<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 3, 1998.
REGISTRATION NO. 333-62793
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
PRE-EFFECTIVE AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
SELECT COMFORT CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MINNESOTA 2515 41-1597886
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) No.)
</TABLE>
6105 TRENTON LANE NORTH, SUITE 100
MINNEAPOLIS, MINNESOTA 55442
(612) 551-7000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
DANIEL J. MCATHIE
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER, CHIEF OPERATING OFFICER AND
SECRETARY
SELECT COMFORT CORPORATION
6105 TRENTON LANE NORTH, SUITE 100
MINNEAPOLIS, MINNESOTA 55442
(612) 551-7000
(Name and address, including zip code, and telephone number, including
area code, of agent for service)
--------------------------
COPIES TO:
Mark A. Kimball Peter Lillevand
Thomas R. Marek Scott Elliott
Amy E. Culbert Greg Liberman
Oppenheimer Wolff & Donnelly LLP Orrick, Herrington & Sutcliffe LLP
3400 Plaza VII, 45 South Seventh Old Federal Reserve Bank Building
Street 400 Sansome Street
Minneapolis, Minnesota 55402 San Francisco, California 94111
(612) 607-7000 (415) 392-1122
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 3, 1998
PROSPECTUS
4,000,000 SHARES
[LOGO]
COMMON STOCK
Of the 4,000,000 shares of Common Stock offered hereby, 2,800,000 shares are
being sold by Select Comfort Corporation ("Select Comfort" or the "Company") and
1,200,000 shares are being sold by the Selling Shareholders. The Company will
not receive any of the proceeds from the sale of shares by the Selling
Shareholders. See "Principal and Selling Shareholders."
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $15.00 and $17.00 per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price. The Company's Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol AIRB.
--------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total (3).................. $ $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting offering expenses payable by the Company estimated at
$1,000,000.
(3) The Company and the Selling Shareholders have granted to the Underwriters a
30-day option to purchase up to 600,000 additional shares of Common Stock
solely to cover over-allotments, if any. If all such shares are purchased,
the total Price to Public, Underwriting Discount, Proceeds to Company and
Proceeds to Selling Shareholders will be $ , $ , $ and
$ , respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998, at the office of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
BANCBOSTON ROBERTSON STEPHENS
PIPER JAFFRAY INC.
CHARLES SCHWAB & CO., INC.
, 1998
<PAGE>
[INSIDE FRONT COVER PAGE OF PROSPECTUS INCLUDES A PICTURE OF A DIRECT MARKETING
SALES PROFESSIONAL, PICTURES OF MANUFACTURING PERSONNEL, A PICTURE OF A SELECT
COMFORT AIR BED, A PICTURE OF A DISPLAY OF SELECT COMFORT PILLOWS, A PICTURE OF
A TYPICAL SELECT COMFORT RETAIL STORE AND A MAP OF THE UNITED STATES
ILLUSTRATING SELECT COMFORT'S RETAIL STORE LOCATIONS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS
PROSPECTUS. THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS."
THE COMPANY
Select Comfort, "The Air Bed Company," is the leading vertically integrated
manufacturer, specialty retailer and direct marketer of premium quality, premium
priced, innovative air beds and sleep-related products. Select Comfort believes
it is revolutionizing the mattress industry by offering a differentiated product
through a variety of service-oriented distribution channels. Select Comfort's
products have been clinically proven to address broad-based consumer sleep
problems through the Company's proprietary air bed technology and the ability to
customize the firmness on each side of the mattress at the touch of a button.
The Company offers its air beds exclusively under the Select Comfort brand
through 244 Select Comfort retail stores and leased departments, direct
marketing operations and road show events. Net sales have grown from $14.0
million in 1993 to $184.4 million in 1997, and comparable stores sales have
increased 26.1%, 36.8% and 26.9% for 1996, 1997 and the nine months ended
October 3, 1998, respectively.
According to the International Sleep Products Association, 35.3 million
mattress and foundation units were sold in the U.S. in 1997, generating
approximately $3.6 billion in wholesale sales, which the Company believes
represented approximately $6.7 billion in retail sales. This market is dominated
by four large manufacturers primarily focused on traditional innerspring
mattresses. The National Sleep Foundation estimates that approximately 50% of
U.S. consumers have suffered from sleep deprivation or poor quality sleep from a
variety of causes. The Company believes there is increasing demand for products
designed to provide a better night's sleep and promote overall wellness and the
traditional innerspring mattress industry has not been responsive to these
consumer preferences.
Select Comfort has commissioned a number of independent clinical studies
which indicate that the Company's air beds provide consumers with substantial
benefits over traditional innerspring mattresses. These studies have confirmed
that Select Comfort's air beds provide greater comfort and support by more
naturally contouring to the body, thereby providing better spinal alignment,
reduced pressure points, greater relief of lower back pain, greater overall
comfort and better quality sleep compared to traditional mattress products. The
Company has been granted or has applications pending for 23 U.S. patents and
maintains an active research and development department.
Unlike traditional mattress manufacturers, Select Comfort sells its products
directly to consumers through three complementary, service-oriented distribution
channels. Each of these channels is operated by knowledgeable Company employees
trained in the latest innovations in sleep technology and the benefits and
features of the Select Comfort product line. The Company's retail operations
included 244 stores in 43 states, including four leased departments (three in
Bed Bath & Beyond stores), at October 3, 1998. The Company plans to have
approximately 264 retail stores, including 13 leased departments in Bed Bath &
Beyond stores, by the end of 1998, and plans to open approximately 50 retail
stores in 1999. In addition, the Company expects to expand its leased department
concept in 1999. The Company's direct marketing operations include approximately
90 sales professionals who service consumer inquiries and make outbound calls.
Road show events are held in selected markets where the Company has high inquiry
levels but does not have a retail presence, as well as at home shows and
consumer product shows, state fairs and similar events. The Company advertises
through targeted print, radio and television media which generate consumer
inquiries that are pursued through each of the Company's three distribution
channels.
The Company's goal is to leverage its leadership position and build the
Select Comfort brand to be synonymous with a better night's sleep. In order to
achieve this goal, the Company's business and growth strategy is to (i) provide
a superior product, (ii) educate consumers and provide superior customer
service, (iii) increase product awareness and brand recognition, (iv) leverage
complementary distribution channels, (v) capitalize on vertically integrated
operations, and (vi) pursue additional growth opportunities by offering new and
enhanced products and services and pursuing additional marketing channels.
The Company was incorporated in Minnesota in February 1987. The Company's
principal executive office is located at 6105 Trenton Lane North, Suite 100,
Minneapolis, MN 55442. The Company's telephone number is (612) 551-7000.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. 2,800,000 shares
Common Stock offered by the Selling
Shareholders.................................. 1,200,000 shares
Common Stock to be outstanding after the
offering...................................... 18,122,249 shares(1)
Use of proceeds................................. To repay a portion of long-term
indebtedness; to fund expansion of its
retail store base and the build-out,
start-up and leasing of a third
manufacturing and distribution facility;
and for general corporate purposes,
including working capital and possible
acquisitions
Proposed Nasdaq National Market symbol.......... AIRB
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED(2) NINE MONTHS ENDED
----------------------------------------------------------- ----------------------
DEC. 31, DEC. 30, DEC. 28, JAN. 3, OCT. 3,
1994 1995 1996 1998 1998
DEC. 31, ----------- ----------- --------- --------- SEPT. 27, ---------
1993 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales................................... $ 14,041 $ 30,472 $ 68,629 $ 102,028 $ 184,430 $ 126,470 $ 178,835
Gross margin................................ 8,221 19,420 39,796 63,507 117,801 81,584 116,545
Operating income (loss)..................... (2,753) (3,297) (4,589) (3,764) 2,078 515 7,382
Net loss.................................... $ (2,752) $ (3,371) $ (4,560) $ (3,685) $ (2,846) $ (2,524) $ (413)
Net loss available to common shareholders... $ (2,752) $ (3,371) $ (4,560) $ (4,585) $ (3,746) $ (3,199) $ (1,088)
Net loss per share(3):
Basic..................................... $ (2.16) $ (2.65) $ (3.16) $ (2.61) $ (1.59) $ (1.39) $ (0.40)
Diluted................................... $ (2.16) $ (2.65) $ (3.16) $ (2.61) $ (1.59) $ (1.39) $ (0.40)
Weighted average common shares:
Basic..................................... 1,272 1,274 1,444 1,753 2,353 2,309 2,746
Diluted................................... 1,272 1,274 1,444 1,753 2,353 2,309 2,746
Pro forma net income(4)..................... $ 1,583 $ 162 $ 5,988
Pro forma net income per share,
diluted(4)................................ $ 0.08 $ 0.01 $ 0.30
Pro forma weighted average common shares,
diluted(5)................................ 19,114 18,890 19,694
SELECTED OPERATING DATA:
Stores open at period-end(6)................ 19 35 68 143 200 190 244
Average square footage of stores open during
period(7)................................. 668 642 703 768 866 866 895
Sales per square foot(7).................... $ 401 $ 442 $ 611 $ 622 $ 666 $ 460 $ 543
Average store age (in months at period
end)...................................... 5 12 15 15 22 20 26
Comparable store sales increase(8).......... -- 57.6% 59.8% 26.1% 36.8% 26.7% 26.9%
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 3, 1998
--------------------------
ACTUAL AS ADJUSTED(9)
--------- ---------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 9,579 $ 35,676
Working capital........................................................................ 3,606 29,939
Total assets........................................................................... 63,323 88,414
Long-term debt, less current maturities................................................ 24,244 167
Mandatorily redeemable preferred stock................................................. 27,612 --
Total common shareholders' equity (deficit)............................................ (20,356) 57,093
</TABLE>
4
<PAGE>
- ------------------------------
(1) Based on the number of shares outstanding as of October 3, 1998. Excludes
(i) an aggregate of 3,250,307 shares of Common Stock issuable upon exercise
of stock options and warrants outstanding as of October 3, 1998 at a
weighted average exercise price of $7.30 per share, and (ii) an aggregate of
up to 225,000 shares of Common Stock issuable upon exercise of employee
stock options expected to be granted in connection with this offering at an
exercise price per share equal to the initial public offering price. See
"Capitalization," "Management--Stock Option and Incentive Plans" and
"Description of Capital Stock--Options and Warrants."
