ensure compliance. This could harm our profitability or financial condition. If we are found to be in violation of any laws or regulations, we could become subject to fines, penalties, damages or other sanctions as well as potential adverse publicity or litigation exposure. This could adversely impact our business, reputation, sales, profitability, cash flows or financial condition.

Regulatory requirements related to flammability standards for mattresses may increase our product costs and increase the risk of disruption to our business.

The federal Consumer Product Safety Commission adopted new flammability standards and related regulations which became effective nationwide in July 2007 for mattresses and mattress and foundation sets. Compliance with these requirements has resulted in higher materials and manufacturing costs for our products, and has required modifications to our information systems and business operations, further increasing our costs and negatively impacting our capacity.

These regulations require manufacturers to implement quality assurance programs and encourage manufacturers to conduct random testing of products. These regulations also require maintenance and retention of compliance documentation. These quality assurance and documentation requirements are costly to implement and maintain. If any product testing, other evidence, or regulatory inspections yield results indicating that any of our products may not meet the flammability standards, we may be required to temporarily cease production and distribution and/or to recall products from the field, and we may be subject to fines or penalties, any of which outcomes could harm our business, reputation, sales, profitability, cash flows and financial condition.

Pending or unforeseen litigation and the potential for adverse publicity associated with litigation could adversely impact our business, reputation, financial results or financial condition.

We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. We currently do not expect the outcome of any pending matters to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more pending claims asserted against us, or claims that may be asserted in the future that we are currently not aware of, or adverse publicity resulting from any such litigation, could adversely impact our business, reputation, sales, profitability, cash flows and financial condition.

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Any improvements or upgrades to our management information systems that may be required to meet the evolving needs of our business as well as existing and emerging regulatory requirements may be costly to implement and may take longer or require greater resources than anticipated, and may result in disruptions to our systems or business.

We depend on our management information systems for many aspects of our business. In the fourth quarter of 2015, we implemented a new ERP system and continue to implement operational improvements under this new system. If our new systems are disrupted in any material way, or improvements or upgrades are required to meet the evolving needs of our business and existing and emerging regulatory requirements, we may be required to incur significant capital expenditures in the pursuit of improvements or upgrades to our management information systems. These efforts may take longer and may require greater financial and other resources than anticipated, may cause distraction of key personnel, and may cause short-term disruptions to our existing systems and our business. Any of these outcomes could impair our ability to achieve critical strategic initiatives and could adversely impact our sales, profitability, cash flows and financial condition.

Our information systems may be subject to attacks by hackers or other cyber threats that could compromise the security of our systems, which could substantially disrupt our business and could result in the breach of consumers' or employees' private data.

Our information systems contain personal information related to our customers and employees in the ordinary course of our business, such as credit card and demographic information of our customers, SleepIQ data from our customer base and social security numbers and demographic information of our employees. While we maintain security measures to protect this information, a breach of these security measures, such as through third-party action, employee error, malfeasance or otherwise, could compromise the security of our customers’ and employees’ personal information. As the techniques used to breach such security measures change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. Any failure of our systems and processes to adequately protect customer or employee personal information from theft or loss could adversely impact our business, reputation, sales, profitability, cash flows and financial condition.

Our future growth and profitability depends in part upon our ability to attract, retain and motivate qualified personnel.

As a vertically integrated manufacturer and retailer, our future growth and profitability will depend in part upon our ability to attract, retain and motivate qualified personnel in a wide variety of areas to execute our growth strategy, including qualified management and executive personnel and qualified retail sales professionals and managers. The failure to attract, retain and motivate qualified personnel may hinder our ability to execute our business strategy and growth initiatives and may adversely impact our sales, profitability, cash flows and financial condition.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

17

ITEM 2.PROPERTIES

Retail Locations

We currently lease all of our existing retail store locations and expect that our policy of leasing stores, rather than owning stores, will continue. We lease our retail stores under operating leases which, in addition to the minimum lease payments, require payment of a proportionate share of the real estate taxes and certain building operating expenses. Our retail store leases generally provide for an initial lease term of five to 10 years. In addition, our mall-based retail store leases may require payment of contingent rent based on net sales in excess of certain thresholds. Certain retail store leases may contain options to extend the term of the original lease.

The following table summarizes the geographic location of our 540 retail stores as of December 31, 2016:

	Retail Stores		Retail Stores		Retail Stores
Alabama	8	Maine	2	Oklahoma	4
Alaska	1	Maryland	12	Oregon	6
Arizona	9	Massachusetts	10	Pennsylvania	20
Arkansas	4	Michigan	15	Rhode Island	1
California	64	Minnesota	14	South Carolina	7
Colorado	13	Mississippi	5	South Dakota	2
Connecticut	6	Missouri	13	Tennessee	11
Delaware	2	Montana	4	Texas	49
Florida	38	Nebraska	3	Utah	4
Georgia	20	Nevada	5	Vermont	1
Idaho	3	New Hampshire	4	Virginia	18
Illinois	20	New Jersey	15	Washington	13
Indiana	11	New Mexico	4	West Virginia	2
Iowa	8	New York	17	Wisconsin	11
Kansas	7	North Carolina	14	Wyoming	1
Kentucky	8	North Dakota	4
Louisiana	8	Ohio	19	Total	540

Manufacturing, Distribution and Headquarters

We lease our 159,000-square-foot corporate headquarters in the Minneapolis, Minnesota area. The lease commenced in November 2007 and runs through October 2017.

We also lease approximately 122,000 square feet in the Minneapolis, Minnesota area that includes our research and development department, customer service department and a distribution center that accepts returns, fulfills accessory orders and processes warranty claims. This lease runs through October 2017.

We have entered into a new lease to replace our current corporate headquarters and a second building also expiring in October 2017. The new lease is for approximately 211,000 square feet and is located in Minneapolis, Minnesota. The lease term will commence in November 2017 and runs through October 2032. The lease includes three five-year renewal options.

We lease two manufacturing and distribution centers in Irmo, South Carolina and Salt Lake City, Utah of approximately 151,000 square feet and approximately 101,000 square feet, respectively. The Irmo facility lease runs through June 2026, with two five-year renewal options. The Salt Lake City facility lease runs through July 2020, with two five-year renewal options. We also lease a storage facility in Salt Lake City of approximately 57,000 square feet through April 2020.

We lease three buildings used for manufacturing purposes for our Comfortaire business in Greenville, South Carolina of approximately 65,000 total square feet. The current lease term for these three buildings runs through June 2017.

We lease one facility for our SleepIQ LABS operations in San Jose, California of approximately 13,050 square feet which runs through August 2018 and contains one three-year renewal option.

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ITEM 3. LEGAL PROCEEDINGS

We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with generally accepted accounting principles in the United States, we record a liability in our consolidated financial statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. With respect to currently pending legal proceedings, we have not established an estimated range of reasonably possible additional losses either because we believe that we have valid defenses to claims asserted against us or the proceeding has not advanced to a stage of discovery that would enable us to establish an estimate. We currently do not expect the outcome of these matters to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us could adversely impact our consolidated results of operations, financial position or cash flows. We expense legal costs as incurred.

On January 12, 2015, Plaintiffs David and Katina Spade commenced a purported class action lawsuit in New Jersey state court against Select Comfort alleging that Select Comfort violated New Jersey consumer statutes by failing to provide to purchasing consumers certain disclosures required by the New Jersey Furniture Regulations. It is undisputed that plaintiffs suffered no actual damages or in any way relied upon or were impacted by the alleged omissions. Nonetheless, on behalf of a purported class of New Jersey purchasers of Select Comfort beds and bases, plaintiffs seek to recover a $100 statutory fine for each alleged omission, along with attorneys’ fees and costs. Select Comfort removed the case to the United States District Court for the District of New Jersey, which subsequently granted Select Comfort’s motion to dismiss. Plaintiffs appealed to the United States Court of Appeals for the Third Circuit, which has certified two questions of law to the New Jersey Supreme Court relating to whether plaintiffs who have suffered no actual injury may bring claims. The New Jersey Supreme Court has not yet indicated whether it will accept the certification. As the United States District Court for the District of New Jersey agreed, we believe that the case is without merit and the order of dismissal should be affirmed.

On December 4, 2015, Saeid Azimpour, a consumer, filed a purported class-action lawsuit in U.S. District Court in Minnesota alleging he was fraudulently induced to purchase a down alternative pillow at a Sleep Number store based on signage that indicated that the pillow was 50% off. Plaintiff alleged that the price he paid for the pillow was not truly 50% off the price at which Sleep Number previously sold the pillow. Plaintiff asserted 10 causes of action including consumer fraud, unlawful trade practices, deceptive trade practices under Minnesota law, violation of the Minnesota false advertising law, unjust enrichment, violation of the California unfair competition law, violation of the California false advertising law and violation of the California remedies act. Plaintiff sought to represent all individuals who “purchased one or more items from the Company advertised or priced at a discount from the original retail price at any time between December 1, 2011 and present.” Plaintiff sought injunctive relief, damages, disgorgement and attorneys’ fees. On June 13, 2016, the Court dismissed the case without prejudice. On August 25, 2016, plaintiff filed a new complaint asserting claims and prayers for relief similar to those described above. On January 4, 2017, plaintiff agreed to dismissal of all claims including dismissal with prejudice of the class claims asserted in this case.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

19

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on The NASDAQ Stock Market LLC (NASDAQ Global Select Market) under the symbol “SCSS.” As of January 28, 2017, there were approximately 237 holders of record of our common stock. The following table sets forth the quarterly high and low sales prices per share of our common stock, at closing, as reported by NASDAQ for the two most recent fiscal years.

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Fiscal 2016
High	$	21.24	$	24.68	$	27.68	$	24.33
Low	15.58		19.17		21.31		18.55
Fiscal 2015
High	$	34.62	$	34.50	$	30.79	$	25.50
Low	26.43		29.11		21.34		20.63

We are not restricted from paying cash dividends under our credit agreement so long as we are not in default under the credit agreement and so long as the payment of such dividends would not create an event of default. However, we have not historically paid, and have no current plans to pay, cash dividends on our common stock.

Information concerning share repurchases completed during the fourth quarter of fiscal 2016 is set forth below:

Fiscal Period	TotalNumber of Shares Purchased(1)(2)	AveragePrice Paidper Share		Total Numberof SharesPurchased asPart ofPubliclyAnnouncedPlans orPrograms (1)	ApproximateDollar Valueof Shares thatMay Yet BePurchasedUnder thePlans orPrograms(3)
October 2, 2016 through October 29, 2016	387,378	$	20.40	387,181	$	267,102,000
October 30, 2016 through November 26, 2016	359,486	21.14		356,952	259,557,000
November 27, 2016 through December 31, 2016	632,844	23.02		632,340	245,000,000
Total	1,379,708	$	21.79	1,376,473	$	245,000,000

___________________

⁽¹⁾  Under the current Board-approved $300 million share repurchase program, we repurchased 1,376,473 shares of our common stock at a cost of $30 million (based on trade dates) during the three months ended December 31, 2016.

⁽²⁾  In connection with the vesting of employee restricted stock grants, we also repurchased 3,235 shares of our common stock at a cost of $68,000 during the three months ended December 31, 2016.

⁽³⁾  There is no expiration date governing the period over which we can repurchase shares under our Board-approved share repurchase program. Any repurchased shares are constructively retired and returned to an unissued status.

20

Comparative Stock Performance

The graph below compares the total cumulative shareholder return on our common stock over the last five years to the total cumulative return on the Standard and Poor’s (S&P) 400 Specialty Stores Index and The NASDAQ Stock Market (U.S.) Index assuming a $100 investment made on December 31, 2011. Each of the three measures of cumulative total return assumes reinvestment of dividends. The stock performance shown on the graph below is not necessarily indicative of future price performance. The information contained in this “Comparative Stock Performance” section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that we specifically request that it be treated as soliciting material or incorporate it by reference into a document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN

AMONG SELECT COMFORT CORPORATION, S&P 400 SPECIALTY STORES INDEX,

AND THE NASDAQ STOCK MARKET (U.S.) INDEX

	12/31/2011		12/29/2012		12/28/2013		1/3/2015		1/2/2016		12/31/2016
Select Comfort Corporation	$	100	$	113	$	98	$	124	$	99	$	104
S&P 400 Specialty Stores Index	100		122		184		230		170		202
The NASDAQ Stock Market (U.S.) Index	100		115		164		188		202		220

21

ITEM 6. SELECTED FINANCIAL DATA

(in thousands, except per share and selected operating data, unless otherwise indicated)

The Consolidated Statements of Operations Data and Consolidated Balance Sheet Data presented below have been derived from our Consolidated Financial Statements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and Notes thereto included in this Annual Report on Form 10-K.

	Year
	2016			2015			2014(1)			2013			2012
Consolidated Statements of Operations Data:
Net sales	$	1,311,291		$	1,213,699		$	1,156,757		$	960,171		$	934,978
Gross profit	810,160			740,751			706,850			601,755			596,546
Operating expenses:
Sales and marketing	595,845			550,475			512,007			439,156			398,205
General and administrative	109,674			99,209			84,864			62,967			66,765
Research and development	27,991			15,971			8,233			9,478			6,194
Other(2)	—			—			—			(534		)	5,595
Operating income	76,650			75,096			101,746			90,688			119,787
Net income	$	51,417		$	50,519		$	67,974		$	60,081		$	78,094
Net income per share:
Basic	$	1.11		$	0.99		$	1.27		$	1.10		$	1.41
Diluted	$	1.10		$	0.97		$	1.25		$	1.08		$	1.37
Shares used in calculation of net income per share:
Basic	46,154			51,252			53,452			54,866			55,516
Diluted	46,902			52,101			54,193			55,803			57,076
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable debt securities	$	11,609		$	36,114		$	166,045		$	145,014		$	177,821
Total assets	457,166			500,897			474,187			381,765			342,021
Total shareholders’ equity	160,320			222,339			256,907			225,220			193,697
Selected Operating Data:
Stores open at period-end	540			488			463			440			410
Stores opened during period	72			38			57			71			57
Stores closed during period	20			13			34			41			28
Average revenue per store (000’s)(3)	$	2,364		$	2,377		$	2,327		$	2,093		$	2,164
Percentage of stores with more than $1.0 million in net sales(3)	98		%	99		%	98		%	96		%	98		%
Percentage of stores with more than $2.0 million in net sales(3)	61		%	62		%	59		%	46		%	49		%
Average revenue per mattress unit - Company-Controlled channel(4)	$	4,046		$	4,028		$	3,671		$	3,245		$	3,050
Company-Controlled comparable-sales increase (decrease)(5)	1		%	3		%	12		%	(4		)%	23		%
Total retail square footage (at period-end) (000's)	1,399			1,214			1,106			949			759
Average square footage per store open during period(3)	2,538			2,445			2,302			1,985			1,670
Net sales per square foot(3)	$	937		$	980		$	1,025		$	1,077		$	1,324
Average store age (in months at period-end)	93			99			97			102			113
Earnings before interest, depreciation and amortization (Adjusted EBITDA)(6)	$	145,689		$	133,057		$	148,223		$	125,020		$	150,285
Free cash flows(6)	$	93,793		$	22,356		$	67,874		$	11,294		$	49,033
Return on Invested Capital (ROIC)(6)	12.2		%	11.2		%	15.1		%	15.1		%	21.5		%

___________________

⁽¹⁾  Fiscal year 2014 had 53 weeks. All other fiscal years presented had 52 weeks.

⁽²⁾  In February 2012, we announced that William R. McLaughlin, then President and CEO, would retire from the Company effective June 1, 2012. In recognition of Mr. McLaughlin's contributions, the Compensation Committee approved the modification of Mr. McLaughlin's unvested stock awards, including performance-based stock awards. As a result of these modifications, we recorded incremental non-cash compensation of $5.6 million ($3.7 million, net of income tax). The performance-based stock awards were subject to applicable adjustments through 2014 based on actual performance. During 2013, we recorded a non-cash compensation benefit of $0.5 million ($0.4 million, net of income tax) resulting from performance-based stock award adjustments. There were no performance-based stock award adjustments in 2014, 2015 or 2016.

⁽³⁾  For stores open during the entire period indicated.

⁽⁴⁾  Represents Company-Controlled channel total net sales divided by Company-Controlled channel mattress units.

⁽⁵⁾  Stores are included in the comparable sales calculation in the 13th full month of operation. Stores that have been remodeled or repositioned within the same shopping center remain in the comparable-store base. The number of comparable stores used to calculate such data was 459, 442, 396, 359 and 348 for 2016, 2015, 2014, 2013 and 2012, respectively. Fiscal 2014 included 53 weeks, as compared to 52 weeks for the other periods presented. Comparable sales have been adjusted and reported as if all years had the same number of weeks.

⁽⁶⁾  These non-GAAP measures are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates annual and year-over-year comparisons for investors and financial analysts. See pages 23 and 24 for the reconciliation of these non-GAAP measures to the appropriate GAAP measures.

22

Non-GAAP Data Reconciliations

Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)

(in thousands)

We define earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments. Management believes Adjusted EBITDA is a useful indicator of our financial performance and our ability to generate cash from operating activities. Our definition of Adjusted EBITDA may not be comparable to similarly titled definitions used by other companies. The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to the comparable GAAP financial measure:

	Year
	2016		2015		2014		2013		2012
Net income	$	51,417	$	50,519	$	67,974	$	60,081	$	78,094
Income tax expense	24,516		24,911		34,134		30,930		41,911
Interest expense	811		160		53		51		91
Depreciation and amortization	56,910		46,916		38,767		29,599		19,735
Stock-based compensation	11,961		10,290		6,798		4,232		10,306
Asset impairments	74		261		497		127		148
Adjusted EBITDA	$	145,689	$	133,057	$	148,223	$	125,020	$	150,285

Free Cash Flow

(in thousands)

Our “free cash flow” data is considered a non-GAAP financial measure and is not in accordance with, or preferable to, “net cash provided by operations,” or GAAP financial data. However, we are providing this information as we believe it facilitates analysis for investors and financial analysts.

	Year
	2016			2015			2014			2013			2012
Net cash provided by operating activities	$	151,645		$	107,942		$	144,468		$	88,105		$	100,626
Less: Purchases of property and equipment	(57,852		)	(85,586		)	(76,594		)	(76,811		)	(51,593		)
Free cash flow	$	93,793		$	22,356		$	67,874		$	11,294		$	49,033

23

Non-GAAP Data Reconciliations (continued)

Return on Invested Capital (ROIC)

(in thousands)

ROIC is a financial measure we use to determine how efficiently we deploy our capital. It quantifies the return we earn on our invested capital. Management believes ROIC is also a useful metric for investors and financial analysts. We compute ROIC as outlined below. Our definition and calculation of ROIC may not be comparable to similarly titled definitions and calculations used by other companies. The tables below reconcile net operating profit after taxes (NOPAT) and total invested capital, which are non-GAAP financial measures, to the comparable GAAP financial measures:

	Year
	2016			2015			2014			2013			2012
Net operating profit after taxes (NOPAT)
Operating income	$	76,650		$	75,096		$	101,746		$	90,688		$	119,787
Add: Rent expense(1)	67,416			62,369			57,605			50,289			48,543
Add: Interest income	94			494			415			375			310
Less: Depreciation on capitalized operating leases(2)	(17,185		)	(16,203		)	(14,265		)	(13,095		)	(12,072		)
Less: Income taxes(3)	(41,933		)	(40,384		)	(48,900		)	(43,827		)	(54,358		)
NOPAT	$	85,042		$	81,372		$	96,601		$	84,430		$	102,210
Average invested capital
Total equity	$	160,320		$	222,339		$	256,907		$	225,220		$	193,697
Less: Cash greater than target(4)	—			—			(37,319		)	(29,622		)	(62,627		)
Add: Long-term debt(5)	—			—			—			2			112
Add: Capitalized operating lease obligations(6)	539,328			498,952			460,840			402,312			388,344
Total invested capital at end of period	$	699,648		$	721,291		$	680,428		$	597,912		$	519,526
Average invested capital(7)	$	699,576		$	726,756		$	639,118		$	560,133		$	475,159
Return on invested capital (ROIC)(8)	12.2		%	11.2		%	15.1		%	15.1		%	21.5		%

___________________

⁽¹⁾ Rent expense is added back to operating income to show the impact of owning versus leasing the related assets.

⁽²⁾ Depreciation is based on the average of the last five fiscal quarters' ending capitalized operating lease obligations (see note 6) for the respective reporting periods with an assumed thirty-year useful life. This is subtracted from operating income to illustrate the impact of owning versus leasing the related assets.

⁽³⁾ Reflects annual effective income tax rates, before discrete adjustments, of 33.0%, 33.2%, 33.6%, 34.2% and 34.7% for 2016, 2015, 2014, 2013 and 2012, respectively.

⁽⁴⁾ Cash greater than target is defined as cash, cash equivalents and marketable debt securities less customer prepayments in excess of $100 million.

⁽⁵⁾ Long-term debt includes capital lease obligations, if applicable.

⁽⁶⁾ A multiple of eight times annual rent expense is used as an estimate for capitalizing our operating lease obligations. The methodology utilized aligns with the methodology of a nationally recognized credit rating agency.

⁽⁷⁾ Average invested capital represents the average of the last five fiscal quarters' ending invested capital balances.

⁽⁸⁾ ROIC equals NOPAT divided by average invested capital.

Note - Our ROIC calculation and data are considered non-GAAP financial measures and are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts.

GAAP - generally accepted accounting principles in the U.S.

24

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The discussion in this Annual Report contains certain forward-looking statements that relate to future plans, events, financial results or performance. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,” “potential,” “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 our historical experience and our present expectations or projections. These risks and uncertainties include, among others:

• Current and future general and industry economic trends and consumer confidence;

• The effectiveness of our marketing messages;

• The efficiency of our advertising and promotional efforts;

• Our ability to execute our Company-Controlled distribution strategy;

• Our ability to achieve and maintain acceptable levels of product and service quality, and acceptable product return and warranty claims rates;

• Our ability to continue to improve and expand our product line, and consumer acceptance of our products, product quality, innovation and brand image;

• Industry competition, the emergence of additional competitive products and the adequacy of our intellectual property rights to protect our products and brand from competitive or infringing activities;

• Availability of attractive and cost-effective consumer credit options, including the impact of recent changes in federal law that restricts various forms of consumer credit promotional offerings;

• Our “just-in-time” manufacturing processes with minimal levels of inventory, which may leave us vulnerable to shortages in supply;

• Our dependence on significant suppliers and our ability to maintain relationships with key suppliers, including several sole-source suppliers;

• Rising commodity costs and other inflationary pressures;

• Risks inherent in global sourcing activities;

• Risks of disruption in the operation of either of our two main manufacturing facilities;

• Increasing government regulation;

• Pending or unforeseen litigation and the potential for adverse publicity associated with litigation;

• The adequacy of our management information systems to meet the evolving needs of our business and existing and evolving regulatory standards applicable to data privacy and security;

• The costs and potential disruptions to our business related to upgrading our management information systems;

• The vulnerability of our management information systems to attacks by hackers or other cyber threats that could compromise the security of our systems or disrupt our business;

• Our ability to attract, retain and motivate qualified management, executive and other key employees, including qualified retail sales professionals and managers; and

• Uncertainties arising from global events, such as terrorist attacks or a pandemic outbreak, or the threat of such events.

Additional information concerning these and other risks and uncertainties is contained under the caption "Risk Factors" in this Annual Report on Form 10-K.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in six sections:

• Overview

• Results of Operations

• Liquidity and Capital Resources

• Off-Balance-Sheet Arrangements and Contractual Obligations

• Critical Accounting Policies and Estimates

• Recent Accounting Pronouncements

25

Overview

Business Overview

We offer consumers high-quality, individualized sleep solutions and services, which include a complete line of Sleep Number beds, bases and bedding accessories. Our business has three significant competitive advantages: proprietary sleep innovations, ongoing customer relationships and exclusive retail distribution.

We have a vertically integrated business model and are the exclusive designer, manufacturer, marketer, retailer and servicer of a complete line of Sleep Number beds. We are the pioneer in biometric sleep tracking and adjustability. Only the Sleep Number bed offers SleepIQ technology - proprietary sensor technology that works directly with the bed’s DualAir system to track each individual’s sleep. SleepIQ technology communicates how you slept and what adjustments you can make to optimize your sleep and improve your daily life. Select Comfort also offers FlextFit adjustable bases, and Sleep Number pillows, sheets and other bedding products. As a specialty mattress retailer with stores across the nation, we offer consumers a unique, value-added retail experience at one of the more than 540 Sleep Number stores across the country, online at SleepNumber.com or via phone.

We are committed to delivering superior shareholder value through three primary drivers of earnings per share growth: increasing demand, leveraging our business model and deploying our capital efficiently. We are the sleep innovation leader and drive growth through effective brand marketing and a differentiated retail experience.

We generate revenue by marketing our innovations to new and existing customers, and selling products through two distribution channels. Our Company-Controlled channel, which includes Retail, Online and Phone, sells directly to consumers. Our Wholesale/Other channel sells to and through selected retail and wholesale customers in the United States and the QVC shopping channel.

We are also the only vertically integrated manufacturer/retailer in the U.S. We have two manufacturing plants that distribute Sleep Number products. We also offer mattress home delivery and installation, and maintain an in-house customer service department. This integration enables operational synergies and efficiencies, and a strong working capital position. Vertical integration allows us to build a long-term loyal customer relationship as we service the consumer through the full purchase and ownership cycle. This relationship with our customer creates a productive cycle of repeat and referral business.

Mission and Vision

Our mission is to improve lives by individualizing sleep experiences.

Our vision is to become one of the world's most beloved brands by delivering an unparalleled sleep experience. We plan to achieve this by offering benefit-driven, innovative sleep solutions to our customers through an unmatched retail experience and a carefree ownership experience.

Results of Operations

Fiscal 2016 Summary

Financial highlights for fiscal 2016 were as follows:

• In the fourth of quarter 2015, we replaced our nearly 20-year-old legacy computer systems with a new vertically integrated Enterprise Resource Planning (ERP) system. We completed our ERP implementation by the end of the first quarter of 2016. Implementation issues negatively affected fourth-quarter 2015 net sales and profits, and to a lesser degree, first-quarter and second-quarter 2016 net sales and profits. The new operating platform enables operational efficiencies, improved customer convenience and supports the growth of our business.

• Net sales for 2016increased8% to $1.31 billion, compared with $1.21 billion in the prior year. Company-Controlled comparable sales increased 1% and sales from 52 net new stores opened in the past 12 months added 7 percentage points (ppt.) of growth in 2016.

• On a trailing twelve-month basis, sales per store (for stores open at least one year) of $2.4 million were consistent with the prior-year comparable period.

• Operating income for 2016increased2% to $77 million, or 5.8% of net sales, compared with $75 million, or 6.2% of net sales, for the same period one year ago. The increase in operating income was attributable to: (i) the8% increase in net sales and a 0.8

26

ppt. improvement in our gross profit rate; partially offset by (ii) $12 million of additional research and development expenses to support the advancement of our product innovation pipeline, including expenses related to SleepIQ LABS' operations (acquired on September 15, 2015); (iii) an increase in expenses associated with operating 52 net new stores; and (iv) an increase in general and administrative expenses to support the growth of the business, including depreciation on our new ERP system that was launched in the fourth-quarter of 2015.

• Net income increased2% to $51.4 million, or $1.10 per diluted share, compared with net income of $50.5 million, or $0.97 per diluted share in 2015.

• We achieved a return on invested capital (ROIC) of 12.2% in 2016.

• Cash provided by operating activities in 2016 totaled $152 million, compared with $108 million for the prior year. With the completion of our ERP implementation, investing activities for 2016 decreased to $58 million of property and equipment purchases, compared with $86 million in 2015.

• At December 31, 2016, cash, cash equivalents and marketable debt securities totaled $12 million compared with $36 million at January 2, 2016, and we had no borrowings under our $150 million revolving credit facility.

• In 2016, we repurchased 5.9 million shares of our common stock under our Board-approved share repurchase program at a cost of $125 million ($21.02 per share). Effective as of July 3, 2016, our Board approved an increase in our total remaining share repurchase authorization to $300 million. As of December 31, 2016, the remaining authorization under our Board-approved share repurchase program was $245 million.

The following table sets forth our results of operations expressed as dollars and percentages of net sales. Figures are in millions, except percentages and per share amounts. Amounts may not add due to rounding differences. 

	2016					2015				2014
	$			% of Net Sales		$		% of Net Sales		$		% of Net Sales
Net sales	$	1,311.3		100.0	%	$	1,213.7	100.0	%	$	1,156.8	100.0	%
Cost of sales	501.1			38.2		472.9		39.0		449.9		38.9
Gross profit	810.2			61.8		740.8		61.0		706.9		61.1
Operating expenses:
Sales and marketing	595.8			45.4		550.5		45.4		512.0		44.3
General and administrative	109.7			8.4		99.2		8.2		84.9		7.3
Research and development	28.0			2.1		16.0		1.3		8.2		0.7
Total operating expenses	733.5			55.9		665.7		54.8		605.1		52.3
Operating income	76.7			5.8		75.1		6.2		101.7		8.8
Other (expense) income, net	(0.7		)	(0.1	)	0.3		0.0		0.4		0.0
Income before income taxes	75.9			5.8		75.4		6.2		102.1		8.8
Income tax expense	24.5			1.9		24.9		2.1		34.1		3.0
Net income	$	51.4		3.9	%	$	50.5	4.2	%	$	68.0	5.9	%
Net income per share:
Basic	$	1.11				$	0.99			$	1.27
Diluted	$	1.10				$	0.97			$	1.25
Weighted-average number of common shares:
Basic	46.2					51.3				53.5
Diluted	46.9					52.1				54.2

The percentage of our total net sales, by dollar volume, from each of our channels was as follows:

	2016		2015		2014
Company-Controlled channel	97.7	%	97.6	%	97.3	%
Wholesale/Other channel	2.3	%	2.4	%	2.7	%
Total	100.0	%	100.0	%	100.0	%

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The components of total net sales growth, including comparable net sales changes, were as follows: 

	Net Sales Increase/(Decrease)
	2016		2015		2014
Retail comparable-store sales(1)	0	%	3	%	12	%
Online and Phone(1)	25	%	(4	%)	9	%
Company-Controlled comparable sales change(1)	1	%	3	%	12	%
Net opened/closed stores and 53rd week in 2014	7	%	2	%	10	%
Total Company-Controlled channel	8	%	5	%	22	%
Wholesale/Other channel	5	%	(9	%)	(13	%)
Total net sales change	8	%	5	%	20	%

___________________

⁽¹⁾ Stores are included in the comparable-store calculation in the 13th full month of operations. Stores that have been remodeled or repositioned within the same shopping center remain in the comparable-store base. Fiscal 2014 included 53 weeks, as compared to 52 weeks in fiscal 2016 and 2015. Comparable-store sales have been adjusted to remove the estimated impact of the additional week for fiscal 2014.

Other sales metrics were as follows: 

	2016			2015			2014(3)
Average sales per store(1) ($ in thousands)	$	2,364		$	2,377		$	2,327
Average sales per square foot(1)	$	937		$	980		$	1,025
Stores > $1 million in net sales(1)	98		%	99		%	98		%
Stores > $2 million in net sales(1)	61		%	62		%	59		%
Average revenue per mattress unit – Company-Controlled channel(2)	$	4,046		$	4,028		$	3,671

___________________

⁽¹⁾ Trailing twelve months for stores included in our comparable store sales calculation.

⁽²⁾ Represents Company-Controlled channel total net sales divided by Company-Controlled channel mattress units.

⁽³⁾Fiscal 2014 included 53 weeks, as compared to 52 weeks in fiscal 2016 and 2015. Company-Controlled comparable sales metrics have been adjusted to remove the estimated impact of the additional week on those metrics.

The number of retail stores operating during the last three years was as follows:

	2016		2015		2014
Beginning of period	488		463		440
Opened	72		38		57
Closed	(20	)	(13	)	(34	)
End of period	540		488		463

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Comparison of 2016 and 2015

Enterprise Resource Planning (ERP) system implementation

In the fourth of quarter 2015, we replaced our nearly 20-year-old legacy computer systems with a new vertically integrated Enterprise Resource Planning (ERP) system. We completed our ERP implementation by the end of the first quarter of 2016. Implementation issues negatively affected fourth-quarter 2015 net sales and profits, and to a lesser degree, first-quarter and second-quarter 2016 net sales and profits. The new operating platform enables operational efficiencies, improved customer convenience and supports the growth of our business.

Net sales

Net sales in 2016increased8% to $1.31 billion, compared with $1.21 billion for the same period one year ago. The sales increase was driven by a 1% comparable sales increase in our Company-Controlled channel, 7 percentage points (ppt.) of growth from sales generated by 52 net new retail stores opened in the past 12 months and an increase in Wholesale/Other channel sales.

The $98 million net sales increase compared with the same period one year ago was primarily comprised of an $83 million increase resulting from net store openings and a $14 million sales increase from Company-Controlled comparable sales. Company-Controlled mattress units increased 8% compared to the prior-year period. Average revenue per mattress unit in our Company-Controlled channel was consistent with the prior year.

Gross profit

Gross profit of $810 million increased by $69 million, or 9%, compared with the same period one year ago. The gross profit rate increased to 61.8% of net sales for 2016, compared with 61.0% for the prior-year period. The 0.8 ppt. increase in the gross profit rate was primarily due to material cost reductions, operating efficiencies, and lower sales return and exchange costs. In addition, our gross profit rate can fluctuate from year-to-year due to a variety of other factors, including warranty expenses, product mix changes and performance-based incentive compensation.

Sales and marketing expenses

Sales and marketing expenses in 2016increased8% to $596 million, compared with $550 million last year. The marketing expense rate of 45.4% of net sales was consistent with the same period one year ago due to: (i) leveraging our media spending, which increased by 5% compared with the prior year, while net sales increased by 8%; partially offset by (ii) higher customer service costs; and (iii) an increase in customer financing expenses, as a larger percentage of our customers took advantage of promotional financing offers.

General and administrative expenses

General and administrative (G&A) expenses increased$10.5 million to $110 million in 2016, compared with $99 million in the prior year and increased to 8.4% of net sales, compared with 8.2% of net sales one year ago. The $10.5 million increase in G&A expenses consisted of the following major components: (i) a $10.4 million increase in employee compensation, including headcount increases to support business growth initiatives, and salary and wage rate increases that were in line with inflation; (ii) $6.5 million of additionaldepreciation expense resulting from the increase in capital expenditures to support the growth of the business, including our new ERP system that was launched in the fourth quarter of 2015; (iii) a $3.5 million gain (net of acquisition-related expenses) in 2015 related to our previously held minority equity investment in BAM Labs, Inc.; and (iv) a$1.5 million increase in miscellaneous other expenses. These increases were partially offset by $11.6 million of data conversion and training expenses incurred in 2015 to support the launch of our ERP system. The G&A expense rate increased by 0.2 ppt. in 2016 compared with the same period one year ago due to the increase in expenses discussed above, partially offset by the leveraging impact of the 8% net sales increase.

Research and development expenses

Research and development expenses for the year endedDecember 31, 2016 were $28 million, or 2.1% of net sales, compared with $16 million, or 1.3% of net sales, for the same period one year ago. The $12 million increase in R&D expenses was due to increased investments to support product innovations, including a $9.7 million increase in expenses related to SleepIQ LABS' operations (post acquisition; acquired on September 15, 2015). The $12 million increase is consistent with our long-term consumer innovation strategy.

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Income tax expense

Income tax expense was $25 million for the year endedDecember 31, 2016, compared with $25 million for the same period one year ago. The effective tax rate for the year endedDecember 31, 2016 was 32.3% compared with 33.0% for the prior-year period. The effective tax rates for 2016 and 2015 include tax benefits associated with our acquisition of BAM Labs, including higher research and development tax credits.

Comparison of 2015 and 2014

Enterprise Resource Planning (ERP) system implementation

In the fourth quarter 2015, we replaced our nearly 20-year-old legacy computer systems with a new vertically-integrated Enterprise Resource Planning (ERP) system. We experienced technical and operational issues in our plants and supply chain as we ramped up the new system, which led to delivery delays and inconveniences for our customers. The lost sales and increases in cost of sales and operating expenses negatively impacted 2015 results by approximately $0.40 per diluted share ($0.43 per diluted share for the fourth quarter).

Net sales

Net sales in 2015 increased 5% to $1.21 billion, compared with $1.16 billion for the same period one year ago. The sales increase was driven by a 3% comparable sales increase in our Company-Controlled channel and sales from 25 net new retail stores opened in the past 12 months. During the first nine months of 2015, demand for our latest product innovations and more effective marketing drove traffic to our stores and contributed to a 20% year-to-date net sales increase. However, net sales decreased 33% in the fourth quarter compared to the prior year, reflecting approximately $84 million in sales disruptions from our ERP system implementation. In addition, 2015 included 52 weeks compared with 53 weeks in 2014, with the extra week benefiting 2014 net sales growth by approximately $24 million.

The $57 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $52 million increase resulting from net store openings; and (ii) a $31 million sales increase from Company-Controlled comparable sales; partially offset by (iii) an approximately $24 million sales decrease as the prior year included an extra week of net sales (52-week year 2015 vs. 53-week year 2014); and (iv) a $2 million decrease in Wholesale/Other channel sales. Company-Controlled mattress units decreased 4% compared to the prior-year period. Average revenue per mattress unit in our Company-Controlled channel increased by 10%.

Gross profit

Gross profit of $741 million increased by $34 million, or 5%, compared with the same period one year ago. The gross profit rate decreased to 61.0% of net sales for 2015, compared with 61.1% for the prior-year period. The 0.1 percentage points (ppt.) decrease in the gross profit rate was primarily due to: (i) appeasements, labor inefficiencies, material costs and excess freight from actions taken to manage our fourth-quarter 2015 ERP issues; partially offset by (ii) favorable product mix changes resulting from advancements in our selling process and product innovations over the last 12 months. In addition, our gross profit rate can fluctuate from year-to-year due to a variety of other factors, including return and exchange costs, raw materials price fluctuations, warranty expenses and performance-based incentive compensation.

Sales and marketing expenses

Sales and marketing expenses in 2015 increased 8% to $550 million, or 45.4% of net sales, compared with $512 million, or 44.3% of net sales, for the same period one year ago. The 1.1 ppt. increase in the sales and marketing expense rate in the current period was mainly due to the deleveraging impact resulting from the approximately $84 million in sales disruptions associated with our fourth-quarter 2015 ERP system implementation.

General and administrative expenses

General and administrative (G&A) expenses increased $14 million to $99 million in 2015, compared with $85 million in the prior year, and increased to 8.2% of net sales, compared with 7.3% of net sales one year ago. G&A expenses for 2015 included 52 weeks of expenses compared with 53 weeks in 2014. The $14 million increase in G&A expenses consisted of the following major components: (i) $11.6 million of ERP launch costs in 2015, including data conversion and training expenses; (ii) $4.5 million of additional depreciation expense resulting from the increase in capital expenditures to support the growth of the business, including our new digital website that was launched in the second quarter of 2014 and our new ERP system that was launched in the fourth quarter of

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2015; (iii) $4.1 million of higher professional fees, including additional costs associated with proxy preparation, filing and consulting services; and (iv) a $2.2 million increase in miscellaneous other expenses. These increases were partially offset by: (i) a $4.9 million decrease in employee compensation, including a year-over-year reduction in company-wide performance-based incentive compensation; and (ii) a $3.5 million gain (net of acquisition-related expenses) related to our previously held minority equity investment in BAM Labs, Inc. The G&A expense rate increased by 0.9 ppt. in the current period compared with the same period one year ago due to the increase in expenses discussed above, partially offset by the leveraging impact of the 5% net sales increase.

Research and development expenses

Research and development expenses for the year ended January 2, 2016 were $16 million, or 1.3% of net sales, compared with $8 million, or 0.7% of net sales, for the same period one year ago. The $8 million increase in R&D expenses was due to increased investments to support product innovations, including $3.3 million of expenses related to SleepIQ LABS' operations (post acquisition; acquired on September 15, 2015). The $8 million increase is consistent with our long-term consumer innovation strategy.

Income tax expense

Income tax expense was $25 million for the year ended January 2, 2016, compared with $34 million for the same period one year ago. The effective tax rate for the year ended January 2, 2016 was 33.0% compared with 33.4% for the prior-year period. The decrease in the effective tax rate primarily resulted from tax planning benefits associated with the BAM Labs, Inc. acquisition gain, partially offset by a reduction in our manufacturing deduction driven by increased year-over-year bonus tax depreciation.

Liquidity and Capital Resources

Managing our liquidity and capital resources is an important part of our commitment to deliver superior shareholder value. Our business model, which can operate with minimal working capital, does not require additional capital from external sources to fund operations or organic growth. Our primary sources of liquidity are cash flows provided by operating activities and cash available under our $150 million revolving credit facility. The cash generated from ongoing operations, and cash available under our revolving credit facility are expected to be adequate to maintain operations and fund anticipated expansion and strategic initiatives for the foreseeable future.

As of December 31, 2016, cash, cash equivalents and marketable debt securities totaled $12 million compared with $36 million as of January 2, 2016. The $25 million decrease was primarily due to $152 million of cash provided by operating activities, which was more than offset by $58 million of cash used to purchase property and equipment and $127 million of cash used to repurchase our common stock ($125 million under our Board-approved share repurchase program and $1.7 million in connection with the vesting of employee restricted stock grants).

The following table summarizes our cash flows (dollars in millions). Amounts may not add due to rounding differences:

	2016			2015
Total cash provided by (used in):
Operating activities	$	151.6		$	107.9
Investing activities	(42.7		)	(44.3		)
Financing activities	(118.4		)	(94.7		)
Net decrease in cash and cash equivalents	$	(9.4	)	$	(31.0	)

Cash provided by operating activities for the fiscal year ended December 31, 2016 was $152 million compared with $108 million for the fiscal year ended January 2, 2016. Significant components of the $44 million year-over-year increase in cash from operating activities included: (i) a $39 million fluctuation in income taxes based on a $15 million income taxes receivable at the end of 2015 compared with income tax liabilities at the end of 2016 and 2014; (ii) a $20 million fluctuation in accrued compensation and benefits which primarily resulted from year-over-year changes in company-wide performance-based incentive compensation that was earned in 2014 and paid in the first quarter of 2015, compared with no company-wide incentive compensation accrued at the end of 2015 and paid in 2016; and (iii) the ERP implementation issues we experienced in our plants and supply chain during the fourth quarter of 2015 that resulted in higher inventory levels, increased accounts receivables, increased accounts payables and higher customer prepayments at the end of 2015.

Net cash used in investing activities was $43 million for the fiscal year ended December 31, 2016, compared with $44 million for the same period one year ago. With the completion of our ERP implementation, investing activities for the current-year period decreased

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to $58 million of property and equipment purchases, compared with $86 million for the same period last year. We decreased our net investments in marketable debt securities by $15 million during the fiscal year ended December 31, 2016, compared with a net decrease of $98 million during the comparable period one year ago. In September 2015, we completed the acquisition of BAM Labs, Inc. (now operating as SleepIQ LABS). We previously held a $6.0 million minority equity investment in BAM Labs, Inc. based on the cost method. In connection with the acquisition, our equity investment was remeasured to a fair value of $12.9 million and we acquired the remaining capital stock in BAM Labs, Inc. for $57.1 million for a total enterprise value of $70.0 million. See Note 2, Acquisition of BAM Labs, Inc., and Note 4, Investments, of the Notes to Consolidated Financial Statements for additional details.

Net cash used in financing activities was $118 million for the fiscal year ended December 31, 2016, compared with net cash used in financing activities of $95 million for the same period one year ago. During the fiscal year ended December 31, 2016, we repurchased $127 million of our common stock ($125 million under our Board-approved share repurchase program and $1.7 million in connection with the vesting of employee restricted stock grants) compared with $100 million during the same period one year ago. Changes in book overdrafts are included in the net change in short-term borrowings. Financing activities for both periods reflect the cash proceeds from the exercise of employee stock options along with the excess tax benefits related to stock-based compensation.

Under our Board-approved share repurchase program, we repurchased 5.9 million shares at a cost of $125 million ($21.02 per share) during the fiscal year ended December 31, 2016. During 2015, we repurchased 3.6 million shares at a cost of $98 million ($27.46 per share). As of December 31, 2016, the remaining authorization under our Board-approved share repurchase program was $245 million. There is no expiration date governing the period over which we can repurchase shares.

Our revolving credit facility, as amended, has a net aggregate availability of $150 million. The credit facility is for general corporate purposes. The credit facility contains an accordion feature that allows us to increase the amount of the available credit from $150 million up to $200 million, subject to lenders' approval. The credit facility matures in February 2021.

The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio and a minimum interest coverage ratio. Under the terms of the credit agreement we pay a variable rate of interest and a commitment fee based on our leverage ratio. As of December 31, 2016, we had no outstanding borrowings or letters of credit and we were in compliance with all financial covenants.

We have an agreement with Synchrony Bank to offer qualified customers revolving credit arrangements to finance purchases from us (Synchrony Agreement). The Synchrony Agreement contains certain financial covenants, including a maximum leverage ratio and a minimum interest coverage ratio. As of December 31, 2016, we were in compliance with all financial covenants.

Under the terms of the Synchrony Agreement, Synchrony Bank sets the minimum acceptable credit ratings, the interest rates, fees and all other terms and conditions of the customer accounts, including collection policies and procedures, and is the owner of the accounts.

Off-Balance-Sheet Arrangements and Contractual Obligations

As of December 31, 2016, we were not involved in any unconsolidated special purpose entity transactions. Other than our operating leases, we do not have any off-balance-sheet financing. There were no outstanding letters of credit at December 31, 2016. A summary of our operating lease obligations is included in the “Contractual Obligations” section (as follows). Additional information regarding our operating leases is available in Item 2, Properties, and Note 8, Leases, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Contractual Obligations

The following table presents information regarding our contractual obligations (in thousands):

	Payments Due by Period(1)
	Total		< 1 Year		1 - 3 Years		3 - 5 Years		> 5 Years
Operating leases(2)	$	392,397	$	66,493	$	108,286	$	80,379	$	137,239
Purchase commitments	5,500		5,500		—		—		—
Other	—		—		—		—		—
Total	$	397,897	$	71,993	$	108,286	$	80,379	$	137,239

___________________

⁽¹⁾ Our unrecognized tax benefits, including interest and penalties, of $3 million have not been included in the Contractual Obligations table as we are not able to determine a reasonable estimate of timing of the cash settlement with the respective taxing authorities.