(2) Except for the year ended January 3, 1998, which included 53 weeks, all
years presented included 52 weeks.
(3) See Note 11 of Notes to Consolidated Financial Statements.
(4) Includes pro forma adjustments for (i) the elimination of non-cash interest
expense associated with a put warrant, the put feature of which will
terminate upon consummation of this offering, (ii) the elimination of
interest expense associated with repayment of $15.0 million of the Company's
outstanding indebtedness from the proceeds of this offering, and (iii)
related tax effects. See "Pro Forma Consolidated Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
(5) Gives effect to the conversion of all outstanding shares of preferred stock
into Common Stock upon the consummation of this offering, the dilutive
effect of outstanding options and warrants, and shares to be issued upon the
consummation of this offering.
(6) Includes Select Comfort stores operated in leased departments within larger
retail stores (one at December 28, 1996, September 27, 1997 and January 3,
1998 and four at October 3, 1998).
(7) For stores open during the entire period indicated.
(8) Stores enter the comparable store calculation in their 13th full month of
operation. The number of comparable stores used to calculate such data were
13, 32, 65, 138, 107 and 182 for 1994, 1995, 1996, 1997 and the nine-month
periods ended September 27, 1997 and October 3, 1998, respectively.
(9) As adjusted to give effect upon the consummation of this offering to the (i)
reclassification of a put warrant from long-term debt to shareholders'
equity, (ii) conversion of all outstanding shares of preferred stock into
Common Stock, and (iii) application of the estimated net proceeds from the
issuance of 2,800,000 shares of Common Stock at an assumed initial public
offering price of $16.00 per share, including repayment of $15.0 million of
the Company's outstanding indebtedness. See "Use of Proceeds" and
"Capitalization."
------------------------------
THE COMPANY'S FISCAL YEAR ENDS ON THE SATURDAY CLOSEST TO DECEMBER 31, AND
UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO YEARS IN THIS
PROSPECTUS REFER TO THE COMPANY'S FISCAL YEARS. ALL REFERENCES TO THE COMPANY
HEREIN INCLUDE THE COMPANY'S WHOLLY OWNED SUBSIDIARIES, SELECT COMFORT DIRECT
CORPORATION, SELECT COMFORT RETAIL CORPORATION, DIRECT CALL CENTERS, INC. AND
SELECT COMFORT SC CORPORATION. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS (I) GIVES EFFECT TO THE CONVERSION OF ALL OUTSTANDING SHARES OF
PREFERRED STOCK INTO COMMON STOCK UPON THE CONSUMMATION OF THIS OFFERING, AND
(II) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED.
SELECT COMFORT-REGISTERED TRADEMARK-, SLEEP NUMBER-REGISTERED TRADEMARK-,
COMFORT CLUB-REGISTERED TRADEMARK-, 90 NIGHT TRIAL, BETTER NIGHT'S SLEEP
GUARANTEE, THE AIR BED COMPANY and the Company's stylized logo are trademarks of
the Company. This Prospectus also includes trademarks of companies other than
the Company.
5
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS
AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH BELOW AND ELSEWHERE IN
THIS PROSPECTUS. SEE "CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS."
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE
OTHER INFORMATION IN THIS PROSPECTUS BEFORE PURCHASING ANY SHARES OF THE COMMON
STOCK OFFERED HEREBY.
HISTORY OF OPERATING LOSSES; UNCERTAIN PROFITABILITY. The Company has
incurred substantial operating losses since its inception and had an accumulated
deficit of $22.7 million as of October 3, 1998. There can be no assurance that
the Company will achieve or sustain profitability on a quarterly or annual basis
in future periods. The Company's future operating results will depend upon a
number of factors, including (i) the level of consumer acceptance of the
Company's products, (ii) the ability of the Company to create product and brand
name awareness, (iii) the effectiveness and efficiency of the Company's
advertising, (iv) the number and timing of new retail store openings, (v) the
performance of the Company's existing and new retail stores, (vi) the ability of
the Company to manage its planned rapid store expansion, (vii) the ability of
the Company to successfully identify and respond to emerging trends in the
mattress industry, (viii) the level of competition in the mattress industry, and
(ix) general economic conditions and consumer confidence. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
LIMITED HISTORY OF RETAIL OPERATIONS; AGGRESSIVE GROWTH STRATEGY. The
Company's net sales have grown significantly in the past several years primarily
as a result of the opening of new retail stores and increases in comparable
store sales from year to year. Until recently, the Company generated most of its
net sales from its direct marketing operations. The Company opened its first
three retail stores in 1992 and operated 19 stores at the end of 1993, 35 stores
at the end of 1994, 68 stores at the end of 1995, 143 stores at the end of 1996,
200 stores at the end of 1997 and 244 stores, including four leased departments
(three in Bed Bath & Beyond stores) as of October 3, 1998. Virtually all of the
Company's retail stores are in mall locations. The Company plans to have
approximately 264 retail stores, including 13 leased departments in Bed Bath &
Beyond stores, by the end of 1998, and plans to open approximately 50 retail
stores in 1999. In addition, the Company expects to expand its leased department
concept in 1999. Approximately 54% of the Company's new store openings in 1998
will be in existing markets and the remainder will be in new geographical
markets. The opening of additional stores in an existing market could result in
lower net sales from existing Company stores in that market. Because the Company
will be expanding into new geographic markets, it may face competitive
challenges that are different from those encountered to date. The Company's
success in any new geographic market will depend on the Company's ability to
select appropriate new store sites and to create awareness in the new market
through effective marketing and advertising strategies. In addition to adding
further mall locations, the Company's retail expansion plans include alternative
locations such as strip shopping centers. The Company has limited experience
with such alternative locations and its success will depend on the Company's
ability to create awareness of, and to attract consumers to, such alternative
locations.
The success of the Company's planned expansion will be dependent upon many
factors, including the ability of the Company to (i) successfully open
additional retail stores in existing geographic markets, (ii) successfully enter
new geographic markets and store environments in which the Company has no
previous retail experience, (iii) negotiate acceptable lease terms for
additional sites, (iv) effectively hire, train, manage and retain qualified
management and other personnel, (v) effectively manage the interaction among the
Company's multiple distribution channels, (vi) generate additional direct
marketing inquiries, (vii) effectively develop strategic alliances with respect
to product development, marketing and distribution, and (viii) effectively refer
selected direct marketing inquiries to the retail and road show distribution
channels. There can be no assurance that the Company will be able to grow at
historical rates or achieve its planned expansion, that new retail stores will
be effectively integrated into the Company's existing
6
<PAGE>
operations, that such stores will be profitable or that the Company will be able
to establish and maintain profitable strategic alliances. See
"Business--Business and Growth Strategy."
ABILITY TO MANAGE GROWTH. The Company's aggressive growth strategy has
placed, and will continue to place, a significant strain on the Company's
management, production, information systems and other resources. To manage
growth effectively, the Company must maintain a high level of manufacturing
quality and efficiency, continue to enhance its operational, financial and
management systems, including its database management, tracking of inquiries,
inventory control and distribution systems, and expand, train and manage its
employee base. There can be no assurance that the Company will be able to
effectively manage this expansion in any one or more of these areas, and any
failure to do so could have a material adverse effect on the Company's business,
financial condition and operating results.
All orders are filled by shipments made directly to the customer from one of
the Company's two manufacturing and distribution centers located in Minneapolis
and in Columbia, South Carolina. The Company believes that its existing
manufacturing and distribution facilities will be adequate to support its
planned expansion through the next 12 months. Any significant interruption in
the operation of either of such facilities would have a material adverse effect
on the business, financial condition and operating results of the Company. The
Company plans to lease a third manufacturing and distribution center in Salt
Lake City, which is expected to be in operation during the first half of 1999,
at a cost of approximately $4.5 million. There can be no assurance that the new
facility will be completed on time, that the cost to build it will not exceed
the Company's estimates or that manufacturing costs for this new facility will
not be greater than manufacturing costs at the Company's current facilities in
Minnesota and South Carolina. In addition, delays or interruptions in the normal
supply of products could occur as the Company attempts to integrate a third
manufacturing and distribution center. Any such increases in costs or delays
could have a material adverse effect on the Company's business, financial
condition and operating results. The Company does not have experience in
manufacturing its products in the volumes that it projects will be necessary to
support the anticipated increase in sales and may encounter difficulties in
scaling up production, including problems involving quality control and
assurance, component supply and shortages of qualified personnel. Any failure on
the part of the Company in manufacturing its products in volumes sufficient to
meet demand could have a material adverse effect on the Company's business,
financial condition and operating results. See "Business--Manufacturing and
Distribution."
EFFECTIVENESS AND EFFICIENCY OF ADVERTISING EXPENDITURES. The Company's
advertising expenditures increased from $5.5 million in 1994 to $28.3 million in
1997, and are expected to continue to increase for the foreseeable future. The
Company's future growth and profitability will be dependent in part on the
effectiveness and efficiency of the Company's advertising expenditures,
including the ability of the Company to (i) create greater awareness of the
Company's products and brand name, (ii) determine the appropriate creative
message and media mix for future advertising expenditures, (iii) effectively
manage advertising costs (including creative and media) in order to maintain
acceptable costs per inquiry, costs per order and operating margins, and (iv)
convert inquiries into actual orders. Historically, the Company's advertising
expenditures have generated revenue benefits beyond the actual duration of the
advertisements. There can be no assurance that the Company will experience
similar benefits from advertising expenditures in the future. In addition, no
assurance can be given that the Company's planned increases in advertising
expenditures will result in increased sales, will generate sufficient levels of
product and brand name awareness or that the Company will be able to manage such
advertising expenditures on a cost effective basis. See "Business--Marketing and
Advertising."
FLUCTUATIONS IN COMPARABLE STORE SALES RESULTS. The Company's comparable
store sales results, which are computed by comparing sales during the current
year with prior year periods for those stores open during the same periods of
the current and prior years, have fluctuated significantly in the past and such
fluctuations are likely to continue. Stores enter the comparable store
calculation in their 13th full month of operation. The Company's comparable
store sales increases were 26.1%, 36.8% and 26.9% for 1996, 1997
7
<PAGE>
and the nine months ended October 3, 1998, respectively. The Company's
comparable store sales results have fluctuated significantly from quarter to
quarter with increases ranging from 8.2% to 62.0% on a quarterly basis for 1996
and 1997. There can be no assurance that the Company's comparable store sales
results will not fluctuate significantly in the future. A variety of factors
affect the Company's comparable store sales results, including (i) the level of
consumer awareness of Select Comfort's products and brand name, (ii) the rate of
consumer acceptance of the Company's products, (iii) the higher levels of sales
in the first year of operations as each successive class of new stores is
opened, (iv) the strong comparable store sales performance in recent periods,
(v) the maturation of its store base, (vi) the timing and relative success of
promotional events, advertising expenditures, new product introductions and
product line extensions, and (vii) general economic conditions and consumer
confidence. In addition, the Company's higher per unit prices and lower number
of transactions relative to other mall-based retailers may cause greater
volatility in the Company's comparable store sales results. Additionally, due to
the integrated nature of the Company's distribution channels, the relative level
of the Company's net sales may fluctuate between retail and direct marketing,
which may contribute to fluctuations in comparable store sales results. Changes
in comparable store sales results could cause the price of the Common Stock to
fluctuate substantially.
QUARTERLY FLUCTUATIONS AND SEASONALITY. The Company's quarterly operating
results may fluctuate significantly as a result of a variety of factors,
including increases or decreases in comparable store sales, the timing, amount
and effectiveness of advertising expenditures, any increases in return rates,
the timing of new store openings and related expenses, competitive factors, net
sales contributed by new stores, any disruptions in third party delivery
services and general economic conditions and consumer confidence. The Company's
business is also subject to some seasonal influences, with heavier
concentrations of sales during the fourth quarter holiday season due to higher
mall traffic. During the third quarter of 1997, the United Parcel Service
("UPS") work stoppage resulted in delayed delivery of the Company's products,
requiring the Company to use alternative carriers. Additionally during that
period, the Company converted its manufacturing and financial operations to a
new integrated information system, which further contributed to delays in
fulfilling customer orders. These factors resulted in higher than normal
customer returns, canceled orders and substantially increased freight charges,
which had a material adverse effect on the Company's operating results in the
second half of 1997. See "--Reliance Upon Carriers."
A substantial portion of the Company's operating expenses is related to
sales and marketing expenses, including costs associated with opening new stores
and advertising and marketing expenditures. The level of such spending cannot be
adjusted quickly and is based, in significant part, on the Company's
expectations of future customer inquiries and net sales. Furthermore, the
Company has often realized a substantial portion of its net sales in the last
month of a quarter, with such net sales frequently concentrated in the last
weeks or days of a quarter, due in part to its promotional schedule. If there is
a shortfall in expected net sales or in the conversion rate of customer
inquiries, the Company may be unable to adjust its spending in a timely manner
and the Company's business, financial condition and operating results may be
materially adversely affected. The Company's results of operations of any
quarter are not necessarily indicative of the results that may be achieved for a
full year or any future quarter.
The Company expects to incur certain charges in the period in which this
offering is consummated in connection with an outstanding put warrant and with
the repayment of certain indebtedness with a portion of the net proceeds of this
offering. Interest expense associated with the put warrant is based on the fair
market value of the Company's Common Stock. Based on an assumed initial public
offering price of $16.00 per share, the Company estimates that the interest
expense associated with the outstanding put warrant will not have a material
impact on the Company's results of operations. However, if the initial public
offering price is greater than $17.00 per share, the Company estimates the
amount of such interest expense would exceed $350,000 and may have a material
impact on the Company's results of operations. The charge associated with the
repayment of certain indebtedness is estimated to be approximately $1.7 million.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Overview."
8
<PAGE>
RETURN POLICY AND PRODUCT WARRANTY. Part of the Company's marketing and
advertising strategy focuses on providing a 90 Night Trial in which customers
may return the air bed and obtain a refund of the purchase price. As the Company
expands its sales, there can be no assurance that its return rates will remain
within acceptable levels. An increase in return rates could have a material
adverse effect on the Company's business, financial condition and operating
results. The Company also provides its customers with a limited 20-year warranty
on its air beds. Although the Company has performed extensive testing to enable
it to project warranty claims over the 20-year warranty period, the Company has
only been selling air beds in significant quantities since 1992. There can be no
assurance that the Company's warranty reserves will be adequate to cover future
warranty claims, and such failure could have a material adverse effect on the
Company's business, financial condition and operating results.
PRODUCT DEVELOPMENT AND ENHANCEMENTS. The Company's growth and future
success will depend upon its ability to enhance its existing products and to
develop and market new products on a timely basis that respond to customer needs
and achieve market acceptance. The Company is pursuing opportunities to enter
into strategic alliances with manufacturers of adjustable frame beds and sofa
sleepers. There can be no assurance that the Company will be successful in
developing or marketing enhanced or new products, or that any such products will
be accepted by the market. There can also be no assurance that the Company will
be able to establish and maintain profitable strategic alliances. Further, there
can be no assurance that the resulting level of sales of any of the Company's
enhanced or new products will justify the costs associated with their
development and marketing. See "Business--Business and Growth Strategy" and
"--Research and Product Development."
MARKET ACCEPTANCE. The U.S. mattress market is dominated by four large
manufacturers of innerspring mattresses. The Company's air bed technology
represents a significant departure from traditional innerspring mattresses. The
market for air beds is continuing to evolve and the success of the Company's
products will be dependent upon both the continued growth of this market and
upon market acceptance of the Company's air beds. The failure of the Company's
air beds to achieve market acceptance for any reason would have a material
adverse effect on the Company's business, financial condition and operating
results.
DEPENDENCE ON CONSUMER SPENDING. The success of the Company's operations
depends to a significant extent upon a number of factors relating to
discretionary consumer spending. These factors include economic conditions such
as employment levels, business conditions, interest rates, availability of
credit, inflation and taxation. Downturns in such economic conditions or in
consumer confidence could have a negative effect on discretionary spending.