⁽²⁾ These amounts include the payments related to 33 lease commitments for future retail store locations and a lease commitment for our corporate facilities. These lease commitments provide for minimum rentals over the next five to 15 years, which if consummated based on current cost estimates, would approximate $96 million over the initial lease term.

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Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). In connection with the preparation of our financial statements, we are required to make estimates and assumptions about future events, and apply judgments that affect the reported amounts of assets, liabilities, sales, expenses and the related disclosure. Predicting future events is inherently an imprecise activity and as such requires the use of judgment. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 1, Business and Summary of Significant AccountingPolicies, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Management believes the accounting policies discussed below are the most critical because they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting policies and estimates, and related disclosures with the Audit Committee of our Board.

Our critical accounting policies and estimates relate to stock-based compensation, goodwill and indefinite-lived intangible assets, warranty liabilities and revenue recognition.

Description	Judgments and Uncertainties	Effect if Actual Results Differ From Assumptions
Stock-Based Compensation
We have stock-based compensation plans, which includes non-qualified stock options and stock awards. See Note 1, Business and Summary of Significant Accounting Policies, and Note 10, Shareholders’ Equity, to the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for a complete discussion of our stock-based compensation programs.	Option-pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the volatility of our stock price, future employee forfeiture rates and future employee stock option exercise behaviors. Changes in these assumptions can materially affect the fair value estimates or future earnings adjustments. Performance-based stock awards require management to make assumptions regarding the likelihood of achieving performance targets.	We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to determine stock-based compensation expense. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in stock-based compensation expense that could be material. In addition, if actual results are not consistent with the assumptions used, the stock-based compensation expense reported in our financial statements may not be representative of the actual economic cost of the stock-based compensation. Finally, if the actual forfeiture rates, or the actual achievement of performance targets, are not consistent with the assumptions used, we could experience future earnings adjustments. A 10% change in our stock-based compensation expense for the year ended December 31, 2016, would have affected net income by approximately $801,000 in 2016.

Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of cost over the fair value of identifiable net assets of businesses acquired. Our indefinite-lived intangible assets include trade names/trademarks. See Note 1, Business and Summary of Significant Accounting Policies and Note 7, Goodwill and Intangible Assets, Net, to the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for a complete discussion of our goodwill and indefinite-lived intangible assets.	The determination of fair value involves uncertainties because it requires management to make assumptions and to apply judgment to estimate industry and economic factors and the profitability of future business strategies. Management’s assumptions also include projected revenues, operating profit levels and discount rates, as well as consideration of any other factors that may indicate potential impairment.	In the fourth quarter of fiscal 2016, management completed its annual goodwill and other indefinite-lived intangible asset impairment tests and determined there was no impairment. We believe our assumptions and judgments used in estimating cash flows and determining fair value were reasonable. However, unexpected changes to such assumptions and judgments could affect our impairment analyses and future results of operations, including an impairment charge that could be material.

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Description	Judgments and Uncertainties	Effect if Actual Results Differ From Assumptions
Warranty Liabilities
We provide a limited warranty on most of the products we sell. See Note 1, Business and Summary of Significant Accounting Policies, to the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for a complete discussion of our warranty program and liabilities.	The majority of our warranty claims are incurred within the first year. However, our warranty liability contains uncertainties because our warranty obligations cover an extended period of time. A revision of estimated claim rates or the projected cost of materials and freight associated with sending replacement parts to customers could have a material adverse effect on future results of operations.	We have not made any material changes in our warranty liability assessment methodology during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our warranty liability. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 10% change in our warranty liability at December 31, 2016, would have affected net income by approximately $578,000 in 2016.
Revenue Recognition
Certain accounting estimates relating to revenue recognition contain uncertainty because they require management to make assumptions and to apply judgment regarding the effects of future events. See Note 1, Business and Summary of Significant Accounting Policies,to the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for a complete discussion of our revenue recognition policies.	Our estimates of sales returns contain uncertainties as actual sales return rates may vary from expected rates, resulting in adjustments to net sales in future periods. These adjustments could have an adverse effect on future results of operations.	We have not made any material changes in the accounting methodology used to establish our sales returns allowance during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our sales returns allowance. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to additional losses or gains in future periods. A 10% change in our sales returns allowance at December 31, 2016 would have affected net income by approximately $1.0 million in 2016.

Recent Accounting Pronouncements

See “Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1 – Business and Summary of Significant Accounting Policies - New Accounting Pronouncements” for recent accounting pronouncements that may affect our financial reporting.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Changes in the overall level of interest rates affect interest income generated from our cash and cash equivalents. If overall interest rates were one percentage point lower than current rates, our annual interest income would not change by a significant amount based on our cash and cash equivalents as of December 31, 2016 and the current low interest-rate environment. We do not manage our investment interest-rate volatility risk through the use of derivative instruments.

As of December 31, 2016, we had no borrowings under our revolving credit facility.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Select Comfort Corporation

Minneapolis, Minnesota

We have audited the internal control over financial reporting of Select Comfort Corporation and subsidiaries (the “Company”) as of December 31, 2016, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule listed in the Index at Item 15 as of and for the year ended December 31, 2016, of the Company and our report dated February 24, 2017 expressed an unqualified opinion on those consolidated financial statements and the financial statement schedule.

/s/ DELOITTE & TOUCHE LLP

Minneapolis, Minnesota

February 24, 2017

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Select Comfort Corporation

Minneapolis, Minnesota

We have audited the accompanying consolidated balance sheets of Select Comfort Corporation and subsidiaries (the “Company”) as of December 31, 2016 and January 2, 2016, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and consolidated financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2016, and January 2, 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2017 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Minneapolis, Minnesota

February 24, 2017

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Consolidated Balance Sheets

December 31, 2016 and January 2, 2016

(in thousands, except per share amounts)

	2016		2015
Assets
Current assets:
Cash and cash equivalents	$	11,609	$	20,994
Marketable debt securities – current	—		6,567
Accounts receivable, net of allowance for doubtful accounts of $884 and $1,039, respectively	19,705		29,002
Inventories	75,026		86,600
Income taxes receivable	—		15,284
Prepaid expenses	8,705		10,207
Other current assets	23,282		13,737
Total current assets	138,327		182,391
Non-current assets:
Marketable debt securities – non-current	—		8,553
Property and equipment, net	208,367		204,376
Goodwill and intangible assets, net	80,817		83,344
Deferred income taxes	4,667		3,036
Other non-current assets	24,988		19,197
Total assets	$	457,166	$	500,897
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	105,375	$	103,941
Customer prepayments	26,207		51,473
Accrued sales returns	15,222		20,562
Compensation and benefits	19,455		15,670
Taxes and withholding	23,430		9,856
Other current liabilities	35,628		23,447
Total current liabilities	225,317		224,949
Non-current liabilities:
Other non-current liabilities	71,529		53,609
Total liabilities	296,846		278,558
Shareholders’ equity:
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding	—		—
Common stock, $0.01 par value; 142,500 shares authorized, 43,569 and 49,402 shares issued and outstanding, respectively	436		494
Additional paid-in capital	—		—
Retained earnings	159,884		221,859
Accumulated other comprehensive loss	—		(14		)
Total shareholders’ equity	160,320		222,339
Total liabilities and shareholders’ equity	$	457,166	$	500,897

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Operations

Years ended December 31, 2016, January 2, 2016 and January 3, 2015

(in thousands, except per share amounts)

	2016			2015		2014
Net sales	$	1,311,291		$	1,213,699	$	1,156,757
Cost of sales	501,131			472,948		449,907
Gross profit	810,160			740,751		706,850
Operating expenses:
Sales and marketing	595,845			550,475		512,007
General and administrative	109,674			99,209		84,864
Research and development	27,991			15,971		8,233
Total operating expenses	733,510			665,655		605,104
Operating income	76,650			75,096		101,746
Other (expense) income, net	(717		)	334		362
Income before income taxes	75,933			75,430		102,108
Income tax expense	24,516			24,911		34,134
Net income	$	51,417		$	50,519	$	67,974
Basic net income per share:
Net income per share – basic	$	1.11		$	0.99	$	1.27
Weighted-average shares – basic	46,154			51,252		53,452
Diluted net income per share:
Net income per share – diluted	$	1.10		$	0.97	$	1.25
Weighted-average shares – diluted	46,902			52,101		54,193

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Comprehensive Income

Years ended December 31, 2016, January 2, 2016 and January 3, 2015

(in thousands)

	2016		2015		2014
Net income	$	51,417	$	50,519	$	67,974
Other comprehensive income (loss) – unrealized gain (loss) on available-for-sale marketable debt securities, net of income tax	14		20		(47		)
Comprehensive income	$	51,431	$	50,539	$	67,927

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Shareholders’ Equity

Years ended December 31, 2016, January 2, 2016 and January 3, 2015

(in thousands)

	Common Stock					Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income/(Loss)			Total
	Shares		Amount
Balance at December 28, 2013	54,901		$	549		$	5,382		$	219,276		$	13		$	225,220
Net income	—		—			—			67,974			—			67,974
Other comprehensive income:
Unrealized loss on available-for-sale marketable debt securities, net of tax	—		—			—			—			(47		)	(47		)
Exercise of common stock options	239		2			2,871			—			—			2,873
Tax effect from stock-based compensation	—		—			581			—			—			581
Stock-based compensation	(96	)	(1		)	6,799			—			—			6,798
Repurchases of common stock	(2,246	)	(22		)	(15,633		)	(30,837		)	—			(46,492		)
Balance at January 3, 2015	52,798		$	528		$	—		$	256,413		$	(34	)	$	256,907
Net income	—		—			—			50,519			—			50,519
Other comprehensive income:
Unrealized gain on available-for-sale marketable debt securities, net of tax	—		—			—			—			20			20
Exercise of common stock options	253		3			2,973			—			—			2,976
Tax effect from stock-based compensation	—		—			1,828			—			—			1,828
Stock-based compensation	(7	)	—			10,290			—			—			10,290
Repurchases of common stock	(3,642	)	(37		)	(15,091		)	(85,073		)	—			(100,201		)
Balance at January 2, 2016	49,402		$	494		$	—		$	221,859		$	(14	)	$	222,339
Net income	—		—			—			51,417			—			51,417
Other comprehensive income:
Unrealized gain on available-for-sale marketable debt securities, net of tax	—		—			—			—			14			14
Exercise of common stock options	188		2			2,296			—			—			2,298
Tax effect from stock-based compensation	—		—			(1,016		)	—			—			(1,016		)
Stock-based compensation	11		—			11,961			—			—			11,961
Repurchases of common stock	(6,032	)	(60		)	(13,241		)	(113,392		)	—			(126,693		)
Balance at December 31, 2016	43,569		$	436		$	—		$	159,884		$	—		$	160,320

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Cash Flows

Years Ended December 31, 2016, January 2, 2016 and January 3, 2015

(in thousands)

	2016			2015			2014
Cash flows from operating activities:
Net income	$	51,417		$	50,519		$	67,974
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	57,172			47,630			39,809
Stock-based compensation	11,961			10,290			6,798
Net loss on disposals and impairments of assets	27			190			492
Excess tax benefits from stock-based compensation	(517		)	(2,182		)	(1,163		)
Deferred income taxes	(1,640		)	11,924			(311		)
Gain on sale of non-marketable equity securities	—			(6,891		)	—
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable	9,297			(9,259		)	(4,717		)
Inventories	11,574			(33,065		)	(13,383		)
Income taxes	25,119			(13,943		)	(4,314		)
Prepaid expenses and other assets	(2,195		)	8,680			(9,973		)
Accounts payable	(4,965		)	19,130			14,340
Customer prepayments	(25,266		)	22,735			13,334
Accrued compensation and benefits	2,808			(17,493		)	17,735
Other taxes and withholding	2,723			135			2,584
Other accruals and liabilities	14,130			19,542			15,263
Net cash provided by operating activities	151,645			107,942			144,468
Cash flows from investing activities:
Purchases of property and equipment	(57,852		)	(85,586		)	(76,594		)
Proceeds from marketable debt securities	21,053			127,664			54,506
Investments in marketable debt securities	(5,968		)	(29,299		)	(90,349		)
Proceeds from sales of property and equipment	92			72			5
Acquisition of business	—			(70,018		)	—
Proceeds from (investment in) non-marketable equity securities	—			12,891			(1,500		)
Increase in restricted cash	—			—			(500		)
Net cash used in investing activities	(42,675		)	(44,276		)	(114,432		)
Cash flows from financing activities:
Repurchases of common stock	(126,693		)	(100,201		)	(46,492		)
Net increase in short-term borrowings	5,932			1,097			6,192
Proceeds from issuance of common stock	2,298			2,976			2,873
Excess tax benefits from stock-based compensation	517			2,182			1,163
Debt issuance costs	(409		)	(721		)	—
Net cash used in financing activities	(118,355		)	(94,667		)	(36,264		)
Net decrease in cash and cash equivalents	(9,385		)	(31,001		)	(6,228		)
Cash and cash equivalents, at beginning of period	20,994			51,995			58,223
Cash and cash equivalents, at end of period	$	11,609		$	20,994		$	51,995
Supplemental Disclosure of Cash Flow Information
Income taxes (received) paid	$	(653	)	$	26,681		$	38,474
Interest paid	$	608		$	96		$	49
Purchases of property and equipment included in accounts payable	$	5,517		$	5,051		$	5,802

See accompanying notes to consolidated financial statements.

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Notes to Consolidated Financial Statements

(1) Business and Summary of Significant Accounting Policies

Business & Basis of Presentation

Select Comfort Corporation and our 100%-owned subsidiaries (Select Comfort or the Company) have a vertically integrated business model and are the exclusive designer, manufacturer, marketer, retailer and servicer of a complete line of Sleep Number beds. We are the pioneer in biometric sleep tracking and adjustability. Only the Sleep Number bed offers SleepIQ technology - proprietary sensor technology that works directly with the bed’s DualAir system to track each individual’s sleep. SleepIQ technology communicates how you slept and what adjustments you can make to optimize your sleep and improve your daily life. Select Comfort also offers FlextFit adjustable bases, and Sleep Number pillows, sheets and other bedding products.

As the only national specialty-mattress retailer, we generate revenue by selling products through two distribution channels. Our Company-Controlled channel, which includes Retail, Online and Phone, sells directly to consumers. Our Wholesale/Other channel sells to and through selected retail and wholesale customers in the United States and the QVC shopping channel. The consolidated financial statements include the accounts of Select Comfort Corporation and our subsidiaries. All significant intra-entity balances and transactions have been eliminated in consolidation.

Fiscal Year

Our fiscal year ends on the Saturday closest to December 31. Fiscal years and their respective fiscal year ends were as follows: fiscal 2016 ended December 31, 2016; fiscal 2015 ended January 2, 2016; and fiscal 2014 ended January 3, 2015. Fiscal years 2016 and 2015 each had 52 weeks and fiscal year 2014 had 53 weeks.

Use of Estimates in the Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of sales, expenses and income taxes during the reporting period. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the financial statements in future periods. Our critical accounting policies consist of stock-based compensation, goodwill and indefinite-lived intangible assets, warranty liabilities and revenue recognition.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with original maturities of three months or less. The carrying value of these investments approximates fair value due to their short-term maturity. Our banking arrangements allow us to fund outstanding checks when presented to the financial institution for payment, resulting in book overdrafts. Book overdrafts are included in accounts payable in our consolidated balance sheets and in net increase in short-term borrowings in the financing activities section of our consolidated statements of cash flows. Book overdrafts totaled $26.6 million and $20.7 million at December 31, 2016, and January 2, 2016, respectively.

Marketable Debt Securities

Our investment portfolio was comprised of U.S. agency securities, corporate debt securities and municipal bonds. The value of these securities was subject to market and credit volatility during the period these investments were held. We classify marketable debt securities as available-for-sale investments and these securities were stated at their estimated fair value. Our investments with original maturities of greater than three months, but current maturities of less than one year, are recorded as marketable debt securities – current. Our investments with current maturities of more than one year are recorded as marketable debt securities – non-current. Unrealized gains and losses, net of income tax, are reported as a component of accumulated other comprehensive income (loss) in our consolidated balance sheets. Other-than-temporary declines in market value, if any, from original cost are charged to other (expense) income, net in the consolidated statements of operations in the period in which the loss occurs, and a new cost basis for the security is

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Notes to Consolidated Financial Statements - (continued)

established. In determining whether an other-than-temporary decline in the market value has occurred, we consider the duration and extent that the fair value of the investment is below its cost. Realized gains and losses, if any, are calculated on the specific identification method and are measured and reclassified from accumulated other comprehensive income (loss) in our consolidated balance sheets to other (expense) income, net in our consolidated statements of operations.

Concentration of Credit Risk

Our investment policy’s primary focus is to preserve principal and maintain adequate liquidity. Our investment policy addresses the concentration of credit risk by limiting the concentration in certain investment types. Our exposure to a concentration of credit risk consists primarily of cash and cash equivalents. We place our cash with high-credit quality issuers and financial institutions. We previously held investments in U.S. agency securities, corporate debt securities and municipal bonds. We believe no significant concentration of credit risk exists with respect to our cash and cash equivalents.

Accounts Receivable

Accounts receivable are recorded net of an allowance for expected losses and consist primarily of receivables from wholesale customers and receivables from third-party financiers for customer credit card purchases. The allowance is recognized in an amount equal to anticipated future write-offs. We estimate future write-offs based on delinquencies, aging trends, industry risk trends, our historical experience and current trends. Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered.

Inventories

Inventories include materials, labor and overhead and are stated at the lower of cost or market. Cost is determined by the first-in, first-out method.

Property and Equipment

Property and equipment, carried at cost, is depreciated using the straight-line method over the estimated useful lives of the assets. The cost and related accumulated depreciation of assets sold or retired is removed from the accounts with any resulting gain or loss included in net income in our consolidated statements of operations. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments that extend useful life are capitalized.

Leasehold improvements are depreciated over the shorter of the estimated useful lives of the assets or the contractual term of the lease, with consideration of lease renewal options if renewal appears probable.

Estimated useful lives of our property and equipment by major asset category are as follows:

Leasehold improvements	5 to 11 years
Furniture and equipment	5 to 7 years
Production machinery	3 to 7 years
Computer equipment and software	3 to 12 years

Goodwill and Intangible Assets, Net

Goodwill is the difference between the purchase price of a company and the fair market value of the acquired company's net identifiable assets. Our intangible assets include developed technologies, trade names/trademarks and customer relationships. Definite-lived intangible assets are being amortized using the straight-line method over their estimated lives, ranging from 7-10 years.

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Notes to Consolidated Financial Statements - (continued)

Asset Impairment Charges

Long-lived Assets and Definite-lived Intangible Assets - we review our long-lived assets and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the estimated future cash flows (undiscounted and without interest charges - plus proceeds expected from disposition, if any). If the estimated undiscounted cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value. When we recognize an impairment loss, the carrying amount of the asset is reduced to estimated fair value based on discounted cash flows, quoted market prices or other valuation techniques. Assets to be disposed of are reported at the lower of the carrying amount of the asset or fair value less costs to sell. We review retail store assets for potential impairment based on historical cash flows, lease termination provisions and expected future retail store operating results. If we recognize an impairment loss for a depreciable long-lived asset, the adjusted carrying amount of the asset becomes its new cost basis and will be depreciated (amortized) over the remaining useful life of that asset.

Goodwill and Indefinite-lived Intangible Assets - goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment annually or when there are indicators of impairment using a fair value approach. The Financial Accounting Standards Board's (FASB) guidance allows us to perform either a quantitative assessment or a qualitative assessment before calculating the fair value of a reporting unit. We have elected to perform the quantitative assessment. The quantitative goodwill impairment test is a two-step process. The first step is a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If this step reflects impairment, then the loss would be measured as the excess of recorded goodwill over its implied fair value. Implied fair value is the excess of fair value of the reporting unit over the fair value of all identified assets and liabilities. Fair value is determined using a market-based approach utilizing widely accepted valuation techniques, including quoted market prices and our market capitalization. Indefinite-lived intangible assets are assessed for impairment by comparing the carrying value of an asset with its fair value. If the carrying value exceeds fair value, an impairment loss is recognized in an amount equal to the excess. Based on our 2016 assessments, we determined there was no impairment.

Warranty Liabilities

We provide a limited warranty on most of the products we sell. The estimated warranty costs, which are expensed at the time of sale and included in cost of sales, are based on historical trends and warranty claim rates incurred by us and are adjusted for any current trends as appropriate. Actual warranty claim costs could differ from these estimates. We regularly assess and adjust the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs.

We classify as non-current those estimated warranty costs expected to be paid out in greater than one year. The activity in the accrued warranty liabilities account was as follows (in thousands): 

	2016			2015			2014
Balance at beginning of period	$	10,028		$	5,824		$	4,153
Additions charged to costs and expenses for current-year sales	9,034			9,368			9,437
Deductions from reserves	(10,016		)	(6,486		)	(8,118		)
Changes in liability for pre-existing warranties during the current year, including expirations	(413		)	1,322			352
Balance at end of period	$	8,633		$	10,028		$	5,824

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Notes to Consolidated Financial Statements - (continued)

Fair Value Measurements

Fair value measurements are reported in one of three levels based on the lowest level of significant input used:

• Level 1 – observable inputs such as quoted prices in active markets;

• Level 2 – inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

• Level 3 – unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Our Level 2 securities included U.S. Agency bonds, corporate bonds and municipal bonds whose value is determined by a third-party pricing service using inputs that are observable in the market or can be derived principally from or corroborated by observable market data such as pricing for similar securities, recently executed transactions, cash flow models with yield curves and benchmark securities. We did not hold any Level 3 securities at December 31, 2016 or January 2, 2016.

We generally estimate fair value of long-lived assets, including our retail stores, using the income approach, which we base on estimated future cash flows (discounted and with interest charges). The inputs used to determine fair value relate primarily to future assumptions regarding sales volumes, gross profit rates, retail store operating expenses and applicable probability weightings regarding future alternative uses. These inputs are categorized as Level 3 inputs under the fair value measurements guidance. The inputs used represent management’s assumptions about what information market participants would use in pricing the assets and are based upon the best information available at the balance sheet date.

Dividends

We are not restricted from paying cash dividends under our credit agreement so long as we are not in default under the credit agreement and so long as the payment of such dividends would not create an event of default. However, we have not historically paid, and have no current plans to pay, cash dividends on our common stock.

Revenue Recognition

Revenue is recognized when the sales price is fixed or determinable, collectability is reasonably assured and title passes. Amounts billed to customers for delivery and setup are included in net sales. Revenue is reported net of estimated sales returns and excludes sales taxes.

We accept sales returns after a 100-night trial period. The accrued sales returns estimate is based on historical return rates and is adjusted for any current trends as appropriate. If actual returns vary from expected rates, sales in future periods are adjusted.

Our SleepIQ system is a multiple-element arrangement with deliverables that include a bed, hardware and software. We analyze our multiple-element arrangement(s) to determine whether the deliverables can be separated or whether they must be accounted for as a single unit of accounting. We determined that the SleepIQ system has two units of accounting consisting of: (i) the bed; and (ii) the hardware/software. The hardware and software are not separable as the hardware and related software are not sold separately and the software is integral to the hardware’s functionality. We valued the two units of accounting based on their relative selling prices.

At December 31, 2016 and January 2, 2016, we had deferred revenue totaling $61.3 million and $33.6 million, of which $21.0 million and $7.7 million are included in other current liabilities, respectively, and $40.3 million and $25.9 million are included in other non-current liabilities, respectively, in our consolidated balance sheets. We also have related deferred costs totaling $33.2 million and $21.6 million, of which $11.6 million and $5.0 million are included in other current assets, respectively, and $21.6 million and $16.6 million are included in other non-current assets, respectively, in our consolidated balance sheets. The deferred revenue and costs are recognized over the product’s estimated life of four years.

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Notes to Consolidated Financial Statements - (continued)

Cost of Sales, Sales and Marketing, General and Administrative (G&A) and Research & Development (R&D) Expenses

The following tables summarize the primary costs classified in each major expense category (the classification of which may vary within our industry):

Cost of Sales	Sales & Marketing
•  Costs associated with purchasing, manufacturing, shipping, handling and delivering our products to our retail stores and customers; •  Physical inventory losses, scrap and obsolescence; •  Related occupancy and depreciation expenses; •  Costs associated with returns and exchanges; and •  Estimated costs to service customer warranty claims.	•  Advertising and media production; •  Marketing and selling materials such as brochures, videos, websites, customer mailings and in-store signage; •  Payroll and benefits for sales and customer service staff; •  Store occupancy costs; •  Store depreciation expense; •  Credit card processing fees; and •  Promotional financing costs.
G&A	R&D(1)
•  Payroll and benefit costs for corporate employees, including information technology, legal, human resources, finance, sales and marketing administration, investor relations and risk management; •   Occupancy costs of corporate facilities; •   Depreciation related to corporate assets; •   Information hardware, software and maintenance; •   Insurance; •   Investor relations costs; and •   Other overhead costs.	•  Internal labor and benefits related to research and development activities; •  Outside consulting services related to research and development activities; and •  Testing equipment related to research and development activities. (1) Costs incurred in connection with R&D are charged to expense as incurred.

Operating Leases

We lease our retail, office and manufacturing space under operating leases which, in addition to the minimum lease payments, may require payment of a proportionate share of the real estate taxes and certain building operating expenses. Our retail store leases generally provide for an initial lease term of five to 10 years. In addition, our mall-based retail store leases may require payment of contingent rent based on net sales in excess of certain thresholds. Certain retail store leases may contain options to extend the term of the original lease.

Minimum rent expense, which excludes contingent rents, is recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. We record any difference between the straight-line rent amounts and amounts payable under the leases as part of deferred rent, in other current liabilities or other non-current liabilities, as appropriate. The lease term for purposes of the calculation begins on the earlier of the lease commencement date or the date we take possession of the property. During lease renewal negotiations that extend beyond the original lease term, we estimate straight-line rent expense based on current market conditions. At December 31, 2016, and January 2, 2016, deferred rent included in other current liabilities in our consolidated balance sheets was $0.2 million and $0.4 million, respectively, and deferred rent included in other non-current liabilities in our consolidated balance sheets was $9.6 million and $7.5 million, respectively. Contingent rent expense is recorded when it is probable the expense has been incurred and the amount is reasonably estimable. Future payments for real estate taxes and certain building operating expenses for which we are obligated are not included in minimum lease payments.

Leasehold improvements that are funded by landlord incentives or allowances under an operating lease are recorded as deferred lease incentives, in other current liabilities or other non-current liabilities, as appropriate and amortized as reductions to rent expense over the lease term. At December 31, 2016, and January 2, 2016, deferred lease incentives included in other current liabilities in our consolidated balance sheets were $2.9 million and $2.8 million, respectively, and deferred lease incentives included in other non-current liabilities in our consolidated balance sheets were $8.9 million and $7.9 million, respectively.

Pre-Opening Costs

Costs associated with the start-up and promotion of new retail store openings are expensed as incurred.

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Notes to Consolidated Financial Statements - (continued)

Advertising Costs

We incur advertising costs associated with print, digital and broadcast advertisements. Advertising costs are charged to expense when the ad first runs. Advertising expense was $189.8 million, $180.8 million and $158.5 million in 2016, 2015 and 2014, respectively. Advertising costs deferred and included in prepaid expenses in our consolidated balance sheets were $1.2 million and $4.5 million as of December 31, 2016, and January 2, 2016, respectively.

Insurance

We are self-insured for certain losses related to health and workers’ compensation claims, although we obtain third-party insurance coverage to limit exposure to these claims. We estimate our self-insured liabilities using a number of factors including historical claims experience and analysis of incurred but not reported claims. Our self-insurance liability was $6.2 million and $7.7 million at December 31, 2016, and January 2, 2016, respectively. At December 31, 2016, and January 2, 2016, $3.5 million and $4.0 million, respectively, were included in compensation and benefits and $2.7 million and $3.7 million, respectively, were included in other non-current liabilities in our consolidated balance sheets. At December 31, 2016 and January 2, 2016, we had a restricted deposit of $3.2 million with our insurer that serves as collateral for our workers’ compensation insurance obligations and was included in other current assets in our consolidated balance sheets.

Software Capitalization

For software developed or obtained for internal use, we capitalize direct external costs associated with developing or obtaining internal-use software. In addition, we capitalize certain payroll and payroll-related costs for employees who are directly involved with the development of such applications. Capitalized costs related to internal-use software under development are treated as construction-in-progress until the program, feature or functionality is ready for its intended use, at which time depreciation commences. We expense any data conversion or training costs as incurred.

Stock-Based Compensation

We compensate officers, directors and key employees with stock-based compensation under two stock plans approved by our shareholders in 2004 and 2010 and administered under the supervision of our Board of Directors (Board). At December 31, 2016, a total of 3.9 million shares were available for future grant under the 2010 stock plan. These plans include non-qualified stock options and stock awards.

We record stock-based compensation expense based on the award’s fair value at the grant date and the awards that are expected to vest. We recognize stock-based compensation expense over the period during which an employee is required to provide services in exchange for the award. We reduce compensation expense by estimated forfeitures. Forfeitures are estimated using historical experience and projected employee turnover. We include, as part of cash flows from financing activities, the benefit of tax deductions in excess of recognized stock-based compensation expense. See "New Accounting Pronouncements" below regarding revised guidance for stock-based compensation in 2017.

Stock Options - stock option awards are granted at exercise prices equal to the closing price of our stock on the grant date. Generally, options vest proportionally over 3 years and expire after 10 years. Compensation expense is recognized ratably over the vesting period.

We determine the fair value of stock options granted and the resulting compensation expense at the date-of-grant using the Black-Scholes-Merton option-pricing model and a single option award approach. Descriptions of significant assumptions used to estimate the expected volatility, risk-free interest rate and expected term are as follows:

Expected Volatility – expected volatility was determined based on implied volatility of our traded options and historical volatility of our stock price.

Risk-Free Interest Rate – the risk-free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues at the date of grant with a term equal to the expected term.

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Notes to Consolidated Financial Statements - (continued)

Expected Term – expected term represents the period that our stock-based awards are expected to be outstanding and was determined based on historical experience and anticipated future exercise patterns, giving consideration to the contractual terms of unexercised stock-based awards.

Stock Awards - we issue stock awards to certain employees in conjunction with our stock-based compensation plan. The stock awards generally vest over three years based on continued employment (time based). Compensation expense related to stock awards, except for stock awards with a market condition, is determined on the grant date based on the publicly quoted closing price of our common stock and is charged to earnings on a straight-line basis over the vesting period. Stock awards with a market condition are valued using a Monte Carlo simulation model. The significant assumptions used to estimate the expected volatility and risk-free interest rate are similar to those described above in Stock Options.

Certain time-based stock awards have either a performance condition (performance-based) or a market condition (market-based).

Performance-based Stock Awards – the final number of shares earned and the related compensation expense is adjusted up or down to the extent the performance target is met as of the last day of the performance period. The actual number of shares that will ultimately be awarded range from 0% - 200% of the targeted amount for the 2016, 2015 and 2014 awards. We evaluate the likelihood of meeting the performance targets at each reporting period and adjust compensation expense, on a cumulative basis, based on the expected achievement of each of the performance targets. For performance-based stock awards granted in 2016, 2015 and 2014, the performance targets are growth in net sales and in operating profit, and the performance periods are fiscal 2016 through 2018, fiscal 2015 through 2017, and 2014 through 2016, respectively.

Market-based Stock Awards – the related compensation expense is fixed, however, the final number of shares earned is adjusted to the extent that the market condition is achieved during the performance period. The actual number of shares that will ultimately be awarded range from 0% to 100% of the target amount for 2014 awards. There were no market-based stock awards granted in 2016 or 2015. For the market-based stock awards granted in 2014, the market condition was based on increases in our stock price for a specified number of sequential days and the performance period is three years beginning on the date of grant, which was March 28, 2014. As of December 31, 2016, the market condition had been achieved.

See Note 10, Shareholders’ Equity, for additional information on stock-based compensation.

Income Taxes

We recognize deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established for any portion of deferred tax assets that are not considered more likely than not to be realized. We evaluate all available positive and negative evidence, including our forecast of future taxable income, to assess the need for a valuation allowance on our deferred tax assets.

We record a liability for unrecognized tax benefits from uncertain tax positions taken, or expected to be taken, in our tax returns. We follow a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments, and may not accurately forecast actual outcomes.

We classify net interest and penalties on tax uncertainties as a component of income tax expense in our consolidated statements of operations.

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Notes to Consolidated Financial Statements - (continued)

Net Income Per Share

We calculate basic net income per share by dividing net income by the weighted-average number of common shares outstanding during the period. We calculate diluted net income per share based on the weighted-average number of common shares outstanding adjusted by the number of potentially dilutive common shares as determined by the treasury stock method. Potentially dilutive shares consist of stock options and stock awards.

Sources of Supply

We currently obtain materials and components used to produce our beds from outside sources. As a result, we are dependent upon suppliers that in some instances, are our sole source of supply. We are continuing our efforts to dual-source key components. The failure of one or more of our suppliers to provide us with materials or components on a timely basis could significantly impact our consolidated results of operations and net income per share. We believe we can obtain these raw materials and components from other sources of supply in the ordinary course of business, although an unexpected loss of supply over a short period of time may not allow us to replace these sources in the ordinary course of business.

New Accounting Pronouncements

Adopted

In November 2015, the FASB issued new guidance related to classification of deferred taxes. The new guidance requires that deferred tax liabilities and assets be classified as non-current on the balance sheet. It is effective for interim and annual periods beginning after December 15, 2016, but early adoption is permitted. We elected to early adopt this guidance as of December 31, 2016 on a retrospective basis. The new guidance did not impact our consolidated results of operations or operating cash flows. Adoption of the new standard impacted our previously reported consolidated balance sheet as follows for the period ended January 2, 2016 (in thousands):

	As Adjusted		As Reported
Current assets:
Deferred income taxes	$	—	$	15,535
Non-current assets:
Deferred income taxes	$	3,036	$	—
Non-current liabilities:
Deferred income taxes	$	—	$	12,499

Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued a comprehensive new revenue recognition model that requires a company to recognize revenue in a manner that depicts the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This new guidance was originally effective for fiscal years beginning after December 15, 2016 and early adoption was not permitted. In July 2015, the FASB deferred the effective date from fiscal years beginning after December 15, 2016 to fiscal years beginning after December 15, 2017 (including interim reporting periods within those fiscal years). Early adoption is permitted to the original effective date of fiscal years beginning after December 15, 2016 (including interim reporting periods within those fiscal years). Companies may use either a full retrospective or a modified retrospective approach to adopt this new guidance. We are evaluating the effect of the new standard on our consolidated financial statements and related disclosures, and have not yet selected a transition method.

In February 2016, the FASB issued new guidance on accounting for leases that generally requires most leases to be recognized on the balance sheet. This new guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The provisions of this new guidance are to be applied using a modified retrospective approach, with elective reliefs, which requires application of the new guidance for all periods presented. We are evaluating the effect of the new standard on our consolidated financial statements and related disclosures.

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Notes to Consolidated Financial Statements - (continued)

In March 2016, the FASB issued new guidance on the accounting for, and disclosure of, stock-based compensation which will be effective for us beginning in 2017. The new guidance is intended to simplify several aspects of the accounting for stock-based compensation arrangements, including the income tax impact, forfeitures and classification on the statement of cash flows. Under the current guidance, excess tax benefits and deficiencies have been recognized in additional paid-in capital in the consolidated balance sheets. Upon adoption of the new guidance, these excess tax benefits or deficiencies are required to be recognized as discrete adjustments to income tax expense in the consolidated statements of operations. We will adopt the new guidance on a prospective basis and these discrete adjustments could have a material impact on income tax expense and net income.

(2) Acquisition of BAM Labs, Inc.

In September 2015, we completed the acquisition of BAM Labs, Inc. (now operating as SleepIQ LABS), the leading provider of biometric sensor and sleep monitoring for data-driven health and wellness. The addition of SleepIQ LABS strengthens Sleep Number’s leadership in sleep innovation, adjustability and individualization. The acquisition broadens and deepens electrical, biomedical, software and backend capabilities - API (application program interface) and bio-signal analysis. Our ownership and control of biometric data advances smart, connected products that empower our customers with the knowledge to adjust for their best sleep.

We previously held a $6.0 million minority equity investment in BAM Labs, Inc. based on the cost method (see Note 4, Investments, for further details). In connection with the acquisition, our equity investment was remeasured to a fair value of $12.9 million. We acquired the remaining capital stock of BAM Labs, Inc. for $57.1 million for a total enterprise value of $70.0 million. Our consolidated statement of operations included $13.0 million and $3.3 million of SleepIQ LABS research and development expenses for the years ended December 31, 2016 and January 2, 2016, respectively. The acquisition of SleepIQ LABS did not have a significant impact on our consolidated results of operations, operating cash flows or financial position for the years ended December 31, 2016 or January 2, 2016.

The following table summarizes the fair value of the net assets acquired as of the acquisition date (in thousands):

Accounts receivable	$	105
Prepaid expenses	98
Property and equipment	91
Deferred income taxes	2,754
Goodwill	55,083
Intangible assets	13,619
Total assets acquired	71,750
Accounts payable	269
Compensation and benefits	322
Other non-current liabilities	1,141
Total liabilities acquired	1,732
Net assets acquired	$	70,018

Intangible assets of $13.6 million consisted of developed technologies with an estimated useful life of eight years. The goodwill will not be deductible for income tax purposes.

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Notes to Consolidated Financial Statements - (continued)

(3) Fair Value Measurements

The following table sets forth by level within the fair value hierarchy, our financial assets at January 2, 2016, that were accounted for at fair value on a recurring basis, according to the valuation techniques we used to determine their fair value (in thousands). At December 31, 2016, we did not hold any financial assets that required a fair value measurement on a recurring basis.

	January 2, 2016
	Level 1		Level 2		Level 3		Total
Marketable debt securities – current
Municipal bonds	$	—	$	4,055	$	—	$	4,055
Corporate bonds	—		2,512		—		2,512
	—		6,567		—		6,567
Marketable debt securities – non-current
Corporate bonds	—		5,001		—		5,001
U.S. Agency bonds	—		2,496		—		2,496
Municipal bonds	—		1,056		—		1,056
	—		8,553		—		8,553
	$	—	$	15,120	$	—	$	15,120

At December 31, 2016 and January 2, 2016, we had $2.3 million and $1.6 million, respectively, of debt and equity securities that fund our deferred compensation plan and are classified in other non-current assets. We also had corresponding deferred compensation plan liabilities of $2.3 million and $1.6 million at December 31, 2016 and January 2, 2016, respectively, which are included in other non-current liabilities. The majority of the debt and equity securities are Level 1 as they trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis. Unrealized gains/(losses) on the debt and equity securities offset those associated with the corresponding deferred compensation plan liabilities.

(4) Investments

Marketable Debt Securities

The following table sets forth our investments in marketable debt securities at January 2, 2016 (in thousands). We did not hold any marketable debt securities at December 31, 2016.

	January 2, 2016
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Corporate bonds	$	7,532	$	—	$	(19	)	$	7,513
U.S. Agency bonds	2,497		—		(1		)	2,496
Municipal bonds	5,114		—		(3		)	5,111
	$	15,143	$	—	$	(23	)	$	15,120

Maturities of marketable debt securities were as follows (in thousands):

	January 2, 2016
	Amortized Cost		Fair Value
Marketable debt securities – current (due in less than one year)	$	6,575	$	6,567
Marketable debt securities – non-current (due in one to two years)	8,568		8,553
	$	15,143	$	15,120

During 2016, 2015 and 2014, respectively, we received proceeds of $21.1 million, $127.5 million and $54.2 million, respectively, from marketable debt securities.

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Notes to Consolidated Financial Statements - (continued)

Other Investments

We previously held a minority equity investment in one of our strategic product-development partners, BAM Labs, Inc. In September 2015, we completed the acquisition of the remaining outstanding capital stock of BAM Labs, Inc. The carrying value of our equity investment in BAM Labs, Inc. prior to the acquisition was $6.0 million based on the cost method. In connection with the acquisition, our equity investment was remeasured to a fair value of $12.9 million, resulting in a $3.5 million gain net of expenses, including $3.4 million of acquisition-related expenses. The remeasured fair value of our equity investment was based on the fair value of BAM Labs, Inc. at the acquisition date. The net gain of $3.5 million is included in general and administrative expenses on our consolidated statement of operations for the fiscal year ended January 2, 2016. See Note 2, Acquisition of BAM Labs, Inc., for details regarding this acquisition.

(5) Inventories

Inventories consisted of the following (in thousands):

	December 31, 2016		January 2, 2016
Raw materials	$	7,973	$	9,349
Work in progress	72		48
Finished goods	66,981		77,203
	$	75,026	$	86,600

Our finished goods inventory, as of December 31, 2016, was comprised of $20.7 million of finished beds, including retail display beds and deliveries in-transit to those customers who have utilized home delivery services, $29.2 million of finished components that were ready for assembly for the completion of beds, and $17.1 million of retail accessories.

Our finished goods inventory, as of January 2, 2016, was comprised of $22.5 million of finished beds, including retail display beds and deliveries in-transit to those customers who have utilized home delivery services, $40.3 million of finished components that were ready for assembly for the completion of beds, and $14.4 million of retail accessories.

(6) Property and Equipment

Property and equipment consisted of the following (in thousands):

	December 31, 2016			January 2, 2016
Land	$	1,999		$	1,999
Leasehold improvements	97,600			91,184
Furniture and equipment	81,541			68,276
Production machinery, computer equipment and software	209,900			191,482
Property under capital lease	—			1,077
Construction in progress	13,823			3,540
Less: Accumulated depreciation and amortization	(196,496		)	(153,182		)
	$	208,367		$	204,376

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Notes to Consolidated Financial Statements - (continued)

(7) Goodwill and Intangible Assets, Net

Goodwill and Indefinite-Lived Intangible Assets

The following is a roll forward of goodwill and indefinite-lived trade name/trademarks (in thousands):

	Twelve Months Ended				Twelve Months Ended
	December 31, 2016				January 2, 2016
	Goodwill		Indefinite-Lived Trade Name/ Trademarks		Goodwill		Indefinite-Lived Trade Name/ Trademarks
Beginning balance	$	64,046	$	1,396	$	8,963	$	1,396
SleepIQ LABS	—		—		55,083		—
Ending balance	$	64,046	$	1,396	$	64,046	$	1,396

Definite-Lived Intangible Assets

The following table provides the gross carrying amount and related accumulated amortization of our definite-lived intangible assets (in thousands):

	December 31, 2016				January 2, 2016
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Developed technologies(1)	$	18,851	$	4,524	$	18,851	$	2,342
Customer relationships	2,413		1,365		2,413		1,020
Trade names/trademarks	101		101		101		101
	$	21,365	$	5,990	$	21,365	$	3,463

___________________

⁽¹⁾ In September 2015, in connection with the acquisition of BAM Labs, Inc. (now operating as SleepIQ LABS), we acquired $13.6 million of definite-lived intangible assets consisting of developed technologies.

Amortization expense in 2016, 2015 and 2014 for definite-lived intangible assets was $2.5 million, $1.3 million and $0.8 million, respectively. Annual amortization for definite-lived intangible assets is expected to be approximately $2.5 million for 2017 through 2019 and $2.2 million for 2020 and 2021.

See Note 2, Acquisition of BAM Labs, Inc., for additional details.

8) Leases

Rent expense was as follows (in thousands):

Facility Rents:	2016		2015		2014
Minimum rents	$	59,002	$	52,650	$	47,754
Contingent rents	3,099		5,168		6,241
Total	$	62,101	$	57,818	$	53,995
Equipment Rents	$	5,316	$	4,362	$	3,609

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Notes to Consolidated Financial Statements - (continued)

The aggregate minimum rental commitments under operating leases for subsequent years are as follows (in thousands):

2017	$	66,493
2018	58,964
2019	49,322
2020	42,862
2021	37,517
Thereafter	137,239
Total future minimum lease payments	$	392,397

(9) Credit Agreement

Our revolving credit facility, as amended, has a net aggregate availability of $150 million. The credit facility is for general corporate purposes and is utilized to meet our seasonal working capital requirements. The credit facility contains an accordion feature that allows us to increase the amount of the available credit from $150 million up to $200 million, subject to lenders' approval. The credit facility matures in February 2021.

The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio and a minimum interest coverage ratio. Under the terms of the credit agreement we pay a variable rate of interest and a commitment fee based on our leverage ratio. As of December 31, 2016, we had no outstanding borrowings or letters of credit and we were in compliance with all financial covenants.

(10) Shareholders’ Equity

Stock-Based Compensation Expense

Total stock-based compensation expense was as follows (in thousands):

	2016		2015		2014
Stock options	$	2,281	$	2,634	$	2,125
Stock awards	9,680		7,656		4,673
Total stock-based compensation expense(1)	11,961		10,290		6,798
Income tax benefit	3,947		3,413		2,284
Total stock-based compensation expense, net of tax	$	8,014	$	6,877	$	4,514

___________________

⁽¹⁾ Reflects a $1.2 million benefit in 2014 related to a change in estimated forfeitures due to employee turnover.

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Notes to Consolidated Financial Statements - (continued)

Stock Options

A summary of our stock option activity was as follows (in thousands, except per share amounts and years):

	Stock Options		Weighted- Average Exercise Price per Share		Weighted- Average Remaining  Contractual Term (years)	Aggregate Intrinsic Value (1)
Balance at January 2, 2016	1,388		$	18.44	5.3	$	7,366
Granted	299		19.19
Exercised	(188	)	12.21
Canceled/Forfeited	(145	)	25.71
Outstanding at December 31, 2016	1,354		$	18.70	5.9	$	7,541
Exercisable at December 31, 2016	927		$	17.40	4.6	$	6,264
Vested and expected to vest at December 31, 2016	1,315		$	18.61	5.9	$	7,442

___________________

⁽¹⁾  Aggregate intrinsic value includes only those options where the current share price is equal to or greater than the share price on the date of grant.

Other information pertaining to options was as follows (in thousands, except per share amounts):

	2016		2015		2014
Weighted-average grant date fair value of stock options granted	$	8.85	$	15.94	$	9.33
Total intrinsic value (at exercise) of stock options exercised	$	2,088	$	4,592	$	2,478

Cash received from the exercise of stock options for the fiscal year ended December 31, 2016 was $2.3 million. Our tax benefit related to the exercise of stock options for the fiscal year ended December 31, 2016 was $0.8 million.

At December 31, 2016, there was $2.6 million of total stock option compensation expense related to non-vested stock options not yet recognized, which is expected to be recognized over a weighted-average period of 1.8 years.

During fiscal 2016, 30,500 market-based stock options were granted and had a weighted-average grant date fair value of $10.25 per option. These options are reflected in the stock option activity table above. There were no market-based stock options granted in 2015 or 2014. The assumptions used to calculate the fair value of market-based stock options granted using the Monte Carlo simulation model were as follows:

Valuation Assumptions	2016		2015	2014
Expected dividend yield	0	%	NA	NA
Expected volatility	50	%	NA	NA
Risk-free interest rate	1.8	%	NA	NA

Except for the market-based stock options discussed above, the fair value of options granted was calculated using the Black-Scholes-Merton option-pricing model.

The assumptions used to calculate the fair value of options granted using the Black-Scholes-Merton option-pricing model were as follows:

Valuation Assumptions	2016		2015		2014
Expected dividend yield	0	%	0	%	0	%
Expected volatility	50	%	54	%	58	%
Risk-free interest rate	1.4	%	1.6	%	1.8	%
Expected term (in years)	5.2		5.2		5.3

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Notes to Consolidated Financial Statements - (continued)

Stock Awards

Stock award activity was as follows (in thousands, except per share amounts):

	Time- Based Stock Awards		Weighted-Average Grant Date Fair Value	Performance- and Market-Based Stock Awards		Weighted-Average Grant Date Fair Value
Outstanding at January 2, 2016	454		$23.14	710		$22.01
Granted	289		19.78	347		18.84
Vested	(189	)	24.55	(52	)	24.57
Canceled/Forfeited	(24	)	21.34	(106	)	20.24
Outstanding at December 31, 2016	530		$20.83	899		$20.87

At December 31, 2016, there was $5.2 million of unrecognized compensation expense related to non-vested time-based stock awards, which is expected to be recognized over a weighted-average period of 1.7 years and $7.8 million of unrecognized compensation expense related to non-vested performance- and market-based stock awards, which is expected to be recognized over a weighted-average period of 1.9 years.

During fiscal 2014, 126,550 market-based stock awards were granted and had a weighted-average grant date fair value of $14.90 per award. These stock awards are reflected in the "Performance- and Market-Based Stock Awards" column in the stock award activity table above. There were no market-based stock awards granted in 2016 or 2015. The assumptions used to calculate the fair value of market-based stock awards granted using the Monte Carlo simulation model were as follows:

Valuation Assumptions	2016	2015	2014
Expected dividend yield	NA	NA	0%
Expected volatility	NA	NA	58%
Risk-free interest rate	NA	NA	0.9%

Repurchases of Common Stock

Repurchases of our common stock were as follows (in thousands): 

	2016		2015		2014
Amount repurchased under Board-approved share repurchase program	$	125,000	$	98,446	$	45,044
Amount repurchased in connection with the vesting of employee restricted stock grants	1,693		1,755		1,448
Total amount repurchased	$	126,693	$	100,201	$	46,492

As of December 31, 2016, the remaining authorization under our Board-approved share repurchase program was $245 million. There is no expiration date governing the period over which we can repurchase shares. Any repurchased shares are constructively retired and returned to an unissued status. The cost of stock repurchases is first charged to additional paid-in-capital. Once additional paid-in capital is reduced to zero, any additional amounts are charged to retained earnings.

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Notes to Consolidated Financial Statements - (continued)

Net Income per Common Share

The components of basic and diluted net income per share were as follows (in thousands, except per share amounts):

	2016		2015		2014
Net income	$	51,417	$	50,519	$	67,974
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	46,154		51,252		53,452
Dilutive effect of stock-based awards	748		849		741
Diluted weighted-average shares outstanding	46,902		52,101		54,193
Net income per share – basic	$	1.11	$	0.99	$	1.27
Net income per share – diluted	$	1.10	$	0.97	$	1.25

Additional potential dilutive stock options totaling 0.6 million, 0.4 million and 0.8 million for 2016, 2015 and 2014, respectively, have been excluded from our diluted net income per share calculations because these securities’ exercise prices were anti-dilutive (e.g., greater than the average market price of our common stock).

(11) Other (Expense) Income, Net

Other (expense) income, net, consisted of the following (in thousands):

	2016			2015			2014
Interest expense	(811		)	(160		)	(53		)
Interest income	$	94		$	494		415
Other (expense) income, net	$	(717	)	$	334		$	362

(12) Income Taxes

Income tax expense consisted of the following (in thousands):

	2016			2015		2014
Current:
Federal	$	21,634		$	7,272	$	29,484
State	5,289			3,870		4,161
	26,923			11,142		33,645
Deferred:
Federal	(105		)	13,567		747
State	(2,302		)	202		(258		)
	(2,407		)	13,769		489
Income tax expense	$	24,516		$	24,911	$	34,134

57

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

The following table provides a reconciliation between the statutory federal income tax rate and our effective income tax rate:

	2016		2015		2014
Statutory federal income tax	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	2.6		3.0		2.5
Manufacturing deduction	(3.3	)	(1.7	)	(3.3	)
Changes in unrecognized tax benefits	1.2		0.3		0.3
Non-taxable acquisition-related transactions	—		(2.6	)	—
Other	(3.2	)	(1.0	)	(1.1	)
Effective income tax rate	32.3	%	33.0	%	33.4	%

We file income tax returns with the U.S. federal government and various state jurisdictions. In the normal course of business, we are subject to examination by federal and state taxing authorities. We are no longer subject to federal income tax examinations for years prior to 2013 or state income tax examinations prior to 2012.

Deferred Income Taxes

The tax effects of temporary differences that give rise to deferred income taxes were as follows (in thousands):

	2016			2015
Deferred tax assets:
Stock-based compensation	$	9,834		$	8,756
Deferred rent and lease incentives	8,388			6,977
Warranty and returns liabilities	7,948			10,817
Net operating loss carryforwards and credits	6,368			7,847
Compensation and benefits	4,115			3,788
Other	5,264			4,561
Total gross deferred tax assets	41,917			42,746
Valuation allowance	(620		)	(1,441		)
Total deferred tax assets after valuation allowance	41,297			41,305
Deferred tax liabilities:
Property and equipment	27,049			26,330
Deferred revenue	3,279			5,598
Other	6,302			6,341
Total gross deferred tax liabilities	36,630			38,269
Net deferred tax assets	$	4,667		$	3,036

At December 31, 2016, we had net operating loss carryforwards for federal purposes of $10.0 million, which will expire between 2025 and 2034, and for state income tax purposes of $14.8 million, which will expire between 2017 and 2036.

We evaluate our deferred income taxes quarterly to determine if valuation allowances are required. As part of this evaluation, we assess whether valuation allowances should be established for any deferred tax assets that are not considered more likely than not to be realized, using all available evidence, both positive and negative. This assessment considers, among other matters, the nature, frequency, and severity of historical losses, forecasts of future profitability, taxable income in available carryback periods and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified. We have provided a $0.6 million valuation allowance resulting primarily from our inability to utilize certain foreign net operating losses, and federal net operating losses associated with our acquisition of BAM Labs, Inc.

58

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

Unrecognized Tax Benefits

Reconciliations of the beginning and ending amounts of unrecognized tax benefits for 2016, 2015 and 2014 were as follows (in thousands): 

	Federal and State Tax
	2016			2015			2014
Beginning balance	$	2,077		$	742		$	474
Increases related to current-year tax positions	326			1,277			172
Increases related to prior-year tax positions	1,594			113			110
Lapse of statute of limitations	(333		)	(55		)	(14		)
Settlements with taxing authorities	(204		)	—			—
Ending balance	$	3,460		$	2,077		$	742

As of December 31, 2016 and January 2, 2016, we had $3.5 million and $2.1 million, respectively, of unrecognized tax benefits, which if recognized, would affect our effective tax rate. The amount of unrecognized tax benefits is not expected to change materially within the next 12 months.

(13) Profit Sharing and 401(k) Plan

Under our profit sharing and 401(k) plan, eligible employees may defer up to 50% of their compensation on a pre-tax basis, subject to Internal Revenue Service limitations. Each year, we may make a discretionary contribution equal to a percentage of the employee’s contribution. During 2016, 2015 and 2014, our contributions, net of forfeitures, were $4.6 million, $4.2 million and $3.7 million, respectively.

(14) Commitments and Contingencies

Legal Proceedings

We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with generally accepted accounting principles in the United States, we record a liability in our consolidated financial statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. With respect to currently pending legal proceedings, we have not established an estimated range of reasonably possible additional losses either because we believe that we have valid defenses to claims asserted against us or the proceeding has not advanced to a stage of discovery that would enable us to establish an estimate. We currently do not expect the outcome of these matters to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us could adversely impact our consolidated results of operations, financial position or cash flows. We expense legal costs as incurred.

On January 12, 2015, Plaintiffs David and Katina Spade commenced a purported class action lawsuit in New Jersey state court against Select Comfort alleging that Select Comfort violated New Jersey consumer statutes by failing to provide to purchasing consumers certain disclosures required by the New Jersey Furniture Regulations. It is undisputed that plaintiffs suffered no actual damages or in any way relied upon or were impacted by the alleged omissions. Nonetheless, on behalf of a purported class of New Jersey purchasers of Select Comfort beds and bases, plaintiffs seek to recover a $100 statutory fine for each alleged omission, along with attorneys’ fees and costs. Select Comfort removed the case to the United States District Court for the District of New Jersey, which subsequently granted Select Comfort’s motion to dismiss. Plaintiffs appealed to the United States Court of Appeals for the Third Circuit, which has certified two questions of law to the New Jersey Supreme Court relating to whether plaintiffs who have suffered no actual injury may bring claims. The New Jersey Supreme Court has not yet indicated whether it will accept the certification. As the United States District Court for the District of New Jersey agreed, we believe that the case is without merit and the order of dismissal should be affirmed.

59

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

On December 4, 2015, Saeid Azimpour, a consumer, filed a purported class-action lawsuit in U.S. District Court in Minnesota alleging he was fraudulently induced to purchase a down alternative pillow at a Sleep Number store based on signage that indicated that thepillow was 50% off. Plaintiff alleged that the price he paid for the pillow was not truly 50% off the price at which Sleep Number previously sold the pillow. Plaintiff asserted 10 causes of action including consumer fraud, unlawful trade practices, deceptive trade practices under Minnesota law, violation of the Minnesota false advertising law, unjust enrichment, violation of the California unfair competition law, violation of the California false advertising law and violation of the California remedies act. Plaintiff sought to represent all individuals who “purchased one or more items from the Company advertised or priced at a discount from the original retail price at any time between December 1, 2011 and present.” Plaintiff sought injunctive relief, damages, disgorgement and attorneys’ fees. On June 13, 2016, the Court dismissed the case without prejudice. On August 25, 2016, plaintiff filed a new complaint asserting claims and prayers for relief similar to those described above. On January 4, 2017, plaintiff agreed to dismissal of all claims including dismissal with prejudice of the class claims asserted in this case.

Consumer Credit Arrangements

We refer customers seeking extended financing to certain third party financiers (Card Servicers). The Card Servicers, if credit is granted, establish the interest rates, fees, and all other terms and conditions of the customer’s account based on their evaluation of the creditworthiness of the customer. As the receivables are owned by the Card Servicers, at no time are the receivables purchased or acquired from us. We are not liable to the Card Servicers for our customers’ credit defaults.

Commitments

As of December 31, 2016, we had $5.5 million of inventory purchase commitments. As part of the normal course of business, there are a limited number of inventory supply contracts that contain penalty provisions for failure to purchase contracted quantities. We do not currently expect any payments under these provisions. At December 31, 2016, we had entered into 33 lease commitments for future retail store locations and a lease commitment for our corporate facilities. These lease commitments provide for minimum rentals over the next five to 15 years, which if consummated based on current cost estimates, would approximate $96 million over the initial lease term. The minimum rentals for these lease commitments have been included in the future minimum lease payments in Note 8, Leases.

(15) Summary of Quarterly Financial Data (unaudited)

The following is a condensed summary of our quarterly results (in thousands, except net income per share amounts). Quarterly diluted net income per share amounts may not total to the respective annual amount due to changes in weighted-average shares outstanding during the year. 

2016	First		Second		Third		Fourth		Fiscal Year
Net sales	$	352,980	$	276,878	$	367,988	$	313,445	$	1,311,291
Gross profit	209,074		171,261		232,343		197,482		810,160
Operating income	19,898		2,396		39,044		15,312		76,650
Net income	12,969		1,416		25,745		11,287		51,417
Net income per share – diluted	$	0.27	$	0.03	$	0.56	$	0.25	$	1.10

2015	First		Second		Third		Fourth			Fiscal Year
Net sales	$	349,809	$	275,289	$	373,919	$	214,682		$	1,213,699
Gross profit	215,833		170,539		233,636		120,743			740,751
Operating income (loss)	43,725		16,629		45,399		(30,657		)	75,096
Net income (loss)	28,799		11,038		31,854		(21,172		)	50,519
Net income (loss) per share – diluted	$	0.54	$	0.21	$	0.62	$	(0.42	)	$	0.97

60

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this annual report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

Management’s Report on Internal Control Over Financial Reporting

Select Comfort’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Select Comfort’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under these criteria, management concluded that our internal control over financial reporting was effective as of December 31, 2016. The report of Deloitte & Touche LLP, our independent registered public accounting firm, regarding the effectiveness of our internal control over financial reporting is included in this report in “Part II, Item 8, Financial Statements and Supplementary Data” under “Report of Independent Registered Public Accounting Firm.”

Fourth Quarter Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

Not applicable.

61

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information under the captions “Election of Directors,” “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for our 2017 Annual Meeting of Shareholders is incorporated herein by reference. Information concerning our executive officers is included in Part I of this report under the caption “Executive Officers of the Registrant.”

We have adopted a Code of Business Conduct applicable to our directors, officers and employees (including our principal executive officer, principal financial officer and principal accounting officer). The Code of Business Conduct is available on the Investor Relations section of our website at www.SleepNumber.com. Select the "About" link, the “Investor Relations” link and then the "Corporate Governance" link. In the event that we amend or waive any of the provisions of the Code of Business Conduct applicable to our principal executive officer, principal financial officer and principal accounting officer, we intend to disclose the same on our website at www.SleepNumber.com.

ITEM 11. EXECUTIVE COMPENSATION

The information under the caption “Executive Compensation” in our Proxy Statement for our 2017 Annual Meeting of Shareholders is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Stock Ownership

The information under the caption “Stock Ownership of Management and Certain Beneficial Owners” in our Proxy Statement for our 2017 Annual Meeting of Shareholders is incorporated herein by reference.

Securities Authorized for Issuance under Equity Compensation Plans

The information under the caption "Equity Compensation Plan Information" in our Proxy Statement for our 2017 Annual Meeting of Shareholders is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information under the caption “Corporate Governance” in our Proxy Statement for our 2017 Annual Meeting of Shareholders is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information under the caption “Ratification of Selection of Independent Registered Public Accounting Firm” in our Proxy Statement for our 2017 Annual Meeting of Shareholders is incorporated herein by reference.

62

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)        Consolidated Financial Statements and Schedule

(1)    Financial Statements

All financial statements as set forth under Item 8 of this report

(2)Consolidated Financial Statement Schedule

The following Report and financial statement schedule are included in this Part IV:

Schedule II - Valuation and Qualifying Accounts

All other schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto.

(3)Exhibits

The exhibits to this Report are listed in the Exhibit Index below.

We will furnish a copy of the exhibits referred to above at a reasonable cost to any shareholder upon receipt of a written request. Requests should be sent to: Select Comfort Corporation, Investor Relations Department, 9800 59th Avenue North, Minneapolis, MN 55442.

63

The following is a list of each management contract or compensatory plan or arrangement required to be filed

as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(c):

1. Select Comfort Corporation 2004 Stock Incentive Plan (Amended and Restated as of January 1, 2007)

2. Form of Nonstatutory Stock Option Award Agreement under the 2004 Stock Incentive Plan

3. Form of Restricted Stock Award Agreement under the 2004 Stock Incentive Plan

4. Form of Performance Stock Award Agreement under the 2004 Stock Incentive Plan

5. Form of Nonstatutory Stock Option Award Agreement (Subject to Performance Adjustment) under the 2004 Stock Incentive Plan

6. Select Comfort Corporation Amended and Restated 2010 Omnibus Incentive Plan

7. Form of Nonstatutory Stock Option Award Agreement under the 2010 Omnibus Incentive Plan

8. Form of Restricted Stock Award Agreement under the 2010 Omnibus Incentive Plan

9. Form of Performance Stock Award Agreement under the 2010 Omnibus Incentive Plan

10. Select Comfort Executive Investment Plan (December 1, 2014 Restatement)

11. Employment Offer Letter from Select Comfort Corporation to Shelly R. Ibach dated February 9, 2007

12. Employment Offer Letter from Select Comfort Corporation to David R. Callen dated March 14, 2014

13. Employment Offer Letter from Select Comfort Corporation to Mark A. Kimball dated April 22, 1999

14. Select Comfort Corporation Executive Physical Plan

15. Summary of Executive Tax and Financial Planning Program

16. Amended and Restated Select Comfort Corporation Executive Severance Pay Plan

17. First Amendment to Amended and Restated Select Comfort Corporation Executive Severance Pay Plan

18. Summary of Non-Employee Director Compensation

64

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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
		(Registrant)
Dated:	February 24, 2017	By:	/s/ Shelly R. Ibach
			Shelly R. Ibach
			Chief Executive Officer
			(principal executive officer)
		By:	/s/ David R. Callen
			David R. Callen
			Chief Financial Officer
			(principal financial officer)
		By:	/s/ Robert J. Poirier
			Robert J. Poirier
			Chief Accounting Officer
			(principal accounting officer)

65

POWER OF ATTORNEY

Know all persons by these presents, that each person whose signature appears below constitutes and appoints Shelly R. Ibach, David R. Callen and Mark A. Kimball, and each of them, as such person’s true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such person and in such person’s name, place and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or such person’s substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date or dates indicated.

Name	Title	Date
/s/ Jean-Michel Valette	Chairman of the Board	February 22, 2017
Jean-Michel Valette
/s/ Shelly R. Ibach	Director	February 22, 2017
Shelly R. Ibach
/s/ Daniel I. Alegre	Director	February 21, 2017
Daniel I. Alegre
/s/ Stephen L. Gulis, Jr.	Director	February 22, 2017
Stephen L. Gulis, Jr.
/s/ Michael J. Harrison	Director	February 19, 2017
Michael J. Harrison
/s/ Brenda J. Lauderback	Director	February 18, 2017
Brenda J. Lauderback
/s/ Barbara R. Matas	Director	February 19, 2017
Barbara R. Matas
/s/ Kathleen L. Nedorostek	Director	February 19, 2017
Kathleen L. Nedorostek
/s/ Vicki A. O'Meara	Director	February 22, 2017
Vicki A. O'Meara
/s/ Michael A. Peel	Director	February 21, 2017
Michael A. Peel

66

SELECT COMFORT CORPORATION

EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2016

Exhibit No.	Description	Method of Filing
3.1	Third Restated Articles of Incorporation of the Company, as amended	Incorporated by reference to Exhibit 3.1 contained in Select Comfort's Annual Report on Form 10-K for the fiscal year ended January 1, 2000 (File No. 0-25121)
3.2	Articles of Amendment to Third Restated Articles of Incorporation of the Company	Incorporated by reference to Exhibit 3.1 contained in Select Comfort's Current Report on Form 8-K filed May 16, 2006 (File No. 0-25121)
3.3	Articles of Amendment to Third Restated Articles of Incorporation of the Company	Incorporated by reference to Exhibit 3.1 contained in Select Comfort's Current Report on Form 8-K filed May 25, 2010 (File No. 0-25121)
3.4	Restated Bylaws of the Company	Incorporated by reference to Exhibit 3.1 contained in Select Comfort's Current Report on Form 8-K filed December 20, 2010 (File No. 0-25121)
10.1	Net Lease Agreement dated December 3, 1993 between the Company and Opus Corporation	Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Registration Statement on Form S-1, as amended (Reg. No. 333-62793)
10.2	Amendment of Lease dated August 10, 1994 between the Company and Opus Corporation	Incorporated by reference to Exhibit 10.2 contained in the Select Comfort's Registration Statement on Form S-1, as amended (Reg. No. 333-62793)
10.3	Second Amendment to Lease dated May 10, 1995 between the Company and Rushmore Plaza Partners Limited Partnership (successor to Opus Corporation)	Incorporated by reference to Exhibit 10.3 contained in Select Comfort's Registration Statement on Form S-1, as amended (Reg. No. 333-62793)
10.4	Letter Agreement dated as of October 5, 1995 between the Company and Rushmore Plaza Partners Limited Partnership	Incorporated by reference to Exhibit 10.4 contained in Select Comfort's Registration Statement on Form S-1, as amended (Reg. No. 333-62793)
10.5	Third Amendment of Lease, Assignment and Assumption of Lease and Consent dated as of January 1, 1996 among the Company, Rushmore Plaza Partners Limited Partnership and Select Comfort Direct Corporation	Incorporated by reference to Exhibit 10.5 contained in Select Comfort's Registration Statement on Form S-1, as amended (Reg. No. 333-62793)
10.6	Fourth Amendment to Lease dated June 30, 2003 between Cabot Industrial Properties, L.P. (successor to Rushmore Plaza Partners Limited Partnership) and Select Comfort Direct Corporation	Incorporated by reference to Exhibit 10.6 contained in Select Comfort's Annual report on Form 10-K for the fiscal year ended January 3, 2004 (File No. 0-25121)
10.7	Fifth Amendment to Lease dated August 28, 2006 between Cabot Industrial Properties, L.P. (successor to Rushmore Plaza Partners Limited Partnership) and Select Comfort Direct Corporation	Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Quarterly report on Form 10-Q for the quarter ended September 30, 2006 (File No. 0-25121)
10.8	Lease Agreement dated September 9, 2015 between the Company and Truluck Industries, Inc.	Incorporated by reference to Exhibit 10.3 contained in Select Comfort's Quarterly Report on Form 10-Q for the quarter ended October 3, 2015 (File No. 0-25121)

67

Exhibit No.	Description	Method of Filing
10.09	Lease Agreement dated September 30, 1998 between the Company and ProLogis Development Services Incorporated	Incorporated by reference to Exhibit 10.12 contained in Select Comfort's Annual Report on Form 10-K for the fiscal year ended December 28, 2002 (File No. 0-25121)
10.10	Second Amendment to Lease Agreement dated June 15, 2015 between the Company and CLFP - SLIC 8, L.P. (successor in interest to ProLogis Development Services Incorporated)	Incorporated by reference to Exhibit 10.4 contained in Select Comfort's Quarterly report on Form 10-Q for the quarter ended October 3, 2015 (File No. 0-25121)
10.11	Net Lease Agreement (Build-to-Suit) by and between Opus Northwest LLC, as Landlord, and Select Comfort Corporation, as Tenant, dated July 26, 2006	Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Quarterly report on Form 10-Q for the quarter ended July 1, 2006 (File No. 0-25121)
10.12	Lease Agreement between DCI 1001 Minneapolis Venture, LLC, as Landlord, and Select Comfort Corporation, as Tenant, dated October 21, 2016	Filed herewith
10.13	Select Comfort Corporation 2004 Stock Incentive Plan (Amended and Restated as of January 1, 2007)	Incorporated by reference to Exhibit 10.16 contained in Select Comfort's Annual Report on Form 10-K for the fiscal year ended December 30, 2006 (File No. 0-25121)
10.14	Form of Nonstatutory Stock Option Award Agreement under the Select Comfort Corporation 2004 Stock Incentive Plan	Incorporated by reference to Exhibit 10.28 contained in Select Comfort's Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (File No. 0-25121)
10.15	Form of Restricted Stock Award Agreement under the Select Comfort Corporation 2004 Stock Incentive Plan	Incorporated by reference to Exhibit 10.29 contained in Select Comfort's Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (File No. 0-25121)
10.16	Form of Performance Stock Award Agreement under the Select Comfort Corporation 2004 Stock Incentive Plan	Incorporated by reference to Exhibit 10.30 contained in Select Comfort's Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (File No. 0-25121)
10.17	Form of Nonstatutory Stock Option Award Agreement (Subject to Performance Adjustment) under the Select Comfort Corporation 2004 Stock Incentive Plan	Incorporated by reference to Exhibit 10.20 contained in Select Comfort's Annual Report on Form 10-K for the fiscal year ended December 30, 2006 (File No. 0-25121)
10.18	Select Comfort Corporation Amended and Restated 2010 Omnibus Incentive Plan	Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed May 15, 2013 (File No. 0-25121)
10.19	Form of Nonstatutory Stock Option Award Agreement under the 2010 Omnibus Incentive Plan	Incorporated by reference to Exhibit 10.20 contained in Select Comfort's Annual Report on Form 10-K for the fiscal year ended January 1, 2011 (File No. 0-25121)
10.20	Form of Restricted Stock Award Agreement under the 2010 Omnibus Incentive Plan	Incorporated by reference to Exhibit 10.21 contained in Select Comfort's Annual Report on Form 10-K for the fiscal year ended January 1, 2011 (File No. 0-25121)
10.21	Form of Performance Stock Award Agreement under the 2010 Omnibus Incentive Plan	Incorporated by reference to Exhibit 10.22 contained in Select Comfort's Annual Report on Form 10-K for the fiscal year ended January 1, 2011 (File No. 0-25121)

68

Exhibit No.	Description	Method of Filing
10.22	Select Comfort Executive Investment Plan (December 1, 2014 Restatement)	Incorporated by reference to Exhibit 10.21 contained in Select Comfort's Annual Report on Form 10-K for the fiscal year ended January 3, 2015 (File No. 0-25121)
10.23	Employment Offer Letter from Select Comfort Corporation to Shelly R. Ibach dated February 9, 2007	Incorporated by reference to Exhibit 10.30 contained in Select Comfort's Annual Report on Form 10-K for the fiscal year ended December 29, 2012 (File No. 0-25121)
10.24	Employment Offer Letter from Select Comfort Corporation to David R. Callen dated March 14, 2014	Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed March 20, 2014
10.25	Employment Offer Letter from Select Comfort Corporation to Mark A. Kimball dated April 22, 1999	Incorporated by reference to Exhibit 10.25 contained in Select Comfort's Annual Report on Form 10-K for the fiscal year ended January 1, 2000 (File No. 0-25121)
10.26	Select Comfort Corporation Executive Physical Plan	Incorporated by reference to Exhibit 10.27 contained in Select Comfort's Annual Report on Form 10-K for the fiscal year ended January 3, 2015 (File No. 0-25121)
10.27	Summary of Executive Tax and Financial Planning Program	Filed herewith
10.28	Amended and Restated Select Comfort Corporation Executive Severance Pay Plan	Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed August 21, 2008 (File No. 0-25121)
10.29	First Amendment to Amended and Restated Select Comfort Corporation Executive Severance Pay Plan	Incorporated by reference to Exhibit 10.34 contained in Select Comfort's Annual Report on Form 10-K for the fiscal year ended January 3, 2009 (File No. 0-25121)
10.30	Summary of Non-Employee Director Compensation	Incorporated by reference to Exhibit 10.30 contained in Select Comfort's Annual Report on Form 10-K for the fiscal year ended January 2, 2016 (File No. 0-25121)
10.31	Master Supply Agreement dated July 16, 2013 between the Company and Supplier (1)	Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Quarterly Report on Form 10-Q for the quarter ended September 28, 2013 (File No. 0-25121)
10.32	Retailer Program Agreement effective as of January 1, 2014 by and between Synchrony Bank, Select Comfort Corporation and Select Comfort Retail Corporation (1)	Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Quarterly Report on Form 10-Q for the quarter ended June 28, 2014 (File No. 0-25121)
10.33	First Amendment to Retailer Program Agreement, dated effective as of October 1, 2014 by and between Synchrony Bank, Select Comfort Corporation and Select Comfort Retail Corporation	Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed October 1, 2014 (File No. 0-25121)

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Exhibit No.	Description	Method of Filing
10.34	Second Amendment to Retailer Program Agreement, dated November 4, 2015 by and between Synchrony Bank, Select Comfort Corporation and Select Comfort Retail Corporation (1)	Incorporated by reference to Exhibit 10.5 contained in Select Comfort's Quarterly Report on Form 10-Q for the quarter ended October 3, 2015 (File No. 0-25121)
10.35	Select Comfort Corporation Non-Employee Director Deferral Plan	Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed September 16, 2011 (File No. 0-25121)
10.36	Credit and Security Agreement dated September 9, 2015 among Select Comfort Corporation, KeyBank National Association and BMO Harris Bank, N.A.	Incorporated by reference to Exhibit 10.2 contained in Select Comfort’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2015 (File No. 0-25121)
10.37	First Amendment Agreement to Credit and Security Agreement dated as of September 9, 2015 by and among Select Comfort Corporation, KeyBank National Association, as Administrative Agent, Swing Line Lender and Issuing Lender, and the other financial institutions from time to time party thereto	Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed February 25, 2016 (File No. 0-25121)
21.1	Subsidiaries of the Company	Incorporated by reference to Exhibit 21.1 contained in Select Comfort's Annual Report on Form 10-K for the fiscal year ended January 2, 2016 (File No. 0-25121)
23.1	Consent of Independent Registered Public Accounting Firm	Filed herewith
24.1	Power of Attorney	Included on signature page
31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1	Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350	Furnished herewith(2)
32.2	Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350	Furnished herewith(2)

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Exhibit No.	Description	Method of Filing
101	The following financial information from the Company's Annual Report on Form 10-K for the period ended December 31, 2016, filed with the SEC on February 24, 2017, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets as of December 31, 2016 and January 2, 2016; (ii) Consolidated Statements of Operations for the years ended December 31, 2016, January 2, 2016 and January 3, 2015; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, January 2, 2016 and January 3, 2015; (iv) Consolidated Statements of Shareholders' Equity for the years ended December 31, 2016, January 2, 2016 and January 3, 2015; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2016, January 2, 2016 and January 3, 2015; and (vi) Notes to Consolidated Financial Statements.	Filed herewith

___________________

⁽¹⁾  Confidential treatment has been requested by the issuer with respect to designated portions contained within document. Such portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities and Exchange Act of 1934, as amended.

⁽²⁾  This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Act of 1934, as amended, (15 U.S.C. 78r) or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any document filed under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except as otherwise expressly stated in any such filing.

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SELECT COMFORT CORPORATION AND SUBSIDIARIES

Schedule II - Valuation and Qualifying Accounts

(in thousands)

Description	2016			2015			2014
Allowance for doubtful accounts
Balance at beginning of period	$	1,039		$	739		$	425
Additions charged to costs and expenses	1,224			1,577			729
Deductions from reserves	(1,379		)	(1,277		)	(415		)
Balance at end of period	$	884		$	1,039		$	739
Accrued sales returns
Balance at beginning of period	$	20,562		$	15,262		$	9,433
Additions charged to costs and expenses	71,958			84,265			78,890
Deductions from reserves	(77,298		)	(78,965		)	(73,061		)
Balance at end of period	$	15,222		$	20,562		$	15,262

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EX-10.12

EX 10.12

LEASE AGREEMENT

between

DCI 1001 Minneapolis Venture, LLC,

as Landlord,

and

Select Comfort Corporation,

as Tenant

1001 3^rd Avenue South

Minneapolis, MN 55404

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LEASE AGREEMENT

1001 3^rd Avenue South

THIS LEASE AGREEMENT (“Lease”) is made and entered into as of the Effective Date (as defined in Section 9.20 below), by and between DCI 1001 Minneapolis Venture, LLC, a Delaware limited liability company (“Landlord”), and Select Comfort Corporation a Minnesota corporation (“Tenant”).

ARTICLE 1

BASIC LEASE INFORMATION AND DEFINED TERMS

Section 1.1    Basic Lease Information.

(a)    Additional Rent shall mean all charges and amounts due from Tenant to Landlord under this Lease, other than Base Rent.

(b)    Base Rent shall mean the following:

Year    PSF        Year            Month

1    $10.25        $2,160,894.75        $180,074.56

2    $10.49        $2,211,491.31        $184,290.94

3    $10.73        $2,262,087.87        $188,507.32

4    $10.98        $2,314,792.62        $192,899.39

5    $11.23        $2,367,497.37        $197,291.45

6    $11.49        $2,422,310.31        $201,859.19

7    $11.75        $2,477,123.25        $206,426.94

8    $12.02        $2,534,044.38        $211,170.37

9    $12.30        $2,593,073.70        $216,089.48

10    $12.58        $2,652,103.02        $221,008.59

11    $12.87        $2,713,240.53        $226,103.38

12    $13.16        $2,774,378.04        $231,198.17

13    $13.46        $2,837,623.74        $236,468.65

14    $13.77        $2,902,977.63        $241,914.80

15    $14.08        $2,968,331.52        $247,360.96

The yearly and monthly rent figures above assume a Premises of 210,819 Rentable Square Feet and Base Rent shall be adjusted if the final Premises size differs.

(c)    Building shall mean the building located on the Land.

(d)    Building Rules shall mean all rules and regulations adopted or modified by Landlord from time to time for the safety, care, cleanliness, and reputation of the Building

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and for the preservation of good order in the Building. The current Building Rules are attached at Exhibit “C”.

(e)    Commencement Date shall mean November 1, 2017, as confirmed in Exhibit F.

(f)    Common Areas shall mean those areas within the Project devoted to corridors, elevator foyers, restrooms, lobby areas, meeting rooms, and other areas provided for the common use or benefit of tenants generally.

(g)    1001 3rd Avenue South shall mean the Project and shall include the Project as it currently exists or as it may from time to time hereafter be expanded or modified.

(h)    Insurance Costs shall mean all costs incurred by Landlord in obtaining insurance on the Project, including property, liability, and casualty insurance on the Building, but excluding all insurance costs which Tenant is required to provide under Section 7.3 below.

(i)    Land shall mean the tract of real property that is described in Exhibit “A” to this Lease.

(j)    Lease Term shall mean a term commencing on the Commencement Date and continuing for one-hundred eighty (180) full calendar months.

(k)    Operating Expenses shall have the meaning set forth in Exhibit “D”.

(l)    Notice Addresses shall mean the following addresses for Tenant and Landlord, respectively:

Tenant:

Select Comfort Corporation

Attention: General Counsel

9800 59^th Avenue North

Minneapolis, Minnesota 55442

After November 1^st, 2017 the following address should be used:

Select Comfort Corporation

Attention: General Counsel

1001 3rd Avenue South, Suite 2000

Minneapolis, MN 55404

Landlord:

c/o DCI Technology Services LLC

LEASE ADMINISTRATION NOTICES

331 2nd Avenue South, Suite 100

Minneapolis, MN 55401

Attn:    Spencer Mullee

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(m)    Permitted Use shall mean the use of the Premises for (i) general office, call center, storage, and research and development space, (ii) uses which are incidental and related to each of these uses, and (iii) any other use as permitted by law.

(m)    Personshall mean, as applicable, a natural person, corporation, general partnership, limited partnership, limited liability partnership, limited liability company, or any other legal entity.

(n)    Premises shall mean the areas of the Building, as outlined on the floor plan of the Building which is attached as Exhibit “B” to this Lease of approximately 210,819 Rentable Square Feet.

(o)    Project shall mean, collectively, the Building, the Land, and all other improvements located on the Land (including parking areas, parking garages, plaza areas, and other similar areas relating to the Building).

(p)     (i)    Projected Delivery Date shall mean July 15, 2017.

(ii)    Early Access. Tenant will have unrestricted access to the Premises beginning on the Projected Delivery Date and continuing until the Commencement Date to perform activities without being deemed to have taken possession. Early Access period will be on the terms of this Lease, excluding Rent and Additional Rent.

(q)    Rent shall mean, collectively, Base Rent; Tenant's Proportionate Share of Operating Expenses and Taxes; Utility Costs; all Additional Rent; and any other amounts payable to Landlord by Tenant.

(r)    Rentable Square Feet shall mean the Usable Square Feet within the Premises, together with an additional amount representing a portion of the Common Areas, Service Areas and other non-tenant space on floors one (1) through six (6) in the Building. For purposes of this Lease, the parties have agreed that the Premises shall be deemed to consist of 210,819 Rentable Square Feet on floors one, two, and three and that floors one (1) through six (6) of the Building shall be deemed to consist of 318,919 Rentable Square Feet. However, both Landlord and Tenant acknowledge that neither of these figures was calculated by measuring the Common Areas, Service Areas and other non-tenant spaces in the Building and that neither Landlord nor Tenant shall have a right to demand re-measurement or recalculation of the Rentable Square Feet applicable to the Premises or the Building.

(s)    Security Deposit. Waived.

(t)    Service Areas shall mean those areas within the outside walls of the Building which are used for mechanical rooms, stairs, elevator shafts, flues, vents, stacks, pipe shafts, risers, raceways, and vertical penetrations (but shall not include any such areas for the exclusive use of a particular tenant).

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(u)    Taxes shall mean all taxes and assessments and governmental charges, whether federal, state, county or municipal, and whether levied or assessed by taxing districts or authorities presently taxing the Landlord, the Premises or the Project or any part of either, or by others, subsequently created or otherwise, and any other taxes and assessments attributable to the Project or the ownership or operation thereof together with any costs incurred by Landlord (including reasonable attorneys' fees and costs of investigation) relative to any negotiation, contest, or appeal pursued by Landlord to reduce or prevent an increase in any portion of the Taxes, regardless of whether any reduction or limitation is obtained.

(v)    Tenant's Proportionate Share shall mean a fraction, the numerator of which is the number of Rentable Square Feet within the Premises, and the denominator of which is the number of Rentable Square Feet on floors one (1) through six (6) of the Building. Accordingly, the parties acknowledge and agree that Tenant's Proportionate Share under this Lease is 66.10425 percent and confirmed in Exhibit F.

(w)    Trade Fixtures shall mean any and all signs and other equipment, including without limitation, the switch and related equipment to be installed by Tenant or placed by Tenant within the Premises pursuant to the provisions of this Lease and any and all items of property used by Tenant in the Premises, including furniture. However, the term Trade Fixtures shall not include any permanent leasehold improvements including any floor, wall, or ceiling coverings, any interior walls or partitions, any lighting fixtures, track lights, or any property which is a part of or associated with any of Landlord's electrical, plumbing, or mechanical systems in the Building, notwithstanding that the same may have been installed within the Premises by Tenant. Notwithstanding the foregoing, Tenant will be installing a store in the Premises for display purposes and all Tenant trade fixtures as installed by Tenant, including but not limited to, signage and Tenant’s unique store design will remain the property of Tenant.

(x)    Usable Square Feet shall mean the gross number of square feet enclosed by the surface of the exterior glass walls, the midpoint of any walls separating portions of the Premises from those of adjacent tenants, the slab penetration line of all walls separating the Premises from Service Areas, and the corridor side of walls separating the Premises from Common Areas, as confirmed by Tenant’s and/or Landlord's architect(s).

(y)    Utility Costs shall mean all costs incurred by Landlord in providing electricity, gas, water, and sewage disposal facilities to the Building, (including but not limited to electricity used for heating, air conditioning, operation of office machines and the lighting and operation of elevators and escalators), and other equipment used on or about the Building, but excluding all such costs which Tenant may, from time to time, be obligated to pay on a separately metered basis under the provisions of Section 4.3.

Section 1.2    Defined Terms.

Each of the terms defined in Section 1.1 will be used as defined terms in this Lease (including the Exhibits to this Lease). In addition, other terms are defined in various sections of this Lease. All words which are used as defined terms in this Lease are delineated with initial capital letters

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and, when delineated with initial capital letters, shall have the meaning specified in the applicable provision of this Lease in which such term is defined.

ARTICLE 2

OCCUPANCY AND USE

Section 2.1    Premises and Term.

In consideration for the obligation of Tenant to pay Rent and subject to and upon the terms and conditions stated in this Lease, Landlord leases to Tenant, and Tenant leases from Landlord, the Premises for the Lease Term. Landlord will deliver the Premises free from all prior tenant’s furniture, fixtures and equipment and in compliance with all applicable federal, state and local codes, including compliance with the Americans with Disability Act (“ADA”), with any pre-existing environmental contamination or Hazardous Materials removed or remediated. Landlord agrees to tender the Premises to Tenant with Landlord’s work completed no later than July 15, 2017. If Landlord requests, Tenant shall execute a memorandum (in a form approved by Landlord) specifying the date upon which the Commencement Date actually occurred as attached as Exhibit F.

Section 2.2    Leasehold Improvements.

The Premises shall be delivered to Tenant in an “as is” condition. Landlord shall install the initial leasehold improvements in the Premises in accordance with Section 5.1 below. Tenant has made a complete examination and inspection of the Premises and accepts the same in its current condition, “as is” and without recourse to Landlord. Landlord shall have no obligation to provide any leasehold improvements to the Premises or to repair, decorate, or paint the Premises, unless otherwise expressly set forth in this Lease, or Landlord’s Work Letter as set forth in Exhibit E. Landlord has made no representations or warranties to Tenant with respect to the condition of the Premises, the Building, or the Project. Tenant's occupancy of the Premises shall be deemed an acknowledgment by Tenant that the Premises are suitable for Tenant's intended use, and Landlord expressly disclaims any warranty that the Premises are suitable for Tenant's intended use. Landlord does not make any warranties, express or implied, with respect to the Premises, the Building, or the Project. All implied warranties (including those of habitability, merchantability, or fitness for a particular purpose) are expressly negated and waived.

Section 2.3    Use.

The Premises may be used only for the Permitted Use specified in Section 1.1(m) and for no other purposes without the prior written consent of Landlord, which consent will not be unreasonably withheld, conditioned, or delayed. Tenant's use of the Premises shall be in compliance with the Building Rules and with all applicable Legal Requirements and Insurance Requirements. Tenant shall not use the Premises for any purpose which is dangerous to person or property, which creates a nuisance, which would violate the Building Rules, or which would violate any applicable Legal Requirement or Insurance Requirement. Tenant shall comply with, and shall cause any Tenant Related Parties to comply with, all Building Rules and all Legal Requirements and Insurance Requirements relating to the use, condition, or occupancy of the Premises. “Insurance Requirements” shall mean all terms of any insurance policy obtained by Landlord or Tenant covering or applicable to the Premises or the Project; all requirements for the issuing of each such insurance policy; and all orders, rules, regulations, and other requirements of the National Board of

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Fire Underwriters (or any other bodies exercising any similar functions) which are applicable to or affect the Premises, the Building, or the Project or any use or condition of the Premises, the Building, or the Project. “Legal Requirements” shall mean all laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, and licenses of all governmental authorities, foreseen or unforeseen, which now or at any time hereafter may be applicable to the Premises, the Building, or the Project, including (a) the Americans with Disabilities Act, (b) all federal, state, and local laws, regulations, and ordinances pertaining to air and water quality, hazardous materials, waste disposal, and other environmental matters; and (c) all laws, codes, and regulations pertaining to zoning, land use, health, or safety. “Tenant Related Parties” shall mean Tenant's officers, partners, employees, agents, contractors, licensees, concessionaires, and subtenants.

Section 2.4    Intentionally Deleted

ARTICLE 3

RENT

Section 3.1    Rental Payments.

Tenant shall pay Base Rent and Additional Rent to Landlord for each month during the Lease Term as provided in this Lease. Rent shall be due and payable in advance on the first (1st) day of each month during the Lease Term. If the Commencement Date is a date other than the first (1st) day of a calendar month, the Rent for the portion of the calendar month in which the Commencement Date occurs shall be due and payable on the Commencement Date; and the Rent for such partial month shall be prorated based upon the number of days from the Commencement Date to the end of that calendar month. Rent for any partial month at the end of the Lease Term shall be prorated based upon the number of days from the beginning of that month to the end of the Lease Term. Rent shall be payable at the address for Landlord designated in the first (1st) paragraph of this Lease (or at such other address as may be designated in writing by Landlord from time to time). Tenant shall pay all Rent under this Lease at the times and in the manner provided in this Lease, without abatement, notice, demand, counterclaim, or set-off, except as specifically set forth in this Lease. Any charges or other sums payable by Tenant to Landlord under the terms of this Lease shall be considered as Additional Rent. No payment by Tenant or receipt by Landlord of a lesser amount than the total amount of Rent then due shall be deemed to be other than on account of the earliest past due installment of Rent required to be paid under this Lease. No endorsement or statement on any check or in any letter accompanying any check or payment of Rent shall ever be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of the Rent then due or to pursue any other remedy available under this Lease, at law, or in equity.

Section 3.2    Interest/Late Charge.

In the event that Tenant fails to pay any monthly Rent installment within ten (10) days after the date on which any such Rent installment becomes due and payable, after the first such late payment in any Lease year, then (a) Tenant shall also be obligated to pay interest on such past due amounts at a rate equal to the lesser of twelve percent (12%) per annum or the highest rate of interest permitted

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by applicable law and (b) Tenant shall pay a late charge in the amount of five percent (5%) of the amount of such past due Rent installment, as Additional Rent under this Lease. Should Tenant make a partial payment of past due amounts, the amount of such partial payment shall be applied first to reduce all accrued and unpaid interest and late charges, in inverse order of their maturity, and then to reduce all other past due amounts, in the inverse order of their maturity. Tenant's failure to pay any installment of Rent when due may cause Landlord to incur anticipated costs (including processing and accounting costs), and the exact amount of these costs is extremely difficult to ascertain. Therefore, the late charges permitted under this Section 3.2 shall be liquidated damages for those costs and shall be in addition to and shall be cumulative of any other rights and remedies which Landlord may have under this Lease with regard to the failure of Tenant to make any payment of Rent or any other sum due under this Lease.