Because a high percentage of the Company's net sales are made on credit, any
downturn in general economic conditions or increases in interest rates may
materially adversely affect the Company's business, financial condition and
operating results. The Company is also dependent upon the continued popularity
of malls as shopping destinations and the ability of mall anchor tenants and
other attractions to generate customer traffic for the Company's retail stores.
A decrease in mall traffic could adversely affect the Company's growth, net
sales, comparable store results and profitability.
RELIANCE UPON VENDORS; FOREIGN SOURCES OF SUPPLY. All of the air chambers
for the Company's air beds are purchased from one Eastern European supplier
under a supply contract expiring in August 1999 (subject to automatic renewal if
neither party gives 90 days' notice of non-renewal), pursuant to which the
Company is obligated to purchase certain minimum quantities, but not all of its
requirements. Either party can terminate the contract upon 90 days notice if
such party ceases to use the air chambers in its business. The Company believes
that it would be able to procure an adequate supply of air chambers from other
sources on a timely basis if the supply contract is terminated or the Eastern
European supplier is otherwise unable to supply air chambers. The Company has
recently completed the development of an air chamber designed with new materials
that will be manufactured by a U.S. based company at a foreign manufacturing
facility. Full production of this new air chamber is expected to commence in the
fourth quarter of 1999.
9
<PAGE>
The Eastern European supplier is expected to provide a second source of supply
of this new air chamber during the first half of 2000. The Company does not
presently have any contract or commitment from either supplier to manufacture
the newly developed air chamber. The Company is continuously searching for
alternative designs and materials for all of its components, as well as
alternative sources of supply. The inability of the Company's sources of supply
to meet, for any reason, the Company's requirement for air chambers could have a
material adverse effect on the Company's business, financial condition and
operating results. In addition, since the Company's air chambers and other
supplies are manufactured outside the United States, the Company's operations
could be materially adversely affected by the risks associated with foreign
sourcing of materials, including (i) political instability resulting in
disruption of trade, (ii) existing or potential duties, tariffs or quotas that
may limit the quantity of certain types of goods that may be imported into the
United States or increase the cost of such goods, and (iii) any significant
fluctuation in the value of the dollar against foreign currencies.
With the exception of its air chambers, the Company has no long-term
purchase contracts or other contractual assurances of continued supply, pricing
or access to components. The inability or failure of one or more key vendors to
supply components, the loss of one or more key vendors or a material change in
the Company's purchase terms could have a material adverse effect on the
Company's business, financial condition and operating results. See
"Business--Suppliers" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RELIANCE UPON CARRIERS. Historically, the Company has relied almost
exclusively on UPS for delivery of the Company's products to customers. For a
significant portion of the third quarter of 1997, UPS was unable to deliver the
Company's products within acceptable time periods, causing delays in deliveries
to customers and requiring the Company to use alternative carriers. This
contributed to substantially greater freight charges and canceled orders, which
had a material adverse effect on the Company's operating results in the second
half of 1997. Due to the extensive national distribution system and cost
effectiveness of UPS, the Company has continued to rely primarily on UPS for
deliveries to customers. No assurance can be given that UPS will not experience
difficulties in meeting the Company's requirements in the future. The Company
continues to evaluate alternative carriers on a national and regional basis, as
well as providers of in-home assembly services. There can be no assurance that
alternative carriers will be able to meet the Company's requirements on a timely
or cost-effective basis. Any significant delay in deliveries to customers or
increase in freight charges may have a material adverse effect on the Company's
business, financial condition and operating results.
COMPETITION. The mattress industry is highly competitive. Participants in
the mattress industry compete primarily on price, quality, brand name
recognition, product availability and product performance, including the
perceived levels of comfort and support provided by a mattress. The Company's
air beds compete with a number of different types of mattress alternatives,
including innerspring mattresses, waterbeds, futons and other air-supported
mattresses that are sold through a variety of channels, including furniture
stores, bedding specialty stores, department stores, mass merchants, wholesale
clubs, telemarketing programs, television infomercials and catalogs. The Company
believes that its success depends in part on increasing consumer awareness and
acceptance of the Company's existing products and continuing to introduce
products that have qualities and benefits which differentiate the Company's
products from those offered by other manufacturers. There can be no assurance
that such products will receive consumer acceptance or that the Company will
continue to be able to successfully introduce such products.
The traditional mattress industry is characterized by a high degree of
concentration among the four largest manufacturers of innerspring mattresses
with nationally recognized brand names, including Sealy, which also owns the
Stearns & Foster brand name, Serta, Simmons and Spring Air. These manufacturers
were estimated by FURNITURE/TODAY to account for approximately 62% of wholesale
dollar sales in 1997. The balance of the mattress market is served by over 700
manufacturers, primarily operating on a regional basis. The traditional mattress
distribution channels and the estimated market shares in 1997, according to the
International Sleep Products Association ("ISPA"), were furniture stores (42%),
specialty bedding
10
<PAGE>
stores (24%), department stores (11%), national chains (8%), wholesale clubs
(6%) and others, including telephone and electronic shopping channels (9%).
Between 1993 and 1997, specialty bedding stores increased their share of the
market from 19% to 24%. Many of these competitors, and in particular the four
largest manufacturers named above, have greater financial, marketing and
manufacturing resources and better brand name recognition than the Company, and
sell their products through broader and more established distribution channels.
The Company believes that a number of companies, including two of the four
largest manufacturers, have begun to offer air beds. There can be no assurance
that these or any other mattress manufacturers will not aggressively pursue the
air bed market. Any such competition by the established manufacturers or new
entrants into the market could have a material adverse effect on the Company's
business, financial condition and operating results. In addition, should any of
the Company's competitors reduce prices on premium mattress products, the
Company may be required to implement price reductions in order to remain
competitive, which could have a material adverse effect on its business,
financial condition and operating results. There are no provisions in the
Company's retail store leases that limit or restrict competing businesses from
operating in the malls in which the Company's stores are located. The lack of
such restrictions and the lack of significant barriers to entry may result in
new competition. See "Business--Competition."
REGULATORY MATTERS. The Company's products and its marketing and
advertising practices are subject to regulation by various federal, state and
local regulatory authorities, including the Federal Trade Commission and the
U.S. Food and Drug Administration. The mattress industry also engages in
advertising self-regulation through certain voluntary forums, including the
National Advertising Division (the "NAD") of the Better Business Bureau. The
Company's advertising campaigns have in the past been the subject of proceedings
before the NAD. As a result of such proceedings, the Company has made minor
modifications to its advertising literature. There can be no assurance that the
Company's marketing and advertising practices will not be the subject of further
proceedings before regulatory authorities or the NAD, or the subject of claims
by other parties. The Company is also subject to various other federal, state
and local regulatory requirements, including federal, state and local
environmental regulation and regulations issued by the U.S. Occupational Safety
and Health Administration. There can be no assurance that the Company will not
experience any material adverse effects on its business, financial condition or
operating results as a result of such regulatory requirements.
YEAR 2000 COMPLIANCE. The Company and third parties with which the Company
does business rely on numerous computer programs in their day to day operations.
There can be no assurance that the Company will be able to effectively address
its Year 2000 issues in a timely and cost-efficient manner and without
interruption to its business. The Company has initiated discussions with its
significant suppliers regarding their plans to remediate Year 2000 issues where
their systems interface with the Company's systems or otherwise impact its
operations. There can be no assurance that Year 2000 difficulties encountered by
its suppliers and other third parties with whom it does business will not have a
material adverse impact on the Company's business, financial condition or
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Impact of Year 2000."
DEPENDENCE ON KEY PERSONNEL. The success of the Company's business will
continue to be dependent upon the efforts of its key operating officers and
employees, including H. Robert Hawthorne, President, Chief Executive Officer and
a director, and Daniel J. McAthie, Executive Vice President, Chief Financial
Officer and Chief Operating Officer. The loss of either of these executive
officers, or other key personnel, could have a material adverse effect on the
Company's business, financial condition and operating results. In addition, the
Company's success in the future will be dependent upon its ability to attract,
retain and motivate qualified personnel, including retail store managers.
INTELLECTUAL PROPERTY PROTECTION. The Company currently holds a number of
U.S. and Canadian patents, and has various U.S. and international patent
applications pending, with respect to certain aspects
11
<PAGE>
of the design, technology and function of its products. Notwithstanding these
patents and patent applications, no assurance can be given that such rights will
provide substantial protection or that others will not be able to develop
products that are similar to or competitive with the Company's air beds. The
Company also relies on a combination of copyright, trademark, trade secret,
unfair competition and other intellectual property laws, nondisclosure
agreements and other protective measures to protect its rights. Such
protections, however, may not preclude competitors from developing products
similar to the Company's products or otherwise competing with the Company. In
addition, the laws of certain foreign countries may not protect the Company's
intellectual property rights and confidential information to the same extent as
the laws of the United States. Although the Company is unaware of any basis for
an intellectual property infringement or invalidity claim against it, there can
be no assurance that third parties, including competitors, will not assert such
claims against the Company or that, if asserted, such claims will not be upheld.