Section 3.3    Consecutive Late Payments.

If Tenant fails in two (2) consecutive months to make Rent payments within ten (10) days after the date when due, Landlord may require that future Rent payments be paid by ACH payment. The election by Landlord to exercise the foregoing remedy shall be made by written notice to Tenant and shall be in addition to any interest and late charges accruing under Section 3.2, as well as any other rights and remedies accruing as a result of such default. Any acceptance of a monthly Rent payment in the form of a personal or corporate check by Landlord thereafter shall not be construed as a subsequent waiver of these rights.

Section 3.4    Intentionally Deleted.

Section 3.5    Tenant's Proportionate Share of Operating Expenses and Taxes.

In addition to the payment of Base Rent, Tenant shall pay to Landlord Tenant's Proportionate Share of Operating Expenses and Taxes in accordance with Section 1.1 (v) and Exhibit “D” attached hereto.

ARTICLE 4

BUILDING SERVICES AND UTILITIES

Section 4.1    Services to be Furnished by Landlord to Tenant.

Landlord shall furnish Tenant (subject to the terms and conditions of this Article 4 and Exhibit D) with the following services (“Building Standard Services”) during the Lease Term:

(a)    Central heating and air conditioning in season to the Premises (as part of Building Standard Capacity) and the enclosed public areas of the Building;

(b)    Non-exclusive passenger escalator and/or elevator services and non-exclusive freight elevator service;

(c)    Maintenance and repair of the roof, exterior walls, and public areas of the Building and electric lighting for all public areas of the Building;

(d)    Janitorial service for the Premises as well as corridors and other public areas of the Building;

(e)    Common use rest rooms and drinking fountains at locations provided for general use of the tenants in the Building and their guests and invitees; and;

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(f)    Security services for the Project.

Landlord recognizes that, at Tenant’s sole costs and expense, Tenant has the right to operate in the Premises twenty-four (24) hours a day, seven (7) days a week.

The Building Standard Services shall be provided (i) during the hours and days which Landlord establishes from time to time as the normal business hours of the Building; (ii) at such locations, in such manner, and to the extent deemed by Landlord to be reasonably adequate for the use and occupancy of the Building, and with due regard for the prudent control of energy; (iii) subject to temporary cessation for ordinary repair, maintenance, and cleaning and during times when life safety systems override normal Building operating systems; and (iv) subject to the other limitations described in this Lease.

Section 4.2    Utilities.

Landlord has caused the necessary mains, conduits, and other facilities necessary to supply normal water, electricity, telephone service, and sewage service to the Building. Landlord shall maintain those facilities within the Building but shall have no responsibility with respect to any of those facilities located outside the boundaries of the Project and not found on Landlord’s property. To the extent the Building Standard Services require electricity, water, or other specified utilities supplied by public utilities, Landlord's obligations under this Lease shall only require Landlord to use reasonable efforts to cause the applicable public utilities to furnish those utilities; and Landlord shall not be responsible for, and shall have no liability with respect to, the quality, quantity, or condition of any services provided by such public utilities. At Landlord’s option, the utilities applicable to the Premises may be separately metered and, in such event, the cost of such utility shall be paid directly by Tenant to the service provider. Notwithstanding the foregoing, if any utility service is interrupted as a result of the gross negligence of Landlord, or its agents or employees, there shall be an equitable abatement of Base Rent due hereunder based upon the length of time during which such interruption continues, and the portion of the Premises that are reasonably unusable or materially impaired for their intended use as a result of such interruption. Notwithstanding any provision set forth in this Lease to the contrary, Landlord shall be responsible for the payment of all sewer, utility set-up, developer, tap-in, connection, impact and/or hook-up fees in connection with the Premises, commonly referred to as sewer access charges, or water access charge.

Section 4.3    Electrical Services.

The facilities furnishing electrical service to the Building have the capacity for furnishing electricity in the amount of seven (7) watts per Usable Square Foot within the Premises (“Building Standard Capacity”); and Tenant’s Proportionate Share of Utility Costs will be calculated on the basis that Tenant’s electrical usage in the Premises is equal to the Building Standard Capacity. Tenant shall pay Tenant's Utility Costs on a monthly basis concurrently with Tenant's payment of Base Rent. Tenant's lighting, heating, air conditioning and receptacle/equipment loads in the Premises shall not have an electrical design load greater than the Building Standard Capacity. In the event Tenant's actual electrical usage within the Premises exceeds the Building Standard Capacity, such excess electrical usage may affect the capability of such electrical systems to furnish electricity to other tenants of the Building at the Building Standard Capacity. For this reason, Landlord shall have the

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right to determine the amount of any electrical usage by Tenant from time to time and, if such electrical usage by Tenant exceeds the Building Standard Capacity, may either separately meter Tenant's electrical usage within the Premises or require Tenant to reduce its electrical usage to the Building Standard Capacity. The cost of purchasing, installing, maintaining, and reading a separate meter shall be at Tenant's expense, and Tenant shall pay to Landlord, on demand, the cost of the consumption of electrical services within the Premises in excess of the Building Standard Capacity at rates determined by Landlord in accordance with applicable laws. In addition, Tenant shall pay for all costs of any wiring, risers, raceways, transformers, electrical panels, and other items required by Landlord, in Landlord’s discretion, to accommodate Tenant’s design loads and capacities that exceed the Standard Building Capacity, that Landlord agrees to in the design phase, including, without limitation, all installation and maintenance costs relative to that equipment. Notwithstanding the foregoing, Landlord may refuse to install, and may withhold consent for Tenant’s installation of, any wiring, transformers, electrical panels, or other equipment required to accommodate Tenant’s excess electrical usage if, in Landlord’s sole judgment, the same are not necessary or would cause damage or injury to the Project or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations or repairs to the Project, or would interfere with or create or constitute a disturbance to other tenants or occupants of the Project. In no event shall Landlord incur any liability for Landlord's refusal to install, or the withholding of consent for Tenant's installation of, any such facilities or equipment; and Landlord shall have no obligation to install any electrical facility or equipment to accommodate Tenant's electrical usage in excess of the Building Standard Capacity.

Notwithstanding the foregoing, Landlord understands and agrees that Tenant's final Premises will include some higher density spaces for Tenant’s Call Center, Product and R&D spaces. These spaces shall be indicated on Tenant's final plans.

Section 4.4    Adverse HVAC Effect.

“Adverse HVAC Effect,” means a condition (including the use of any of Tenant’s equipment or lighting or a higher than normal occupancy rate) which, in Landlord’s reasonable judgment, after due investigation, causes more than an immaterial effect on the temperature ranges normally maintained within any part of the Building. Upon the occurrence of an Adverse HVAC Effect, Landlord may (a) require Tenant to take corrective measures to eliminate the Adverse HVAC Effect or (b) install supplemental air conditioning units or other supplemental equipment in the Premises or other portions of the Project to reduce the Adverse HVAC Effect. The cost of purchasing, installing, operating, using, and maintaining such supplemental units or equipment (together with an administrative fee equal to fifteen percent [15%] of such costs), will be paid by Tenant to Landlord upon demand.

Section 4.5    Interruption of Utilities or Services.

In the event that any utility services to the Building or the Premises are interrupted, malfunction, or are subject to partial curtailment; any equipment, machinery, or facility within the Building furnished by Landlord breaks down or, for any cause, ceases to function; or an interruption or malfunction occurs with respect to any Building Standard Service, Landlord shall use reasonable efforts to repair (if related to facilities or equipment within the Project) or obtain the restoration of such services as soon as reasonably practicable. No such occurrence, nor Landlord's compliance with any Legal Requirement or with any mandatory governmental or business requirements related

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to the conservation of energy, shall ever (a) cause Landlord to be liable or responsible to Tenant for any loss or damage which Tenant may sustain or incur as a result of any such occurrence, (b) be construed as an eviction of Tenant or as a disturbance of Tenant's use or possession of the Premises, (c) constitute a breach by Landlord of any of Landlord's obligations under this Lease, (d) work an abatement or reduction of Rent, except a set forth herein, (e) entitle Tenant to any right of setoff or recoupment, or (f) relieve Tenant of any of Tenant's obligations under this Lease.

Notwithstanding the foregoing, in the event there is a disruption in utility service, due to Landlord’s failure to maintain or repair any equipment, machinery, or facility within the Building that lasts beyond forty-eight (48) hours, or such disruption is due to the gross negligence of Landlord, such that Tenant’s employees and/or contractors are unable to operate at the Premises, Tenant’s Base Rent will abate in full until such time as the the utility service is re-established and Landlord has repaired Landlord’s equipment in the building, or cure Landlord’s gross negligence.

Section 4.6    Telecommunications.

In the event that Tenant desires to utilize the services of a telephone or telecommunications provider who is not then servicing the Project, such provider shall not be permitted to install its lines or other equipment within the Project without first obtaining the prior approval of Landlord (including Landlord’s approval of any plans or specifications for the installation of lines and/or other telecommunications equipment within the Project). Neither Landlord’s approval of any provider nor Landlord’s approval of any plans and specifications relative to the installation of any telecommunications equipment will ever constitute an indication, representation, or certification by Landlord as to the suitability, competence, or financial strength of that provider or as to the suitability of any telecommunications equipment provided. Landlord shall have no obligation to repair, maintain, or replace any telecommunications facilities or equipment provided by a telephone or telecommunications provider selected by Tenant, notwithstanding any provision of this Lease to the contrary.

ARTICLE 5

ALTERATIONS, REPAIRS AND TRADE FIXTURES

Section 5.1    Alterations, Improvements and Additions.

(a)    Intentionally Deleted.

(b)    Except for Landlord’s build out requirements of Landlord’s Work Letter, as set forth in Exhibit E, Tenant shall, at Tenant's expense, furnish, equip, and improve the Premises, to the extent necessary or appropriate for the proper operation of the Premises for the Permitted Use. Tenant's obligations to provide leasehold improvements within the Premises shall include partitions, lighting fixtures, floor and wall coverings, and other interior decoration and shall be of a design and quality consistent with the standards generally observed by Landlord and other tenants of the Building.

(c)    All work to be done to improve, equip, or alter the Premises and any work in any other areas of the Project for which Tenant is responsible shall be subject to the following conditions:

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(i) all such work shall be done in accordance with a Work Letter and be made a part hereof and at Tenant's sole cost, risk, and expense and in accordance with all Legal Requirements, Insurance Requirements, Building Rules, and construction guidelines and standards of Landlord;

(ii) all such work shall be performed in a good and workmanlike manner with labor and materials of such quality as Landlord may reasonably require;

(iii) no such work shall be commenced until approved in writing by Landlord;

(iv) all such work shall be performed in strict accordance with the plans and/or specifications previously approved by Landlord;

(v) all such work shall be prosecuted diligently and continuously to completion;

(vi) all such work shall be performed in a manner so as to minimize interference with the normal business operations of other tenants in the Building; the performance of Landlord's obligations under this Lease, any other lease for space in the Building, or any Financing Lien or Ground Lease covering or affecting all or any part of the Project; and any work being done in any other portion of the Project;

(vii) Landlord may impose such conditions with respect to such work as Landlord deems reasonably appropriate, including, without limitation, (A) requiring Tenant to furnish Landlord with security for the payment of all costs to be incurred in connection with such work and (B) requiring Tenant or Tenant's contractor to maintain insurance against liabilities which may arise out of such work;

(viii) such work shall be performed by contractors approved in writing by Landlord and, if requested by Landlord, any such contractor and all work to be performed by such contractor shall be fully bonded (with Landlord named as co-obligee) with companies and in amounts reasonably acceptable to Landlord in its sole discretion; and

(ix) upon completion of any such work and upon Landlord's request, Tenant shall deliver to Landlord evidence of payment, contractors' affidavits, and full and final waivers of all liens for labor, services, or material.

(d)    No alterations, improvements, or additions (including lighting fixtures, track lighting tracks, track lighting cans, and light bulbs) made to the Premises by or on behalf of either Landlord or Tenant may be removed by Tenant without Landlord's prior written consent. All such alterations, improvements, or additions shall become the property of Landlord upon the termination or expiration of this Lease. Tenant shall have no (and hereby waives all) rights to payment or compensation for any such alteration, improvement, or addition to the Premises. However, Tenant's Trade Fixtures, attached or not, shall remain the property of Tenant as provided in Section 5.3 below.

(e)    Tenant shall not allow any liens to be filed against the Premises or the Project in connection with the installation of any alterations, improvements, or additions to the Premises. If any such liens shall be filed, Tenant shall cause the same to be released immediately by payment, bonding, or other method acceptable to Landlord. If Tenant shall fail to cancel or remove any lien, then Landlord, at its sole option, may obtain the release of that lien; and Tenant shall pay

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to Landlord, on demand, the amount incurred by Landlord for the release of each lien, plus an additional charge (as reasonably determined by Landlord) to cover Landlord's administrative overhead and expenses.

(f)    Tenant hereby indemnifies and holds Landlord harmless from all losses, costs, damages, claims, expenses (including reasonable attorneys' fees and costs of suit), liabilities, or causes of action arising out of or relating to any alterations, additions, or improvements that Tenant makes or causes to be made to the Premises or to any repairs made to any portion of the Project, including any occasioned by the filing of any mechanic's, materialman's, construction, or other liens or claims (and all costs or expenses associated with any such lien or claim) asserted, filed, or arising out of such work. Nothing contained in this Lease shall be deemed or construed in any way as constituting the consent of or request by Landlord, express or implied, to any contractor, subcontractor, laborer, or materialman for the performance of any labor or the furnishing of any materials for the improvement, alteration, or repair of the Premises or the Project or as giving Tenant any right or authority to contract for or permit the rendering of any labor or the furnishing of any materials that would give rise to a lien against the Premises or the Project.

(g)    Tenant shall have the sole responsibility for compliance with all applicable Legal Requirements and Insurance Requirements relative to any such alterations, improvements, or additions. Landlord's approval of any plans or specifications shall never constitute an indication, representation, or certification that such alterations, improvements, or additions will be in compliance with any applicable Legal Requirement or Insurance Requirement or as to the adequacy or sufficiency of the alterations, improvements, or additions to which such consent relates. In instances in which several sets of requirements must be met, the strictest applicable requirements shall control.

(h)    Tenant shall not permit any weight exceeding seventy-five (75) pounds per square foot of floor area upon the floor of the Premises.

Section 5.2    Maintenance and Repairs.

Tenant shall take good care of and maintain the Premises (including all Trade Fixtures, and improvements, additions, or alterations situated in the Premises) in a first class, clean, and safe condition. Tenant shall not commit or allow any waste or damage to be committed on any portion of the Premises. Tenant shall repair or replace any damage to any part of the Project, caused by Tenant or by a Tenant Related Party. However, upon written notice and Tenant fails to cure within a reasonable time as set forth in this Lease after written notice, Landlord may, at its option, make such repairs, improvements, or replacements; and Tenant shall repay Landlord on demand the actual costs incurred by Landlord to make such repairs, improvements, or replacements plus an additional charge (as reasonably determined by Landlord) to cover administrative overhead. Landlord shall arrange for the repair and maintenance of the foundation, exterior walls, and roof of the Building; the public areas within the Building; the heating, air conditioning, and ventilation system within the Building; and the facilities providing utility services (other than facilities installed by a telephone or telecommunications provider selected by Tenant) which are located within the Project (collectively, “Landlord's Repair Obligations”). Landlord, however, shall not be required to make any repairs arising as a result of, in whole or in part, the act or negligence of Tenant or any Tenant Related Party; and the cost of those repairs shall be the obligation of Tenant. In the event that the Premises

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become in need of repairs which are within Landlord's Repair Obligations, Tenant shall give immediate notice to Landlord of the nature of such repair needs; and Landlord shall not be responsible in any way for failure to make any repairs until a reasonable time shall have elapsed after receipt by Landlord of such written notice.

Section 5.3    Trade Fixtures.

All Trade Fixtures, attached or not, shall be and remain the property of Tenant and, so long as Tenant is not in default beyond any applicable cure period under this Lease, may be removed by Tenant prior to or upon the expiration or termination of this Lease. Tenant shall repair any damage caused by such removal and restore the Premises to the condition existing prior to the installation of those Trade Fixtures, normal wear and tear excluded. Any Trade Fixtures which are not removed from the Premises upon the expiration or termination of this Lease shall be deemed to have been abandoned by Tenant and shall, at Landlord's option, become the property of Landlord. In that event, Tenant shall have no (and hereby waives all) rights to payment or compensation for any such item.

Section 5.4    Surrender of Premises.

Upon the expiration or termination of this Lease, Tenant shall surrender the Premises to Landlord, broom-clean and in a good state of repair and condition, excepting only ordinary wear and tear. Upon request of Landlord, Tenant shall (a) demolish or remove all or any portion of any Trade Fixtures and other property and all alterations, improvements, or additions to the Premises made by or on behalf of Tenant and (b) restore the Premises to the condition existing prior to the installation of those Trade Fixtures or other property or the making of any such alterations, improvements, or additions. Tenant will tag any wiring as installed by Tenant to ensure future potential for re-use, but Tenant will not be required to remove the cabling or wiring upon expiration of the Lease. Upon the expiration or termination of this Lease, Tenant will deliver all keys to the Premises to Landlord and inform Landlord of all combinations on locks, safes, and vaults, if any, which remain in the Premises.

ARTICLE 6

RIGHTS RESERVED BY LANDLORD

Section 6.1    Landlord's Access.

Landlord (and its agents, representatives, and contractors) shall have the right to enter upon the Premises at any reasonable time (and, in the case of an emergency, at any time) to (a) inspect the Premises; (b) make repairs, alterations, or additions (including, without limitation, to make any repairs, alterations, or additions in the portion of the Premises that is 10.5 feet and higher from the slab of the floor) as long as such repairs do not materially interfere with Tenant’s permitted use or quiet enjoyment of the Premises; and (c) show the Premises to prospective tenants, subtenants, mortgagees, and purchasers as Landlord may deem necessary or desirable. Tenant shall not be entitled to any abatement or reduction of any Rent by reason of any such entry by Landlord, and no such entry shall ever be construed to be an eviction of Tenant, a default by Landlord, or a breach of the covenant of quiet enjoyment, as long as such access, or repairs do not materially interfere with Tenant’s permitted use or quiet enjoyment of the Premises. In exercising its rights under this Section 6.1, Landlord shall use reasonable efforts to avoid (to the extent reasonable and practicable

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under the circumstances) material interference with Tenant's Permitted Use of the Premises and complete the repairs in a commercially reasonable time frame.

Landlord agrees to provide written notice of any construction or material repairs to Tenant and schedule such work at a time that minimizes any impact to Tenant.

Section 6.2    Assignment, Subletting, or Other Transfers by Tenant.

Landlord reserves the right to approve any transfers of any interest of Tenant under this Lease. Tenant shall not, without having obtained Landlord's prior written consent, (a) assign, convey, or otherwise transfer (whether voluntarily, by operation of law, or otherwise) this Lease, the Premises, or any interest of Tenant under this Lease, (b) mortgage, pledge, or otherwise encumber any interest of Tenant under this Lease, (c) grant any concession or license within the Premises, (d) grant or transfer any management privileges or rights with respect to the Premises, (e) allow any lien, security interest, or other encumbrance to be placed upon any interest of Tenant under this Lease, (f) sublet all or any part of the Premises, or (g) permit any other party to occupy or use all or any part of the Premises. Any attempted transfer by Tenant without Landlord's prior written consent shall be of no force or effect and may, at Landlord's option, be a default by Tenant under this Lease. If Tenant is other than a natural person and if Tenant's voting securities are not traded on a national securities exchange, any conveyance, assignment, or transfer of more than a seventy-five percent (75%) interest in Tenant in a single transaction or in a series of transactions shall be deemed an assignment prohibited by this Lease. In the event of a transfer of any interest of Tenant under this Lease (whether with or without Landlord's consent), (h) Tenant shall pay to Landlord any reasonable out-of-pockets costs incurred by Landlord, not to exceed $1,000; (i) each transferee shall fully observe all covenants and obligations of Tenant under this Lease; (j) no transferee shall use the Premises for any use except the Permitted Use; (k) such transfer shall be subject to all of the terms, covenants, and conditions of this Lease; (l) any transferee must assume in writing all of the applicable obligations of the Tenant under this Lease; (m) Tenant shall remain fully liable for all conditions, requirements and financial obligations under this Lease in addition to any party to which the Lease may be assigned or sublet; and (n) any expansion, renewal, or like options granted to Tenant under this Lease shall automatically terminate as of the date of such transfer, unless the transfer is a Permitted Transfer, as defined herein. No such transfer shall ever be construed to constitute a waiver of any of Tenant's covenants contained in this Lease, a release of Tenant from any obligation or liability of Tenant under this Lease, or a waiver of any of Landlord's rights under this Lease. The consent by Landlord to a particular transfer shall not constitute Landlord's consent to any other or subsequent transfer. No transferee of Tenant shall have any right to further sublease or assign, or otherwise transfer, encumber, pledge, or mortgage its interest under this Lease. Neither the voluntary or other surrender of this Lease by Tenant nor a mutual cancellation of this Lease shall ever constitute a merger of estates. Instead, any such early termination of this Lease shall, at the option of Landlord, either terminate all or any existing subleases or sub-tenancies or operate as an assignment to Landlord of Tenant's interest in any or all such subleases or sub-tenancies.

Notwithstanding any provision herein to the contrary, Tenant shall have the absolute and unrestricted right to assign this Lease and any and all of its rights or entitlements hereunder or sublet all or any part of the Premises, without Landlord’s consent, to: (i) to an entity which controls, is controlled by, or under common control with, Tenant (an “Affiliate”), or (ii) in

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connection with the merger, acquisition or reorganization of Tenant or its Affiliate, sale of substantially all of Tenant’s assets, or in connection with the issuance, redemption or transfer of any portion of Tenant’s stock (a “Permitted Transfer”). Tenant shall be required to give notice to the Landlord for such assignment or subletting when permitted by the Securities and Exchange Commission, but will not need Landlord’s consent. Tenant shall be entitled to half of the profits regarding the Rent, if any, from any assignment or subletting, after Tenant’s reasonable sublease expenses.

Section 6.3    Assignment by Landlord.

Landlord shall have the right at any time to transfer and assign, in whole or in part and by operation of law or otherwise, Landlord's rights, benefits, privileges, duties, and obligations under this Lease, in the Building, or in any portion of the Project. Landlord shall be released from any further obligation under this Lease, and Tenant agrees to look solely to Landlord's successor in interest for the performance of, all obligations of Landlord accruing subsequent to the date of such transfer. All covenants of Landlord under this Lease shall be binding upon Landlord and its successors only with respect to breaches occurring during its or their respective periods of ownership of Landlord's interest under this Lease.

Section 6.4    Alterations and Additions by Landlord.

Landlord reserves the right to make alterations or additions to the Project at any time and from time to time. Landlord further reserves the right to construct (or permit others to construct) other buildings or improvements within the Project at any time and from time to time as long as such alterations or additions do not materially interfere with Tenant’s permitted use, or quiet enjoyment of the Premises. In the event there is a material interruption in Tenant’s use of the Premises beyond forty-eight (48) hours, there will be an equitable adjustment in the Rent and Additional Rent until such time as the material interruption is cured and Tenant can utilize 100% of the Premises. Except as set forth herein, neither the diminution nor the shutting off of any light, air, or view nor any other effect on the Premises as a result of Landlord's exercise of the rights reserved in this Section 6.4 shall affect this Lease, abate or reduce Rent, or otherwise impose any liability on Landlord.

Section 6.5    Subordination to Mortgages and Leases.

This Lease shall be subject and subordinate at all times to (a) all ground or underlying leases now existing or which may be subsequently executed affecting the Project (“Ground Lease”), (b) the lien or liens of all mortgages and deeds of trust now existing or subsequently placed on the Project or Landlord's interest or estate in the Project (“Financing Lien”), and (c) all renewals, modifications, consolidations, replacements, and extensions of any Ground Lease or Financing Lien. The provisions of this Section shall be self-operative without the necessity of the execution of any other document by any party. However, Tenant shall execute and deliver any mutually acceptable instruments, releases, or other documents as reasonably requested by Landlord for the purpose of confirming the provisions of this Section or further subjecting and subordinating this Lease to any Ground Lease or Financing Lien within twenty (20) days after Landlord’s written request therefor. In the event of the enforcement by the lessor under any Ground Lease or by the holder of any Financing Lien of the remedies provided for by law or by such Ground Lease or Financing Lien, or in the event of the transfer of the Building or Landlord's interest or estate in any part of the Building by deed in lieu of foreclosure, Tenant, upon request of any person or party succeeding to the interest of Landlord as a result of such enforcement or deed in lieu of foreclosure,

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automatically will become the tenant of such successor in interest without change in the terms or provisions of this Lease. However, such successor in interest shall not be bound by any payment of Rent for more than one (1) month in advance, except prepayments in the nature of security for the performance by Tenant of its obligations under this Lease which have been actually delivered to such successor; or bound by any amendment or modification of this Lease made after the applicable Ground Lease or Financing Lien is placed against the Project without the written consent of any trustee, mortgagee, beneficiary, or lessor. Tenant shall, upon request, execute and deliver an instrument or instruments confirming the attornment and other agreements contemplated by this Section, as long as the subordination agreement does not increase Tenant’s financial obligations hereunder, or materially modify the terms and conditions of the Lease. Notwithstanding anything to the contrary set forth in this Lease, the lessor under any Ground Lease or the holder of any Financing Lien may elect at any time to cause their interest in the Project to be subordinate to Tenant's interest under this Lease by filing an instrument in the real property records of Hennepin County, Minnesota, affecting such election; and Tenant shall execute and deliver to Landlord within the time frame as set forth herein any such instruments or documents requested by the lessor under such Ground Lease or the holder of such Financing Lien for the purpose of confirming that such Ground Lease or Financing Lien is subordinated to Tenant's interest under this Lease.

Section 6.6    Certificates.

Within twenty (20) days after Landlord's written request, Tenant will execute, acknowledge, and deliver to Landlord (and any other persons specified by Landlord) a certificate certifying as to such facts (to the extent true) as Landlord may reasonably request, including (a) that this Lease is in full force and effect, (b) the date and nature of each modification to this Lease, (c) the date to which Rent and other sums payable under this Lease have been paid, (d) that Tenant is not aware of any default under this Lease which has not been cured, except such defaults as may be specified in said certificate, and (e) other items reasonably requested by Landlord. Such request may be made by Landlord at any time, and from time to time, during the Lease Term. Any such certificate may be relied upon by Landlord and by such other persons specified by Landlord or to whom such certificate may be delivered. Tenant's failure to deliver any such certificate within the specified time period shall be a default under the Lease.

Section 6.7    Building Rules.

Landlord reserves the right to rescind any of the Building Rules and to make any written modifications or additions to the Building Rules as shall be necessary or advisable for the safety, protection, care, and cleanliness of the Building and the Project, the operation of the Project, the preservation of good order in the Project, the protection and comfort of the tenants in the Building (and their agents, employees, and invitees), and the reputation of the Project. All amendments, modifications, and additions to the Building Rules shall be binding upon Tenant from the date on which notice of any such Building Rules is delivered to Tenant. While the Building Rules are intended to be of general applicability to all tenants of the Building, Landlord reserves the right to waive the applicability of any one or more of the Building Rules to a particular situation, but such waiver by Landlord shall not be construed as a waiver of such Building Rules with respect to any other comparable situation and shall not prevent Landlord from thereafter enforcing any of such Building Rules against or any or all of the tenants in the Building. Landlord agrees to apply the Rules and Regulations as attached to this Lease on a uniform basis for all tenants. Notwithstanding the foregoing, in the event there is any ambiguity between the Rules and

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Regulations and the terms and conditions of the Lease, the terms and conditions of the Lease will prevail.

ARTICLE 7

CONDEMNATION AND CASUALTY

Section 7.1    Condemnation.

In the event of a Total Taking of the Premises or the Building, then this Lease shall terminate as of the date when physical possession of the Premises or Building, as applicable, is taken by the condemning authority. If a Partial Taking occurs which relates to a material portion of the Building or if Landlord is required to pay any of the proceeds from such Partial Taking to the lessor under a Ground Lease or to the holder of a Financing Lien, then this Lease, at the option of Landlord, exercised by written notice to Tenant within one hundred eighty (180) days before the date of such Partial Taking, shall terminate on the date of taking the portion of the Premises are affected by such Partial Taking. In this event, Rent shall be apportioned as of the date when physical possession of the applicable portion of the Building is taken by the condemning authority. In the event of a Partial Taking of the Premises which results in the Premises being Untenantable, then Landlord may, at Landlord's sole option and cost, elect to relocate Tenant to a space within the Building with same level of fit and finish which is reasonably comparable to the Premises as approved by Tenant. If Landlord does not elect to relocate Tenant following a Taking which renders the Premises Untenantable, then Tenant may terminate this Lease as of the date of such Taking by giving Landlord written notice of Tenant's termination election within thirty (30) days after the date of such Taking; and Rent shall be apportioned as of the date of such Taking. If a Taking of the Premises occurs which entitles Tenant to terminate this Lease but Tenant does not do so in the manner and within the time period specified in the immediately preceding sentence, then Tenant shall be deemed to have irrevocably waived its termination right. If Tenant is deemed to have waived its termination right or if a Partial Taking of the Premises occurs which does not result in the Premises becoming Untenantable, then Landlord shall allow Tenant a fair diminution of Rent as to that portion of the Premises subject to such Taking; and this Lease shall otherwise continue in full force and effect. Notwithstanding the foregoing, in the event the Tenant makes a good faith determination that Tenant cannot operate in the reduced Premises, Tenant reserves the right to terminate this Lease. All proceeds (whether in a lump sum or in separate awards) of any Taking shall be paid to Landlord, and Tenant shall not be entitled to (and expressly waives any claim to) any portion of any such award. Notwithstanding the foregoing, Tenant will have the right to file any claim as authorized by statute. The term “Taking” means a permanent transfer during the Lease Term of all or any part of the Premises, the Building, or the Project, as applicable, as a result of, or in lieu of or in anticipation of, the exercise of the right of condemnation or eminent domain for any public or quasi-public use under any governmental law, ordinance, or regulation. The term “Partial Taking” means a Taking of less than the whole or substantially the whole of the Building and/or the Premises. The term “Total Taking” means a Taking of the whole or substantially the whole of the Building or the Premises or to a Taking which results in the termination of an applicable Ground Lease. “Untenantable” shall mean that Tenant is unable to conduct its business

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in the Premises in a manner reasonably comparable to that conducted immediately before the applicable occurrence.

Section 7.2    Casualty Damage.

If the Premises shall be destroyed or damaged by fire or any other casualty, Tenant shall immediately give written notice of that occurrence to Landlord. In the event that any portion of the Project is damaged by fire or other casualty and if (a) such damage is such that Landlord cannot reasonably be expected to substantially complete the repairs which are within Landlord's Repair Obligations within two hundred forty (240) days after the date of the casualty, (b) Landlord, in Landlord's sole judgment, elects not to repair or rebuild such damaged areas, or (c) less than one (1) year remains in the Lease Term at the time of any damage to the Project, then Landlord, at Landlord's sole option, shall have the right to terminate this Lease, regardless of whether the Premises are affected by such casualty. In such event, all Rent owed up to the time of termination shall be paid by Tenant to Landlord; and this Lease shall cease and come to an end as of the date of Landlord's written notice to Tenant regarding such termination. In the event that (x) the Premises is rendered Untenantable by fire or any other casualty which is not caused by the fault or neglect of Tenant or any Tenant Related Parties; (y) such damage is such that Landlord cannot reasonably be expected to substantially complete the repairs within the Premises which are within Landlord's Repair Obligations within two hundred forty (240) days after the date of that casualty, as reasonably estimated by Landlord; and (z) Landlord has not terminated this Lease, then Tenant shall have the right to terminate this Lease by delivering written notice to Landlord within thirty (30) days after receipt of written notice of Landlord's estimate of the time to complete Landlord's Repair Obligations relative to the Premises. If Tenant does not provide Landlord with notice of Tenant's termination election in the manner and within the time period specified in the preceding sentence, then Tenant shall be deemed to have irrevocably waived its right to terminate the Lease as a result of such casualty; and Landlord, in reliance upon Tenant's waiver of its termination right, shall proceed to make the repairs which are within Landlord's Repair Obligations. During any period of reconstruction or repair of the Premises, Tenant shall continue the operation of Tenant's business within the Premises to the extent practicable. During the period from the occurrence of a casualty which was not caused, in whole or in part, by Tenant or any Tenant related party, until the completion of the work within Landlord's Repair Obligations which is necessary to render the Premises tenantable, Rent shall be reduced to the extent that the Premises are unfit for the conduct of Tenant's Permitted Use of the Premises. If, however, the Premises or any portion of the Project is damaged by fire or other casualty resulting from the fault or negligence of Tenant or any Tenant Related Party, the Rent shall not be reduced during the repair of such damage. If neither Landlord nor Tenant elects, or has the right to elect, to terminate this Lease as the result of such casualty, then Landlord shall commence and proceed with reasonable diligence to restore the Premises to the extent of Landlord's Repair Obligations. When the repairs described in the preceding sentence have been completed by Landlord, Tenant shall then complete the restoration of all leasehold improvements in excess of Landlord's Repair Obligations which are necessary to permit Tenant to re-occupy the Premises for the Permitted Use. Tenant's restoration work shall be conducted in accordance with the provisions of Section 5.1 above. In no event shall Landlord have the obligation to expend for the restoration or repair of the Project an amount in excess of the insurance proceeds actually received by Landlord as a result of such casualty with the understanding that Landlord will purchase 100% current market replacement property insurance coverage for the Building including the Premises, so long as available at commercially reasonable terms; and except for those repairs

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which are within Landlord's Repair Obligations, all costs and expenses of restoring the Premises shall be borne by Tenant. Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from any casualty or the repair or restoration work made necessary by the occurrence of any casualty.

Section 7.3    Insurance.

(a)    Landlord shall not be obligated to insure any of Tenant's goods, Trade Fixtures, leasehold improvements, or any other property placed in or incorporated in the Premises by or on behalf of Tenant. Landlord shall maintain fire and extended coverage insurance on the Building (excluding leasehold improvements and tenants' personal property) in amounts of 100% of full current market replacement insurance coverage, so long as available at commercially reasonable terms. All payments for losses thereunder shall be made solely to Landlord.

(b)    Tenant shall procure and maintain, at its sole cost and expense during and throughout the Lease Term, a policy or policies of (i) commercial general liability insurance in an amount of not less than $3,000,000.00 which can be complied with by commercial general liability limits or by combination with additional excess or umbrella (commercial catastrophe) liability limits (ii) fire and extended coverage insurance with respect to Tenant's Trade Fixtures, inventory, and leasehold improvements located in the Premises written on an “All Risk” basis for the full replacement cost, (iii) worker's compensation and employer's liability insurance, and (iv) such other insurance as Landlord may, from time to time, reasonably require not more often than once every five (5) years. In addition, Tenant shall obtain a fire legal liability endorsement or other coverage reasonably satisfactory to Landlord in the amount of $100,000.00, which removes the “owned, rented, or occupied” property exclusion from Tenant's liability policy. All such insurance shall be maintained with companies authorized to transact business in the State of Minnesota and of good financial standing on forms and in amounts reasonably acceptable to Landlord. In addition, each such policy, other than the workers compensation/employers liability policies, shall name Landlord and the Landlord Related Parties as "additional insureds" for all general liability coverage thereunder and shall contain a standard "other insurance" clause, unmodified in any way that would make the coverage provided by the policy excess over or contributory with any additional insured's own insurance coverage.

(c)    All policies of insurance required to be maintained by Tenant shall provide that Landlord shall be given at least thirty (30) days' prior written notice of any cancellation or non-renewal of any such policy. A duly executed certificate of insurance with respect to each such policy shall be deposited with Landlord by Tenant on or before the Commencement Date, and a duly executed certificate of insurance with respect to each subsequent policy shall be deposited with Landlord at least fifteen (15) days prior to the expiration of the policy then in effect.

(d)    Tenant shall not do or permit anything to be done in or about the Premises, nor bring nor keep nor permit anything to be brought to or kept in the Premises, which will in any way increase the existing rate of or affect any fire insurance or other insurance which Landlord carries on the Project or any of its contents, cause a cancellation or invalidation of any such insurance or otherwise violate any Insurance Requirement. If the annual premiums to be paid by Landlord with respect to any insurance obtained by Landlord covering the Project or any of its

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contents shall be increased because either the nature of Tenant's operations or the nature of Tenant's Trade Fixtures, inventory, or leasehold improvements in the Premises may result in a hazardous exposure, Tenant shall pay such increase upon demand by Landlord.

(e)    All fire and extended coverage insurance policies carried by either Landlord or Tenant shall provide for a waiver of rights of subrogation against Landlord and Tenant on the part of the applicable insurance carrier unless either (i) such waiver is then prohibited by applicable Minnesota law or (ii) such waiver would invalidate, nullify, or provide a defense to coverage under any such insurance policy. As long as the waivers contemplated by this Subsection are in effect, Landlord and Tenant each hereby waives any and all rights of recovery, claims, actions, or causes of action against the other (and their respective employees, agents, officers, or partners) for any loss or damage which may occur to the Premises or the Project which is covered by valid and collectible insurance policies. The failure of Tenant to take out or maintain any insurance policy required under this Section 7.3 shall be a defense to any claim asserted by Tenant against Landlord by reason of any loss sustained by Tenant which would have been covered by any such required policy. The waivers set forth in this Subsection shall be in addition to, but shall not be in substitution for, any other waivers, indemnities, or limitation of liabilities set forth in this Lease.

Section 7.4    Indemnity.

Tenant shall not be liable to Landlord or to the Landlord Related Parties for any injury to person or damage to property caused by the gross negligence or willful misconduct of Landlord or the Landlord Related Parties. Subject to the provisions of Section 9.14 below, Landlord shall indemnify and hold Tenant and the Tenant Related Parties harmless from any liability, loss, cost, claim, or expense (including reasonable attorneys' fees and expenses, court costs, and costs of investigation) arising out of, or alleged to have arisen out of, the gross negligence or willful misconduct of Landlord or the Landlord Related Parties. Landlord and the other Protected Parties shall not be liable to Tenant or to the Tenant Related Parties for any injury to person or damage to property caused by the negligence or misconduct of Tenant or the Tenant Related Parties, or arising out of any use of, or the conduct of any business in the Premises or other portions of the Project, by Tenant or the Tenant Related Parties. Tenant shall indemnify and hold Landlord and the other Protected Parties harmless from any liability, loss, cost, claim, or expense (including reasonable attorneys' fees and expenses, court costs, and costs of investigation) arising out of, or alleged to have arisen out of, the negligence or misconduct of Tenant or the Tenant Related Parties or out of any use of, or conduct of any business in, the Premises or any other portion of the Project by Tenant or the Tenant Related Parties. The indemnifications granted by both Landlord and Tenant in this Section 7.4 are subject to any express limitations to the contrary in this Lease. “Landlord Related Parties” means Landlord's officers, partners, employees, agents, and contractors. “Protected Parties” means the Landlord Related Parties and, to the extent applicable, the holder of any Financing Lien, the lessor under any Ground Lease, and the management company for the Building (and their respective directors, partners, officers, employees, and agents).

Section 7.5    Damages from Certain Causes.

None of the Protected Parties shall ever be liable or responsible to Tenant, or any person claiming through Tenant, for any loss, injury to person, or damage to property in, upon, or about the Premises or any other portion of the Project resulting from (a) theft, fire, casualty, vandalism, acts of God, public enemy, injunction, riot, strike, inability to procure materials, insurrection, war, court order,

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requisition, or order of any governmental body or authority; (b) the acts or omissions of other tenants of the Project; (c) any other causes beyond Landlord's control; or (d) any damage or inconvenience which may arise through repair or alteration of the Project. All goods, property, or personal effects stored or placed by Tenant in or about the Project shall be at the sole risk of Tenant.

ARTICLE 8

DEFAULT AND REMEDIES

Section 8.1    Default by Tenant.

The occurrence of any of the following events and the expiration of any grace periods hereafter described shall constitute a default by Tenant under this Lease:

(a)    The failure of Tenant to pay any Rent for a period of ten (10) days after written notice;

(b)    Tenant assigns its interest in this Lease or sublets any portion of the Premises except as permitted in this Lease or Tenant otherwise breaches the provisions of Section 6.2 of this Lease;

(c)    Tenant uses the Premises for any purpose other than the Permitted Use or otherwise breaches Tenant's operational covenants under Sections 2.3 of this Lease;

(d)    Tenant breaches or fails to comply with any non-financial material term, provision, covenant, or condition of this Lease (other than as described in Subsections [a], [b], or [c] above), or with any of the Building Rules now or subsequently established, and such breach or failure continues for thirty (30) calendar days after notice by Landlord to Tenant (or, if such default cannot reasonably be cured within said thirty (30) day period, such longer period of time as is reasonably necessary to cure such default, provided Tenant commences to cure such default within said thirty (30) day period and diligently continues to prosecute same to completion);

(e)    If the interest of Tenant under this Lease is levied on under execution or other legal process, or if any petition in bankruptcy or other insolvency proceedings is filed by or against Tenant, or any petition is filed or other action taken to declare Tenant as bankrupt or to delay, reduces or modify Tenant's debts or obligations or to reorganize or modify Tenant's capital structure or indebtedness or to appoint a trustee, receiver or liquidator of Tenant or of any property of Tenant, or any proceedings or other action is commenced or taken by a governmental authority for the dissolution or liquidation of Tenant (provided that no such levy, execution, legal process; or petition filed against Tenant shall constitute a breach of this Lease if Tenant shall vigorously contest the same by appropriate proceedings and shall remove or vacate the same within thirty (30) calendar days from the date of its creation, service, or filing);

(f)    Tenant becomes insolvent, makes an assignment for the benefit of creditors, or makes a transfer in fraud of creditors; or a receiver or trustee is appointed for Tenant or any of its properties;

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(g)    Tenant permanently abandons the Premises during the Lease Term; or

(h)    If Tenant is an individual person, the death or legal incapacity of Tenant; if Tenant is a corporation, Tenant ceases to exist as a corporation in good standing in the state of its incorporation and/or ceases to be duly authorized to transact business within the State of Minnesota; or if Tenant is a partnership or other entity, Tenant is dissolved or otherwise liquidated.

Section 8.2    Landlord's Remedies.

Upon the occurrence of any default by Tenant under this Lease, Landlord, at Landlord's sole option, may exercise any one or more of the following described remedies, in addition to all other rights and remedies provided at law or in equity:

(a)    Landlord may at any time thereafter (without being under any obligation to do so) re-enter the Premises and correct or repair any condition which shall constitute a failure on the part of Tenant to observe, perform, or satisfy any term, condition, covenant, agreement, or obligation of Tenant under this Lease; and Tenant shall fully reimburse and compensate Landlord on demand for the costs incurred by Landlord in doing so, plus profit and overhead in any amount equal to eighteen percent (18%) of such cost. No action taken by Landlord under this subsection shall relieve Tenant from any of Tenant's obligations under this Lease or from any consequences or liabilities arising from the failure of Tenant to perform such obligations.

(b)    Landlord may terminate this Lease and repossess the Premises. In the event that Landlord elects to terminate this Lease, Landlord shall be entitled to recover damages equal to the total of (i) the cost of recovering the Premises (including reasonable attorneys' fees and costs); (ii) the cost of removing and storing Tenant's or any other occupant's property; (iii) the unpaid Rent owed at the time of termination, plus interest thereon from the date when due at the maximum rate of interest then allowed by law; (iv) the cost of reletting the Premises (as reasonably estimated by Landlord and including alterations or repairs to the Premises and brokerage commissions); (v) the costs of collecting any sum due to Landlord (including without limitation, reasonable attorneys' fees and costs); and (vi) any other sum of money or damages owed by Tenant to Landlord as a result of the default by Tenant, whether under this Lease, at law, or in equity.

(c)    Landlord may terminate Tenant's right of possession of the Premises without terminating this Lease and repossess the Premises. In the event that Landlord elects to take possession of the Premises without terminating this Lease, Tenant shall remain liable for, and shall pay to Landlord, from time to time on demand, (i) all costs and damages described in Subsection (b) of this Section 8.2 and (ii) any deficiency between the total Rent due under this Lease for the remainder of the Lease Term and rents, if any, which Landlord is able to collect from another tenant for the Premises during the remainder of the Lease Term (“Rental Deficiency”). Landlord may file suit to recover any sums falling due under the terms of this Lease from time to time, and no delivery to or recovery by Landlord of any portion of the sums owed to Landlord by Tenant under this Lease shall be a defense in any action to recover any amount not previously reduced to judgment in favor of Landlord. Landlord may use reasonable efforts to re-let the Premises on such terms and conditions and to such parties as Landlord, in Landlord's reasonable discretion, may determine (including a term different from the Lease Term, rental concessions, and alterations and improvements to the Premises); but Landlord shall never be obligated to re-let the Premises before

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leasing other rentable areas within the Project, it being the intent of the parties that Tenant shall not be placed in a preferential position by reason of Tenant's own default. Any sums received by Landlord through re-letting shall reduce the sums owing by Tenant to Landlord, but Tenant shall not be entitled to any excess of any sums obtained by re-letting over and above the Rent provided in this Lease under any circumstances. For the purpose of such re-letting, Landlord is authorized to decorate or to make any repairs, changes, alterations, or additions in and to the Premises that Landlord may deem necessary or advisable. No re-letting shall be construed as an election on the part of Landlord to terminate this Lease unless a written notice of such intention is given to Tenant by Landlord. Notwithstanding any such re-letting without termination, Landlord may, at any time thereafter, elect to terminate this Lease for such previous default. In the alternative (but only in the event that Tenant's default constitutes a material breach), Landlord may elect to terminate Tenant's right to possession of the Premises and to immediately recover as damages, in lieu of the Rental Deficiency, a sum equal to the difference between (a) the total Rent due under this Lease for the remainder of the Lease Term and (b) the then fair market rental value of the Premises during such period, discounted to present value using a discount rate of eight percent (8%) per annum (“Discounted Future Rent”). In such event, Landlord shall have no obligation to re-let the Premises or to apply any rentals received by Landlord as a result of any re-letting to Tenant's obligations under this Lease; and the aggregate amount of all damages due to Landlord, including the Discounted Future Rent, shall be immediately due and payable to Landlord upon demand.

(d)    In the event that Landlord elects to re-enter or take possession of the Premises after Tenant's default, Tenant hereby waives notice of such re-entry or re-possession and of Landlord's intent to re-enter or retake possession. Landlord may, without prejudice to any other remedy which Landlord may have for possession or arrearages in or future Rent, expel or remove Tenant or any other person who may be occupying the Premises. Landlord may also change or alter the locks or other security devices on the doors to the Premises and/or, if applicable, remove Tenant's access media from the security system; and Tenant waives, to the fullest extent allowed by law, any requirement that notice be posted on the Premises as to the location of a key to such new locks and any rights to obtain such a key.

(e)    If Tenant abandons the Premises, Landlord may remove and store any property of Tenant that remains within the Project at Tenant's expense. In addition to Landlord's other rights and remedies, Landlord may dispose of the stored property if Tenant does not claim that property within ten (10) days after the date on which that property is first stored by Landlord. Landlord shall deliver by certified mail to Tenant, at Tenant's last known address, a notice stating that Landlord will dispose of Tenant's property if Tenant does not claim such property within ten (10) days after the date the property was first seized and stored by Landlord. In addition, Tenant shall be liable to Landlord for all costs and expenses incurred by Landlord in moving, storing, and disposing of the abandoned property and shall indemnify and hold harmless Landlord from and against any and all loss, damage, costs, expenses, and liability related to or in connection with such removal, storage, and disposal of Tenant's property after abandonment.

(f)    In the event that Rent is to be increased at various intervals during the Lease Term, then Landlord may, at Landlord's sole election, calculate the amount of unpaid Rents owed at the time of termination of this Lease or calculate the amount of any Rental Deficiency or Discounted Future Rent based upon the difference between the average rate of Rent payable by

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Tenant over the entire Lease Term instead of on the amount of Rent payable by Tenant during the applicable period. If Landlord agreed to allow Tenant to pay a lower rate of rent during the earlier portions of the Lease Term and to then increase the Rent at various stages during the Lease Term, Tenant acknowledges and agrees that (i) that agreement was made as an accommodation to Tenant and in reliance upon Tenant performing all of Tenant's obligations and paying Rent throughout the entire Lease Term and (ii) such method of calculation is intended to provide Landlord with the benefit of Landlord's bargain in this Lease.

(g)    No termination of this Lease shall ever be deemed to have occurred unless Landlord specifically notifies Tenant in writing that Landlord has elected to terminate this Lease. No election of Landlord to re-enter the Premises or to retake possession of the Premises shall ever be deemed or construed to be a termination of this Lease.

(h)    If Tenant commits any event of default under this Lease with respect to which written notice was provided and Tenant fails to cure or Tenant fails to commence to cure, at any time within the immediately preceding twelve (12) month period and thereafter commits the same or a similar default, no notice after the first such notice shall be required to be given by Landlord for or with respect to any subsequent default before the pursuit of any one or more of the remedies provided in this Lease. Tenant hereby expressly waives both (i) notice of any default for which notice is not specifically required under Section 8.1 and (ii) all subsequent notices of a similar default.

(i)    All rights and remedies of Landlord under this Lease shall be non-exclusive and shall be in addition to and cumulative of all other rights or remedies available to Landlord under this Lease or by law or in equity.

Section 8.3    Intentionally Deleted.

Section 8.4    Attorney's Fees and Other Expenses of Enforcement.

In the event Tenant defaults in the performance or observance of any of the terms, covenants, agreements, or conditions contained in this Lease, Tenant, to the extent permitted by applicable law, shall pay to Landlord (a) all reasonable expenses incurred by Landlord in collecting any sums due under, or enforcing any of the terms of, this Lease; and (b) if Landlord places the enforcement of all or any part of this Lease in the hands of an attorney, all reasonable attorneys' fees and other costs of collection and enforcement incurred by Landlord if Landlord prevails.

Section 8.5    Default by Landlord.

Landlord shall be in default under this Lease in the event Landlord has not begun and pursued with reasonable diligence the cure of any failure of Landlord to meet its obligations under this Lease within thirty (30) days of the receipt by Landlord of written notice from Tenant of Landlord's alleged failure to perform (or, if such default cannot reasonably be cured within said thirty (30) day period, such longer period of time as is reasonably necessary to cure such default, provided Tenant commences to cure such default within said thirty (30) day period and diligently continues to prosecute same to completion). In no event shall Tenant have the right to terminate or rescind this Lease as a result of Landlord's default. Tenant waives such remedies of termination and rescission and agrees that Tenant's remedies for default under this Lease and for breach of any promise or

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inducement are limited to a suit for damages and/or injunction. In addition, Tenant shall, prior to the exercise of any such remedies, provide each holder of a Financing Lien and each lessor under a Ground Lease with written notice and a reasonable time to cure any default by Landlord.

ARTICLE 9

MISCELLANEOUS PROVISIONS

Section 9.1    Amendments.

This Lease may not be altered, changed, or amended except by an instrument in writing signed by both Landlord and Tenant.

Section 9.2    Non-Waiver.

No course of dealing between Landlord and Tenant or any other person, nor any delay on the part of Landlord in exercising any rights under this Lease, nor any failure to enforce any provision of this Lease, nor the acceptance of any Rent by Landlord shall operate as a waiver or a modification of the terms of this Lease or of any right which Landlord has to demand strict compliance by Tenant with the terms of this Lease. If Landlord waives any agreement, condition, or provision of this Lease, such waiver must be expressly set forth in a writing signed by Landlord and shall not be deemed a waiver of any subsequent breach of the same or any other agreement, condition, or provision contained in this Lease.

Section 9.3    Holding Over.

In the event Tenant remains in possession of the Premises after the expiration or termination of this Lease without the consent of Landlord, Tenant shall be deemed to be occupying the Premises as a tenant at will and shall pay Rent for each month (or partial month) during any such holdover period at a rate for the first 90 days past expiration or termination of Rent which Tenant was obligated to pay for the month immediately preceding the end of the Lease Term. After 90 days holding over, rent shall increase to 125% of Rent which Tenant was obligated to pay for the month immediately preceding the end of the Lease Term. No holding over by Tenant after the expiration or termination of this Lease shall be construed to extend the Lease Term or in any other manner be construed as permission by Landlord to holdover. Additionally, in the event of any unauthorized holding over by Tenant, Tenant shall indemnify Landlord against all claims for any damages by any other person or entity to whom Landlord may have leased all or any part of the Premises and for any other loss, cost, damage, or expense (including reasonable attorneys' fees and costs of suit) incurred by Landlord as a result of such holding over.

Section 9.4    Notices.

Any notice, demand, consent, approval, request, or other communication required or permitted to be given pursuant to this Lease (including any Exhibit to this Lease) or by applicable law shall be in writing and shall be delivered by registered or certified mail, postage prepaid, return receipt requested, or expedited delivery service with proof of delivery, addressed to Landlord or Tenant, as applicable, at the Notice Addresses for each specified in Section 1.1 of this Lease. Any such communication transmitted by personal delivery shall be deemed to have been delivered as of the date actually received by the addressee. Any such communication transmitted by registered or certified mail shall be deemed to have been given or served on the third (3rd) day following the date

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on which such notice was deposited in a receptacle maintained by the United States Postal Service for such purpose. Any notice of default from Tenant to Landlord shall also be delivered to any holder of a Financing Lien or any lessor under a Ground Lease who has notified Tenant of its interest and the address to which notices are to be sent; and such notice shall not be effective until delivered to such parties. Either Landlord or Tenant may, by ten (10) days' prior notice to the other in accordance with this Section 9.4, designate a different address or different addresses to which communications intended for the party are to be sent.

Section 9.5    Independent Obligations.

The obligations of Tenant under this Lease are independent of Landlord's obligations, and Tenant shall not, for any reason, withhold or reduce Tenant's required payments of Rent or fail to fully perform Tenant's obligations under this Lease. Notwithstanding the foregoing, Tenant reserves the right to request any equitable remedy as provided by law. In the event that Landlord commences any proceedings against Tenant as a result of Tenant's default under this Lease, Tenant will not interpose any counterclaim or other claim against Landlord of whatever nature or description in any such proceedings excluding mandatory claims. In the event that Tenant attempts to interpose any such counterclaim or other claim against Landlord in such proceedings, Landlord and Tenant stipulate and agree that such counterclaim or other claim asserted by Tenant shall, upon motion by Landlord, be severed out of the proceedings instituted by Landlord and that those proceedings may proceed to final judgment separately and apart from, and without consolidation with or reference to the status of, such counterclaim or other claim asserted by Tenant.

Section 9.6    Survival.

Neither the expiration or termination of the Lease Term pursuant to the provisions of this Lease, by operation of law, or otherwise, nor any repossession of the Premises pursuant to any remedy granted to Landlord under this Lease or otherwise shall ever relieve Tenant of Tenant's liabilities and obligations under this Lease, all of which shall survive such expiration, termination, or repossession.

Section 9.7    Other Tenants of Building.

Neither this Lease nor Tenant's continued occupancy of the Premises is conditioned upon either (a) the opening of any business in the Building or in any portion of the Project by any other person or entity or (b) the continued operations of any such business.

Section 9.8    Name of Building and Project.

Tenant shall not utilize the name of the Building or the Project for any purpose whatsoever, except to identify the location of the Premises in Tenant's address. Landlord shall have the right to change the name of the Building and/or the Project whenever Landlord, in its sole discretion, deems it appropriate without any liability to Tenant and without any consent of Tenant being necessary. Notwithstanding the foregoing, Landlord agrees to grant Tenant naming rights for the building, so long as Tenant leases a minimum of 200,000 RSF under the Lease.

Section 9.9    Consent by Landlord.

In each circumstance under this Lease in which the prior consent or permission of Landlord is required before Tenant is authorized to take any particular type of action, the decision of whether to grant or deny such consent or permission shall be within the sole and exclusive judgment and discretion of Landlord unless otherwise specifically provided in this Lease with respect to that

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specific matter. Tenant shall not have any claim for breach by Landlord or any defense to performance of any covenant, duty, or obligation of Tenant under this Lease on the basis that Landlord delayed or withheld the granting of such consent or permission. Landlord's consent or approval to any particular act by Tenant that requires such consent or approval shall not be deemed to waive or render unnecessary consent to or approval of any subsequent similar act.

Section 9.10    Legal Interpretation.

This Lease, and the rights and obligations of Landlord and Tenant under this Lease, shall be interpreted, construed, and enforced in accordance with the laws of the State of Minnesota. All obligations of the parties shall be performable in, and all legal actions to enforce or construe this Lease shall be instituted in, the courts of, Hennepin County, Minnesota. All defined terms and other words used in this Lease shall include the singular and plural, as applicable. References to the Premises, the Building, the Land, or the Project shall also include any portion of each. References to the Project shall include the Building and the Premises, and references to the Building shall include the Premises. Words which are not used as defined terms in this Lease shall be construed in accordance with the meanings commonly ascribed to those words, relative to the context in which each is used. The word “including” shall be construed as if followed, in each instance, by the phrase “but not limited to.” All article, section, and subsection headings used in this Lease are for reference and identification purposes only and are not intended to, and shall not under any circumstances, alter, amend, amplify, vary, or limit the express provisions in this Lease. All rights, powers, and remedies provided in this Lease may be exercised only to the extent that their exercise does not violate any applicable law and are intended to be limited to the extent necessary so that such provision will not render this Lease invalid or unenforceable under applicable law. In the event that any provision in this Lease, or the application of such provision to any person or circumstance, shall be invalid or unenforceable to any extent, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those to which it is held invalid or unenforceable, shall not be affected thereby. Landlord and Tenant hereby respectively acknowledge that each such party has substantial experience in negotiation commercial real estate leases, that this Lease is the product of extension negotiations between the parties, and that, therefore, neither Landlord nor Tenant shall be charged with having promulgated this Lease and that no rule of strict construction with respect to the provisions of this Lease shall be applicable.

Section 9.11    Entire Agreement.

Tenant agrees that (a) this Lease supersedes and cancels any and all previous statements, negotiations, arrangements, brochures, agreements, and understandings, if any, between Landlord and Tenant or displayed by Landlord to Tenant with respect of the subject matter of this Lease, the Premises, the Building, or the Project and (b) there are no representations, agreements or warranties (express or implied, oral or written) between Landlord and Tenant with respect to the subject matter of this Lease, the Premises, the Building, or the Project other than as set forth in this Lease.

Section 9.12     Authority.

(a)     Tenant represents and warrants that (i) Tenant has the full right, power, and authority to enter into, and to perform its obligations under, this Lease, and (ii) upon execution of this Lease by Tenant, this Lease shall constitute a valid and legally binding obligation of Tenant. If Tenant signs as a corporation, each of the persons executing this Lease on behalf of Tenant covenant and warrant that Tenant is a duly and validly existing corporation, that the execution of this Lease by such

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persons on behalf of Tenant has been duly authorized by all necessary corporate action, and that Tenant is qualified to do business in the State of Minnesota.

(b)     Landlord represents and warrants that (i) Landlord has the full right, power, and authority to enter into, and to perform its obligations under, this Lease, and (ii) upon execution of this Lease by Landlord, this Lease shall constitute a valid and legally binding obligation of Landlord. If Landlord signs as a corporation, or a limited liability company, each of the persons executing this Lease on behalf of Landlord covenant and warrant that Landlord is a duly and validly existing corporation, or limited liability company that the execution of this Lease by such persons on behalf of Landlord has been duly authorized by all necessary corporate action, and that Landlord is qualified to do business in the State of Minnesota.

Section 9.13    Taxes on Tenant's Property.

Tenant shall be liable for all taxes levied against Tenant's Trade Fixtures, inventory, leasehold improvements, and any other property of Tenant in the Premises or the Project. If any such taxes are ever assessed against Landlord or Landlord's property and Landlord elects to pay the same or if the assessed value of Landlord's property is increased by the inclusion of Tenant's property, Tenant shall pay to Landlord, within thirty (30) days of demand, that part of such taxes attributable to Tenant's property as Additional Rent. If any alteration, addition, or improvement shall be made by Tenant which causes an increase in the real property taxes, assessments, or other governmental charges levied against the Building, Tenant shall pay to Landlord, within thirty days of demand, the amount of any such increase as Additional Rent.

Section 9.14    Landlord's Liability.

Notwithstanding anything to the contrary set forth in this Lease, Tenant agrees that no personal, partnership, or corporate liability of any kind or character whatsoever shall attach to Landlord or its partners or venturers for payment of any amounts payable under this Lease or for the performance of any obligation under this Lease. The exclusive remedies of Tenant for the failure of Landlord to perform any of Landlord's obligations under this Lease shall be to proceed against the interest of Landlord in and to the Project (and any rents, income, sale proceeds and insurance proceeds therefrom). Landlord shall not be responsible in any way to Tenant or any Tenant Related Party for any loss of property from the Premises or public areas of the Building or for any damages to any property from any cause whatever. Nor shall Landlord be responsible for lost or stolen personal property, money, or jewelry from the Premises, regardless of whether such loss occurs when the Premises are locked. Landlord or Tenant shall never be liable for consequential or special damages.

Section 9.15    Time of the Essence.

In all instances in which Tenant is required to pay any sum or do any act at a particular time or within a particular period, it is understood that time is of the essence.

Section 9.16    Instruments and Evidence Required to be Submitted to Landlord.

Each written instrument and all evidence of the existence or non-existence of any circumstances or conditions which is required by this Lease to be furnished to Landlord shall in all respects be in form and substance reasonably satisfactory to Landlord, and the duty to furnish such written instrument or evidence shall not be considered satisfied until Landlord shall have acknowledged that Landlord is satisfied with the form and content of each.

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Section 9.17    Financial Information.

Tenant shall, within ten (10) business days following a written request from Landlord, deliver to Landlord, from time to time, and to cause any guarantor of Tenant's obligations under this Lease to deliver to Landlord, from time to time, such financial statements of Tenant or any guarantor and any other information as may be reasonably requested by Landlord or any lender or purchaser of Landlord. Notwithstanding the foregoing, as long as Tenant is a publically traded company and Tenant’s financial statements are listed on Tenant’s website, this will satisfy the financial reporting requirement as set forth herein.

Section 9.18    Counterparts.

This Lease may be executed in any number of counterparts, each of which, when executed and delivered, shall be an original; but such counterparts shall together constitute one and the same instrument.

Section 9.19    Recordation.

Tenant shall not record (a) this Lease, (b) any instrument to which this Lease may now or hereafter be attached, or (c) any memorandum of this Lease.

Section 9.20    Effective Date.

The submission of this Lease to Tenant for examination does not constitute a reservation of or offer or option for the Premises, and this Lease shall become effective only upon execution by both Landlord and Tenant. The term “Effective Date” shall mean the date on which this Lease is first fully executed by both Landlord and Tenant.

Section 9.21    Successors and Assigns.

From and after the Effective Date, this Lease shall be binding upon, inure to the benefit of, and be enforceable by the parties to this Lease and their respective successors and assigns (subject to the provisions of this Lease). As used in this Lease, the phrase “successors and assigns” is used in its broadest possible context and includes, without limitation and as applicable, the respective heirs, personal representatives, successors, and assigns of each of the parties to this Lease and any person, partnership, corporation, or other entity succeeding to any interest in this Lease, the Premises, the Building, or the Project. Nothing contained in this Section 9.20 nor in the definition of Tenant Related Parties shall serve to alter or vary the provisions of Section 6.2 prohibiting the types of transfers by Tenant described in that Section.

Section 9.22    Joint and Several Liability.

If there is more than one party executing this Lease as Tenant, or if Tenant is a partnership, Tenant's obligations under this Lease shall be the joint and several obligations of all such parties executing as Tenant or all such partners constituting Tenant (as applicable).

Section 9.23    Unavoidable Delay.

Except as otherwise specifically provided in this Lease, the time in which either party shall be required to perform any act under this Lease, other than the payment of money or Tenant's completion of the Initial Improvements, shall be extended for a period of time equal to the number of days during which performance of that act is delayed due to an Unavoidable Delay.

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However, in order to qualify for an extension based upon an Unavoidable Delay, Tenant shall give notice to Landlord of Tenant's claim, or Landlord shall give notice to Tenant of Landlord’s claim for that extension and the nature of the Unavoidable Delay giving rise to that claim within five (5) business days after the start of that Unavoidable Delay. “Unavoidable Delay” shall mean a delay due to strike, lockout, or other labor or industrial disturbance (whether on the part of employees of either party to this Lease), civil disturbance, act of public enemy, riot, sabotage, embargo, fire, storm, or other casualty or act of God, or any other cause whatsoever beyond the reasonable control of the party claiming an Unavoidable Delay, whether similar to any of the causes stated above. However, for the purpose of this definition, Tenant's lack of funds or inability to obtain financing or either party’s inability to obtain labor or materials necessary to complete Landlord’s build out as set forth in Exhibit E, or the Initial Improvements shall not be deemed to be a cause beyond the control of Tenant with respect to Tenant's obligations to pay rent or other sums as and when due under this Lease or to complete the Initial Improvements.

Section 9.24    Commissions.

Landlord has agreed to pay, for the benefit of Tenant, a commission to CBRE (“Broker”) in connection with the negotiation and execution of this Lease by both parties, pursuant to a separate commission agreement between Landlord and Broker. Landlord and Tenant hereby indemnify and hold each other harmless against any loss, claim, expense, or liability with respect to any other commission or brokerage fees claimed on account of the execution, expansion, and/or renewal of this Lease, due to any action by the indemnifying party.

Section 9.25 Effect of Delivery of this Lease.

Landlord has delivered a copy of this lease to Tenant for Tenant’s review only, and the delivery of a copy of this Lease does not constitute an offer or option by Landlord to Tenant. This Lease shall not be effective until a duplicate original copy of this Lease which has been executed by Tenant is delivered to and executed by Landlord. Tenant acknowledges that Tenant has been advised that Landlord’s current lender has the right to approve or disapprove this Lease and that Landlord will not execute this Lease until Landlord has received approval from Landlord’s current lender to do so.

Section 9.26 Signage and Naming Rights.

Tenant shall have the right to exterior building signage in locations to be determined by Tenant, approved by Landlord (not to be unreasonably withheld) so long as such signage meets all ordinances and building codes.

Section 9.27 Renewal Right.

Tenant to have three (3), five (5) year options to renew at a rate equal to 95% of the then market rate for comparable buildings in the market. Market rate shall be defined to include all concessions common in the market at that time for comparable tenants entering into new leases in comparable buildings including tenant improvements and commissions. Tenant shall provide 9 months written notice to Landlord of their intent to exercise this option.

Section 9.28 Expansion Right.

Tenant to have the ongoing first right of refusal on all office space in the building located on floors one through four under the same lease terms, excepting Base Rent, with a prorated Tenant

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Improvement Allowance, as defined in Section 1(a) of Exhibit E, for the new square footage taken by Tenant. Should Tenant exercise their right within the first thirty-six (36) months of the original lease term, then Tenant’s Base Rent shall be under the same terms and conditions as the original lease with a prorated Tenant Improvement Allowance. Notwithstanding the foregoing, in the event Tenant requests additional space after the expiration of the first thirty-six (36) months of the original lease term, Landlord agrees that the Rent for the additional space will not exceed ninety-five percent (100%) of the commercially reasonable and competitive rent for office space in the metro area.

Section 9.29 Overtime Lighting and HVAC.

Normal office operating hours provided are 55 hours weekly (subject to agreement between Landlord and Tenant). Overtime HVAC service can be zoned and provided at actual cost to Landlord not to exceed $10/zone (approximately 10,000 SF) per hour.

Section 9.30 Parking.

Landlord will make 185 stalls located in the underground garage space available onsite at no additional cost for the duration of the Lease Term, including options. Landlord retains the option of offering valet service in the lower level parking garage at no charge to Tenant, at any time, in order to maximize parking options and efficiency.

Section 9.31 Environmental Conditions.

Landlord represents and warrants to Tenant that: (1) no asbestos exists in the Building (including the Premises) and (2) it is aware of no other environmental contamination or hazardous materials that have been released or discharged at, in, or under the Building (including the Premises) or in, under, or on the Land and Tenant will have no obligation to remediate any environmental contamination, or hazardous materials not caused by Tenant, Tenant’s employees or contractors.

Section 9.32    Exhibits.

The following Exhibits (and, if applicable, addenda, riders, or other attachments to this Lease) are attached hereto and incorporated herein this Lease for all purposes.

Exhibit “A”        Property Description

Exhibit “B”        Floor Plan

Exhibit “C”        Rules and Regulations

Exhibit “D”        Operating Expenses

Exhibit "E"        Work Letter

Exhibit “F”        Commencement Date Agreement

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IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the Effective Date.

LANDLORD:

By:    DCI 1001 Minneapolis Venture LLC,

a Delaware limited liability company,

Date Executed on            By:    /s/ Spencer E. Mullee

Behalf of Landlord:            Name:    Spencer E. Mullee

October 21, 2016            Title:    Chief Operating Officer

TENANT:

BY: SELECT COMFORT CORPORATION

Date Executed on            By:    /s/ David R. Callen    

Behalf of Tenant:            Name: David R. Callen

October 21, 2016            Title: Chief Financial Officer

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EXHIBIT “A”

To Lease Agreement

PROPERTY DESCRIPTION

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EXHIBIT “B”

To Lease Agreement

FLOOR PLANS

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EXHIBIT “B-2”

To Lease Agreement

Tenant's Proportionate Share

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EXHIBIT “C”

To Lease Agreement

RULES AND REGULATIONS

1.    No additional locks shall be placed on the doors of the Premises by Tenant, nor shall any existing locks be changed unless Landlord is immediately furnished with two keys thereto. Landlord will without charge furnish Tenant with two keys (or as many as Tenant reasonably needs) for each lock existing upon the entrance doors when Tenant assumes possession with the understanding that at the termination of the lease these keys shall be returned or paid for at five dollars ($5.00) each. A deposit of one dollar ($1.00) each shall be required for additional keys.

2.    Tenant shall not at any time display a “For Rent” sign upon the Building or the Premises, or advertise the Premises for rent.

3.    Safes and other unusually heavy objects shall be placed by Tenant only in such places as may be approved by Landlord. Any damage caused by overloading the floor or by taking in or removing any object from the Premises or the Building shall be paid by Tenant.

4.    Windows facing on corridors shall at all times be wholly clear and uncovered (except for such signs as Landlord may reasonably approve) so that a full unobstructed view of the interior of the Premises may be had from the corridors, unless otherwise approved in writing by Landlord.

5.    No vehicles or animals shall be brought into the Building, other than as required by handicapped persons.

6.    Tenant shall not make any changes in the pipes, ducts, or wiring serving the Premises or add any additional pipes, ducts, or wiring without the prior written consent of Landlord, and any such changes or additions shall be made in such manner as Landlord may reasonably direct.

7.    No sign, tag, label, picture, advertisement, or notice (other than price tags of customary size used in marking samples) shall be displayed, distributed, inscribed, painted or affixed by Tenant on any part of the outside of the Building or of the Premises without the prior written consent of the Landlord, which consent will not be unreasonably withheld, conditioned, or delayed.

8.    In the event Landlord should advance upon the request, or for the account of the Tenant, any amount for labor, material, packing, shipping, postage, freight or express upon articles delivered to the Premises or for the safety, care, and cleanliness of the Premises, the amount so paid shall be regarded as Additional Rent and shall be due and payable forthwith to the Landlord from the Tenant.

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.    The corridors and hallways of the Building shall not be used by Tenant for any purpose other than ingress to or egress from the Premises.

10.    Tenant shall not do or permit to be done within the Premises anything which would unreasonably annoy or interfere with the rights of other tenants in the Building, or which might constitute a potential hazard to other tenants or visitors.

11.    During the ninety (90) days prior to the expiration of this Lease, Landlord may show the Premises to prospective tenants.

12.    Tenant shall not put or operate any steam engine, boiler, industrial machinery except in conjunction with Tenant’s Product and R&D equipment used for testing purposes or stove in the Building or upon the Premises or do any cooking thereon (excluding the cafeteria) or use or allow to be kept in the Building or upon the Premises any explosives or any kerosene, camphene, bottled gas, oil or other highly flammable materials, except gas supplied through metal pipes for heating purposes and normal and customary cleaning and janitorial supplies, or supplies in the Product and R & D area to the extent permitted under applicable laws.

13.    Landlord reserves the right to prescribe reasonable qualifications for admission into the Building.

14.    Models, salespersons or other employees or representatives of Tenant, shall not model, demonstrate display, or show in any manner any merchandise outside of the Premises in the Building or on the Property without Landlord's prior written consent.

15.    As a courtesy, but not as an obligation, Landlord may, at Landlord's option, upon request by Tenant, receive and store articles or merchandise delivered to Tenant at the Building; provided, however that such articles of merchandise are properly addressed and identified and all postage, handling and delivery charges are prepaid by Tenant. Landlord assumes no responsibility whatsoever for the loss, damage or destruction of such articles of merchandise received at the Building by Landlord on behalf of Tenant, and Tenant hereby waives all claims against Landlord for any damage or loss arising at any time from the loss, damage or destruction of such articles of merchandise. Tenant agrees to pay to Landlord as Additional Rent the amount of all storage, delivery, handling and other expenses incurred by Landlord as a result of the receipt and storage of such articles of merchandise.

16.    Canvassing, peddling, soliciting and distribution of handbills or any other written material in the Building or in the Building's parking areas are prohibited, and each tenant shall cooperate to prevent the same.

17.    If the Premises front on the atrium within the Building, Tenant shall cause the Premises to be kept open for business and occupied by Tenant's personnel during all normal business hours of the Building.

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18.    These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of space in the Building.

19.    Landlord reserves the right to make such other and reasonable rules and regulations as in its judgment may from time to time be needed for the safety, care and cleanliness of the Building, and for the preservation of good order therein.

20.    Smoking is not permitted within the Building. Tenant hereby indemnifies Landlord from any and all claims resulting from Tenant's permitting of smoking within the Leased Premises.

21.    A visitor information directory system will be provided by Landlord to assist visitors in locating tenants.

22.    To the extent that meeting rooms are offered outside Tenant’s Premises assuming Tenant is not paying Rent for such space, a tenant's meeting room use will be coordinated on a reservation basis and all tenants will be eligible. Standard fees will be applied and Landlord will control the rental of these areas and the use of the areas will be coordinated by the buyer/tenant services department of Landlord. Reservations for meeting room space within the Building will be on a first-come first-served basis.

23.    If, and only if, the Tenant’s permitted use allows the operation of a showroom, warehousing and onsite delivery to customers is prohibited in permanent showrooms and in exhibit space when used in conjunction with showrooms, payment for products or services that of a retail sales nature are prohibited (provided, however, payment or partial payment for orders taken at the Building for future delivery to a buyer will be allowed if it is within the applicable tenant’s normal business practices and is not of a retail sales nature, it being the intention of this provision to permit payments or partial payments intended to bind an order for future delivery without in any way qualifying or circumventing the prohibition within the Building against retail sales).

24.    Landlord mayamend these Rules and Regulations from time to time and such changes shall be binding upon Tenant.

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EXHIBIT "D"

To Lease Agreement

OPERATING EXPENSES

This Exhibit “D” (“Operating Expense Exhibit”) describes and specifies the manner in which Tenant’s Proportionate Share of Operating Expenses and Tenant’s Monthly Operating Payment are to be determined under this Lease.

1. Definitions. For purposes of this Operating Expenses Exhibit, all terms defined in this Lease, or in other exhibits to this Lease, will be utilized herein without further definition. In addition, the following terms will, when delineated with initial capital letters, have the following respective definitions and meanings:

(a)    “Allocated Electrical Costs” shall mean those electrical costs paid by tenants of the Building to Landlord which are determined by a separate meter or sub-meter.

(b)    “Monthly Operating Payment” shall mean (i) one-twelfth (1/12th) of Tenant's Proportionate Share of Operating Expenses and Taxes for that calendar year, as estimated by Landlord, in the exercise of good faith and reasonable business judgment, with respect to the applicable period; and (ii) Tenant’s Proportionate Share of Utility Costs for the applicable period.

(c)    “Operating Expenses” shall mean all direct and indirect costs and expenses in each calendar year of operating, maintaining, repairing, managing and owning the Project and of performing Landlord’s obligations under this Lease, including costs attributable to (i) wages and salaries (including management fees which are already included in the Operating Expense) of all employees exclusively engaged in the operation, repair, replacement, maintenance, providing of janitorial services, and security of the Project or the Exterior Common Areas (inclusive of taxes, insurance, and other benefits relating thereto), or if not exclusively engaged, then a fair and reasonable allocation of time; (ii) all supplies and materials used in the operation, maintenance, repair, replacement, and security of the Project; (iii) the cost of providing Building Standard Services to the Project (but excluding Utility Costs); (iv) any insurance or insurance related expenses payable by Landlord which are applicable to the Project or Landlord’s personal property used in connection with the operation of the Project (including, but not limited to, Insurance Costs); (v) repairs, replacements, and general maintenance of the Project (including the Exterior Common Areas); (vi) the costs of operating and maintaining an on-site management office at the property (not to exceed 800 square feet), including fair rental value thereof at a rate no higher than what Tenant pays for space in the Building; (vii) the cost of maintaining and operating a fitness/workout facility and food service operation including fair rental value thereof at a rate no higher than what Tenant pays for space in the Building (but only to the extent the costs thereof exceed any revenues generated by the use of such facilities) and (viii) service or maintenance contracts relative to the repair,

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replacement, providing of janitorial services, or security of the Project (including alarm service, window cleaning, sprinkler systems, security systems, and elevator maintenance). Operating Expenses shall not include Allocated Electrical Costs, the cost of capital improvements (except to the extent provided below), depreciation, interest, lease commission, and principal payments on mortgage and other non-operating debts of Landlord. Operating Expenses shall, however, include the amortization of capital improvements which are for the purpose of reducing Operating Expenses, which are for Landlord providing life safety or security systems, or which are required by governmental authorities, together with an amount equal to twelve percent (12%) per annum on the unamortized balance thereof. “Exterior Common Areas” shall mean that portion of the Project (and other tracts of real property comprising a multi-building project in the event the Building is located in such a project) which are not located within the Building (or other building in a multi-building project) and which are provided and maintained for the common use and benefit of Landlord and tenants of the Building (or multi-building project) generally and the employees, and licensees of Landlord and such tenants including, without limitation, all parking areas (enclosed or otherwise) and all streets, sidewalks, walkways, and landscaped areas.

(d)    Notwithstanding anything contained herein to the contrary, Operating Expenses shall not include any of the following:

(i)    principal, interest, amortization, or other payments of loans by Landlord or debt service, or new construction or additions within the Project;

(ii)    expenses incurred related to negotiations with existing and prospective tenants;

(iii)    legal expenses incurred in negotiating or enforcing lease agreements with tenants;

(iv)    costs incurred in selling, syndicating, financing, mortgaging, or pledging Landlord's interest in the Building;

(v)    capital expenditures unless undertaken with the reasonable expectation of reducing Operating Expenses;

(vi)    costs arising out of the breach by Landlord of any contract, including, without limitation, penalties and interest due to late payment, or costs incurred as the result of Landlord’s negligence, except in connection with a good faith dispute by Landlord;

(vii)    costs of correcting defects (including latent defects) in the design or construction of the Building, including the structural elements and the Building systems, except that (a) general maintenance and repair necessitated by or resulting from ordinary wear and tear are not deemed defects and (b) costs incurred with the intention of reducing Operating Expenses shall not be excluded;

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(viii)    advertising and promotional costs and expenses other than tenant newsletters and tenant parties;

(ix)    any cost or expense to the extent to which Landlord is paid or reimbursed or is entitled to payment or reimbursement from any person (other than as a payment for Operating Expenses), or the cost of repairs or replacements incurred by reason of fire or other casualty or condemnation to the extent that Landlord is compensated therefor through proceeds of insurance or condemnation awards;

(x)    costs of repairs undertaken for, or services provided exclusively for, any other tenant of the Building;

(xi)    management fees in excess of four percent (4%) of the gross rents payable with respect to the Building from time to time;

(xii)    any tenant improvement allowance or costs of installing tenant improvements for other tenants of the Building;

(xiii)    items and services for which Tenant, or any other tenant pays directly to third parties;

(xiv)    any costs, fines, or penalties incurred because Landlord violated any applicable laws, statute, ordinance, order, decree, rule or regulation;

(xv)    original construction costs of the Building;

(xvi)    costs and expenses of painting or decorating areas of the Building other than Common Areas;

(xvii)    leasing commissions and broker commissions, or other expenses associated with leasing space in the Building;

(xviii)    bad debt loss, rent loss or reserves for bad debts or rent loss and reserves for Operating Expenses or capital improvements;

(xix)    costs of relocating tenants in the Building;

(xx)    costs relating to maintaining Landlord’s existence, as a corporation, partnership or other entity, such as trustee’s fees, annual fees, corporate or partnership organization or administration expenses, deed recordation expenses, and legal and accounting fees (other than with respect to Building operations);

(xxi)    costs of removal, remediation or other treatment of environmental contamination or hazardous materials (as defined by law) generated, released, manufactured, discharged, disposed of or otherwise located in, on, under or about the Premises or Building (other than any environmental contamination or

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hazardous materials generated, manufactured, released, discharged, disposed of or otherwise located in, on, under or about the Premises or Building as caused by Tenant’s acts or omissions);

(xxii)    costs of removal and encapsulation or other treatment or remediation of asbestos-containing materials (other than asbestos-containing materials that were installed by Tenant) contained in any portion of the Premises or the Building; and

(xxiii)    charges for depreciation or amortization of capital expenditures, except as permitted above.

(e) RU Factor. The RU factor for the Premises will be a combined rate of 11.2578% as shown on Exhibit B-2.

2. Payment. During the Lease Term, Tenant shall make a Monthly Operating Payment for the applicable period on the same day as Base Rent is due.

3. Procedure. The following additional provisions shall apply to Paragraph 2 of this Operating Expense Exhibit:

(a)    Landlord shall make a good faith estimate of the Tenant’s Proportionate Share of Operating Expenses and of Taxes from time to time for each upcoming calendar year (or remainder thereof, if applicable). Landlord may also, from time to time, revise that estimate; and upon thirty (30) days written notice to Tenant, Landlord may require the Monthly Operating Payment to be adjusted in accordance with such revised estimate. Any amounts paid based on such an estimate shall be subject to adjustment when Operating Expenses and Taxes are actually determined for that calendar year.

(b)    By April 1 of each calendar year during the Lease Term, or as soon thereafter as reasonably practicable, Landlord shall furnish to Tenant a statement of Landlord's Operating Expenses and Taxes for the previous calendar year. If for any calendar year the aggregate Monthly Operating Payments for the prior year were in excess of the amount of Tenant’s Proportionate Share of Operating Expenses and/or Taxes actually due during such prior year, then Landlord shall refund to Tenant any over payment (or at Landlord's option, apply such amount against Base Rent due or to become due under the Lease). Likewise, Tenant shall pay to Landlord, on demand, any underpayment with respect to the prior year.

(c)    Tenant, at its expense, shall have the right no more frequently than once per calendar year, within nine months of Tenant's receipt of Landlord's annual statement of Operating Expenses and Taxes for the previous calendar year and following thirty (30) days' prior written notice to Landlord, to audit Landlord's books and records relating to Operating Expenses and Taxes for the prior calendar year.

(d)    Notwithstanding any language in the Lease or in this Exhibit seemingly to the contrary, Landlord may, at Landlord's sole election, determine and estimate Operating Expenses for any calendar year within the Lease Term by increasing the variable components of Operating Expenses and Taxes to the amount which Landlord projects

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would have been incurred had the Building been occupied to the extent of ninety-five percent (95%) of the Rentable Square Feet within the Building during all of the applicable calendar year. In such event, the term Operating Expenses, as used in this Exhibit and in the Lease, shall include (i) the actual Operating Expenses incurred during any portion of such calendar year in which the Building is occupied to the extent ninety-five percent (95%) or more of the Rentable Square Feet within the Building or (ii) the Operating Expenses which would have been incurred had the Building been occupied to the extent of ninety-five percent (95%) of the Rentable Square Feet within the Building during the portion of that calendar year in which the actual occupancy of the Building is less than ninety-five percent (95%) of the Rentable Square Feet within the Building; and Landlord shall have the option of making such estimate in advance for any upcoming calendar year.

(e)    In the event that the Lease Term commences on a day other than January 1 or terminates on a day other than December 31, Tenant's Proportionate Share of Operating Expenses for that part of the initial calendar year or last calendar year during the Lease Term shall be prorated based upon the number of months in that partial calendar year. With respect to any partial calendar month occurring during that partial calendar year, Tenant's Proportionate Share of Operating Expenses and of Taxes shall also be prorated based upon the number of days in that partial calendar month. The provisions of this Exhibit “D” shall survive the termination of the Lease Term.

4. Tax Protests. Tenant is aware that the provisions of of the Minnesota Property Tax Code (that statute or any successor thereto being the “Protest Provision”) provides tenants with the right to protest ad valorem real estate taxes under certain circumstances. Because Tenant recognizes that (a) because of the size of the Building and the number of tenants who are or will be occupying space in the Building during the Lease Term, Tenant's share of any real estate tax increase will be relatively small and (b) the confusion which could result if several tenants filed a real estate tax protest with respect to the Building, Tenant waives its rights under the Protest Provision to the fullest extent allowed by law. In the event that Tenant's rights under the Protest Provision cannot be waived, Tenant agrees not to protest any valuation of the Building unless Tenant notifies Landlord in writing of Tenant's intent to do so and Landlord then fails to protest the valuation within thirty (30) days after Landlord receives Tenant's written notice. Tenant will have no standing to challenge the real estate taxes without obtaining Landlord’s written consent. In addition, if Tenant exercises the right to protest under the Protest Provision, Tenant shall pay all costs of such protest.

5. Cap on Controllable Operating Expenses.  Operating expenses for controllable items (i.e. all expenses except taxes, insurance, utilities, electricity and any other item for which landlord does not have exclusive control to set pricing) shall not increase in any one calendar year by more than 4% (on a cumulative, compounding basis) over (i) the actual Operating Expenses incurred during any portion of such calendar year in which the Building is occupied to the extent ninety-five percent (95%) or more of the Rentable Square Feet within the Building or (ii) the Operating Expenses which would have been incurred had the Building been occupied to the extent of ninety-five percent (95%) of the Rentable Square Feet within the Building during the portion of that calendar year in

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which the actual occupancy of the Building is less than ninety-five percent (95%) of the Rentable Square Feet within the Building; and Landlord shall have the option of making such estimate in advance for any upcoming calendar year. The cost of Operating expenses for the first year of the Lease is estimated to be $10.28 per square foot.

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EXHIBIT "E"

To Lease Agreement

WORK LETTER

[Allowance]

This Work Letter (“Work Letter”) describes and specifies the rights and obligations of Landlord and Tenant with respect to the Allowance granted to Tenant under this Work Letter and the rights and responsibilities of Landlord and Tenant with respect to the design, construction, and payment for the completion of Tenant’s improvements (“Improvements”) within the Premises.

1.    DEFINITIONS. Terms which are defined in other portions of the Lease will have the same respective meanings in this Work Letter. Additionally, as used in this Work Letter, the following terms (when delineated with initial capital letters) will have the following respective meanings:

(a) “Allowance” means an amount not to exceed seventy-five dollars and fifty cents ($75.50) per square foot (“Tenant Improvement Allowance”) plus $1,100,000 to cover costs of common area improvements (e.g. food service, fitness and common area restroom improvements) requested by Tenant and shown on Tenant's approved plans, which shall be available to reimburse Tenant for the actual, documented cost of design and construction of the Improvements.

(b) “Basic Construction of the Building” means the interior structure of the Building and all other improvements, fixtures, and facilities which are owned by Landlord and which are a part of the Building, as these exist on the date of this Lease.

(c) “Change Costs” means all costs or expenses attributable to any change in the Construction Plans requested or approved by Tenant, including (i) any cost caused by direction of Tenant to omit any item of Work contained in the Construction Plans as previously approved by Tenant, (ii) any additional architectural or engineering services or Landlord requested modifications after approval of Construction Plans, (iii) any changes to materials in the process of fabrication, (iv) the cancellation or modification of supply or fabricating contracts, (v) the removal or alteration of any Work or any plans completed or in process as previously approved by Tenant, or (vi) any Tenant's Delays affecting the completion of the Work. Notwithstanding the foregoing, Tenant will not be responsible to reimburse Landlord for any costs that exceed the Tenant Improvement Allowance which are not previously approved by Tenant in writing, or any costs incurred due to Landlord delays or contractor mistakes.

(d) “Contractor” means the contractor or contractors engaged by Landlord, as approved by Tenant pursuant to the Request For Proposal process (“RFP”), to perform the Work. Landlord agrees to work with Tenant during the RFP process in the selection of the contractor, or contractors to perform the build out work as approved by the parties.

(e)    “Construction Plans” means, collectively, the plans, specifications and other information prepared or to be prepared by Tenant’s Architect after Landlord has provided the plans of the Premises to Tenant’s Architect and, where necessary, by Landlord's electrical, mechanical, and structural engineers, which will detail the Work required by Tenant in the Premises and which must be approved in writing by both Tenant and Landlord prior to the commencement of such Work. Within four (4) weeks after the date Landlord delivers to Tenant a so-called plans of the Premises, Tenant shall submit a floor plan, or fit plan of the Premises for Landlord's Work to Landlord for its approval, which approval shall not be unreasonably

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withheld, conditioned or delayed. Landlord shall have a period of ten (10) days after receipt of such floor plan within which to either approve such floor plan or to make reasonable comments and changes thereto and send such comments and changes to Tenant. If Landlord does not respond to Tenant's floor plan within such ten (10) day period, then Landlord shall be deemed to have approved the same. If Landlord responds with comments as described above, then Tenant shall revise the floor plan of the Premises taking into consideration Landlord's comments and resubmit them to Landlord for approval within five (5) days from the date of receipt of such comments. Landlord shall then have five (5) days to approve such revised floor plan. The final approved floor plan shall be referred to as "Tenant's Plans."

(f) “Cost of the Work” means the cost of (i) all materials and labor to be added to the Basic Construction of the Premises and common area improvements in order to complete the installation of the Initial Improvements in accordance with the Construction Plans and (ii) having the Space Plan and the Construction Plans prepared.

(g) “Space Plan” means the set of design drawings that have been (i) prepared by Tenant’s Architect, (ii) approved by both Landlord and Tenant, and (iii) specifies the Tenant improvements to the Premises as requested by Tenant to be completed by Landlord pursuant to the terms and conditions of the Lease and this Exhibit E.

(h) “Architect” means the Tenant’s Architect, to perform the functions of the Space Planner with respect to the Initial Improvements.

(i) “Tenant's Costs” means that portion of the Cost of the Work in excess of the Tenant Improvement Allowance.