Intellectual property litigation, which could result in substantial cost to and
diversion of effort by the Company, may be necessary to enforce patents issued
to the Company, to protect trade secrets or proprietary technology owned by the
Company or to defend the Company against claimed infringement of the rights of
others and to determine the scope and validity of the proprietary rights of
others. There can be no assurance that the Company would prevail in any such
litigation or that, if it is unsuccessful, the Company would be able to obtain
any necessary licenses on reasonable terms or at all. See "Business--
Intellectual Property."
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS. The Company's directors,
executive officers and their affiliates will, in the aggregate, beneficially own
approximately 45.7% of the Company's outstanding Common Stock after this
offering. Although the Company does not know of the existence of any agreements
among such shareholders with respect to the voting of their shares, if they were
to act in concert, they would be able to elect all of the Company's directors,
increase the Company's authorized capital stock, dissolve, merge or sell the
assets of the Company, effect other fundamental corporate transactions requiring
shareholder approval, including delaying, deterring or preventing a change in
control of the Company, and generally direct the affairs of the Company. See
"Principal and Selling Shareholders."
LACK OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to
this offering, there has been no public market for the Common Stock, and there
can be no assurance that an active trading market will develop or be sustained.
The initial public offering price for the shares of Common Stock to be sold in
this offering will be determined by agreement among the Company, the Selling
Shareholders and the representatives of the Underwriters and may bear no
relationship to the price at which the Common Stock will trade after completion
of this offering. For a discussion of the factors to be considered in
determining the initial public offering price, see "Underwriting."
The stock market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In addition, the market price of the
Common Stock is likely to be highly volatile. Factors such as fluctuations in
the Company's operating results, including sales volume growth and comparable
store sales, a downturn in the retail industry, changes in stock market
analysts' recommendations regarding the Company, other retail companies or the
retail industry in general and general market and economic conditions may have a
significant effect on the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE. The sale of substantial amounts of the
Company's Common Stock in the public market following this offering could
adversely affect the market price of the Common Stock and could impair the
Company's ability to raise capital in the future through the sale of its equity
securities. Upon completion of the offering, the Company will have 18,122,249
shares of Common Stock outstanding, assuming no exercise of options or warrants
after October 3, 1998. Of these shares, the 4,000,000 shares of Common Stock
offered hereby will be freely tradable. Of the remaining shares, 13,797,022
shares are
12
<PAGE>
subject to lock-up agreements expiring 180 days after the date of this
Prospectus. Upon expiration of these agreements, 13,747,722 shares of Common
Stock will be eligible for immediate resale in the public market subject to the
limitations of Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"). Of such shares, approximately 5,504,333 shares will be
eligible for resale in the public market pursuant to Rule 144(k) without regard
to the volume and manner of sale limitations in Rule 144. Of the 460,379 shares
not subject to lock-up agreements, 350,126 shares will be eligible for immediate
resale in the public market pursuant to Rule 144(k) and the remainder will be
eligible for resale in the public market subject to the limitations of Rule 144.
The Company intends to file a registration statement on Form S-8 within 30 days
after the completion of this offering to register the shares of Common Stock
reserved for issuance upon the exercise of outstanding stock options. As of
October 3, 1998, options to purchase approximately 122,693 shares not subject to
lock-up agreements were vested and would be eligible for sale pursuant to such
registration statement. In addition, certain existing shareholders and
warrantholders have the right to register shares of Common Stock for sale in the
public market. See "Shares Eligible for Future Sale" and "Description of Capital
Stock--Registration Rights."
ANTI-TAKEOVER CONSIDERATIONS. The Company's Articles of Incorporation (the
"Articles") provide for a classified Board of Directors (the "Board") serving
staggered terms of three years. The Articles also require the approval of
two-thirds of the outstanding voting power of the Company entitled to vote in
the event of any sale or merger of the Company. Under the Articles, the Board
has the authority, without shareholder approval, to issue up to 5,000,000 shares
of undesignated preferred stock (the "Undesignated Preferred Stock") and to fix
the rights and preferences thereof. This authority, together with the super-
majority shareholder voting requirements and the staggered Board, may have the
effect of making it more difficult for a third party to acquire, or discourage a
third party from attempting to acquire, control of the Company, even if
shareholders purchasing shares in this offering may consider such a change in
control to be in their best interests. In addition, Minnesota law contains
certain provisions that may have the effect of delaying, deterring or preventing
a hostile takeover of the Company. See "Description of Capital Stock--
Provisions with Potential Anti-Takeover Effect."
DILUTION. The initial public offering price per share is substantially
higher than the net tangible book value per share of Common Stock. New investors
purchasing Common Stock in this offering will incur immediate and substantial
dilution of $12.45 in net tangible book value per share of Common Stock
purchased. See "Dilution."
13
<PAGE>
CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus that are not purely historical
are forward-looking statements, including statements regarding the Company's
expectations, hopes, beliefs, intentions or strategies regarding the future.
Statements which use the words "expects," "will," "may," "anticipates,"
"believes," "intends," and "seeks" are forward-looking statements. These
forward-looking statements, including statements regarding the Company's efforts
to increase store level profitability and plans to open new retail stores and
develop new products, are based on information available to the Company on the
date hereof, and the Company assumes no obligation to update any such
forward-looking statement. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
Among the factors that could cause actual results to differ materially are the
factors set forth under the heading "Risk Factors." In particular, the success
of the Company will be dependent upon many factors, including (i) the level of
consumer acceptance of the Company's products, (ii) the ability of the Company
to create product and brand name awareness, (iii) the effectiveness and
efficiency of the Company's advertising, (iv) the number and timing of new
retail store openings, (v) the performance of the Company's existing and new
retail stores, (vi) the ability of the Company to manage its planned rapid store
expansion, (vii) the ability of the Company to successfully identify and respond
to emerging trends in the mattress industry, (viii) the level of competition in
the mattress industry, and (ix) general economic conditions and consumer
confidence. There can be no assurance that the Company will be able to achieve
its planned expansion, that new stores will be effectively integrated into the
Company's existing operations, that new or existing stores will be profitable or
that the Company will be able to establish and maintain profitable strategic
alliances.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,800,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $16.00 per share are estimated to be $40.7 million ($42.6 million if
the Underwriters' over-allotment option is exercised in full), after deducting
the underwriting discount and estimated offering expenses payable by the
Company. The Company intends to use such net proceeds as follows: (i)
approximately $15.0 million to repay long-term debt; (ii) approximately $6.5
million to fund expansion of its retail store base; (iii) approximately $4.5
million to fund the build-out, start-up and leasing of its third manufacturing
and distribution facility scheduled for completion during the first half of
1999; and (iv) the remainder for general corporate purposes, including working
capital and for possible acquisitions of complementary products, technologies or
businesses. The Company has no current plans to undertake any acquisitions of a
material nature. The Company's $15.0 million of long-term debt intended to be
repaid with a portion of the net proceeds of this offering bears interest at 11%
per annum and is due March 31, 2003. The $15.0 million in long-term debt is owed
by the Company to General Electric Capital Corporation, a beneficial owner of
approximately 7.9% of the Company's Common Stock immediately prior to this
offering. The proceeds of such indebtedness were used to fund expansion of the
Company's retail store base and for general corporate purposes. Pending
application of the net proceeds described above, the Company intends to invest
the net proceeds in short-term, interest-bearing, investment-grade securities.
The Company will not receive any proceeds from the sale of Common Stock by the
Selling Shareholders. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Principal and Selling Shareholders."
DIVIDEND POLICY
To date, the Company has neither declared nor paid cash dividends on shares
of its Common Stock. The Company currently intends to retain future earnings, if
any, to fund the development and growth of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. The payment of
any future dividends will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's future
earnings, capital requirements and financial condition and general business
conditions. The Company's current debt agreement contains various financial
covenants, including covenants relating to net worth, which may have the effect
of restricting the Company's ability to pay dividends. This agreement will
terminate upon repayment of the $15.0 million outstanding thereunder from a
portion of the net proceeds of this offering.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
October 3, 1998 (i) on an actual basis and (ii) as adjusted to give effect to
the conversion of all outstanding shares of preferred stock into shares of
Common Stock upon the consummation of this offering, the reclassification of
certain warrants from long-term debt to common shareholders' equity upon the
consummation of this offering, and the receipt and the application of the
estimated net proceeds from the sale of the shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $16.00 per
share. The table should be read in conjunction with the Consolidated Financial
Statements of the Company and the Pro Forma Consolidated Financial Statements
and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
OCTOBER 3, 1998
----------------------------
ACTUAL AS ADJUSTED(1)
----------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt............................................................... $ 1,052 $ 1,052
----------- -------
----------- -------
Long-term debt, less current maturities............................................................ $ 24,244 $ 167
Mandatorily redeemable preferred stock............................................................. 27,612 --
----------- -------
Common shareholders' equity (deficit):
Undesignated preferred stock, 5,000,000 shares authorized, no shares issued and outstanding
actual, as adjusted............................................................................ -- --
Common stock, $0.01 par value, 95,000,000 shares authorized, 2,989,885 shares issued and
outstanding, actual; 18,122,249 shares issued and outstanding, as adjusted(2).................. 30 181
Additional paid-in capital....................................................................... 3,328 82,345
Accumulated deficit.............................................................................. (22,720) (24,439)
Notes receivable--investors...................................................................... (994) (994)
----------- -------
Total common shareholders' equity (deficit).................................................. (20,356) 57,093
----------- -------
Total capitalization....................................................................... $ 31,500 $ 57,260
----------- -------
----------- -------
</TABLE>
- ------------------------
(1) See Pro Forma Consolidated Financial Statements.
(2) Excludes (i) an aggregate of 3,250,307 shares of Common Stock issuable upon
exercise of stock options and warrants outstanding as of October 3, 1998 at
a weighted average exercise price of $7.30 per share and (ii) an aggregate
of up to 225,000 shares of Common Stock issuable upon exercise of employee
stock options expected to be granted in connection with this offering at an
exercise price per share equal to the initial public offering price. See
"Management--Stock Option and Incentive Plans" and "Description of Capital
Stock--Options and Warrants."
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<PAGE>
DILUTION
As of October 3, 1998, the Company had a net tangible book value of
approximately $32.2 million or $1.82 per share of Common Stock, giving effect to
the conversion of all outstanding shares of preferred stock into Common Stock,
the exercise of stock options and warrants to purchase 2,387,756 shares of
Common Stock, which were exercisable as of October 3, 1998, and the
reclassification of certain warrants from long-term debt to common shareholders'
equity upon the consummation of this offering. Net tangible book value per share
represents the amount of the Company's common shareholders' equity (deficit),
less intangible assets, divided by the number of shares of Common Stock
outstanding. After giving effect to the sale of the 2,800,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering price
of $16.00 per share and the application of the estimated net proceeds therefrom,
the net tangible book value of the Company as of October 3, 1998 would have been
approximately $72.8 million, or approximately $3.55 per share. This represents
an immediate increase in net tangible book value of $1.73 per share to existing
shareholders and an immediate dilution in net tangible book value of $12.45 per
share to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $ 16.00
Net tangible book value per share before the offering...... $ 1.82
Increase per share attributable to new investors........... 1.73
---------
Net tangible book value per share after the offering......... 3.55
---------
Dilution per share to new investors.......................... $ 12.45
---------
---------
</TABLE>
The following table summarizes, as of October 3, 1998, the differences
between the existing shareholders and the new investors with respect to the
number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid (based upon an assumed
initial public offering price of $16.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(2).... 17,710,005 86.3% $ 48,570,001 52.0% $ 2.74
New investors............... 2,800,000 13.7 44,800,000 48.0 16.00
------------ ----- ------------- ----- ------
Total..................... 20,510,005 100.0% $ 93,370,001 100.0% $ 4.55
------------ ----- ------------- ----- ------
------------ ----- ------------- ----- ------
</TABLE>
- ------------------------
(1) Sales by the Selling Shareholders in this offering will reduce the number of
shares held by the existing shareholders to 16,510,005 or approximately
80.5% (16,039,107 shares or approximately 77.7% if the underwriter's
over-allotment option is exercised in full) and will increase the number of
shares held by new investors to 4,000,000 or approximately 19.5% (4,600,000
or approximately 22.3% if the over-allotment option is exercised in full) of
the total number of shares of Common Stock outstanding after this offering.
See "Principal and Selling Shareholders."
(2) Assumes the exercise of stock options and warrants to purchase 2,387,756
shares of Common Stock at a weighted average exercise price of $7.37 per
share, which were exercisable as of October 3, 1998. Does not include the
exercise of stock options to purchase 862,551 shares at a weighted average
exercise price of $7.11 per share, which were not exercisable as of October
3, 1998. See "Management--Stock Option and Incentive Plans" and "Description
of Capital Stock--Options and Warrants." Does not include the exercise of
warrants to purchase 5,513 shares at an exercise price of $8.82 per share
issued as of November 30, 1998. See "Certain Transactions--GE Financing and
Restructuring of GE Warrants."
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The Consolidated Statements of Operations Data presented below for the years
ended December 30, 1995, December 28, 1996 and January 3, 1998 and the nine
months ended October 3, 1998 and the Consolidated Balance Sheet Data as of
December 28, 1996, January 3, 1998 and October 3, 1998 are derived from the
Company's consolidated financial statements included elsewhere in this
Prospectus, which have been audited by KPMG Peat Marwick LLP, independent
certified public accountants, and should be read in conjunction with those
consolidated financial statements and notes thereto. The Consolidated Statements
of Operations Data presented below for the year ended December 31, 1994 and the
Consolidated Balance Sheet Data as of December 31, 1994 and December 30, 1995
are derived from audited consolidated financial statements of the Company not
included herein. The Consolidated Statement of Operations Data presented below
for the year ended December 31, 1993 and the Consolidated Balance Sheet Data as
of December 31, 1993 are derived from the unaudited consolidated financial
statements of the Company which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information set forth therein. The
Consolidated Statements of Operations Data presented below for the nine months
ended September 27, 1997 and the Pro Forma Consolidated Statements of Operations
Data for all periods shown, are derived from the Company's unaudited
consolidated financial statements included elsewhere in this Prospectus which,
in the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
information set forth therein. The consolidated results of operations for the
nine months ended October 3, 1998 are not necessarily indicative of the results
to be expected for the entire year ending January 2, 1999 or for any future
period. The information presented below under the caption "Selected Operating
Data" is unaudited.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED(1) ENDED
----------------------------------------------------------- -----------
DEC. 31, DEC. 31, DEC. 30, DEC. 28, JAN. 3, SEPT. 27,
1993 1994 1995 1996 1998 1997
----------- ----------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales..................................... $ 14,041 $ 30,472 $ 68,629 $ 102,028 $ 184,430 $ 126,470
Cost of sales................................. 5,820 11,052 28,833 38,521 66,629 44,886
----------- ----------- ----------- --------- --------- -----------
Gross margin................................ 8,221 19,420 39,796 63,507 117,801 81,584
Operating expenses:
Sales and marketing......................... 7,391 16,331 34,164 54,814 99,218 69,476
General and administrative.................. 3,583 6,386 10,221 12,457 16,505 11,593
----------- ----------- ----------- --------- --------- -----------
Total operating expenses.................. 10,974 22,717 44,385 67,271 115,723 81,069
----------- ----------- ----------- --------- --------- -----------
Operating income (loss)....................... (2,753) (3,297) (4,589) (3,764) 2,078 515
Other income (expense), net................... 1 (74) 29 79 (4,783) (3,023)
----------- ----------- ----------- --------- --------- -----------
Income (loss) before income taxes............. (2,752) (3,371) (4,560) (3,685) (2,705) (2,508)
Income tax expense............................ -- -- -- -- 141 16
----------- ----------- ----------- --------- --------- -----------
Net loss...................................... $ (2,752) $ (3,371) $ (4,560) $ (3,685) $ (2,846) $ (2,524)
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Cumulative preferred dividends................ -- -- -- $ (900) $ (900) $ (675)
Net loss available to common shareholders..... $ (2,752) $ (3,371) $ (4,560) $ (4,585) $ (3,746) $ (3,199)
Net loss per share(2):
Basic....................................... $ (2.16) $ (2.65) $ (3.16) $ (2.61) $ (1.59) $ (1.39)
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Diluted..................................... $ (2.16) $ (2.65) $ (3.16) $ (2.61) $ (1.59) $ (1.39)
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Weighted average common shares:
Basic....................................... 1,272 1,274 1,444 1,753 2,353 2,309
Diluted..................................... 1,272 1,274 1,444 1,753 2,353 2,309
Pro forma net income(3)....................... $ 1,583 $ 162
--------- -----------
--------- -----------
Pro forma net income per share, diluted(3).... $ 0.08 $ 0.01
--------- -----------
--------- -----------
Pro forma weighted average common shares,
diluted(4).................................. 19,114 18,890
<CAPTION>
OCT. 3,
1998
---------
<S> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales..................................... $ 178,835
Cost of sales................................. 62,290
---------
Gross margin................................ 116,545
Operating expenses:
Sales and marketing......................... 95,231
General and administrative.................. 13,932
---------
Total operating expenses.................. 109,163
---------
Operating income (loss)....................... 7,382
Other income (expense), net................... (6,447)
---------
Income (loss) before income taxes............. 935
Income tax expense............................ 1,348
---------
Net loss...................................... $ (413)
---------
---------
Cumulative preferred dividends................ $ (675)
Net loss available to common shareholders..... $ (1,088)
Net loss per share(2):
Basic....................................... $ (0.40)
---------
---------
Diluted..................................... $ (0.40)
---------
---------
Weighted average common shares:
Basic....................................... 2,746
Diluted..................................... 2,746
Pro forma net income(3)....................... $ 5,988
---------
---------
Pro forma net income per share, diluted(3).... $ 0.30
---------
---------
Pro forma weighted average common shares,
diluted(4).................................. 19,694
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED(1) ENDED
----------------------------------------------------------- -----------
DEC. 31, DEC. 31, DEC. 30, DEC. 28, JAN. 3, SEPT. 27,
1993 1994 1995 1996 1998 1997
----------- ----------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Stores open at period-end(5).................. 19 35 68 143 200 190
Average square footage of stores open during
period(6)................................... 668 642 703 768 866 866
Sales per square foot(6)...................... $ 401 $ 442 $ 611 $ 622 $ 666 $ 460
Average store age (in months at period end)... 5 12 15 15 22 20
Comparable store sales increase(7)............ -- 57.6% 59.8% 26.1% 36.8% 26.7%
<CAPTION>
OCT. 3,
1998
---------
<S> <C>
SELECTED OPERATING DATA:
Stores open at period-end(5).................. 244
Average square footage of stores open during
period(6)................................... 895
Sales per square foot(6)...................... $ 543
Average store age (in months at period end)... 26
Comparable store sales increase(7)............ 26.9%
</TABLE>
<TABLE>
<CAPTION>
DEC. 31, DEC. 31, DEC. 30, DEC. 28, JAN. 3, OCT. 3,
1993 1994 1995 1996 1998 1998
----------- ----------- --------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 635 $ 3,770 $ 6,862 $ 2,422 $ 12,670 $ 9,579
Working capital...................................... 260 2,614 2,734 (7,809) 757 3,606
Total assets......................................... 5,873 14,243 23,838 29,794 57,241 63,323
Long-term debt, less current maturities.............. 109 77 40 1,162 19,511 24,244
Mandatorily redeemable preferred stock............... 10,130 18,669 27,625 27,612 27,612 27,612
Total common shareholders' deficit................... (7,333) (10,592) (14,779) (18,216) (21,038) (20,356)
</TABLE>
- ------------------------------
(1) Except for the year ended January 3, 1998, which included 53 weeks, all
years presented included 52 weeks.
(2) See Note 11 of Notes to Consolidated Financial Statements.
(3) Includes pro forma adjustments for (i) the elimination of non-cash interest
expense associated with a put warrant, the put feature of which will
terminate upon the consummation of this offering, (ii) the elimination of
interest expense associated with repayment of $15.0 million of the Company's
outstanding indebtedness from the proceeds of this offering, and (iii)
related tax effects. See Pro Forma Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
(4) Gives effect to the conversion of all outstanding shares of preferred stock
into Common Stock upon the consummation of this offering, the dilutive
effect of outstanding options and warrants, and shares to be issued upon the
consummation of this offering.
(5) Includes Select Comfort stores operated in leased departments within larger
retail stores (one at December 28, 1996, September 27, 1997 and January 3,
1998 and four at October 3, 1998).
(6) For stores open during the entire period indicated.
(7) Stores enter the comparable store calculation in their 13th full month of
operation. The number of comparable stores used to calculate such data were
13, 32, 65, 138, 107 and 182 for 1994, 1995, 1996, 1997 and the nine months
ended September 27, 1997 and October 3, 1998, respectively.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED CONSOLIDATED FINANCIAL DATA" AND THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS AND THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AND
THE NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. EXCEPT FOR THE
HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS PROSPECTUS
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHENEVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN "RISK FACTORS," AS
WELL AS THOSE DISCUSSED ELSEWHERE HEREIN. SEE "CAUTIONARY LANGUAGE REGARDING
FORWARD-LOOKING STATEMENTS."
OVERVIEW
Select Comfort was founded in 1987 and has become the leading vertically
integrated manufacturer, specialty retailer and direct marketer of innovative
air beds and sleep-related products. The Company's initial focus was on its
direct marketing operations which have grown in depth and sophistication and now
provide critical support for the Company's retail and road show distribution
channels. Since the Company's first retail stores were opened in 1992, an
increasing percentage of the Company's net sales has occurred at the Company's
retail stores, and retail store sales now account for a majority of the
Company's net sales. In 1994, the Company established its road show distribution
channel, which focuses primarily on markets where the Company does not have
retail stores.
The Company's vertically integrated operations and control over its three
separate but complementary distribution channels enable it to develop and
maintain direct customer relationships as well as leverage its advertising
dollars. The Company's sales generation is driven by targeted print, radio and
television media which generate customer inquiries that historically were
pursued primarily through the Company's direct marketing operations. As the
Company's retail store base has expanded, the Company believes it has been able
to further leverage the direct marketing infrastructure and improve the process
of converting inquiries into sales. The Company has also enhanced its marketing
programs at its retail stores to focus more on increasing customer traffic,
including a number of in-store activities and promotions. The Company believes
that its direct marketing operations will also continue to play a significant
role in building consumer awareness and product sales. The Company believes that
its sales will continue to grow for the foreseeable future as the Company
increases its advertising expenditures and opens additional retail stores, and
as consumer awareness of the Company's products and brand name increases. The
magnitude of future sales growth will depend on the ability of the Company to
create greater awareness of the Company's products and brand name, the
effectiveness and efficiency of the Company's advertising, the ability of the
Company to generate consumer inquiries and drive consumer traffic to its retail
stores, and the ability of the Company to convert customer inquiries into
orders.
The Company's retail operations included 143 stores as of December 28, 1996,
200 stores as of January 3, 1998 and 244 stores, including four leased
departments within larger retail stores (three in Bed Bath & Beyond stores), at
October 3, 1998. The Company plans to have approximately 264 retail stores,
including 13 leased departments in Bed Bath & Beyond stores, by the end of 1998,
and plans to open approximately 50 additional retail stores in 1999. In
addition, the Company expects to expand its leased department concept in 1999.
The Company expects that approximately 46% of the 1998 retail store openings,
including leased departments, will be in new markets. As of October 3, 1998, the
Company had closed four stores.
Historically, the Company has experienced strong comparable store sales
growth, reporting increases of 26.1%, 36.8% and 26.9% in 1996, 1997 and the
first nine months of 1998, respectively. The Company believes this performance
is due to increased awareness of the Select Comfort brand and its product
20
<PAGE>
benefits, the relatively young age of the Company's store base and various
initiatives implemented in recent periods related to the Company's increased
emphasis on the retail distribution channel. These initiatives include (i) a
change in focus of advertising toward brand awareness, (ii) the evolution of the
Company's retail store operations, including improvements in store design, and
(iii) the closer integration of the Company's direct marketing and retail
distribution channels. Comparable store sales results in the future will be
influenced by a variety of factors. See "Risk Factors--Fluctuations in
Comparable Store Sales Results."
The Company's advertising expenditures increased from $5.5 million in 1994
to $28.3 million in 1997. The Company expenses advertising costs as incurred as
a component of sales and marketing expenses, although the Company believes that
advertising expenditures provide significant benefits beyond the period in which
they are expensed. The Company also expenses pre-opening costs associated with
new retail stores as incurred. The Company's future advertising expenditures
will depend on the effectiveness and efficiency of the advertising in creating
awareness of the Company's products and brand name, generating consumer
inquiries and driving consumer traffic to the Company's retail stores. Although
advertising expenditures are expected to continue to increase in the foreseeable
future, such increases are expected to be at a lower rate than historical
increases.
The Company believes its historical operating losses have been primarily the
result of an aggressive retail store opening strategy, a relatively immature
store base, significant marketing, advertising and research and development
expenditures, and the development of a substantial corporate infrastructure to
support future growth. Future increases in net sales and the achievement of
long-term profitability will depend upon greater consumer awareness and
acceptance of the Company's products, the opening and successful performance of
new retail stores, and continued improvement in the performance of its current
stores as they mature. There can be no assurance that the Company will be able
to achieve or sustain its historical sales growth or profitability in the
future, on a quarterly or annual basis. See "Risk Factors-- History of Operating
Losses; Uncertain Profitability."