(j) “Tenant Delays” means a delay in the completion of the Work as the probable result of (i) any failure by Tenant to approve the Construction Plans when due, (ii) any failure of Tenant to furnish Tenant's electrical, mechanical, and/or structural requirements when due, (iii) any change by Tenant in the Construction Plans as approved by Tenant, or any state of facts which gives rise to a change referred to in the definition of Change Costs or any changes resulting in a Change Cost as directly caused by Tenant, (iv) any other act or omission of Tenant, or a Tenant Related Party, including any violation of the provisions of the Lease or any delay in giving authorizations or approvals pursuant to this Work Letter, or (v) any other cause except a cause arising directly from a delay by Landlord or a Landlord Related Party. Tenant and Landlord agree to establish a mutually acceptable schedule of due dates for submission of plans and the required approval time frames to be attached to this Exhibit E as Exhibit E-1 as soon as reasonably available.

(k) “Work” means all materials and labor to be added to the Basic Construction of the improvements in order to complete the installation of the Initial Improvements within the Premises for Tenant in accordance with the approved Construction Plans, including any modifications to the Building, any electrical or plumbing work required to meet Tenant's electrical and plumbing requirements, and any special air conditioning work required to be performed in the Premises.

(l) “Working Days” means all days of the week other than Saturday, Sunday, and legal holidays.

2.    CONSTRUCTION PLANS. Within four (4) weeks after execution of the Lease, Tenant’s Architect, shall provide Landlord’s architect with sufficient information for Landlord’s architect to complete the Construction Plans, including Tenant's contemplated electrical loads, finishes, and

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1001 3^rd Avenue South - Select Comfort Corporation - NNN (2016 v1.1)    

other items necessary for Landlord’s Architect to complete the Construction Plans. Attached to this Exhibit E is the schedule of approval dates as prepared by Tenant’s Architect Landlord’s Architect and Landlord’s engineer will, at Tenant’s expense (after Tenant has approved such costs), prepare an initial set of Construction Plans for the Initial Improvements, including complete detail and finish drawings for partitions, doors, reflected ceiling, telephone outlets, electrical switches and outlets and Building standard heating, ventilation and air conditioning equipment and controls. Prior to the time that the Construction Plans are completed, (at Schematic Design, with updates at Design Develop and 70% completion of the Construction Documents) Landlord will retain a price estimate contactor to provide pricing information for both Landlord and Tenant, regarding construction of the improvements to the Premises and Common Areas. The parties will select a mutually acceptable price estimate contractor to provide the pricing information. This price estimate contractor will also be allowed the right to submit a proposal in response to the RFP to select a construction contractor to construct the improvements to the Premises and the Common Area. . Within ten (10) Working Days after Construction Plans are delivered to Tenant, Tenant shall approve (which approval shall be not unreasonably withheld) or disapprove the initial set of Construction Plans in writing and if disapproved, Tenant shall provide Landlord and Landlord’s Architect and Landlord’s engineer with specific reasons for disapproval. The foregoing process shall be repeated until the Construction Plans are approved by Tenant. If the Construction Plans are not approved in writing by both Tenant and Landlord on or before a date mutually agreed to by the parties, because of a delay caused by Tenant, then each day after that date until the Constructions Plans are approved by Tenant shall constitute one (1) day of Tenant Delay. Notwithstanding the foregoing, any delay caused by Landlord in not approving Tenant’s modifications beyond the mutually agreed to date will constitute one (1) day of Landlord Delay delaying the Rent Commencement Date for each day of Landlord Delays.

Landlord agrees that any changes to the Construction Plans, or changes to the specified materials require Tenant’s prior written approval before commencement of work. Landlord will be responsible for latent defects to the building system.

3.    CHANGES TO APPROVED PLANS. If any re-drawing or re-drafting of either the Space Plan or the Construction Plans is necessitated by Tenant’s requested changes after Tenant has approved the Construction Plans (all of which shall be subject to approval by Landlord and, if applicable, any other governmental agency or authority to which the Construction Plans are required to be submitted), excluding changes due to code compliance or incorrect information as supplied by Landlord or Landlord architect, the expense of any such re-drawing or re-drafting and the applicable change costs will be charged to Tenant and payable from Tenant’s Tenant Improvement Allowance, subject to Tenant’s prior written approval. Any expense for re-drawing or re-drafting of approved plans requested by Landlord after the approval of such plans shall be borne by Landlord.

4.    COORDINATION OF PLANNERS AND DESIGNERS. Tenant has selected HGA as Tenant’s Architect of record. Landlord has selected HGA as Landlord's Architect of record.

5.    CONSTRUCTION OBLIGATION AND FINISH ALLOWANCE. Landlord agrees to construct the Initial Improvements but Landlord shall not, under any circumstances, be required to spend more than the Tenant Improvement Allowance in doing so. The Tenant Improvement Allowance shall be disbursed by Landlord, from time to time after receiving Tenant’s written

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approval, for payment of the Cost of the Work, including the Construction Management Fee payable to Landlord. In consideration for Landlord administering the construction of the Initial Improvements, Tenant agrees to pay Landlord a fee equal to one and one half percent (1.5%) of the sum of the Cost of the Work (“Construction Management Fee”). The Construction Management Fee shall be paid to Landlord bi-weekly on the basis of Landlord’s reasonable estimate of the percentage of the Initial Improvements completed at the time of the payment. Tenant will be billed in arears for any payment owed for any additional work requested and approved in writing by Tenant above and beyond the Tenant Improvement Allowance. On or prior to the Commencement Date, Landlord agrees to provide to Tenant the final cost of the Tenant approved improvements, Tenant shall deliver to Landlord the actual Tenant’s Costs, minus the Prepayment previously paid, unless there are any good faith challenges which parties agree to resolve in a timely fashion. All sums due Landlord under this Section 5 shall be considered Rent under the terms of the Lease. Except as set forth herein, nonpayment shall constitute a default under the Lease and shall entitle Landlord to any and all remedies specified in the Lease, unless Tenant has a good faith defense as to the amount owed.

6.    LIENS ARISING FROM TENANT’S COSTS. Tenant agrees to keep the Premises free from any liens arising out of nonpayment of work as requested and approved by Tenant above the Tenant Improvement Allowance (“Tenant’s Costs”). In the event that any such lien is filed and Tenant, within thirty (30) days following such filing fails to cause same to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but not the obligation, to cause the same to be released by such means as Landlord in its reasonable discretion deems proper, including payment of or defense against the claim giving rise to such lien. All sums paid by Landlord in connection with any such lien shall constitute Rent under the Lease and a demand obligation of Tenant to Landlord, shall bear interest at the rate provided for in the Lease thirty days from the date of invoicing by Landlord to Tenant, until the date of reimbursement by Tenant, assuming there is no good faith challenge by Tenant.

7.    DELAYS. In the event that the Initial Improvements are not Substantially Complete by the Projected Delivery Date because of one or more Tenant Delays, then the Commencement Date shall be the Adjusted Substantial Completion Date (hereinafter defined). The Adjusted Substantial Completion Date shall be the date on which the Initial Improvements are Substantially Complete, adjusted backward, however, by one day for each day of Tenant Delays, if any. Notwithstanding the foregoing, in the event that the Initial Improvements are not Substantially Complete by the Projected Delivery Date because of one or more Landlord Delays, then the Commencement Date shall be the Adjusted Substantial Completion Date (hereinafter defined) and Tenant will be granted a corresponding abatement in daily Rent for any Landlord Delays which delay delivery of the Premises to Tenant for Tenant’s work or occupancy. Notwithstanding the foregoing, in the event Tenant is delayed in occupying the Premises for a period of more than 30 days after the Projected Delivery Date due to Landlord Delay, Tenant will have to hold over in Tenant’s current buildings and all reasonable direct out-of-pocket costs incurred by Tenant’s hold over will be reimbursed by Landlord.

8.    SUBSTANTIAL COMPLETION AND PUNCH LIST. The terms “Substantial Completion” and “Substantially Complete,” as applicable, shall mean that the Initial Improvements are sufficiently complete in accordance with the Construction Plans so that Tenant

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can reasonably use the Premises for the Permitted Use. Tenant’s acceptance of the Premises does not relieve Landlord of Landlord’s responsibility to correct defective work, nor does Tenant’s acceptance of the Premises change Landlord’s obligation to correct such defective work under warranty.

Landlord’s Work must include, but not be limited to, the following: (i) completion of all the requirements of Exhibit E entitled “Landlord’s Work Letter”, (ii) permanent utilities must be installed and operational at the Premises (including HVAC, gas, water and electricity, as well as a fully operational electrical panel), and (iii) issuance of a final Certificate of Occupancy; however, if the final Certificate of Occupancy cannot be issued until Tenant has finished Tenant’s build out, then a temporary Certificate of Occupancy can be issued with the understanding that Landlord is responsible for obtaining the Final Certificate of Occupancy. Fifteen (15) days prior to substantial completion of Landlord’s Work, Landlord will notify Tenant’s project manager of the scheduled completion of Landlord’s Work. Tenant will schedule a walk through to complete Tenant’s punch list, with Landlord’s representative to confirm Landlord’s substantial completion and accept the premises and confirm the Delivery Date. All open punch list items must be completed within thirty (30) days of submission of Tenant’s completed punch list to Landlord’s representative.

9.    ADDITIONAL WORK. If Tenant should desire to perform any work in the Premises prior to the Commencement Date which is not within the Initial Improvements (“Additional Work”), all Additional Work shall be subject to the provisions of Article 5 of the Lease. Landlord shall not be liable for any injury, loss, or damage to any of Tenant's installations or decorations made prior to the Commencement Date and not installed by Landlord. Tenant shall indemnify and hold harmless Landlord and Landlord's Contractor from and against any and all costs, expenses, claims, liabilities and causes of action arising out of or in connection with work performed in the Premises by or on behalf of Tenant (but excluding work performed by Landlord or Landlord's Contractor).

10.    CONSTRUCTION REPRESENTATIVES. Landlord's and Tenant's representatives for coordination and approval of change orders will be as follows, provided that either party may change its representative upon written notice to the other:

Landlord's Representative:

Name:	Spencer E. Mullee, DCI Technology Services, LLC
Address:	331 2nd Avenue South, Suite 100
	Minneapolis, MN 55401
Phone:	612.424.8485

Tenant's Representative:

Name:	Mark E. Battis, Select Comfort Corporation
Address:	9800 59th Avenue North
	Minneapolis, MN 55442
Phone:	763-551-6149

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Or any other Tenant Representative as designated by Tenant and such information is communicated in writing by Tenant to Landlord

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1001 3^rd Avenue South - Select Comfort Corporation - NNN (2016 v1.1)    

EXHIBIT "F"

Commencement Date Agreement and

Confirmation of Gross Leasable Area

WHEREAS, DCI 1001 Minneapolis Venture, LLC, (hereinafter called “Landlord”), and Select Comfort Corporation, a Minnesota corporation (hereinafter called “Tenant”) have entered into a certain “Lease” dated _____________________ for Premises in the building located at 1001 Third Ave South, Minneapolis, Minnesota; and

WHEREAS, Landlord and Tenant now desire hereby to confirm the Commencement Date and the Termination Date of the Lease Term and other matters as set forth herein;

NOW, THEREFORE, in consideration of the mutual covenants contained herein and of the benefits to be derived here from, the parties hereby agree as follows:

1. Possession of the Premises was delivered to Tenant on: ___________________.

2. The Rentable Square Footage of the Premises is: _____________________.

3. The Rent Commencement Date is: ____________________.

4. The First Lease Year is: _________________.

5. The expiration of the Lease Term shall be: _____________________.

6 Tenant’s Proportionate Share is:                 .

THIS Agreement supplements and, if applicable, supersedes any dates set forth in the Lease.

The remainder of this page was intentionally left blank.

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EXECUTED this _____ day of _____________________, ______.

LANDLORD:

DCI 1001 Minneapolis Venture, LLC,a _________ limited liability company

By: ____________________________        

Name: _________________________

Title: ___________________________

TENANT:

SELECT COMFORT CORPORATION

a Minnesota corporation

By: ____________________________        

Name: _________________________

Title: ___________________________

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EX-10.27

EX 10.27

SELECT COMFORT CORPORATION

Executive Tax and Financial Planning Program

(Revised July 6, 2016)

Summary

◦ CEO eligible for up to $15,000 per fiscal year of executive tax and financial planning services.

◦ Senior Vice Presidents eligible for up to $8,000 per fiscal year of executive tax and financial planning services.

◦ Reimbursable services include tax preparation and planning, financial planning, estate planning, employer stock & stock option planning and related legal fees. Money management fees and brokerage fees are not reimbursable.

◦ All amounts will be considered taxable wages to executives and will not be “grossed up” for any resulting taxes.

◦ Services must be performed, invoiced and turned in prior to the last payroll in the fiscal year of services provided.

EX-23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-70493, 333-79157, 333‑74876, 333-84329, 333-80755, 333-85914, 333-118329, 333-167331, and 333-188766 on Form S-8 of our reports dated February 24, 2017, relating to the consolidated financial statements and consolidated financial statement schedule of Select Comfort Corporation and subsidiaries (the “Company”), and the effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2016.

/s/ DELOITTE & TOUCHE LLP

Minneapolis, Minnesota
February 24, 2017

EX-31.1

Exhibit 31.1

Certification by Chief Executive Officer

I, Shelly R. Ibach, certify that:

1. I have reviewed this annual report on Form 10-K of Select Comfort Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	February 24, 2017
		/s/ Shelly R. Ibach
		Shelly R. Ibach
		Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification by Chief Financial Officer

I, David R. Callen, certify that:

1. I have reviewed this annual report on Form 10-K of Select Comfort Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	February 24, 2017
		/s/ David R. Callen
		David R. Callen
		Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Select Comfort Corporation (the “Company”) on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Shelly R. Ibach, Chief Executive Officer of the Company, solely for the purposes of 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, does hereby certify, to her knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	February 24, 2017
		/s/ Shelly R. Ibach
		Shelly R. Ibach
		Chief Executive Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Select Comfort Corporation (the “Company”) on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, David R. Callen, Senior Vice President and Chief Financial Officer of the Company, solely for the purposes of 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, does hereby certify, to his knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	February 24, 2017
		/s/ David R. Callen
		David R. Callen
		Senior Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

XML

Document and Entity Information - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Jan. 28, 2017	Jul. 02, 2016
Entity Information [Line Items]
Entity Registrant Name	SELECT COMFORT CORP
Entity Central Index Key	0000827187
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Document Type	10-K
Document Period End Date	Dec. 31, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	FY
Amendment Flag	false
Entity Common Stock, Shares Outstanding		42,950,000
Entity Well-known Seasoned Issuer	Yes
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Public Float			$ 747,344

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Dec. 31, 2016	Jan. 02, 2016
Current assets:
Cash and cash equivalents	$ 11,609	$ 20,994
Marketable debt securities – current	0	6,567
Accounts receivable, net of allowance for doubtful accounts of $884 and $1,039, respectively	19,705	29,002
Inventories	75,026	86,600
Income taxes receivable	0	15,284
Prepaid expenses	8,705	10,207
Other current assets	23,282	13,737
Total current assets	138,327	182,391
Non-current assets:
Marketable debt securities – non-current	0	8,553
Property and equipment, net	208,367	204,376
Goodwill and intangible assets, net	80,817	83,344
Deferred income taxes	4,667	3,036
Other non-current assets	24,988	19,197
Total assets	457,166	500,897
Current liabilities:
Accounts payable	105,375	103,941
Customer prepayments	26,207	51,473
Accrued sales returns	15,222	20,562
Compensation and benefits	19,455	15,670
Taxes and withholding	23,430	9,856
Other current liabilities	35,628	23,447
Total current liabilities	225,317	224,949
Non-current liabilities:
Other non-current liabilities	71,529	53,609
Total liabilities	296,846	278,558
Shareholders' equity:
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding	0	0
Common stock, $0.01 par value; 142,500 shares authorized, 43,569 and 49,402 shares issued and outstanding, respectively	436	494
Additional paid-in capital	0	0
Retained earnings	159,884	221,859
Accumulated other comprehensive loss	0	(14)
Total shareholders’ equity	160,320	222,339
Total liabilities and shareholders’ equity	$ 457,166	$ 500,897

XML

Consolidated Balance Sheets (Parenthetical) - USD ($) shares in Thousands, $ in Thousands	Dec. 31, 2016	Jan. 02, 2016
Current assets:
Accounts receivable, net of allowance for doubtful accounts	$ 884	$ 1,039
Shareholders' equity:
Undesignated preferred stock, shares authorized (in shares)	5,000	5,000
Undesignated preferred stock, shares issued (in shares)	0	0
Undesignated preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	142,500	142,500
Common stock, shares issued (in shares)	43,569	49,402
Common stock, shares outstanding (in shares)	43,569	49,402

XML

Consolidated Statements of Operations - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Income Statement [Abstract]
Net sales	$ 1,311,291	$ 1,213,699	$ 1,156,757
Cost of sales	501,131	472,948	449,907
Gross profit	810,160	740,751	706,850
Operating expenses:
Sales and marketing	595,845	550,475	512,007
General and administrative	109,674	99,209	84,864
Research and development	27,991	15,971	8,233
Total operating expenses	733,510	665,655	605,104
Operating income	76,650	75,096	101,746
Other (expense) income, net	(717)	334	362
Income before income taxes	75,933	75,430	102,108
Income tax expense	24,516	24,911	34,134
Net income	$ 51,417	$ 50,519	$ 67,974
Basic net income per share:
Net income per share – basic	$ 1.11	$ 0.99	$ 1.27
Weighted-average shares – basic	46,154,000	51,252,000	53,452,000
Diluted net income per share:
Net income per share – diluted	$ 1.10	$ 0.97	$ 1.25
Weighted-average shares – diluted	46,902,000	52,101,000	54,193,000

XML

Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Statement of Comprehensive Income [Abstract]
Net income	$ 51,417	$ 50,519	$ 67,974
Other comprehensive income (loss) – unrealized gain (loss) on available-for-sale marketable debt securities, net of income tax	14	20	(47)
Comprehensive income	$ 51,431	$ 50,539	$ 67,927

XML

Consolidated Statement of Shareholders' Equity - USD ($) shares in Thousands, $ in Thousands	Total	Common Stock [Member]	Additional Paid-In Capital [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss) [Member]
Balance (in shares) at Dec. 28, 2013		54,901
Balance at Dec. 28, 2013	$ 225,220	$ 549	$ 5,382	$ 219,276	$ 13
Comprehensive income:
Net income	67,974	0	0	67,974	0
Unrealized gain (loss) on available-for-sale marketable debt securities	(47)	$ 0	0	0	(47)
Exercise of common stock options (in shares)		239
Exercise of common stock options	2,873	$ 2	2,871	0	0
Tax effect from stock-based compensation	581	$ 0	581	0	0
Stock-based compensation (in shares)		(96)
Stock-based compensation	6,798	$ (1)	6,799	0	0
Repurchases of common stock (in shares)		(2,246)
Repurchases of common stock	(46,492)	$ (22)	(15,633)	(30,837)	0
Balance (in shares) at Jan. 03, 2015		52,798
Balance at Jan. 03, 2015	256,907	$ 528	0	256,413	(34)
Comprehensive income:
Net income	50,519	0	0	50,519	0
Unrealized gain (loss) on available-for-sale marketable debt securities	20	$ 0	0	0	20
Exercise of common stock options (in shares)		253
Exercise of common stock options	2,976	$ 3	2,973	0	0
Tax effect from stock-based compensation	1,828	$ 0	1,828	0	0
Stock-based compensation (in shares)		(7)
Stock-based compensation	10,290	$ 0	10,290	0	0
Repurchases of common stock (in shares)		(3,642)
Repurchases of common stock	$ (100,201)	$ (37)	(15,091)	(85,073)	0
Balance (in shares) at Jan. 02, 2016	49,402	49,402
Balance at Jan. 02, 2016	$ 222,339	$ 494	0	221,859	(14)
Comprehensive income:
Net income	51,417	0	0	51,417	0
Unrealized gain (loss) on available-for-sale marketable debt securities	14	$ 0	0	0	14
Exercise of common stock options (in shares)		188
Exercise of common stock options	2,298	$ 2	2,296	0	0
Tax effect from stock-based compensation	(1,016)	$ 0	(1,016)	0	0
Stock-based compensation (in shares)		11
Stock-based compensation	11,961	$ 0	11,961	0	0
Repurchases of common stock (in shares)		(6,032)
Repurchases of common stock	$ (126,693)	$ (60)	(13,241)	(113,392)	0
Balance (in shares) at Dec. 31, 2016	43,569	43,569
Balance at Dec. 31, 2016	$ 160,320	$ 436	$ 0	$ 159,884	$ 0

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Cash flows from operating activities:
Net income	$ 51,417	$ 50,519	$ 67,974
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	57,172	47,630	39,809
Stock-based compensation	11,961	10,290	6,798
Net loss on disposals and impairments of assets	27	190	492
Excess tax benefits from stock-based compensation	(517)	(2,182)	(1,163)
Deferred income taxes	(1,640)	11,924	(311)
Gain on sale of non-marketable equity securities	0	(6,891)	0
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable	9,297	(9,259)	(4,717)
Inventories	11,574	(33,065)	(13,383)
Income taxes	25,119	(13,943)	(4,314)
Prepaid expenses and other assets	(2,195)	8,680	(9,973)
Accounts payable	(4,965)	19,130	14,340
Customer prepayments	(25,266)	22,735	13,334
Accrued compensation and benefits	2,808	(17,493)	17,735
Other taxes and withholding	2,723	135	2,584
Other accruals and liabilities	14,130	19,542	15,263
Net cash provided by operating activities	151,645	107,942	144,468
Cash flows from investing activities:
Purchases of property and equipment	(57,852)	(85,586)	(76,594)
Proceeds from marketable debt securities	21,053	127,664	54,506
Investments in marketable debt securities	(5,968)	(29,299)	(90,349)
Proceeds from sales of property and equipment	92	72	5
Acquisition of business	0	(70,018)	0
Proceeds from (investment in) non-marketable equity securities	0	12,891	(1,500)
Increase in restricted cash	0	0	(500)
Net cash used in investing activities	(42,675)	(44,276)	(114,432)
Cash flows from financing activities:
Repurchases of common stock	(126,693)	(100,201)	(46,492)
Net increase in short-term borrowings	5,932	1,097	6,192
Proceeds from issuance of common stock	2,298	2,976	2,873
Excess tax benefits from stock-based compensation	517	2,182	1,163
Debt issuance costs	(409)	(721)	0
Net cash used in financing activities	(118,355)	(94,667)	(36,264)
Net decrease in cash and cash equivalents	(9,385)	(31,001)	(6,228)
Cash and cash equivalents, at beginning of period	20,994	51,995	58,223
Cash and cash equivalents, at end of period	11,609	20,994	51,995
Supplemental Cash Flow Information [Abstract]
Income taxes (received) paid	(653)	26,681	38,474
Interest paid	608	96	49
Purchases of property and equipment included in accounts payable	$ 5,517	$ 5,051	$ 5,802

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Business and Summary of Significant Accounting Policies (Notes)

12 Months Ended

Dec. 31, 2016

Accounting Policies [Abstract]

Business and Summary of Significant Accounting Policies

Business and Summary of Significant Accounting Policies

Business & Basis of Presentation

Select Comfort Corporation and our 100%-owned subsidiaries (Select Comfort or the Company) have a vertically integrated business model and are the exclusive designer, manufacturer, marketer, retailer and servicer of a complete line of Sleep Number beds. We are the pioneer in biometric sleep tracking and adjustability. Only the Sleep Number bed offers SleepIQ technology - proprietary sensor technology that works directly with the bed’s DualAir system to track each individual’s sleep. SleepIQ technology communicates how you slept and what adjustments you can make to optimize your sleep and improve your daily life. Select Comfort also offers FlextFit adjustable bases, and Sleep Number pillows, sheets and other bedding products.

As the only national specialty-mattress retailer, we generate revenue by selling products through two distribution channels. Our Company-Controlled channel, which includes Retail, Online and Phone, sells directly to consumers. Our Wholesale/Other channel sells to and through selected retail and wholesale customers in the United States and the QVC shopping channel. The consolidated financial statements include the accounts of Select Comfort Corporation and our subsidiaries. All significant intra-entity balances and transactions have been eliminated in consolidation.

Fiscal Year

Our fiscal year ends on the Saturday closest to December 31. Fiscal years and their respective fiscal year ends were as follows: fiscal 2016 ended December 31, 2016; fiscal 2015 ended January 2, 2016; and fiscal 2014 ended January 3, 2015. Fiscal years 2016 and 2015 each had 52 weeks and fiscal year 2014 had 53 weeks.

Use of Estimates in the Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of sales, expenses and income taxes during the reporting period. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the financial statements in future periods. Our critical accounting policies consist of stock-based compensation, goodwill and indefinite-lived intangible assets, warranty liabilities and revenue recognition.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with original maturities of three months or less. The carrying value of these investments approximates fair value due to their short-term maturity. Our banking arrangements allow us to fund outstanding checks when presented to the financial institution for payment, resulting in book overdrafts. Book overdrafts are included in accounts payable in our consolidated balance sheets and in net increase in short-term borrowings in the financing activities section of our consolidated statements of cash flows. Book overdrafts totaled $26.6 million and $20.7 million at December 31, 2016, and January 2, 2016, respectively.

Marketable Debt Securities

Our investment portfolio was comprised of U.S. agency securities, corporate debt securities and municipal bonds. The value of these securities was subject to market and credit volatility during the period these investments were held. We classify marketable debt securities as available-for-sale investments and these securities were stated at their estimated fair value. Our investments with original maturities of greater than three months, but current maturities of less than one year, are recorded as marketable debt securities – current. Our investments with current maturities of more than one year are recorded as marketable debt securities – non-current. Unrealized gains and losses, net of income tax, are reported as a component of accumulated other comprehensive income (loss) in our consolidated balance sheets. Other-than-temporary declines in market value, if any, from original cost are charged to other (expense) income, net in the consolidated statements of operations in the period in which the loss occurs, and a new cost basis for the security is established. In determining whether an other-than-temporary decline in the market value has occurred, we consider the duration and extent that the fair value of the investment is below its cost. Realized gains and losses, if any, are calculated on the specific identification method and are measured and reclassified from accumulated other comprehensive income (loss) in our consolidated balance sheets to other (expense) income, net in our consolidated statements of operations.

Concentration of Credit Risk

Our investment policy’s primary focus is to preserve principal and maintain adequate liquidity. Our investment policy addresses the concentration of credit risk by limiting the concentration in certain investment types. Our exposure to a concentration of credit risk consists primarily of cash and cash equivalents. We place our cash with high-credit quality issuers and financial institutions. We previously held investments in U.S. agency securities, corporate debt securities and municipal bonds. We believe no significant concentration of credit risk exists with respect to our cash and cash equivalents.

Accounts Receivable

Accounts receivable are recorded net of an allowance for expected losses and consist primarily of receivables from wholesale customers and receivables from third-party financiers for customer credit card purchases. The allowance is recognized in an amount equal to anticipated future write-offs. We estimate future write-offs based on delinquencies, aging trends, industry risk trends, our historical experience and current trends. Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered.

Inventories

Inventories include materials, labor and overhead and are stated at the lower of cost or market. Cost is determined by the first-in, first-out method.

Property and Equipment

Property and equipment, carried at cost, is depreciated using the straight-line method over the estimated useful lives of the assets. The cost and related accumulated depreciation of assets sold or retired is removed from the accounts with any resulting gain or loss included in net income in our consolidated statements of operations. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments that extend useful life are capitalized.

Leasehold improvements are depreciated over the shorter of the estimated useful lives of the assets or the contractual term of the lease, with consideration of lease renewal options if renewal appears probable.

Estimated useful lives of our property and equipment by major asset category are as follows:

Leasehold improvements	5 to 11 years
Furniture and equipment	5 to 7 years
Production machinery	3 to 7 years
Computer equipment and software	3 to 12 years

Goodwill and Intangible Assets, Net

Goodwill is the difference between the purchase price of a company and the fair market value of the acquired company's net identifiable assets. Our intangible assets include developed technologies, trade names/trademarks and customer relationships. Definite-lived intangible assets are being amortized using the straight-line method over their estimated lives, ranging from 7-10 years.

Asset Impairment Charges

Long-lived Assets and Definite-lived Intangible Assets - we review our long-lived assets and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the estimated future cash flows (undiscounted and without interest charges - plus proceeds expected from disposition, if any). If the estimated undiscounted cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value. When we recognize an impairment loss, the carrying amount of the asset is reduced to estimated fair value based on discounted cash flows, quoted market prices or other valuation techniques. Assets to be disposed of are reported at the lower of the carrying amount of the asset or fair value less costs to sell. We review retail store assets for potential impairment based on historical cash flows, lease termination provisions and expected future retail store operating results. If we recognize an impairment loss for a depreciable long-lived asset, the adjusted carrying amount of the asset becomes its new cost basis and will be depreciated (amortized) over the remaining useful life of that asset.

Goodwill and Indefinite-lived Intangible Assets - goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment annually or when there are indicators of impairment using a fair value approach. The Financial Accounting Standards Board's (FASB) guidance allows us to perform either a quantitative assessment or a qualitative assessment before calculating the fair value of a reporting unit. We have elected to perform the quantitative assessment. The quantitative goodwill impairment test is a two-step process. The first step is a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If this step reflects impairment, then the loss would be measured as the excess of recorded goodwill over its implied fair value. Implied fair value is the excess of fair value of the reporting unit over the fair value of all identified assets and liabilities. Fair value is determined using a market-based approach utilizing widely accepted valuation techniques, including quoted market prices and our market capitalization. Indefinite-lived intangible assets are assessed for impairment by comparing the carrying value of an asset with its fair value. If the carrying value exceeds fair value, an impairment loss is recognized in an amount equal to the excess. Based on our 2016 assessments, we determined there was no impairment.

Warranty Liabilities

We provide a limited warranty on most of the products we sell. The estimated warranty costs, which are expensed at the time of sale and included in cost of sales, are based on historical trends and warranty claim rates incurred by us and are adjusted for any current trends as appropriate. Actual warranty claim costs could differ from these estimates. We regularly assess and adjust the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs.

We classify as non-current those estimated warranty costs expected to be paid out in greater than one year. The activity in the accrued warranty liabilities account was as follows (in thousands): 

	2016			2015			2014
Balance at beginning of period	$	10,028		$	5,824		$	4,153
Additions charged to costs and expenses for current-year sales	9,034			9,368			9,437
Deductions from reserves	(10,016		)	(6,486		)	(8,118		)
Changes in liability for pre-existing warranties during the current year, including expirations	(413		)	1,322			352
Balance at end of period	$	8,633		$	10,028		$	5,824

Fair Value Measurements

Fair value measurements are reported in one of three levels based on the lowest level of significant input used:

• Level 1 – observable inputs such as quoted prices in active markets;

• Level 2 – inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

• Level 3 – unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Our Level 2 securities included U.S. Agency bonds, corporate bonds and municipal bonds whose value is determined by a third-party pricing service using inputs that are observable in the market or can be derived principally from or corroborated by observable market data such as pricing for similar securities, recently executed transactions, cash flow models with yield curves and benchmark securities. We did not hold any Level 3 securities at December 31, 2016 or January 2, 2016.

We generally estimate fair value of long-lived assets, including our retail stores, using the income approach, which we base on estimated future cash flows (discounted and with interest charges). The inputs used to determine fair value relate primarily to future assumptions regarding sales volumes, gross profit rates, retail store operating expenses and applicable probability weightings regarding future alternative uses. These inputs are categorized as Level 3 inputs under the fair value measurements guidance. The inputs used represent management’s assumptions about what information market participants would use in pricing the assets and are based upon the best information available at the balance sheet date.

Dividends

We are not restricted from paying cash dividends under our credit agreement so long as we are not in default under the credit agreement and so long as the payment of such dividends would not create an event of default. However, we have not historically paid, and have no current plans to pay, cash dividends on our common stock.

Revenue Recognition

Revenue is recognized when the sales price is fixed or determinable, collectability is reasonably assured and title passes. Amounts billed to customers for delivery and setup are included in net sales. Revenue is reported net of estimated sales returns and excludes sales taxes.

We accept sales returns after a 100-night trial period. The accrued sales returns estimate is based on historical return rates and is adjusted for any current trends as appropriate. If actual returns vary from expected rates, sales in future periods are adjusted.

Our SleepIQ system is a multiple-element arrangement with deliverables that include a bed, hardware and software. We analyze our multiple-element arrangement(s) to determine whether the deliverables can be separated or whether they must be accounted for as a single unit of accounting. We determined that the SleepIQ system has two units of accounting consisting of: (i) the bed; and (ii) the hardware/software. The hardware and software are not separable as the hardware and related software are not sold separately and the software is integral to the hardware’s functionality. We valued the two units of accounting based on their relative selling prices.

At December 31, 2016 and January 2, 2016, we had deferred revenue totaling $61.3 million and $33.6 million, of which $21.0 million and $7.7 million are included in other current liabilities, respectively, and $40.3 million and $25.9 million are included in other non-current liabilities, respectively, in our consolidated balance sheets. We also have related deferred costs totaling $33.2 million and $21.6 million, of which $11.6 million and $5.0 million are included in other current assets, respectively, and $21.6 million and $16.6 million are included in other non-current assets, respectively, in our consolidated balance sheets. The deferred revenue and costs are recognized over the product’s estimated life of four years.

Cost of Sales, Sales and Marketing, General and Administrative (G&A) and Research & Development (R&D) Expenses

The following tables summarize the primary costs classified in each major expense category (the classification of which may vary within our industry):

Cost of Sales	Sales & Marketing
•  Costs associated with purchasing, manufacturing, shipping, handling and delivering our products to our retail stores and customers; •  Physical inventory losses, scrap and obsolescence; •  Related occupancy and depreciation expenses; •  Costs associated with returns and exchanges; and •  Estimated costs to service customer warranty claims.	•  Advertising and media production; •  Marketing and selling materials such as brochures, videos, websites, customer mailings and in-store signage; •  Payroll and benefits for sales and customer service staff; •  Store occupancy costs; •  Store depreciation expense; •  Credit card processing fees; and •  Promotional financing costs.
G&A	R&D(1)
•  Payroll and benefit costs for corporate employees, including information technology, legal, human resources, finance, sales and marketing administration, investor relations and risk management; •   Occupancy costs of corporate facilities; •   Depreciation related to corporate assets; •   Information hardware, software and maintenance; •   Insurance; •   Investor relations costs; and •   Other overhead costs.	•  Internal labor and benefits related to research and development activities; •  Outside consulting services related to research and development activities; and •  Testing equipment related to research and development activities. (1) Costs incurred in connection with R&D are charged to expense as incurred.

Operating Leases

We lease our retail, office and manufacturing space under operating leases which, in addition to the minimum lease payments, may require payment of a proportionate share of the real estate taxes and certain building operating expenses. Our retail store leases generally provide for an initial lease term of five to 10 years. In addition, our mall-based retail store leases may require payment of contingent rent based on net sales in excess of certain thresholds. Certain retail store leases may contain options to extend the term of the original lease.

Minimum rent expense, which excludes contingent rents, is recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. We record any difference between the straight-line rent amounts and amounts payable under the leases as part of deferred rent, in other current liabilities or other non-current liabilities, as appropriate. The lease term for purposes of the calculation begins on the earlier of the lease commencement date or the date we take possession of the property. During lease renewal negotiations that extend beyond the original lease term, we estimate straight-line rent expense based on current market conditions. At December 31, 2016, and January 2, 2016, deferred rent included in other current liabilities in our consolidated balance sheets was $0.2 million and $0.4 million, respectively, and deferred rent included in other non-current liabilities in our consolidated balance sheets was $9.6 million and $7.5 million, respectively. Contingent rent expense is recorded when it is probable the expense has been incurred and the amount is reasonably estimable. Future payments for real estate taxes and certain building operating expenses for which we are obligated are not included in minimum lease payments.

Leasehold improvements that are funded by landlord incentives or allowances under an operating lease are recorded as deferred lease incentives, in other current liabilities or other non-current liabilities, as appropriate and amortized as reductions to rent expense over the lease term. At December 31, 2016, and January 2, 2016, deferred lease incentives included in other current liabilities in our consolidated balance sheets were $2.9 million and $2.8 million, respectively, and deferred lease incentives included in other non-current liabilities in our consolidated balance sheets were $8.9 million and $7.9 million, respectively.

Pre-Opening Costs

Costs associated with the start-up and promotion of new retail store openings are expensed as incurred.

Advertising Costs

We incur advertising costs associated with print, digital and broadcast advertisements. Advertising costs are charged to expense when the ad first runs. Advertising expense was $189.8 million, $180.8 million and $158.5 million in 2016, 2015 and 2014, respectively. Advertising costs deferred and included in prepaid expenses in our consolidated balance sheets were $1.2 million and $4.5 million as of December 31, 2016, and January 2, 2016, respectively.

Insurance

We are self-insured for certain losses related to health and workers’ compensation claims, although we obtain third-party insurance coverage to limit exposure to these claims. We estimate our self-insured liabilities using a number of factors including historical claims experience and analysis of incurred but not reported claims. Our self-insurance liability was $6.2 million and $7.7 million at December 31, 2016, and January 2, 2016, respectively. At December 31, 2016, and January 2, 2016, $3.5 million and $4.0 million, respectively, were included in compensation and benefits and $2.7 million and $3.7 million, respectively, were included in other non-current liabilities in our consolidated balance sheets. At December 31, 2016 and January 2, 2016, we had a restricted deposit of $3.2 million with our insurer that serves as collateral for our workers’ compensation insurance obligations and was included in other current assets in our consolidated balance sheets.

Software Capitalization

For software developed or obtained for internal use, we capitalize direct external costs associated with developing or obtaining internal-use software. In addition, we capitalize certain payroll and payroll-related costs for employees who are directly involved with the development of such applications. Capitalized costs related to internal-use software under development are treated as construction-in-progress until the program, feature or functionality is ready for its intended use, at which time depreciation commences. We expense any data conversion or training costs as incurred.

Stock-Based Compensation

We compensate officers, directors and key employees with stock-based compensation under two stock plans approved by our shareholders in 2004 and 2010 and administered under the supervision of our Board of Directors (Board). At December 31, 2016, a total of 3.9 million shares were available for future grant under the 2010 stock plan. These plans include non-qualified stock options and stock awards.

We record stock-based compensation expense based on the award’s fair value at the grant date and the awards that are expected to vest. We recognize stock-based compensation expense over the period during which an employee is required to provide services in exchange for the award. We reduce compensation expense by estimated forfeitures. Forfeitures are estimated using historical experience and projected employee turnover. We include, as part of cash flows from financing activities, the benefit of tax deductions in excess of recognized stock-based compensation expense. See "New Accounting Pronouncements" below regarding revised guidance for stock-based compensation in 2017.

Stock Options - stock option awards are granted at exercise prices equal to the closing price of our stock on the grant date. Generally, options vest proportionally over 3 years and expire after 10 years. Compensation expense is recognized ratably over the vesting period.

We determine the fair value of stock options granted and the resulting compensation expense at the date-of-grant using the Black-Scholes-Merton option-pricing model and a single option award approach. Descriptions of significant assumptions used to estimate the expected volatility, risk-free interest rate and expected term are as follows:

Expected Volatility – expected volatility was determined based on implied volatility of our traded options and historical volatility of our stock price.

Risk-Free Interest Rate – the risk-free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues at the date of grant with a term equal to the expected term.

Expected Term – expected term represents the period that our stock-based awards are expected to be outstanding and was determined based on historical experience and anticipated future exercise patterns, giving consideration to the contractual terms of unexercised stock-based awards.

Stock Awards - we issue stock awards to certain employees in conjunction with our stock-based compensation plan. The stock awards generally vest over three years based on continued employment (time based). Compensation expense related to stock awards, except for stock awards with a market condition, is determined on the grant date based on the publicly quoted closing price of our common stock and is charged to earnings on a straight-line basis over the vesting period. Stock awards with a market condition are valued using a Monte Carlo simulation model. The significant assumptions used to estimate the expected volatility and risk-free interest rate are similar to those described above in Stock Options.

Certain time-based stock awards have either a performance condition (performance-based) or a market condition (market-based).

Performance-based Stock Awards – the final number of shares earned and the related compensation expense is adjusted up or down to the extent the performance target is met as of the last day of the performance period. The actual number of shares that will ultimately be awarded range from 0% - 200% of the targeted amount for the 2016, 2015 and 2014 awards. We evaluate the likelihood of meeting the performance targets at each reporting period and adjust compensation expense, on a cumulative basis, based on the expected achievement of each of the performance targets. For performance-based stock awards granted in 2016, 2015 and 2014, the performance targets are growth in net sales and in operating profit, and the performance periods are fiscal 2016 through 2018, fiscal 2015 through 2017, and 2014 through 2016, respectively.

Market-based Stock Awards – the related compensation expense is fixed, however, the final number of shares earned is adjusted to the extent that the market condition is achieved during the performance period. The actual number of shares that will ultimately be awarded range from 0% to 100% of the target amount for 2014 awards. There were no market-based stock awards granted in 2016 or 2015. For the market-based stock awards granted in 2014, the market condition was based on increases in our stock price for a specified number of sequential days and the performance period is three years beginning on the date of grant, which was March 28, 2014. As of December 31, 2016, the market condition had been achieved.

See Note 10, Shareholders’ Equity, for additional information on stock-based compensation.

Income Taxes

We recognize deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established for any portion of deferred tax assets that are not considered more likely than not to be realized. We evaluate all available positive and negative evidence, including our forecast of future taxable income, to assess the need for a valuation allowance on our deferred tax assets.

We record a liability for unrecognized tax benefits from uncertain tax positions taken, or expected to be taken, in our tax returns. We follow a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments, and may not accurately forecast actual outcomes.

We classify net interest and penalties on tax uncertainties as a component of income tax expense in our consolidated statements of operations.

Net Income Per Share

We calculate basic net income per share by dividing net income by the weighted-average number of common shares outstanding during the period. We calculate diluted net income per share based on the weighted-average number of common shares outstanding adjusted by the number of potentially dilutive common shares as determined by the treasury stock method. Potentially dilutive shares consist of stock options and stock awards.

Sources of Supply

We currently obtain materials and components used to produce our beds from outside sources. As a result, we are dependent upon suppliers that in some instances, are our sole source of supply. We are continuing our efforts to dual-source key components. The failure of one or more of our suppliers to provide us with materials or components on a timely basis could significantly impact our consolidated results of operations and net income per share. We believe we can obtain these raw materials and components from other sources of supply in the ordinary course of business, although an unexpected loss of supply over a short period of time may not allow us to replace these sources in the ordinary course of business.

New Accounting Pronouncements

Adopted

In November 2015, the FASB issued new guidance related to classification of deferred taxes. The new guidance requires that deferred tax liabilities and assets be classified as non-current on the balance sheet. It is effective for interim and annual periods beginning after December 15, 2016, but early adoption is permitted. We elected to early adopt this guidance as of December 31, 2016 on a retrospective basis. The new guidance did not impact our consolidated results of operations or operating cash flows. Adoption of the new standard impacted our previously reported consolidated balance sheet as follows for the period ended January 2, 2016 (in thousands):

	As Adjusted		As Reported
Current assets:
Deferred income taxes	$	—	$	15,535
Non-current assets:
Deferred income taxes	$	3,036	$	—
Non-current liabilities:
Deferred income taxes	$	—	$	12,499

Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued a comprehensive new revenue recognition model that requires a company to recognize revenue in a manner that depicts the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This new guidance was originally effective for fiscal years beginning after December 15, 2016 and early adoption was not permitted. In July 2015, the FASB deferred the effective date from fiscal years beginning after December 15, 2016 to fiscal years beginning after December 15, 2017 (including interim reporting periods within those fiscal years). Early adoption is permitted to the original effective date of fiscal years beginning after December 15, 2016 (including interim reporting periods within those fiscal years). Companies may use either a full retrospective or a modified retrospective approach to adopt this new guidance. We are evaluating the effect of the new standard on our consolidated financial statements and related disclosures, and have not yet selected a transition method.

In February 2016, the FASB issued new guidance on accounting for leases that generally requires most leases to be recognized on the balance sheet. This new guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The provisions of this new guidance are to be applied using a modified retrospective approach, with elective reliefs, which requires application of the new guidance for all periods presented. We are evaluating the effect of the new standard on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued new guidance on the accounting for, and disclosure of, stock-based compensation which will be effective for us beginning in 2017. The new guidance is intended to simplify several aspects of the accounting for stock-based compensation arrangements, including the income tax impact, forfeitures and classification on the statement of cash flows. Under the current guidance, excess tax benefits and deficiencies have been recognized in additional paid-in capital in the consolidated balance sheets. Upon adoption of the new guidance, these excess tax benefits or deficiencies are required to be recognized as discrete adjustments to income tax expense in the consolidated statements of operations. We will adopt the new guidance on a prospective basis and these discrete adjustments could have a material impact on income tax expense and net income.

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Acquisition of BAM Labs, Inc. (Notes)

12 Months Ended

Dec. 31, 2016

Acquisition of BAM Labs, Inc. [Abstract]

Business Combination Disclosure [Text Block]

Acquisition of BAM Labs, Inc.

In September 2015, we completed the acquisition of BAM Labs, Inc. (now operating as SleepIQ LABS), the leading provider of biometric sensor and sleep monitoring for data-driven health and wellness. The addition of SleepIQ LABS strengthens Sleep Number’s leadership in sleep innovation, adjustability and individualization. The acquisition broadens and deepens electrical, biomedical, software and backend capabilities - API (application program interface) and bio-signal analysis. Our ownership and control of biometric data advances smart, connected products that empower our customers with the knowledge to adjust for their best sleep.

We previously held a $6.0 million minority equity investment in BAM Labs, Inc. based on the cost method (see Note 4, Investments, for further details). In connection with the acquisition, our equity investment was remeasured to a fair value of $12.9 million. We acquired the remaining capital stock of BAM Labs, Inc. for $57.1 million for a total enterprise value of $70.0 million. Our consolidated statement of operations included $13.0 million and $3.3 million of SleepIQ LABS research and development expenses for the years ended December 31, 2016 and January 2, 2016, respectively. The acquisition of SleepIQ LABS did not have a significant impact on our consolidated results of operations, operating cash flows or financial position for the years ended December 31, 2016 or January 2, 2016.

The following table summarizes the fair value of the net assets acquired as of the acquisition date (in thousands):

Accounts receivable	$	105
Prepaid expenses	98
Property and equipment	91
Deferred income taxes	2,754
Goodwill	55,083
Intangible assets	13,619
Total assets acquired	71,750
Accounts payable	269
Compensation and benefits	322
Other non-current liabilities	1,141
Total liabilities acquired	1,732
Net assets acquired	$	70,018

Intangible assets of $13.6 million consisted of developed technologies with an estimated useful life of eight years. The goodwill will not be deductible for income tax purposes.

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Fair Value Measurements (Notes)

12 Months Ended

Dec. 31, 2016

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

The following table sets forth by level within the fair value hierarchy, our financial assets at January 2, 2016, that were accounted for at fair value on a recurring basis, according to the valuation techniques we used to determine their fair value (in thousands). At December 31, 2016, we did not hold any financial assets that required a fair value measurement on a recurring basis.

	January 2, 2016
	Level 1		Level 2		Level 3		Total
Marketable debt securities – current
Municipal bonds	$	—	$	4,055	$	—	$	4,055
Corporate bonds	—		2,512		—		2,512
	—		6,567		—		6,567
Marketable debt securities – non-current
Corporate bonds	—		5,001		—		5,001
U.S. Agency bonds	—		2,496		—		2,496
Municipal bonds	—		1,056		—		1,056
	—		8,553		—		8,553
	$	—	$	15,120	$	—	$	15,120

At December 31, 2016 and January 2, 2016, we had $2.3 million and $1.6 million, respectively, of debt and equity securities that fund our deferred compensation plan and are classified in other non-current assets. We also had corresponding deferred compensation plan liabilities of $2.3 million and $1.6 million at December 31, 2016 and January 2, 2016, respectively, which are included in other non-current liabilities. The majority of the debt and equity securities are Level 1 as they trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis. Unrealized gains/(losses) on the debt and equity securities offset those associated with the corresponding deferred compensation plan liabilities.

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Investments (Notes)

12 Months Ended

Dec. 31, 2016

Investments [Abstract]

Investments

Investments

Marketable Debt Securities

The following table sets forth our investments in marketable debt securities at January 2, 2016 (in thousands). We did not hold any marketable debt securities at December 31, 2016.

	January 2, 2016
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Corporate bonds	$	7,532	$	—	$	(19	)	$	7,513
U.S. Agency bonds	2,497		—		(1		)	2,496
Municipal bonds	5,114		—		(3		)	5,111
	$	15,143	$	—	$	(23	)	$	15,120

Maturities of marketable debt securities were as follows (in thousands):

	January 2, 2016
	Amortized Cost		Fair Value
Marketable debt securities – current (due in less than one year)	$	6,575	$	6,567
Marketable debt securities – non-current (due in one to two years)	8,568		8,553
	$	15,143	$	15,120

During 2016, 2015 and 2014, respectively, we received proceeds of $21.1 million, $127.5 million and $54.2 million, respectively, from marketable debt securities.

Other Investments

We previously held a minority equity investment in one of our strategic product-development partners, BAM Labs, Inc. In September 2015, we completed the acquisition of the remaining outstanding capital stock of BAM Labs, Inc. The carrying value of our equity investment in BAM Labs, Inc. prior to the acquisition was $6.0 million based on the cost method. In connection with the acquisition, our equity investment was remeasured to a fair value of $12.9 million, resulting in a $3.5 million gain net of expenses, including $3.4 million of acquisition-related expenses. The remeasured fair value of our equity investment was based on the fair value of BAM Labs, Inc. at the acquisition date. The net gain of $3.5 million is included in general and administrative expenses on our consolidated statement of operations for the fiscal year ended January 2, 2016. See Note 2, Acquisition of BAM Labs, Inc., for details regarding this acquisition.

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Inventories (Notes)

12 Months Ended

Dec. 31, 2016

Inventory Disclosure [Abstract]

Inventories

Inventories

Inventories consisted of the following (in thousands):

	December 31, 2016		January 2, 2016
Raw materials	$	7,973	$	9,349
Work in progress	72		48
Finished goods	66,981		77,203
	$	75,026	$	86,600

Our finished goods inventory, as of December 31, 2016, was comprised of $20.7 million of finished beds, including retail display beds and deliveries in-transit to those customers who have utilized home delivery services, $29.2 million of finished components that were ready for assembly for the completion of beds, and $17.1 million of retail accessories.

Our finished goods inventory, as of January 2, 2016, was comprised of $22.5 million of finished beds, including retail display beds and deliveries in-transit to those customers who have utilized home delivery services, $40.3 million of finished components that were ready for assembly for the completion of beds, and $14.4 million of retail accessories.

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Property and Equipment (Notes)

12 Months Ended

Dec. 31, 2016

Property and Equipment [Abstract]

Property and Equipment[Text Block]

Property and Equipment

Property and equipment consisted of the following (in thousands):

	December 31, 2016			January 2, 2016
Land	$	1,999		$	1,999
Leasehold improvements	97,600			91,184
Furniture and equipment	81,541			68,276
Production machinery, computer equipment and software	209,900			191,482
Property under capital lease	—			1,077
Construction in progress	13,823			3,540
Less: Accumulated depreciation and amortization	(196,496		)	(153,182		)
	$	208,367		$	204,376

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Goodwill and Intangible Assets (Notes)

12 Months Ended

Dec. 31, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets

Goodwill and Intangible Assets, Net

Goodwill and Indefinite-Lived Intangible Assets

The following is a roll forward of goodwill and indefinite-lived trade name/trademarks (in thousands):

	Twelve Months Ended				Twelve Months Ended
	December 31, 2016				January 2, 2016
	Goodwill		Indefinite-Lived Trade Name/ Trademarks		Goodwill		Indefinite-Lived Trade Name/ Trademarks
Beginning balance	$	64,046	$	1,396	$	8,963	$	1,396
SleepIQ LABS	—		—		55,083		—
Ending balance	$	64,046	$	1,396	$	64,046	$	1,396

Definite-Lived Intangible Assets

The following table provides the gross carrying amount and related accumulated amortization of our definite-lived intangible assets (in thousands):

	December 31, 2016				January 2, 2016
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Developed technologies(1)	$	18,851	$	4,524	$	18,851	$	2,342
Customer relationships	2,413		1,365		2,413		1,020
Trade names/trademarks	101		101		101		101
	$	21,365	$	5,990	$	21,365	$	3,463

___________________

⁽¹⁾ In September 2015, in connection with the acquisition of BAM Labs, Inc. (now operating as SleepIQ LABS), we acquired $13.6 million of definite-lived intangible assets consisting of developed technologies.

Amortization expense in 2016, 2015 and 2014 for definite-lived intangible assets was $2.5 million, $1.3 million and $0.8 million, respectively. Annual amortization for definite-lived intangible assets is expected to be approximately $2.5 million for 2017 through 2019 and $2.2 million for 2020 and 2021.

See Note 2, Acquisition of BAM Labs, Inc., for additional details.

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Leases (Notes)

12 Months Ended

Dec. 31, 2016

Leases [Abstract]

Leases of Lessee Disclosure [Text Block]

Leases

Rent expense was as follows (in thousands):

Facility Rents:	2016		2015		2014
Minimum rents	$	59,002	$	52,650	$	47,754
Contingent rents	3,099		5,168		6,241
Total	$	62,101	$	57,818	$	53,995
Equipment Rents	$	5,316	$	4,362	$	3,609

The aggregate minimum rental commitments under operating leases for subsequent years are as follows (in thousands):

2017	$	66,493
2018	58,964
2019	49,322
2020	42,862
2021	37,517
Thereafter	137,239
Total future minimum lease payments	$	392,397

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Credit Agreement (Notes)

12 Months Ended

Dec. 31, 2016

Debt Disclosure [Abstract]

Credit Agreement

Credit Agreement

Our revolving credit facility, as amended, has a net aggregate availability of $150 million. The credit facility is for general corporate purposes and is utilized to meet our seasonal working capital requirements. The credit facility contains an accordion feature that allows us to increase the amount of the available credit from $150 million up to $200 million, subject to lenders' approval. The credit facility matures in February 2021.

The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio and a minimum interest coverage ratio. Under the terms of the credit agreement we pay a variable rate of interest and a commitment fee based on our leverage ratio. As of December 31, 2016, we had no outstanding borrowings or letters of credit and we were in compliance with all financial covenants.

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Shareholders' Equity (Notes)

12 Months Ended

Dec. 31, 2016

Shareholders' Equity [Abstract]

Shareholders’ Equity

Shareholders’ Equity

Stock-Based Compensation Expense

Total stock-based compensation expense was as follows (in thousands):

	2016		2015		2014
Stock options	$	2,281	$	2,634	$	2,125
Stock awards	9,680		7,656		4,673
Total stock-based compensation expense(1)	11,961		10,290		6,798
Income tax benefit	3,947		3,413		2,284
Total stock-based compensation expense, net of tax	$	8,014	$	6,877	$	4,514

___________________

⁽¹⁾ Reflects a $1.2 million benefit in 2014 related to a change in estimated forfeitures due to employee turnover.

Stock Options

A summary of our stock option activity was as follows (in thousands, except per share amounts and years):

	Stock Options		Weighted- Average Exercise Price per Share		Weighted- Average Remaining  Contractual Term (years)	Aggregate Intrinsic Value (1)
Balance at January 2, 2016	1,388		$	18.44	5.3	$	7,366
Granted	299		19.19
Exercised	(188	)	12.21
Canceled/Forfeited	(145	)	25.71
Outstanding at December 31, 2016	1,354		$	18.70	5.9	$	7,541
Exercisable at December 31, 2016	927		$	17.40	4.6	$	6,264
Vested and expected to vest at December 31, 2016	1,315		$	18.61	5.9	$	7,442

___________________

⁽¹⁾  Aggregate intrinsic value includes only those options where the current share price is equal to or greater than the share price on the date of grant.

Other information pertaining to options was as follows (in thousands, except per share amounts):

	2016		2015		2014
Weighted-average grant date fair value of stock options granted	$	8.85	$	15.94	$	9.33
Total intrinsic value (at exercise) of stock options exercised	$	2,088	$	4,592	$	2,478

Cash received from the exercise of stock options for the fiscal year ended December 31, 2016 was $2.3 million. Our tax benefit related to the exercise of stock options for the fiscal year ended December 31, 2016 was $0.8 million.

At December 31, 2016, there was $2.6 million of total stock option compensation expense related to non-vested stock options not yet recognized, which is expected to be recognized over a weighted-average period of 1.8 years.

During fiscal 2016, 30,500 market-based stock options were granted and had a weighted-average grant date fair value of $10.25 per option. These options are reflected in the stock option activity table above. There were no market-based stock options granted in 2015 or 2014. The assumptions used to calculate the fair value of market-based stock options granted using the Monte Carlo simulation model were as follows:

Valuation Assumptions	2016		2015	2014
Expected dividend yield	0	%	NA	NA
Expected volatility	50	%	NA	NA
Risk-free interest rate	1.8	%	NA	NA

Except for the market-based stock options discussed above, the fair value of options granted was calculated using the Black-Scholes-Merton option-pricing model.

The assumptions used to calculate the fair value of options granted using the Black-Scholes-Merton option-pricing model were as follows:

Valuation Assumptions	2016		2015		2014
Expected dividend yield	0	%	0	%	0	%
Expected volatility	50	%	54	%	58	%
Risk-free interest rate	1.4	%	1.6	%	1.8	%
Expected term (in years)	5.2		5.2		5.3

Stock Awards

Stock award activity was as follows (in thousands, except per share amounts):

	Time- Based Stock Awards		Weighted-Average Grant Date Fair Value	Performance- and Market-Based Stock Awards		Weighted-Average Grant Date Fair Value
Outstanding at January 2, 2016	454		$23.14	710		$22.01
Granted	289		19.78	347		18.84
Vested	(189	)	24.55	(52	)	24.57
Canceled/Forfeited	(24	)	21.34	(106	)	20.24
Outstanding at December 31, 2016	530		$20.83	899		$20.87

At December 31, 2016, there was $5.2 million of unrecognized compensation expense related to non-vested time-based stock awards, which is expected to be recognized over a weighted-average period of 1.7 years and $7.8 million of unrecognized compensation expense related to non-vested performance- and market-based stock awards, which is expected to be recognized over a weighted-average period of 1.9 years.

During fiscal 2014, 126,550 market-based stock awards were granted and had a weighted-average grant date fair value of $14.90 per award. These stock awards are reflected in the "Performance- and Market-Based Stock Awards" column in the stock award activity table above. There were no market-based stock awards granted in 2016 or 2015. The assumptions used to calculate the fair value of market-based stock awards granted using the Monte Carlo simulation model were as follows:

Valuation Assumptions	2016	2015	2014
Expected dividend yield	NA	NA	0%
Expected volatility	NA	NA	58%
Risk-free interest rate	NA	NA	0.9%

Repurchases of Common Stock

Repurchases of our common stock were as follows (in thousands): 

	2016		2015		2014
Amount repurchased under Board-approved share repurchase program	$	125,000	$	98,446	$	45,044
Amount repurchased in connection with the vesting of employee restricted stock grants	1,693		1,755		1,448
Total amount repurchased	$	126,693	$	100,201	$	46,492

As of December 31, 2016, the remaining authorization under our Board-approved share repurchase program was $245 million. There is no expiration date governing the period over which we can repurchase shares. Any repurchased shares are constructively retired and returned to an unissued status. The cost of stock repurchases is first charged to additional paid-in-capital. Once additional paid-in capital is reduced to zero, any additional amounts are charged to retained earnings.

Net Income per Common Share

The components of basic and diluted net income per share were as follows (in thousands, except per share amounts):

	2016		2015		2014
Net income	$	51,417	$	50,519	$	67,974
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	46,154		51,252		53,452
Dilutive effect of stock-based awards	748		849		741
Diluted weighted-average shares outstanding	46,902		52,101		54,193
Net income per share – basic	$	1.11	$	0.99	$	1.27
Net income per share – diluted	$	1.10	$	0.97	$	1.25

Additional potential dilutive stock options totaling 0.6 million, 0.4 million and 0.8 million for 2016, 2015 and 2014, respectively, have been excluded from our diluted net income per share calculations because these securities’ exercise prices were anti-dilutive (e.g., greater than the average market price of our common stock).

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Other (Expense) Income, Net (Notes)

12 Months Ended

Dec. 31, 2016

Other Income and Expenses [Abstract]

Other Income, Net

Other (Expense) Income, Net

Other (expense) income, net, consisted of the following (in thousands):

	2016			2015			2014
Interest expense	(811		)	(160		)	(53		)
Interest income	$	94		$	494		415
Other (expense) income, net	$	(717	)	$	334		$	362

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Income Taxes (Notes)

12 Months Ended

Dec. 31, 2016

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Income tax expense consisted of the following (in thousands):

	2016			2015		2014
Current:
Federal	$	21,634		$	7,272	$	29,484
State	5,289			3,870		4,161
	26,923			11,142		33,645
Deferred:
Federal	(105		)	13,567		747
State	(2,302		)	202		(258		)
	(2,407		)	13,769		489
Income tax expense	$	24,516		$	24,911	$	34,134

The following table provides a reconciliation between the statutory federal income tax rate and our effective income tax rate:

	2016		2015		2014
Statutory federal income tax	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	2.6		3.0		2.5
Manufacturing deduction	(3.3	)	(1.7	)	(3.3	)
Changes in unrecognized tax benefits	1.2		0.3		0.3
Non-taxable acquisition-related transactions	—		(2.6	)	—
Other	(3.2	)	(1.0	)	(1.1	)
Effective income tax rate	32.3	%	33.0	%	33.4	%

We file income tax returns with the U.S. federal government and various state jurisdictions. In the normal course of business, we are subject to examination by federal and state taxing authorities. We are no longer subject to federal income tax examinations for years prior to 2013 or state income tax examinations prior to 2012.

Deferred Income Taxes

The tax effects of temporary differences that give rise to deferred income taxes were as follows (in thousands):

	2016			2015
Deferred tax assets:
Stock-based compensation	$	9,834		$	8,756
Deferred rent and lease incentives	8,388			6,977
Warranty and returns liabilities	7,948			10,817
Net operating loss carryforwards and credits	6,368			7,847
Compensation and benefits	4,115			3,788
Other	5,264			4,561
Total gross deferred tax assets	41,917			42,746
Valuation allowance	(620		)	(1,441		)
Total deferred tax assets after valuation allowance	41,297			41,305
Deferred tax liabilities:
Property and equipment	27,049			26,330
Deferred revenue	3,279			5,598
Other	6,302			6,341
Total gross deferred tax liabilities	36,630			38,269
Net deferred tax assets	$	4,667		$	3,036

At December 31, 2016, we had net operating loss carryforwards for federal purposes of $10.0 million, which will expire between 2025 and 2034, and for state income tax purposes of $14.8 million, which will expire between 2017 and 2036.

We evaluate our deferred income taxes quarterly to determine if valuation allowances are required. As part of this evaluation, we assess whether valuation allowances should be established for any deferred tax assets that are not considered more likely than not to be realized, using all available evidence, both positive and negative. This assessment considers, among other matters, the nature, frequency, and severity of historical losses, forecasts of future profitability, taxable income in available carryback periods and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified. We have provided a $0.6 million valuation allowance resulting primarily from our inability to utilize certain foreign net operating losses, and federal net operating losses associated with our acquisition of BAM Labs, Inc.

Unrecognized Tax Benefits

Reconciliations of the beginning and ending amounts of unrecognized tax benefits for 2016, 2015 and 2014 were as follows (in thousands): 

	Federal and State Tax
	2016			2015			2014
Beginning balance	$	2,077		$	742		$	474
Increases related to current-year tax positions	326			1,277			172
Increases related to prior-year tax positions	1,594			113			110
Lapse of statute of limitations	(333		)	(55		)	(14		)
Settlements with taxing authorities	(204		)	—			—
Ending balance	$	3,460		$	2,077		$	742

As of December 31, 2016 and January 2, 2016, we had $3.5 million and $2.1 million, respectively, of unrecognized tax benefits, which if recognized, would affect our effective tax rate. The amount of unrecognized tax benefits is not expected to change materially within the next 12 months.

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Profit Sharing and 401(K) Plan (Notes)

12 Months Ended

Dec. 31, 2016

Profit Sharing and 401 (k) Plan [Abstract]

Pension and Other Postretirement Benefits Disclosure [Text Block]

Profit Sharing and 401(k) Plan

Under our profit sharing and 401(k) plan, eligible employees may defer up to 50% of their compensation on a pre-tax basis, subject to Internal Revenue Service limitations. Each year, we may make a discretionary contribution equal to a percentage of the employee’s contribution. During 2016, 2015 and 2014, our contributions, net of forfeitures, were $4.6 million, $4.2 million and $3.7 million, respectively.

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Commitments and Contingencies (Notes)

12 Months Ended

Dec. 31, 2016

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

Legal Proceedings

We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with generally accepted accounting principles in the United States, we record a liability in our consolidated financial statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. With respect to currently pending legal proceedings, we have not established an estimated range of reasonably possible additional losses either because we believe that we have valid defenses to claims asserted against us or the proceeding has not advanced to a stage of discovery that would enable us to establish an estimate. We currently do not expect the outcome of these matters to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us could adversely impact our consolidated results of operations, financial position or cash flows. We expense legal costs as incurred.

On January 12, 2015, Plaintiffs David and Katina Spade commenced a purported class action lawsuit in New Jersey state court against Select Comfort alleging that Select Comfort violated New Jersey consumer statutes by failing to provide to purchasing consumers certain disclosures required by the New Jersey Furniture Regulations. It is undisputed that plaintiffs suffered no actual damages or in any way relied upon or were impacted by the alleged omissions. Nonetheless, on behalf of a purported class of New Jersey purchasers of Select Comfort beds and bases, plaintiffs seek to recover a $100 statutory fine for each alleged omission, along with attorneys’ fees and costs. Select Comfort removed the case to the United States District Court for the District of New Jersey, which subsequently granted Select Comfort’s motion to dismiss. Plaintiffs appealed to the United States Court of Appeals for the Third Circuit, which has certified two questions of law to the New Jersey Supreme Court relating to whether plaintiffs who have suffered no actual injury may bring claims. The New Jersey Supreme Court has not yet indicated whether it will accept the certification. As the United States District Court for the District of New Jersey agreed, we believe that the case is without merit and the order of dismissal should be affirmed.

On December 4, 2015, Saeid Azimpour, a consumer, filed a purported class-action lawsuit in U.S. District Court in Minnesota alleging he was fraudulently induced to purchase a down alternative pillow at a Sleep Number store based on signage that indicated that thepillow was 50% off. Plaintiff alleged that the price he paid for the pillow was not truly 50% off the price at which Sleep Number previously sold the pillow. Plaintiff asserted 10 causes of action including consumer fraud, unlawful trade practices, deceptive trade practices under Minnesota law, violation of the Minnesota false advertising law, unjust enrichment, violation of the California unfair competition law, violation of the California false advertising law and violation of the California remedies act. Plaintiff sought to represent all individuals who “purchased one or more items from the Company advertised or priced at a discount from the original retail price at any time between December 1, 2011 and present.” Plaintiff sought injunctive relief, damages, disgorgement and attorneys’ fees. On June 13, 2016, the Court dismissed the case without prejudice. On August 25, 2016, plaintiff filed a new complaint asserting claims and prayers for relief similar to those described above. On January 4, 2017, plaintiff agreed to dismissal of all claims including dismissal with prejudice of the class claims asserted in this case.

Consumer Credit Arrangements

We refer customers seeking extended financing to certain third party financiers (Card Servicers). The Card Servicers, if credit is granted, establish the interest rates, fees, and all other terms and conditions of the customer’s account based on their evaluation of the creditworthiness of the customer. As the receivables are owned by the Card Servicers, at no time are the receivables purchased or acquired from us. We are not liable to the Card Servicers for our customers’ credit defaults.

Commitments

As of December 31, 2016, we had $5.5 million of inventory purchase commitments. As part of the normal course of business, there are a limited number of inventory supply contracts that contain penalty provisions for failure to purchase contracted quantities. We do not currently expect any payments under these provisions. At December 31, 2016, we had entered into 33 lease commitments for future retail store locations and a lease commitment for our corporate facilities. These lease commitments provide for minimum rentals over the next five to 15 years, which if consummated based on current cost estimates, would approximate $96 million over the initial lease term. The minimum rentals for these lease commitments have been included in the future minimum lease payments in Note 8, Leases.

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Summary of Quarterly Financial Data (unaudited) (Notes)

12 Months Ended

Dec. 31, 2016

Summary of Quarterly Financial Data (unaudited) [Abstract]

Quarterly Financial Information [Text Block]

Summary of Quarterly Financial Data (unaudited)

The following is a condensed summary of our quarterly results (in thousands, except net income per share amounts). Quarterly diluted net income per share amounts may not total to the respective annual amount due to changes in weighted-average shares outstanding during the year. 

2016	First		Second		Third		Fourth		Fiscal Year
Net sales	$	352,980	$	276,878	$	367,988	$	313,445	$	1,311,291
Gross profit	209,074		171,261		232,343		197,482		810,160
Operating income	19,898		2,396		39,044		15,312		76,650
Net income	12,969		1,416		25,745		11,287		51,417
Net income per share – diluted	$	0.27	$	0.03	$	0.56	$	0.25	$	1.10

2015	First		Second		Third		Fourth			Fiscal Year
Net sales	$	349,809	$	275,289	$	373,919	$	214,682		$	1,213,699
Gross profit	215,833		170,539		233,636		120,743			740,751
Operating income (loss)	43,725		16,629		45,399		(30,657		)	75,096
Net income (loss)	28,799		11,038		31,854		(21,172		)	50,519
Net income (loss) per share – diluted	$	0.54	$	0.21	$	0.62	$	(0.42	)	$	0.97

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Schedule II - Valuation and Qualifying Accounts

12 Months Ended

Dec. 31, 2016

Valuation and Qualifying Accounts [Abstract]

Schedule II - Valuation and Qualifying Accounts

SELECT COMFORT CORPORATION AND SUBSIDIARIES

Schedule II - Valuation and Qualifying Accounts

(in thousands)

Description	2016			2015			2014
Allowance for doubtful accounts
Balance at beginning of period	$	1,039		$	739		$	425
Additions charged to costs and expenses	1,224			1,577			729
Deductions from reserves	(1,379		)	(1,277		)	(415		)
Balance at end of period	$	884		$	1,039		$	739
Accrued sales returns
Balance at beginning of period	$	20,562		$	15,262		$	9,433
Additions charged to costs and expenses	71,958			84,265			78,890
Deductions from reserves	(77,298		)	(78,965		)	(73,061		)
Balance at end of period	$	15,222		$	20,562		$	15,262

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Business and Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2016

Accounting Policies [Abstract]

Business and Basis of Presentation [Text Block]

Business & Basis of Presentation

Select Comfort Corporation and our 100%-owned subsidiaries (Select Comfort or the Company) have a vertically integrated business model and are the exclusive designer, manufacturer, marketer, retailer and servicer of a complete line of Sleep Number beds. We are the pioneer in biometric sleep tracking and adjustability. Only the Sleep Number bed offers SleepIQ technology - proprietary sensor technology that works directly with the bed’s DualAir system to track each individual’s sleep. SleepIQ technology communicates how you slept and what adjustments you can make to optimize your sleep and improve your daily life. Select Comfort also offers FlextFit adjustable bases, and Sleep Number pillows, sheets and other bedding products.

As the only national specialty-mattress retailer, we generate revenue by selling products through two distribution channels. Our Company-Controlled channel, which includes Retail, Online and Phone, sells directly to consumers. Our Wholesale/Other channel sells to and through selected retail and wholesale customers in the United States and the QVC shopping channel. The consolidated financial statements include the accounts of Select Comfort Corporation and our subsidiaries. All significant intra-entity balances and transactions have been eliminated in consolidation.

Fiscal Year [Policy Text Block]

Fiscal Year

Our fiscal year ends on the Saturday closest to December 31. Fiscal years and their respective fiscal year ends were as follows: fiscal 2016 ended December 31, 2016; fiscal 2015 ended January 2, 2016; and fiscal 2014 ended January 3, 2015. Fiscal years 2016 and 2015 each had 52 weeks and fiscal year 2014 had 53 weeks.

Use of Estimates in the Preparation of Financial Statements [Policy Text Block]

Use of Estimates in the Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of sales, expenses and income taxes during the reporting period. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the financial statements in future periods. Our critical accounting policies consist of stock-based compensation, goodwill and indefinite-lived intangible assets, warranty liabilities and revenue recognition.

Cash and Cash Equivalents [Policy Text Block]

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with original maturities of three months or less. The carrying value of these investments approximates fair value due to their short-term maturity. Our banking arrangements allow us to fund outstanding checks when presented to the financial institution for payment, resulting in book overdrafts. Book overdrafts are included in accounts payable in our consolidated balance sheets and in net increase in short-term borrowings in the financing activities section of our consolidated statements of cash flows.

Marketable Debt Securities[Policy Text Block]

Marketable Debt Securities

Our investment portfolio was comprised of U.S. agency securities, corporate debt securities and municipal bonds. The value of these securities was subject to market and credit volatility during the period these investments were held. We classify marketable debt securities as available-for-sale investments and these securities were stated at their estimated fair value. Our investments with original maturities of greater than three months, but current maturities of less than one year, are recorded as marketable debt securities – current. Our investments with current maturities of more than one year are recorded as marketable debt securities – non-current. Unrealized gains and losses, net of income tax, are reported as a component of accumulated other comprehensive income (loss) in our consolidated balance sheets. Other-than-temporary declines in market value, if any, from original cost are charged to other (expense) income, net in the consolidated statements of operations in the period in which the loss occurs, and a new cost basis for the security is established. In determining whether an other-than-temporary decline in the market value has occurred, we consider the duration and extent that the fair value of the investment is below its cost. Realized gains and losses, if any, are calculated on the specific identification method and are measured and reclassified from accumulated other comprehensive income (loss) in our consolidated balance sheets to other (expense) income, net in our consolidated statements of operations.

Concentration of Credit Risk [Policy Text Block]

Concentration of Credit Risk

Our investment policy’s primary focus is to preserve principal and maintain adequate liquidity. Our investment policy addresses the concentration of credit risk by limiting the concentration in certain investment types. Our exposure to a concentration of credit risk consists primarily of cash and cash equivalents. We place our cash with high-credit quality issuers and financial institutions. We previously held investments in U.S. agency securities, corporate debt securities and municipal bonds. We believe no significant concentration of credit risk exists with respect to our cash and cash equivalents.

Accounts Receivable [Policy Text Block]

Accounts Receivable

Accounts receivable are recorded net of an allowance for expected losses and consist primarily of receivables from wholesale customers and receivables from third-party financiers for customer credit card purchases. The allowance is recognized in an amount equal to anticipated future write-offs. We estimate future write-offs based on delinquencies, aging trends, industry risk trends, our historical experience and current trends. Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered.

Inventories [Policy Text Block]

Inventories

Inventories include materials, labor and overhead and are stated at the lower of cost or market. Cost is determined by the first-in, first-out method.

Property and Equipment [Policy Text Block]

Property and Equipment

Property and equipment, carried at cost, is depreciated using the straight-line method over the estimated useful lives of the assets. The cost and related accumulated depreciation of assets sold or retired is removed from the accounts with any resulting gain or loss included in net income in our consolidated statements of operations. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments that extend useful life are capitalized.

Leasehold improvements are depreciated over the shorter of the estimated useful lives of the assets or the contractual term of the lease, with consideration of lease renewal options if renewal appears probable.

Estimated useful lives of our property and equipment by major asset category are as follows:

Leasehold improvements	5 to 11 years
Furniture and equipment	5 to 7 years
Production machinery	3 to 7 years
Computer equipment and software	3 to 12 years

Goodwill and Intangible Assets, Net - Goodwill, Policy [Policy Text Block]

Goodwill and Intangible Assets, Net

Goodwill is the difference between the purchase price of a company and the fair market value of the acquired company's net identifiable assets.

Goodwill and Intangible Assets, Net - Intangible Assets, Policy [Policy Text Block]

Our intangible assets include developed technologies, trade names/trademarks and customer relationships. Definite-lived intangible assets are being amortized using the straight-line method over their estimated lives, ranging from 7-10 years.

Asset Impairment Charges [Policy Text Block]

Asset Impairment Charges

Long-lived Assets and Definite-lived Intangible Assets - we review our long-lived assets and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the estimated future cash flows (undiscounted and without interest charges - plus proceeds expected from disposition, if any). If the estimated undiscounted cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value. When we recognize an impairment loss, the carrying amount of the asset is reduced to estimated fair value based on discounted cash flows, quoted market prices or other valuation techniques. Assets to be disposed of are reported at the lower of the carrying amount of the asset or fair value less costs to sell. We review retail store assets for potential impairment based on historical cash flows, lease termination provisions and expected future retail store operating results. If we recognize an impairment loss for a depreciable long-lived asset, the adjusted carrying amount of the asset becomes its new cost basis and will be depreciated (amortized) over the remaining useful life of that asset.

Goodwill and Indefinite-lived Intangible Assets - goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment annually or when there are indicators of impairment using a fair value approach. The Financial Accounting Standards Board's (FASB) guidance allows us to perform either a quantitative assessment or a qualitative assessment before calculating the fair value of a reporting unit. We have elected to perform the quantitative assessment. The quantitative goodwill impairment test is a two-step process. The first step is a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If this step reflects impairment, then the loss would be measured as the excess of recorded goodwill over its implied fair value. Implied fair value is the excess of fair value of the reporting unit over the fair value of all identified assets and liabilities. Fair value is determined using a market-based approach utilizing widely accepted valuation techniques, including quoted market prices and our market capitalization. Indefinite-lived intangible assets are assessed for impairment by comparing the carrying value of an asset with its fair value. If the carrying value exceeds fair value, an impairment loss is recognized in an amount equal to the excess. Based on our 2016 assessments, we determined there was no impairment.

Warranty Liabilities [Policy Text Block]

Warranty Liabilities

We provide a limited warranty on most of the products we sell. The estimated warranty costs, which are expensed at the time of sale and included in cost of sales, are based on historical trends and warranty claim rates incurred by us and are adjusted for any current trends as appropriate. Actual warranty claim costs could differ from these estimates. We regularly assess and adjust the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs.

We classify as non-current those estimated warranty costs expected to be paid out in greater than one year.

Fair Value Measurements [Policy Text Block]

Fair Value Measurements

Fair value measurements are reported in one of three levels based on the lowest level of significant input used:

• Level 1 – observable inputs such as quoted prices in active markets;

• Level 2 – inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

• Level 3 – unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Our Level 2 securities included U.S. Agency bonds, corporate bonds and municipal bonds whose value is determined by a third-party pricing service using inputs that are observable in the market or can be derived principally from or corroborated by observable market data such as pricing for similar securities, recently executed transactions, cash flow models with yield curves and benchmark securities. We did not hold any Level 3 securities at December 31, 2016 or January 2, 2016.

We generally estimate fair value of long-lived assets, including our retail stores, using the income approach, which we base on estimated future cash flows (discounted and with interest charges). The inputs used to determine fair value relate primarily to future assumptions regarding sales volumes, gross profit rates, retail store operating expenses and applicable probability weightings regarding future alternative uses. These inputs are categorized as Level 3 inputs under the fair value measurements guidance. The inputs used represent management’s assumptions about what information market participants would use in pricing the assets and are based upon the best information available at the balance sheet date.

Dividends [Policy Text Block]

Dividends

We are not restricted from paying cash dividends under our credit agreement so long as we are not in default under the credit agreement and so long as the payment of such dividends would not create an event of default. However, we have not historically paid, and have no current plans to pay, cash dividends on our common stock.

Revenue Recognition [Policy Text Block]

Revenue Recognition

Revenue is recognized when the sales price is fixed or determinable, collectability is reasonably assured and title passes. Amounts billed to customers for delivery and setup are included in net sales. Revenue is reported net of estimated sales returns and excludes sales taxes.

We accept sales returns after a 100-night trial period. The accrued sales returns estimate is based on historical return rates and is adjusted for any current trends as appropriate. If actual returns vary from expected rates, sales in future periods are adjusted.

Our SleepIQ system is a multiple-element arrangement with deliverables that include a bed, hardware and software. We analyze our multiple-element arrangement(s) to determine whether the deliverables can be separated or whether they must be accounted for as a single unit of accounting. We determined that the SleepIQ system has two units of accounting consisting of: (i) the bed; and (ii) the hardware/software. The hardware and software are not separable as the hardware and related software are not sold separately and the software is integral to the hardware’s functionality. We valued the two units of accounting based on their relative selling prices.

At December 31, 2016 and January 2, 2016, we had deferred revenue totaling $61.3 million and $33.6 million, of which $21.0 million and $7.7 million are included in other current liabilities, respectively, and $40.3 million and $25.9 million are included in other non-current liabilities, respectively, in our consolidated balance sheets. We also have related deferred costs totaling $33.2 million and $21.6 million, of which $11.6 million and $5.0 million are included in other current assets, respectively, and $21.6 million and $16.6 million are included in other non-current assets, respectively, in our consolidated balance sheets. The deferred revenue and costs are recognized over the product’s estimated life of four years.

Expenses [Policy Text Block]

The following tables summarize the primary costs classified in each major expense category (the classification of which may vary within our industry):

Cost of Sales	Sales & Marketing
•  Costs associated with purchasing, manufacturing, shipping, handling and delivering our products to our retail stores and customers; •  Physical inventory losses, scrap and obsolescence; •  Related occupancy and depreciation expenses; •  Costs associated with returns and exchanges; and •  Estimated costs to service customer warranty claims.	•  Advertising and media production; •  Marketing and selling materials such as brochures, videos, websites, customer mailings and in-store signage; •  Payroll and benefits for sales and customer service staff; •  Store occupancy costs; •  Store depreciation expense; •  Credit card processing fees; and •  Promotional financing costs.
G&A	R&D(1)
•  Payroll and benefit costs for corporate employees, including information technology, legal, human resources, finance, sales and marketing administration, investor relations and risk management; •   Occupancy costs of corporate facilities; •   Depreciation related to corporate assets; •   Information hardware, software and maintenance; •   Insurance; •   Investor relations costs; and •   Other overhead costs.	•  Internal labor and benefits related to research and development activities; •  Outside consulting services related to research and development activities; and •  Testing equipment related to research and development activities. (1) Costs incurred in connection with R&D are charged to expense as incurred.

Operating Leases [Policy Text Block]

Operating Leases

We lease our retail, office and manufacturing space under operating leases which, in addition to the minimum lease payments, may require payment of a proportionate share of the real estate taxes and certain building operating expenses. Our retail store leases generally provide for an initial lease term of five to 10 years. In addition, our mall-based retail store leases may require payment of contingent rent based on net sales in excess of certain thresholds. Certain retail store leases may contain options to extend the term of the original lease.

Minimum rent expense, which excludes contingent rents, is recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. We record any difference between the straight-line rent amounts and amounts payable under the leases as part of deferred rent, in other current liabilities or other non-current liabilities, as appropriate. The lease term for purposes of the calculation begins on the earlier of the lease commencement date or the date we take possession of the property. During lease renewal negotiations that extend beyond the original lease term, we estimate straight-line rent expense based on current market conditions. At December 31, 2016, and January 2, 2016, deferred rent included in other current liabilities in our consolidated balance sheets was $0.2 million and $0.4 million, respectively, and deferred rent included in other non-current liabilities in our consolidated balance sheets was $9.6 million and $7.5 million, respectively. Contingent rent expense is recorded when it is probable the expense has been incurred and the amount is reasonably estimable. Future payments for real estate taxes and certain building operating expenses for which we are obligated are not included in minimum lease payments.

Leasehold improvements that are funded by landlord incentives or allowances under an operating lease are recorded as deferred lease incentives, in other current liabilities or other non-current liabilities, as appropriate and amortized as reductions to rent expense over the lease term. At December 31, 2016, and January 2, 2016, deferred lease incentives included in other current liabilities in our consolidated balance sheets were $2.9 million and $2.8 million, respectively, and deferred lease incentives included in other non-current liabilities in our consolidated balance sheets were $8.9 million and $7.9 million, respectively.

Pre-opening Costs [Policy Text Block]

Pre-Opening Costs

Costs associated with the start-up and promotion of new retail store openings are expensed as incurred.

Advertising Costs [Policy Text Block]

Advertising Costs

We incur advertising costs associated with print, digital and broadcast advertisements. Advertising costs are charged to expense when the ad first runs.

Insurance [Policy Text Block]

Insurance

We are self-insured for certain losses related to health and workers’ compensation claims, although we obtain third-party insurance coverage to limit exposure to these claims. We estimate our self-insured liabilities using a number of factors including historical claims experience and analysis of incurred but not reported claims.

Software Capitalization, Policy [Policy Text Block]

Software Capitalization

For software developed or obtained for internal use, we capitalize direct external costs associated with developing or obtaining internal-use software. In addition, we capitalize certain payroll and payroll-related costs for employees who are directly involved with the development of such applications. Capitalized costs related to internal-use software under development are treated as construction-in-progress until the program, feature or functionality is ready for its intended use, at which time depreciation commences. We expense any data conversion or training costs as incurred.

Stock-based Compensation [Policy Text Block]

Stock-Based Compensation

We compensate officers, directors and key employees with stock-based compensation under two stock plans approved by our shareholders in 2004 and 2010 and administered under the supervision of our Board of Directors (Board). At December 31, 2016, a total of 3.9 million shares were available for future grant under the 2010 stock plan. These plans include non-qualified stock options and stock awards.

We record stock-based compensation expense based on the award’s fair value at the grant date and the awards that are expected to vest. We recognize stock-based compensation expense over the period during which an employee is required to provide services in exchange for the award. We reduce compensation expense by estimated forfeitures. Forfeitures are estimated using historical experience and projected employee turnover. We include, as part of cash flows from financing activities, the benefit of tax deductions in excess of recognized stock-based compensation expense. See "New Accounting Pronouncements" below regarding revised guidance for stock-based compensation in 2017.

Stock Options - stock option awards are granted at exercise prices equal to the closing price of our stock on the grant date. Generally, options vest proportionally over 3 years and expire after 10 years. Compensation expense is recognized ratably over the vesting period.

We determine the fair value of stock options granted and the resulting compensation expense at the date-of-grant using the Black-Scholes-Merton option-pricing model and a single option award approach. Descriptions of significant assumptions used to estimate the expected volatility, risk-free interest rate and expected term are as follows:

Expected Volatility – expected volatility was determined based on implied volatility of our traded options and historical volatility of our stock price.

Risk-Free Interest Rate – the risk-free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues at the date of grant with a term equal to the expected term.

Expected Term – expected term represents the period that our stock-based awards are expected to be outstanding and was determined based on historical experience and anticipated future exercise patterns, giving consideration to the contractual terms of unexercised stock-based awards.

Stock Awards - we issue stock awards to certain employees in conjunction with our stock-based compensation plan. The stock awards generally vest over three years based on continued employment (time based). Compensation expense related to stock awards, except for stock awards with a market condition, is determined on the grant date based on the publicly quoted closing price of our common stock and is charged to earnings on a straight-line basis over the vesting period. Stock awards with a market condition are valued using a Monte Carlo simulation model. The significant assumptions used to estimate the expected volatility and risk-free interest rate are similar to those described above in Stock Options.

Certain time-based stock awards have either a performance condition (performance-based) or a market condition (market-based).

Performance-based Stock Awards – the final number of shares earned and the related compensation expense is adjusted up or down to the extent the performance target is met as of the last day of the performance period. The actual number of shares that will ultimately be awarded range from 0% - 200% of the targeted amount for the 2016, 2015 and 2014 awards. We evaluate the likelihood of meeting the performance targets at each reporting period and adjust compensation expense, on a cumulative basis, based on the expected achievement of each of the performance targets. For performance-based stock awards granted in 2016, 2015 and 2014, the performance targets are growth in net sales and in operating profit, and the performance periods are fiscal 2016 through 2018, fiscal 2015 through 2017, and 2014 through 2016, respectively.

Market-based Stock Awards – the related compensation expense is fixed, however, the final number of shares earned is adjusted to the extent that the market condition is achieved during the performance period. The actual number of shares that will ultimately be awarded range from 0% to 100% of the target amount for 2014 awards. There were no market-based stock awards granted in 2016 or 2015. For the market-based stock awards granted in 2014, the market condition was based on increases in our stock price for a specified number of sequential days and the performance period is three years beginning on the date of grant, which was March 28, 2014. As of December 31, 2016, the market condition had been achieved.

See Note 10, Shareholders’ Equity, for additional information on stock-based compensation.

Income Taxes [Policy Text Block]

Income Taxes

We recognize deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established for any portion of deferred tax assets that are not considered more likely than not to be realized. We evaluate all available positive and negative evidence, including our forecast of future taxable income, to assess the need for a valuation allowance on our deferred tax assets.

We record a liability for unrecognized tax benefits from uncertain tax positions taken, or expected to be taken, in our tax returns. We follow a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments, and may not accurately forecast actual outcomes.

We classify net interest and penalties on tax uncertainties as a component of income tax expense in our consolidated statements of operations.

Net Income Per Share [Policy Text Block]

Net Income Per Share

We calculate basic net income per share by dividing net income by the weighted-average number of common shares outstanding during the period. We calculate diluted net income per share based on the weighted-average number of common shares outstanding adjusted by the number of potentially dilutive common shares as determined by the treasury stock method. Potentially dilutive shares consist of stock options and stock awards.

Sources of Supply [Policy Text Block]

Sources of Supply

We currently obtain materials and components used to produce our beds from outside sources. As a result, we are dependent upon suppliers that in some instances, are our sole source of supply. We are continuing our efforts to dual-source key components. The failure of one or more of our suppliers to provide us with materials or components on a timely basis could significantly impact our consolidated results of operations and net income per share. We believe we can obtain these raw materials and components from other sources of supply in the ordinary course of business, although an unexpected loss of supply over a short period of time may not allow us to replace these sources in the ordinary course of business.

New Accounting Pronouncements, Policy [Policy Text Block]

New Accounting Pronouncements

Adopted

In November 2015, the FASB issued new guidance related to classification of deferred taxes. The new guidance requires that deferred tax liabilities and assets be classified as non-current on the balance sheet. It is effective for interim and annual periods beginning after December 15, 2016, but early adoption is permitted. We elected to early adopt this guidance as of December 31, 2016 on a retrospective basis. The new guidance did not impact our consolidated results of operations or operating cash flows. Adoption of the new standard impacted our previously reported consolidated balance sheet as follows for the period ended January 2, 2016 (in thousands):

	As Adjusted		As Reported
Current assets:
Deferred income taxes	$	—	$	15,535
Non-current assets:
Deferred income taxes	$	3,036	$	—
Non-current liabilities:
Deferred income taxes	$	—	$	12,499

Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued a comprehensive new revenue recognition model that requires a company to recognize revenue in a manner that depicts the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This new guidance was originally effective for fiscal years beginning after December 15, 2016 and early adoption was not permitted. In July 2015, the FASB deferred the effective date from fiscal years beginning after December 15, 2016 to fiscal years beginning after December 15, 2017 (including interim reporting periods within those fiscal years). Early adoption is permitted to the original effective date of fiscal years beginning after December 15, 2016 (including interim reporting periods within those fiscal years). Companies may use either a full retrospective or a modified retrospective approach to adopt this new guidance. We are evaluating the effect of the new standard on our consolidated financial statements and related disclosures, and have not yet selected a transition method.

In February 2016, the FASB issued new guidance on accounting for leases that generally requires most leases to be recognized on the balance sheet. This new guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The provisions of this new guidance are to be applied using a modified retrospective approach, with elective reliefs, which requires application of the new guidance for all periods presented. We are evaluating the effect of the new standard on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued new guidance on the accounting for, and disclosure of, stock-based compensation which will be effective for us beginning in 2017. The new guidance is intended to simplify several aspects of the accounting for stock-based compensation arrangements, including the income tax impact, forfeitures and classification on the statement of cash flows. Under the current guidance, excess tax benefits and deficiencies have been recognized in additional paid-in capital in the consolidated balance sheets. Upon adoption of the new guidance, these excess tax benefits or deficiencies are required to be recognized as discrete adjustments to income tax expense in the consolidated statements of operations. We will adopt the new guidance on a prospective basis and these discrete adjustments could have a material impact on income tax expense and net income.

Repurchase of Common Stock [Text Block]

There is no expiration date governing the period over which we can repurchase shares. Any repurchased shares are constructively retired and returned to an unissued status. The cost of stock repurchases is first charged to additional paid-in-capital. Once additional paid-in capital is reduced to zero, any additional amounts are charged to retained earnings.

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Business and Summary of Significant Accounting Policies Estimate Useful Life of Property and Equipment by Major Asset Category (Tables)

12 Months Ended

Dec. 31, 2016

Estimated Useful Life of our Property, Plant and Equipment [Abstract]

Estimated Useful Lives Of Property And Equipment [Table Text Block]

Estimated useful lives of our property and equipment by major asset category are as follows:

Leasehold improvements	5 to 11 years
Furniture and equipment	5 to 7 years
Production machinery	3 to 7 years
Computer equipment and software	3 to 12 years

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Business and Summary of Significant Accounting Policies Warranty Liabilities (Tables)

12 Months Ended

Dec. 31, 2016

Standard Product Warranty Disclosure [Abstract]

Schedule of Product Warranty Liability [Table Text Block]

The activity in the accrued warranty liabilities account was as follows (in thousands): 

	2016			2015			2014
Balance at beginning of period	$	10,028		$	5,824		$	4,153
Additions charged to costs and expenses for current-year sales	9,034			9,368			9,437
Deductions from reserves	(10,016		)	(6,486		)	(8,118		)
Changes in liability for pre-existing warranties during the current year, including expirations	(413		)	1,322			352
Balance at end of period	$	8,633		$	10,028		$	5,824

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Acquisition of BAM Labs, Inc. (Tables)

12 Months Ended

Dec. 31, 2016

Acquisition of BAM Labs, Inc. [Abstract]

Schedule of Business Acquisitions, by Acquisition [Table Text Block]

The following table summarizes the fair value of the net assets acquired as of the acquisition date (in thousands):

Accounts receivable	$	105
Prepaid expenses	98
Property and equipment	91
Deferred income taxes	2,754
Goodwill	55,083
Intangible assets	13,619
Total assets acquired	71,750
Accounts payable	269
Compensation and benefits	322
Other non-current liabilities	1,141
Total liabilities acquired	1,732
Net assets acquired	$	70,018

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Fair Value Measurements (Tables)

12 Months Ended

Dec. 31, 2016

Fair Value Disclosures [Abstract]

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

The following table sets forth by level within the fair value hierarchy, our financial assets at January 2, 2016, that were accounted for at fair value on a recurring basis, according to the valuation techniques we used to determine their fair value (in thousands). At December 31, 2016, we did not hold any financial assets that required a fair value measurement on a recurring basis.

	January 2, 2016
	Level 1		Level 2		Level 3		Total
Marketable debt securities – current
Municipal bonds	$	—	$	4,055	$	—	$	4,055
Corporate bonds	—		2,512		—		2,512
	—		6,567		—		6,567
Marketable debt securities – non-current
Corporate bonds	—		5,001		—		5,001
U.S. Agency bonds	—		2,496		—		2,496
Municipal bonds	—		1,056		—		1,056
	—		8,553		—		8,553
	$	—	$	15,120	$	—	$	15,120

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Investments (Tables)

12 Months Ended

Dec. 31, 2016

Investments [Abstract]

Investments of marketable debt securities

The following table sets forth our investments in marketable debt securities at January 2, 2016 (in thousands). We did not hold any marketable debt securities at December 31, 2016.

	January 2, 2016
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Corporate bonds	$	7,532	$	—	$	(19	)	$	7,513
U.S. Agency bonds	2,497		—		(1		)	2,496
Municipal bonds	5,114		—		(3		)	5,111
	$	15,143	$	—	$	(23	)	$	15,120

Maturities of marketable debt securities

Maturities of marketable debt securities were as follows (in thousands):

	January 2, 2016
	Amortized Cost		Fair Value
Marketable debt securities – current (due in less than one year)	$	6,575	$	6,567
Marketable debt securities – non-current (due in one to two years)	8,568		8,553
	$	15,143	$	15,120

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Inventories (Tables)

12 Months Ended

Dec. 31, 2016

Inventory Disclosure [Abstract]

Schedule of Inventory, Current [Table Text Block]

Inventories consisted of the following (in thousands):

	December 31, 2016		January 2, 2016
Raw materials	$	7,973	$	9,349
Work in progress	72		48
Finished goods	66,981		77,203
	$	75,026	$	86,600

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Property and Equipment (Tables)

12 Months Ended

Dec. 31, 2016

Property and Equipment [Abstract]

Property, Plant and Equipment [Table Text Block]

Property and equipment consisted of the following (in thousands):

	December 31, 2016			January 2, 2016
Land	$	1,999		$	1,999
Leasehold improvements	97,600			91,184
Furniture and equipment	81,541			68,276
Production machinery, computer equipment and software	209,900			191,482
Property under capital lease	—			1,077
Construction in progress	13,823			3,540
Less: Accumulated depreciation and amortization	(196,496		)	(153,182		)
	$	208,367		$	204,376

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Goodwill and Intangible Assets (Tables)

12 Months Ended

Dec. 31, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Indefinite-Lived Intangible Assets

The following is a roll forward of goodwill and indefinite-lived trade name/trademarks (in thousands):

	Twelve Months Ended				Twelve Months Ended
	December 31, 2016				January 2, 2016
	Goodwill		Indefinite-Lived Trade Name/ Trademarks		Goodwill		Indefinite-Lived Trade Name/ Trademarks
Beginning balance	$	64,046	$	1,396	$	8,963	$	1,396
SleepIQ LABS	—		—		55,083		—
Ending balance	$	64,046	$	1,396	$	64,046	$	1,396

Schedule of Indefinite-Lived Intangible Assets [Table Text Block]

	Twelve Months Ended				Twelve Months Ended
	December 31, 2016				January 2, 2016
	Goodwill		Indefinite-Lived Trade Name/ Trademarks		Goodwill		Indefinite-Lived Trade Name/ Trademarks
Beginning balance	$	64,046	$	1,396	$	8,963	$	1,396
SleepIQ LABS	—		—		55,083		—
Ending balance	$	64,046	$	1,396	$	64,046	$	1,396

Definite-Lived Intangible Assets

The following table provides the gross carrying amount and related accumulated amortization of our definite-lived intangible assets (in thousands):

	December 31, 2016				January 2, 2016
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Developed technologies(1)	$	18,851	$	4,524	$	18,851	$	2,342
Customer relationships	2,413		1,365		2,413		1,020
Trade names/trademarks	101		101		101		101
	$	21,365	$	5,990	$	21,365	$	3,463

___________________

⁽¹⁾ In September 2015, in connection with the acquisition of BAM Labs, Inc. (now operating as SleepIQ LABS), we acquired $13.6 million of definite-lived intangible assets consisting of developed technologies.

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Leases (Tables)

12 Months Ended

Dec. 31, 2016

Leases [Abstract]

Rent Expense [Table Text Block]

Rent expense was as follows (in thousands):

Facility Rents:	2016		2015		2014
Minimum rents	$	59,002	$	52,650	$	47,754
Contingent rents	3,099		5,168		6,241
Total	$	62,101	$	57,818	$	53,995
Equipment Rents	$	5,316	$	4,362	$	3,609

Future minimum payments operating leases [Table Text Block]

The aggregate minimum rental commitments under operating leases for subsequent years are as follows (in thousands):

2017	$	66,493
2018	58,964
2019	49,322
2020	42,862
2021	37,517
Thereafter	137,239
Total future minimum lease payments	$	392,397

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Shareholders' Equity (Tables)

12 Months Ended

Dec. 31, 2016

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Stock-based compensation expense

Total stock-based compensation expense was as follows (in thousands):

	2016		2015		2014
Stock options	$	2,281	$	2,634	$	2,125
Stock awards	9,680		7,656		4,673
Total stock-based compensation expense(1)	11,961		10,290		6,798
Income tax benefit	3,947		3,413		2,284
Total stock-based compensation expense, net of tax	$	8,014	$	6,877	$	4,514

___________________

⁽¹⁾ Reflects a $1.2 million benefit in 2014 related to a change in estimated forfeitures due to employee turnover.

Stock options rollforward

A summary of our stock option activity was as follows (in thousands, except per share amounts and years):

	Stock Options		Weighted- Average Exercise Price per Share		Weighted- Average Remaining  Contractual Term (years)	Aggregate Intrinsic Value (1)
Balance at January 2, 2016	1,388		$	18.44	5.3	$	7,366
Granted	299		19.19
Exercised	(188	)	12.21
Canceled/Forfeited	(145	)	25.71
Outstanding at December 31, 2016	1,354		$	18.70	5.9	$	7,541
Exercisable at December 31, 2016	927		$	17.40	4.6	$	6,264
Vested and expected to vest at December 31, 2016	1,315		$	18.61	5.9	$	7,442

___________________

⁽¹⁾  Aggregate intrinsic value includes only those options where the current share price is equal to or greater than the share price on the date of grant.

Stock options - other information

Other information pertaining to options was as follows (in thousands, except per share amounts):

	2016		2015		2014
Weighted-average grant date fair value of stock options granted	$	8.85	$	15.94	$	9.33
Total intrinsic value (at exercise) of stock options exercised	$	2,088	$	4,592	$	2,478

Stock options - valuation assumptions

The assumptions used to calculate the fair value of options granted using the Black-Scholes-Merton option-pricing model were as follows:

Valuation Assumptions	2016		2015		2014
Expected dividend yield	0	%	0	%	0	%
Expected volatility	50	%	54	%	58	%
Risk-free interest rate	1.4	%	1.6	%	1.8	%
Expected term (in years)	5.2		5.2		5.3

Stock awards rollforward

Stock award activity was as follows (in thousands, except per share amounts):

	Time- Based Stock Awards		Weighted-Average Grant Date Fair Value	Performance- and Market-Based Stock Awards		Weighted-Average Grant Date Fair Value
Outstanding at January 2, 2016	454		$23.14	710		$22.01
Granted	289		19.78	347		18.84
Vested	(189	)	24.55	(52	)	24.57
Canceled/Forfeited	(24	)	21.34	(106	)	20.24
Outstanding at December 31, 2016	530		$20.83	899		$20.87

Stock awards - valuation assumptions

The assumptions used to calculate the fair value of market-based stock awards granted using the Monte Carlo simulation model were as follows:

Valuation Assumptions	2016	2015	2014
Expected dividend yield	NA	NA	0%
Expected volatility	NA	NA	58%
Risk-free interest rate	NA	NA	0.9%

Share Repurchase

Repurchases of our common stock were as follows (in thousands): 

	2016		2015		2014
Amount repurchased under Board-approved share repurchase program	$	125,000	$	98,446	$	45,044
Amount repurchased in connection with the vesting of employee restricted stock grants	1,693		1,755		1,448
Total amount repurchased	$	126,693	$	100,201	$	46,492

Schedule of Earnings Per Share Reconciliation

The components of basic and diluted net income per share were as follows (in thousands, except per share amounts):

	2016		2015		2014
Net income	$	51,417	$	50,519	$	67,974
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	46,154		51,252		53,452
Dilutive effect of stock-based awards	748		849		741
Diluted weighted-average shares outstanding	46,902		52,101		54,193
Net income per share – basic	$	1.11	$	0.99	$	1.27
Net income per share – diluted	$	1.10	$	0.97	$	1.25

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Other (Expense) Income, Net (Tables)

12 Months Ended

Dec. 31, 2016

Other Income and Expenses [Abstract]

Other Income, Net

Other (expense) income, net, consisted of the following (in thousands):

	2016			2015			2014
Interest expense	(811		)	(160		)	(53		)
Interest income	$	94		$	494		415
Other (expense) income, net	$	(717	)	$	334		$	362

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Income Taxes (Tables)

12 Months Ended

Dec. 31, 2016

Income Tax Disclosure [Abstract]

Income tax expense (benefit)

Income tax expense consisted of the following (in thousands):

	2016			2015		2014
Current:
Federal	$	21,634		$	7,272	$	29,484
State	5,289			3,870		4,161
	26,923			11,142		33,645
Deferred:
Federal	(105		)	13,567		747
State	(2,302		)	202		(258		)
	(2,407		)	13,769		489
Income tax expense	$	24,516		$	24,911	$	34,134

Reconciliation of income tax expense (benefit) at the statutory federal rate

The following table provides a reconciliation between the statutory federal income tax rate and our effective income tax rate:

	2016		2015		2014
Statutory federal income tax	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	2.6		3.0		2.5
Manufacturing deduction	(3.3	)	(1.7	)	(3.3	)
Changes in unrecognized tax benefits	1.2		0.3		0.3
Non-taxable acquisition-related transactions	—		(2.6	)	—
Other	(3.2	)	(1.0	)	(1.1	)
Effective income tax rate	32.3	%	33.0	%	33.4	%

Deferred income taxes

The tax effects of temporary differences that give rise to deferred income taxes were as follows (in thousands):

	2016			2015
Deferred tax assets:
Stock-based compensation	$	9,834		$	8,756
Deferred rent and lease incentives	8,388			6,977
Warranty and returns liabilities	7,948			10,817
Net operating loss carryforwards and credits	6,368			7,847
Compensation and benefits	4,115			3,788
Other	5,264			4,561
Total gross deferred tax assets	41,917			42,746
Valuation allowance	(620		)	(1,441		)
Total deferred tax assets after valuation allowance	41,297			41,305
Deferred tax liabilities:
Property and equipment	27,049			26,330
Deferred revenue	3,279			5,598
Other	6,302			6,341
Total gross deferred tax liabilities	36,630			38,269
Net deferred tax assets	$	4,667		$	3,036

Summary of Income Tax Contingencies [Table Text Block]

Reconciliations of the beginning and ending amounts of unrecognized tax benefits for 2016, 2015 and 2014 were as follows (in thousands): 

	Federal and State Tax
	2016			2015			2014
Beginning balance	$	2,077		$	742		$	474
Increases related to current-year tax positions	326			1,277			172
Increases related to prior-year tax positions	1,594			113			110
Lapse of statute of limitations	(333		)	(55		)	(14		)
Settlements with taxing authorities	(204		)	—			—
Ending balance	$	3,460		$	2,077		$	742

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Summary of Quarterly Financial Data (unaudited) (Tables)

12 Months Ended

Dec. 31, 2016

Summary of Quarterly Financial Data (unaudited) [Abstract]

Schedule of Quarterly Financial Information [Table Text Block]

The following is a condensed summary of our quarterly results (in thousands, except net income per share amounts). Quarterly diluted net income per share amounts may not total to the respective annual amount due to changes in weighted-average shares outstanding during the year. 

2016	First		Second		Third		Fourth		Fiscal Year
Net sales	$	352,980	$	276,878	$	367,988	$	313,445	$	1,311,291
Gross profit	209,074		171,261		232,343		197,482		810,160
Operating income	19,898		2,396		39,044		15,312		76,650
Net income	12,969		1,416		25,745		11,287		51,417
Net income per share – diluted	$	0.27	$	0.03	$	0.56	$	0.25	$	1.10

2015	First		Second		Third		Fourth			Fiscal Year
Net sales	$	349,809	$	275,289	$	373,919	$	214,682		$	1,213,699
Gross profit	215,833		170,539		233,636		120,743			740,751
Operating income (loss)	43,725		16,629		45,399		(30,657		)	75,096
Net income (loss)	28,799		11,038		31,854		(21,172		)	50,519
Net income (loss) per share – diluted	$	0.54	$	0.21	$	0.62	$	(0.42	)	$	0.97

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Business and Summary of Significant Accounting Policies Fiscal Year (Details)	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Fiscal Year [Abstract]
Fiscal Years	364 days	364 days	371 days

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Business and Summary of Significant Accounting Policies Cash and Cash Equivalents (Details) - USD ($) $ in Millions	Dec. 31, 2016	Jan. 02, 2016
Accounts Payable [Member]
Cash and Cash Equivalents [Line Items]
Book Overdrafts	$ 26.6	$ 20.7

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Business and Summary of Significant Accounting Policies Property and Equipment (Details)	12 Months Ended
	Dec. 31, 2016
Leasehold Improvements [Member] | Minimum [Member]
Property and equipment [Line Items]
Property, Plant and Equipment, Useful Life	5 years
Leasehold Improvements [Member] | Maximum [Member]
Property and equipment [Line Items]
Property, Plant and Equipment, Useful Life	11 years
Furniture and Fixtures [Member] | Minimum [Member]
Property and equipment [Line Items]
Property, Plant and Equipment, Useful Life	5 years
Furniture and Fixtures [Member] | Maximum [Member]
Property and equipment [Line Items]
Property, Plant and Equipment, Useful Life	7 years
Machinery and Equipment [Member] | Minimum [Member]
Property and equipment [Line Items]
Property, Plant and Equipment, Useful Life	3 years
Machinery and Equipment [Member] | Maximum [Member]
Property and equipment [Line Items]
Property, Plant and Equipment, Useful Life	7 years
Computer Equipment and Software [Member] | Minimum [Member]
Property and equipment [Line Items]
Property, Plant and Equipment, Useful Life	3 years
Computer Equipment and Software [Member] | Maximum [Member]
Property and equipment [Line Items]
Property, Plant and Equipment, Useful Life	12 years

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Business and Summary of Significant Accounting Policies Definite-Lived Intangible Assets (Details)	12 Months Ended
	Dec. 31, 2016
Minimum [Member]
Definite-Lived Intangible Assets [Line Items]
Finite-Lived Intangible Asset, Useful Life	7 years
Maximum [Member]
Definite-Lived Intangible Assets [Line Items]
Finite-Lived Intangible Asset, Useful Life	10 years

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Business and Summary of Significant Accounting Policies Warranty Liabilities (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Movement in Standard Product Warranty Accrual [Roll Forward]
Balance at beginning of year	$ 10,028	$ 5,824	$ 4,153
Additions charged to costs and expenses for current-year sales	9,034	9,368	9,437
Deductions from reserves	(10,016)	(6,486)	(8,118)
Changes in liability for pre-existing warranties during the current year, including expirations	(413)	1,322	352
Balance at end of period	$ 8,633	$ 10,028	$ 5,824

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Business and Summary of Significant Accounting Policies Revenue Recognition (Details) - USD ($) $ in Millions	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016
Deferred Revenue [Line Items]
Deferred Revenue	$ 61.3	$ 33.6
Deferred Costs	$ 33.2	21.6
Product's Estimate Useful Life [Member]
Deferred Revenue [Line Items]
Product's Estimated Life	4 years
Other Current Assets [Member]
Deferred Revenue [Line Items]
Deferred Costs, Current	$ 11.6	5.0
Other Noncurrent Assets [Member]
Deferred Revenue [Line Items]
Deferred Costs, Noncurrent	21.6	16.6
Other Current Liabilities [Member]
Deferred Revenue [Line Items]
Deferred Revenue, Current	21.0	7.7
Other Noncurrent Liabilities [Member]
Deferred Revenue [Line Items]
Deferred Revenue, Noncurrent	$ 40.3	$ 25.9

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Business and Summary of Significant Accounting Policies Operating Leases (Details) - USD ($) $ in Millions	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016
Other Current Liabilities [Member]
Property and equipment [Line Items]
Deferred Rent Credit, Current	$ 0.2	$ 0.4
Deferred Lease Incentives, Current	2.9	2.8
Other Noncurrent Liabilities [Member]
Property and equipment [Line Items]
Deferred Rent Credit, Noncurrent	9.6	7.5
Deferred Lease Incentives, Noncurrent	$ 8.9	$ 7.9
Minimum [Member]
Property and equipment [Line Items]
Lessee Leasing Arrangements, Operating Leases, Term of Contract	5 years
Maximum [Member]
Property and equipment [Line Items]
Lessee Leasing Arrangements, Operating Leases, Term of Contract	10 years

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Business and Summary of Significant Accounting Policies Advertising Costs (Details) - USD ($) $ in Millions	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Advertising Expense	$ 189.8	$ 180.8	$ 158.5
Prepaid Expenses [Member]
Prepaid Advertising	$ 1.2	$ 4.5

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Business and Summary of Significant Accounting Policies Insurance (Details) - USD ($) $ in Millions	Dec. 31, 2016	Jan. 02, 2016
Self-Insurance Liability	$ 6.2	$ 7.7
Compensation and Benefits [Member]
Self-Insurance Liability, Current	3.5	4.0
Other Noncurrent Liabilities [Member]
Self-Insurance Liability, Noncurrent	2.7	3.7
Other Current Assets [Member]
Restricted Deposit Workers Compensation	$ 3.2	$ 3.2

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Business and Summary of Significant Accounting Policies Stock-Based Compensation (Details) shares in Millions	12 Months Ended
	Dec. 31, 2016 stock_plan shares	Jan. 02, 2016	Jan. 03, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of stock plans approved by shareholders | stock_plan	2
Number of Shares Available for Grant | shares	3.9
Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Award Option Vesting Period	3 years
Award Expiration Period	10 years
2016 Performance Stock Award Grant [Member] | Minimum [Member] | Performance-Based Stock Award [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock Awards - Shares Awarded - Increase (Decrease), Percentage	0.00%
2016 Performance Stock Award Grant [Member] | Maximum [Member] | Performance-Based Stock Award [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock Awards - Shares Awarded - Increase (Decrease), Percentage	200.00%
2015 Performance Stock Award Grant [Member] | Minimum [Member] | Performance-Based Stock Award [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock Awards - Shares Awarded - Increase (Decrease), Percentage		0.00%
2015 Performance Stock Award Grant [Member] | Maximum [Member] | Performance-Based Stock Award [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock Awards - Shares Awarded - Increase (Decrease), Percentage		200.00%
2014 Performance Stock Award Grant [Member] | Minimum [Member] | Performance-Based Stock Award [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock Awards - Shares Awarded - Increase (Decrease), Percentage			0.00%
2014 Performance Stock Award Grant [Member] | Maximum [Member] | Performance-Based Stock Award [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock Awards - Shares Awarded - Increase (Decrease), Percentage			200.00%
2014 Market-Based Stock Award Grant [Member] | Minimum [Member] | Market-Based Stock Award [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock Awards - Shares Awarded - Increase (Decrease), Percentage			0.00%
2014 Market-Based Stock Award Grant [Member] | Maximum [Member] | Market-Based Stock Award [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock Awards - Shares Awarded - Increase (Decrease), Percentage			100.00%

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Business and Summary of Significant Accounting Policies Business and Summary of Significant accounting Policies New Accounting Pronouncements (Details) - USD ($) $ in Thousands	Dec. 31, 2016	Jan. 02, 2016
New Accounting Pronouncements [Line Items]
Deferred income tax assets, noncurrent	$ 4,667	$ 3,036
As adjusted [Member] | Accounting Standards Update 2015-17 [Member]
New Accounting Pronouncements [Line Items]
Deferred income tax assets, current		0
Deferred income tax assets, noncurrent		3,036
Deferred income tax liabilities, noncurrent		0
As reported [Member] | Accounting Standards Update 2015-17 [Member]
New Accounting Pronouncements [Line Items]
Deferred income tax assets, current		15,535
Deferred income tax assets, noncurrent		0
Deferred income tax liabilities, noncurrent		$ 12,499

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Acquisition of BAM Labs, Inc. (Details) - USD ($) $ in Thousands	1 Months Ended	12 Months Ended
	Sep. 30, 2015	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015	Sep. 29, 2015
Business Acquisition [Line Items]
Cash paid to acquire remaining capital stock of BAM Labs, Inc.		$ 0	$ 70,018	$ 0
Research and Development Expense		27,991	15,971	8,233
Goodwill		64,046	64,046	$ 8,963
BAM Labs, Inc. [Member]
Business Acquisition [Line Items]
Remeasured Fair Value	$ 12,900
Cash paid to acquire remaining capital stock of BAM Labs, Inc.	$ 57,100
Total acquisition price			70,018
Accounts Receivables			105
Prepaid expenses			98
Property and Equipment			91
Deferred income taxes			2,754
Goodwill			55,083
Intangible Assets			13,619
Total Assets Acquired			71,750
Accounts Payable			269
Compensation and benefits			322
Other long-term liabilities			1,141
Total liabilities acquired			1,732
Developed Technologies [Member] | BAM Labs, Inc. [Member]
Business Acquisition [Line Items]
Estimated Useful Life - acquired developed technologies	8 years
Other Noncurrent Assets [Member]
Business Acquisition [Line Items]
Cost Method Investment					$ 6,000
Research and Development Expense [Member] | BAM Labs, Inc. [Member]
Business Acquisition [Line Items]
Research and Development Expense		$ 13,000	$ 3,300

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Fair Value Measurements (Details) - Recurring [Member] - USD ($) $ in Thousands	Dec. 31, 2016	Jan. 02, 2016
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable debt securities - current		$ 6,567
Marketable debt securities - noncurrent		8,553
Marketable debt securities		15,120
Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable debt securities - current		0
Marketable debt securities - noncurrent		0
Marketable debt securities		0
Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable debt securities - current		6,567
Marketable debt securities - noncurrent		8,553
Marketable debt securities		15,120
Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable debt securities - current		0
Marketable debt securities - noncurrent		0
Marketable debt securities		0
Corporate Bonds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable debt securities - current		2,512
Marketable debt securities - noncurrent		5,001
Corporate Bonds [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable debt securities - current		0
Marketable debt securities - noncurrent		0
Corporate Bonds [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable debt securities - current		2,512
Marketable debt securities - noncurrent		5,001
Corporate Bonds [Member] | Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable debt securities - current		0
Marketable debt securities - noncurrent		0
U.S. Agency bonds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable debt securities - noncurrent		2,496
U.S. Agency bonds [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable debt securities - noncurrent		0
U.S. Agency bonds [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable debt securities - noncurrent		2,496
U.S. Agency bonds [Member] | Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable debt securities - noncurrent		0
Municipal Bonds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable debt securities - current		4,055
Marketable debt securities - noncurrent		1,056
Municipal Bonds [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable debt securities - current		0
Marketable debt securities - noncurrent		0
Municipal Bonds [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable debt securities - current		4,055
Marketable debt securities - noncurrent		1,056
Municipal Bonds [Member] | Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable debt securities - current		0
Marketable debt securities - noncurrent		0
Other Assets [Member] | Available-for-sale Securities [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Deferred compensation plan assets	$ 2,300	1,600
Other Noncurrent Liabilities [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Deferred compensation plan liability	$ 2,300	$ 1,600

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Investments - Marketable Debt Securities (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Debt Securities, Amortized Cost Basis		$ 15,143
Available-for-sale Securities, Accumulated Gross Unrealized Gain, before Tax		0
Available-for-sale Debt Securities, Accumulated Gross Unrealized Loss, before Tax		(23)
Available-for-sale Securities, Debt Securities		15,120
Available-for-sale Securities, Gross Realized Gains (Losses), Sale Proceeds	$ 21,100	127,500	$ 54,200
Amortized Cost [Abstract]
Marketable debt securities - current (due in less than one year)		6,575
Marketable debt securities - non-current (due in one to two years)		8,568
Marketable debt securities		15,143
Fair Value [Abstract]
Marketable debt securities - current (due in less than one year)		6,567
Marketable debt securities - non-current (due in one to two years)		8,553
Corporate bonds [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Debt Securities, Amortized Cost Basis		7,532
Available-for-sale Securities, Accumulated Gross Unrealized Gain, before Tax		0
Available-for-sale Debt Securities, Accumulated Gross Unrealized Loss, before Tax		(19)
Available-for-sale Securities, Debt Securities		7,513
Amortized Cost [Abstract]
Marketable debt securities		7,532
U.S. Agency bonds [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Debt Securities, Amortized Cost Basis		2,497
Available-for-sale Securities, Accumulated Gross Unrealized Gain, before Tax		0
Available-for-sale Debt Securities, Accumulated Gross Unrealized Loss, before Tax		(1)
Available-for-sale Securities, Debt Securities		2,496
Amortized Cost [Abstract]
Marketable debt securities		2,497
Municipal bonds [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Debt Securities, Amortized Cost Basis		5,114
Available-for-sale Securities, Accumulated Gross Unrealized Gain, before Tax		0
Available-for-sale Debt Securities, Accumulated Gross Unrealized Loss, before Tax		(3)
Available-for-sale Securities, Debt Securities		5,111
Amortized Cost [Abstract]
Marketable debt securities		$ 5,114

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Investments - Other Investments (Details) - USD ($) $ in Millions	1 Months Ended	12 Months Ended
	Sep. 30, 2015	Jan. 02, 2016	Sep. 29, 2015
Other Noncurrent Assets [Member]
Cost method investment			$ 6.0
BAM Labs, Inc. [Member]
Remeasured Fair Value	$ 12.9
Acquisition related costs		$ 3.4
BAM Labs, Inc. [Member] | General and Administrative Expense [Member]
Gain on remeasurement of cost investment, net of acquisition related expenses		$ 3.5

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Inventories (Details) - USD ($) $ in Thousands	Dec. 31, 2016	Jan. 02, 2016
Inventory Disclosure [Abstract]
Raw materials	$ 7,973	$ 9,349
Work in progress	72	48
Finished goods	66,981	77,203
Inventories	75,026	86,600
Components of finished goods inventory [Abstract]
Finished beds included in finished goods inventory	20,700	22,500
Finished components included in finished goods inventory	29,200	40,300
Retail accessories included in finished goods inventory	$ 17,100	$ 14,400

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Property and Equipment (Details) - USD ($) $ in Thousands	Dec. 31, 2016	Jan. 02, 2016
Property and equipment [Line Items]
Less: Accumulated depreciation and amortization	$ (196,496)	$ (153,182)
Property and equipment, net	208,367	204,376
Land [Member]
Property and equipment [Line Items]
Property and equipment, gross	1,999	1,999
Leasehold Improvements [Member]
Property and equipment [Line Items]
Property and equipment, gross	97,600	91,184
Office furniture and equipment [Member]
Property and equipment [Line Items]
Property and equipment, gross	81,541	68,276
Production machinery, computer equipment and software [Member]
Property and equipment [Line Items]
Property and equipment, gross	209,900	191,482
Property under capital lease [Member]
Property and equipment [Line Items]
Property and equipment, gross	0	1,077
Construction in Progress [Member]
Property and equipment [Line Items]
Property and equipment, gross	$ 13,823	$ 3,540

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Goodwill and Intangible Assets Goodwill and Indefinite-Lived Intangible Assets (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016
Goodwill [Roll Forward]
Beginning balance	$ 64,046	$ 8,963
SleepIQ LABS	0	55,083
Ending balance	64,046	64,046
Trade Name/Trademarks [Member]
Indefinite-lived Intangible Assets [Roll Forward]
Beginning Balance	1,396	1,396
SleepIQ LABS	0	0
Ending Balance	$ 1,396	$ 1,396

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Goodwill and Intangible Assets Definite-Lived Intangible Assets (Details) - USD ($) $ in Thousands	1 Months Ended
	Sep. 30, 2015	Dec. 31, 2016	Jan. 02, 2016
Definite-Lived Intangible Assets [Line Items]
Gross Carrying Amount		$ 21,365	$ 21,365
Accumulated Amortization		5,990	3,463
Developed Technologies [Member]
Definite-Lived Intangible Assets [Line Items]
Gross Carrying Amount		18,851	18,851	[1]
Accumulated Amortization		4,524	2,342
Customer Relationships [Member]
Definite-Lived Intangible Assets [Line Items]
Gross Carrying Amount		2,413	2,413
Accumulated Amortization		1,365	1,020
Trade name/trademarks [Member]
Definite-Lived Intangible Assets [Line Items]
Gross Carrying Amount		101	101
Accumulated Amortization		$ 101	$ 101
BAM Labs, Inc. [Member] | Developed Technologies [Member]
Definite-Lived Intangible Assets [Line Items]
BAM Labs, Inc. purchase	$ 13,600

[1] In September 2015, in connection with the acquisition of BAM Labs, Inc. (now operating as SleepIQ LABS), we acquired $13.6 million of definite-lived intangible assets consisting of developed technologies.

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Goodwill and Intangible Assets Amortization Expense and Future Amortization Expense (Details) - USD ($) $ in Millions	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Definite-Lived Intangible Assets [Line Items]
Amortization expense	$ 2.5	$ 1.3	$ 0.8
2017	2.5
2018	2.5
2019	2.5
2020	2.2
2021	$ 2.2

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Leases (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Operating Leases, Future Minimum Payments Due [Abstract]
2017	$ 66,493
2018	58,964
2019	49,322
2020	42,862
2021	37,517
Thereafter	137,239
Total future minimum lease payments	392,397
Facility Rents [Member]
Rent Expense
Minimum Rents	59,002	$ 52,650	$ 47,754
Contingent Rents	3,099	5,168	6,241
Total	62,101	57,818	53,995
Equipment Rents [Member]
Rent Expense
Total	$ 5,316	$ 4,362	$ 3,609

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Credit Agreement (Details) $ in Millions	12 Months Ended
	Dec. 31, 2016 USD ($)
Debt Disclosure [Abstract]
Current borrowing capacity	$ 150
Potential borrowing capacity, with accordion feature	$ 200
Line of Credit Facility, Expiration Date	Feb. 24, 2021

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Shareholders' Equity Stock Based Compensation Expense (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense	$ 11,961	$ 10,290	$ 6,798	[1]
Income tax benefit	3,947	3,413	2,284
Total stock-based compensation expense, net of tax	8,014	6,877	4,514
Share-based Compensation, Impact of Change in Forfeiture Rate			1,200
Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense	2,281	2,634	2,125
Time-based, Performance-based and Market-based Stock Awards [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense	$ 9,680	$ 7,656	$ 4,673

[1] Reflects a $1.2 million benefit in 2014 related to a change in estimated forfeitures due to employee turnover.

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Shareholders' Equity Stock Options (Details) - USD ($) $ / shares in Units, $ in Thousands		12 Months Ended
		Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Employee Stock Option [Member]
Stock options activity [Roll Forward]
Balance at January 2, 2016		1,388,000
Granted		299,000
Exercised		(188,000)
Canceled/Forfeited		(145,000)
Outstanding at December 31, 2016		1,354,000	1,388,000
Exercisable at December 31, 2016		927,000
Vested and expected to vest at December 31, 2016		1,315,000
Weighted- Average Exercise Price per Share
Balance at January 2, 2016		$ 18.44
Granted		19.19
Exercised		12.21
Canceled/Forfeited		25.71
Outstanding at December 31, 2016		18.70	$ 18.44
Exercisable at December 31, 2016		17.40
Vested and expected to vest at December 31, 2016		$ 18.61
Weighted- Average Remaining Contractual Term
Weighted-average remaining contractual term (years) - outstanding		5 years 10 months 24 days	5 years 3 months 18 days
Weighted-average remaining contractual terms (years) - exercisable		4 years 7 months 6 days
Weighted-average remaining contractual term (years) - vested and expected to vest		5 years 10 months 24 days
Aggregate Intrinsic Value
Aggregate intrinsic value - outstanding	[1]	$ 7,541	$ 7,366
Aggregate intrinsic value - exercisable	[1]	6,264
Aggregate intrinsic value - vested and expected to vest	[1]	$ 7,442
Other information - options [Abstract]
Weighted-average grant date fair value of stock options granted		$ 8.85	$ 15.94	$ 9.33
Total intrinsic value (at exercise) of stock options exercised		$ 2,088	$ 4,592	$ 2,478
Proceeds from stock options exercised		2,300
Tax benefit, exercise of stock options		800
Stock-based compensation expense related to non-vested awards		$ 2,600
Weighted average period to recognize remaining expense over		1 year 9 months 18 days
Stock Option Valuation Assumptions [Abstract]
Fair value assumptions, method used		Black-Scholes-Merton option-pricing model
Expected dividend yield (in hundredths)		0.00%	0.00%	0.00%
Expected volatility (in hundredths)		50.00%	54.00%	58.00%
Risk-free interest rate (in hundredths)		1.40%	1.60%	1.80%
Expected term (in years)		5 years 2 months 12 days	5 years 2 months 12 days	5 years 3 months 18 days
MarketBasedEmployeeStockOption [Member]
Stock options activity [Roll Forward]
Granted		30,500
Weighted- Average Exercise Price per Share
Granted		$ 10.25
Stock Option Valuation Assumptions [Abstract]
Fair value assumptions, method used		Monte Carlo simulation model
Expected dividend yield (in hundredths)		0.00%
Expected volatility (in hundredths)		50.00%
Risk-free interest rate (in hundredths)		1.80%

[1] Aggregate intrinsic value includes only those options where the current share price is equal to or greater than the share price on the date of grant.

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Shareholders' Equity Stock Awards (Details) - USD ($) $ / shares in Units, $ in Millions	12 Months Ended
	Dec. 31, 2016	Jan. 03, 2015
Restricted Stock [Member]
Stock awards [Roll Forward]
Outstanding at January 2, 2016	454,000
Granted	289,000
Vested	(189,000)
Canceled/Forfeited	(24,000)
Outstanding at December 31, 2016	530,000
Weighted-Average Grant Date Fair Value
Outstanding at January 2, 2016	$ 23.14
Granted	19.78
Vested	24.55
Canceled/Forfeited	21.34
Outstanding at December 31, 2016	$ 20.83
Stock-based compensation expense related to non-vested awards	$ 5.2
Weighted average period to recognize remaining expense over	1 year 8 months 12 days
Performance-Based and Market-Based Stock Award [Member]
Stock awards [Roll Forward]
Outstanding at January 2, 2016	710,000
Granted	347,000
Vested	(52,000)
Canceled/Forfeited	(106,000)
Outstanding at December 31, 2016	899,000
Weighted-Average Grant Date Fair Value
Outstanding at January 2, 2016	$ 22.01
Granted	18.84
Vested	24.57
Canceled/Forfeited	20.24
Outstanding at December 31, 2016	$ 20.87
Stock-based compensation expense related to non-vested awards	$ 7.8
Weighted average period to recognize remaining expense over	1 year 10 months 24 days
Market-Based Stock Award [Member]
Stock awards [Roll Forward]
Granted		126,550
Weighted-Average Grant Date Fair Value
Granted		$ 14.90
Fair value assumptions, method used		Monte Carlo simulation model
Expected dividend yield (in hundredths)		0.00%
Expected volatility (in hundredths)		58.00%
Risk-free interest rate (in hundredths)		0.90%

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Shareholders' Equity Repurchase of Common Stock (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Amount repurchased under Board-approved share repurchase program	$ 125,000	$ 98,446	$ 45,044
Amount repurchased in connection with the vesting of employee restricted stock grants	1,693	1,755	1,448
Total amount repurchased	126,693	$ 100,201	$ 46,492
Remaining Authorization Stock Purchase Plan	$ 245,000

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Shareholders' Equity Net Income per Common Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2016	Oct. 01, 2016	Jul. 02, 2016	Apr. 02, 2016	Jan. 02, 2016	Oct. 03, 2015	Jul. 04, 2015	Apr. 04, 2015	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Net income	$ 11,287	$ 25,745	$ 1,416	$ 12,969	$ (21,172)	$ 31,854	$ 11,038	$ 28,799	$ 51,417	$ 50,519	$ 67,974
Basic weighted-average shares outstanding									46,154,000	51,252,000	53,452,000
Effect of dilutive securities									748,000	849,000	741,000
Diluted weighted-average shares outstanding									46,902,000	52,101,000	54,193,000
Net income per share – basic									$ 1.11	$ 0.99	$ 1.27
Net income per share – diluted	$ 0.25	$ 0.56	$ 0.03	$ 0.27	$ (0.42)	$ 0.62	$ 0.21	$ 0.54	$ 1.10	$ 0.97	$ 1.25
Employee Stock Option [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount									600,000	400,000	800,000

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Other (Expense) Income, Net (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Other Income and Expenses [Abstract]
Interest expense	$ (811)	$ (160)	$ (53)
Interest income	94	494	415
Other (expense) income, net	$ (717)	$ 334	$ 362

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Income Taxes Income Tax Expense (benefit) (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Current:
Federal	$ 21,634	$ 7,272	$ 29,484
State	5,289	3,870	4,161
Current Income Tax Expense	26,923	11,142	33,645
Deferred:
Federal	(105)	13,567	747
State	(2,302)	202	(258)
Deferred Income Tax Expense	(2,407)	13,769	489
Income Tax Expense	$ 24,516	$ 24,911	$ 34,134

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Income Taxes Income Tax Expense (Benefit) Reconciliation to Statutory Rate (Details)	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Income Tax Examination [Line Items]
Statutory federal income tax	35.00%	35.00%	35.00%
State income taxes, net of federal benefit	2.60%	3.00%	2.50%
Manufacturing deduction	(3.30%)	(1.70%)	(3.30%)
Changes in unrecognized tax benefits	1.20%	0.30%	0.30%
Non-taxable acquisition-related transactions	0.00%	(2.60%)	0.00%
Other	(3.20%)	(1.00%)	(1.10%)
Effective income tax rate	32.30%	33.00%	33.40%

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Income Taxes Deferred Income Taxes (Details) - USD ($) $ in Thousands	Dec. 31, 2016	Jan. 02, 2016
Deferred Tax Assets [Abstract]
Stock-based compensation	$ 9,834	$ 8,756
Deferred rent and lease incentives	8,388	6,977
Warranty and returns liabilities	7,948	10,817
Net operating loss carryforwards and credits	6,368	7,847
Compensation and benefits	4,115	3,788
Other	5,264	4,561
Total gross deferred tax assets	41,917	42,746
Valuation allowance	(620)	(1,441)
Total deferred tax assets after valuation allowance	41,297	41,305
Deferred Tax Liabilities [Abstract]
Property and equipment	27,049	26,330
Deferred revenue	3,279	5,598
Other	6,302	6,341
Total gross deferred tax liabilities	36,630	38,269
Net deferred tax assets	4,667	$ 3,036
Federal [Member]
Operating Loss Carryforwards [Line Items]
Operating Loss Carryforwards	10,000
State [Member]
Operating Loss Carryforwards [Line Items]
Operating Loss Carryforwards	$ 14,800

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Income Taxes Income Taxes Unrecognized Tax Benefits (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Reconciliation of Unrecognized Tax Benefits, Excluding Amounts Pertaining to Examined Tax Returns [Roll Forward]
Beginning balance	$ 2,077	$ 742	$ 474
Increases related to current-year tax positions	326	1,277	172
Increases related to prior-year tax positions	1,594	113	110
Lapse of statute of limitations	(333)	(55)	(14)
Settlements with taxing authorities	(204)	0	0
Ending balance	3,460	2,077	$ 742
Unrecognized Tax Benefits that Would Impact Effective Tax Rate	$ 3,500	$ 2,100

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Profit Sharing and 401(K) Plan (Details) - USD ($) $ in Millions	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Profit Sharing and 401 (k) Plan [Abstract]
Employee compensation deferral (in hundredths)	50.00%
Employer contributions	$ 4.6	$ 4.2	$ 3.7

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Commitments and Contingencies (Details) $ in Millions	12 Months Ended
	Dec. 31, 2016 USD ($) lease_commitment
Purchase Commitment, Excluding Long-term Commitment [Line Items]
Inventory Purchase Commitments	$ 5.5
Purchase Commitment [Member] | Future Retail Sites [Member]
Purchase Commitment, Excluding Long-term Commitment [Line Items]
Number of future retail store lease commitments | lease_commitment	33
Future retail store leases, Rent Expense, Minimum Rentals	$ 96.0
Minimum [Member] | Purchase Commitment [Member] | Future Retail Sites [Member]
Purchase Commitment, Excluding Long-term Commitment [Line Items]
Future retail store lease commitments term	5 years
Maximum [Member] | Purchase Commitment [Member] | Future Retail Sites [Member]
Purchase Commitment, Excluding Long-term Commitment [Line Items]
Future retail store lease commitments term	15 years

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Summary of Quarterly Financial Data (unaudited) (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2016	Oct. 01, 2016	Jul. 02, 2016	Apr. 02, 2016	Jan. 02, 2016	Oct. 03, 2015	Jul. 04, 2015	Apr. 04, 2015	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Summary of Quarterly Financial Data (unaudited) [Abstract]
Net sales	$ 313,445	$ 367,988	$ 276,878	$ 352,980	$ 214,682	$ 373,919	$ 275,289	$ 349,809	$ 1,311,291	$ 1,213,699	$ 1,156,757
Gross profit	197,482	232,343	171,261	209,074	120,743	233,636	170,539	215,833	810,160	740,751	706,850
Operating income (loss)	15,312	39,044	2,396	19,898	(30,657)	45,399	16,629	43,725	76,650	75,096	101,746
Net income (loss)	$ 11,287	$ 25,745	$ 1,416	$ 12,969	$ (21,172)	$ 31,854	$ 11,038	$ 28,799	$ 51,417	$ 50,519	$ 67,974
Net income (loss) per share – diluted	$ 0.25	$ 0.56	$ 0.03	$ 0.27	$ (0.42)	$ 0.62	$ 0.21	$ 0.54	$ 1.10	$ 0.97	$ 1.25

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Schedule II - Valuation and Qualifying Accounts (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Jan. 02, 2016	Jan. 03, 2015
Allowance for Doubtful Accounts [Member]
Movement in Valuation Allowances and Reserves [Roll Forward]
Balance at beginning of period	$ 1,039	$ 739	$ 425
Additions charged to costs and expenses	1,224	1,577	729
Deductions from reserves	(1,379)	(1,277)	(415)
Balance at end of period	884	1,039	739
Allowance for Sales Returns [Member]
Movement in Valuation Allowances and Reserves [Roll Forward]
Balance at beginning of period	20,562	15,262	9,433
Additions charged to costs and expenses	71,958	84,265	78,890
Deductions from reserves	(77,298)	(78,965)	(73,061)
Balance at end of period	$ 15,222	$ 20,562	$ 15,262