In connection with its March 1997 $15.0 million debt financing, the Company
issued a warrant that contained a put feature. This put feature requires the
Company to record the warrant as long-term debt at its fair value. Furthermore,
any change in the fair value of this warrant is required to be reflected as
interest expense, which resulted in non-cash interest expense of $3.3 million,
$1.9 million and $5.2 million during 1997 and the nine months ended September
27, 1997 and October 3, 1998, respectively. The put feature of this warrant will
be eliminated upon the closing of this offering with the result that the warrant
will be reclassified from long-term debt to common shareholders' equity, and
there will be no further interest expense associated with the warrant. Until
such time, the Company will be required to recognize any increases in the fair
value of this warrant, which will be based on valuations as determined by a
third party, as a non-cash interest expense and the amount of such non-cash
interest expense may be substantial in the periods up to and including the
period in which this offering is consummated. See "Pro Forma Consolidated
Financial Statements."
A portion of the net proceeds from this offering is intended to be used to
repay the Company's March 1997 $15.0 million debt financing. As a result of this
repayment, the Company will be required to write off certain deferred assets
associated with such indebtedness in the period in which such repayment occurs.
This charge is estimated to be approximately $1.7 million at the time of such
repayment and will be recorded as an extraordinary charge.
In November 1998, the Company agreed to reduce the conversion price of its
Series E Preferred Stock from $8.82 to $8.20 per share. This reduction of the
conversion price will have no impact on the net income (loss) of the Company.
However, for purposes of calculating net income (loss) per share in the period
in which the initial public offering is completed, net income available to
common shareholders will be reduced by an amount equal to the 77,155 incremental
shares issuable as a result in this change multiplied by the initial public
offering price.
21
<PAGE>
At October 3, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $1.6 million. Future earnings will
result in the elimination of the Company's net operating loss carryforwards,
increasing the Company's effective tax rate.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's
results of operations expressed as percentages of net sales. Percentage amounts
may not total due to rounding.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-------------------------------------------------------------
YEAR ENDED NINE MONTHS ENDED
----------------------------------- ------------------------
DEC. 30, DEC. 28, JAN. 3, SEPT. 27, OCT. 3,
1995 1996 1998 1997 1998
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales...................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................................. 42.0 37.8 36.1 35.5 34.8
----------- ----------- --------- ----------- -----------
Gross margin................................................. 58.0 62.2 63.9 64.5 65.2
Operating expenses:
Sales and marketing.......................................... 49.8 53.7 53.8 54.9 53.3
General and administrative................................... 14.9 12.2 8.9 9.2 7.8
----------- ----------- --------- ----------- -----------
Total operating expenses................................... 64.7 65.9 62.7 64.1 61.0
----------- ----------- --------- ----------- -----------
Operating income (loss)........................................ (6.7) (3.7) 1.1 0.4 4.1
Other income (expense), net.................................... 0.0 0.1 (2.6) (2.4) (3.6)
----------- ----------- --------- ----------- -----------
Income (loss) before income taxes.............................. (6.6) (3.6) (1.5) (2.0) 0.5
Income tax expense............................................. 0.0 0.0 0.1 0.0 0.8
----------- ----------- --------- ----------- -----------
Net loss....................................................... (6.6)% (3.6)% (1.5)% (2.0)% (0.2)%
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
</TABLE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 27, 1997 AND OCTOBER 3, 1998
NET SALES. Net sales increased 41.4% from $126.5 million for the first nine
months of 1997 to $178.8 million for the first nine months of 1998, primarily
due to an increase in unit sales. The components of the increase in net sales
were (i) a $20.5 million increase associated with the opening of 54 new retail
stores from September 27, 1997 through October 3, 1998, (ii) a $17.2 million
increase associated with an increase of 26.9% in comparable store sales over the
comparable period of the prior year, resulting primarily from the continuing
maturation of stores, and (iii) a $13.6 million increase in direct marketing
sales. For a significant portion of the third quarter of 1997, due to a UPS work
stoppage, UPS was unable to deliver the Company's products within acceptable
time periods, causing delays in deliveries to customers and requiring the
Company to use alternative carriers. Also, during this period, the Company
converted its manufacturing and financial operations to a new integrated
information system. These factors resulted in higher than normal customer
returns and canceled orders, lower order volumes and substantially increased
freight charges, which the Company estimates negatively impacted its operating
income by approximately $3.9 million in the second half of 1997.
GROSS MARGIN. Gross margin increased from 64.5% for the first nine months
of 1997 to 65.2% for the first nine months of 1998 primarily due to improved
purchasing through volume discounts and better relationships with key suppliers
and improved leverage of fixed manufacturing costs over higher unit volumes.
SALES AND MARKETING. Sales and marketing expenses increased 37.1% from
$69.5 million in the first nine months of 1997 to $95.2 million in the first
nine months of 1998, and decreased slightly as a percentage of net sales from
54.9% in the first nine months of 1997 to 53.3% in the first nine months of
1998. The increase in the dollar amount of sales and marketing expenses was
primarily due to the opening
22
<PAGE>
of 54 new retail stores from September 27, 1997 through October 3, 1998,
increased advertising expenditures to support the Company's growth, and higher
commissions, percentage rents and freight expense related to the higher net
sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
20.2% from $11.6 million in the first nine months of 1997 to $13.9 million in
the first nine months of 1998, but decreased as a percentage of net sales from
9.2% in the first nine months of 1997 to 7.8% for the first nine months of 1998.
The increase in the dollar amount of general and administrative expenses was
primarily due to increased spending to provide infrastructure to support overall
net sales growth. The decrease in general and administrative expenses as a
percentage of net sales was primarily due to improved leverage of fixed costs
over the increase in net sales.
OTHER INCOME (EXPENSE), NET. Other expense increased from $3.0 million in
the first nine months of 1997 to $6.4 million in the first nine months of 1998
primarily due to an increase in interest expense associated with the Company's
March 1997 $15.0 million debt issuance, offset in part by the interest income
associated with the proceeds thereof. Other expense in the first nine months of
1998 included $5.2 million of non-cash interest expense relating to the change
in the fair value of an outstanding put warrant compared with $1.9 million in
the first nine months of 1997.
COMPARISON OF YEARS ENDED DECEMBER 28, 1996 AND JANUARY 3, 1998
NET SALES. Net sales increased 80.8% from $102.0 million in 1996 to $184.4
million in 1997 primarily due to an increase in unit sales. The components of
the net sales increase were (i) a $36.6 million increase associated with the
opening of 58 new retail stores in 1997, (ii) a $27.4 million increase in direct
marketing sales, and (iii) a $16.1 million increase associated with an increase
of 36.8% in comparable store sales over the prior year, resulting primarily from
the continuing maturation of stores. For a significant portion of the third
quarter of 1997, due to a UPS work stoppage, UPS was unable to deliver the
Company's products within acceptable time periods, causing delays in deliveries
to customers and requiring the Company to use alternative carriers. Also, during
this period, the Company converted its manufacturing and financial operations to
a new integrated information system. These factors resulted in higher than
normal customer returns and canceled orders, lower order volumes and
substantially increased freight charges, which the Company estimates negatively
impacted its operating income by approximately $3.9 million in the second half
of 1997.
GROSS MARGIN. Gross margin increased from 62.2% in 1996 to 63.9% in 1997
primarily due to improved purchasing through volume discounts and better
relationships with key suppliers and improved leverage of fixed manufacturing
costs over higher unit volumes.
SALES AND MARKETING. Sales and marketing expenses increased 81.0% from
$54.8 million in 1996 to $99.2 million in 1997, and increased slightly as a
percentage of net sales from 53.7% in 1996 to 53.8% in 1997. The increase in the
dollar amount of sales and marketing expenses was primarily due to the opening
of 58 new retail stores in 1997, higher commissions, percentage rents and
freight expenses related to the higher level of net sales, increased advertising
expenditures to support the Company's growth, and an increase in freight charges
due to the UPS strike.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
32.5% from $12.5 million in 1996 to $16.5 million in 1997, but decreased as a
percentage of net sales from 12.2% in 1996 to 8.9% in 1997. The increase in the
dollar amount of general and administrative expenses was primarily due to
increased infrastructure to support overall net sales growth. The decrease in
general and administrative expenses as a percentage of net sales was primarily
due to improved leverage of fixed costs over the increase in net sales.
OTHER INCOME (EXPENSE), NET. Other income (expense) decreased from $0.1
million of other income in 1996 to $4.8 million of other expense in 1997
primarily due to (i) the inclusion of $3.3 million of non-cash
23
<PAGE>
interest expense relating to the change in the fair value of an outstanding put
warrant and (ii) interest expense associated with the Company's March 1997 $15.0
million debt issuance, offset in part by the interest income associated with the
proceeds thereof.
COMPARISON OF YEARS ENDED DECEMBER 30, 1995 AND DECEMBER 28, 1996
NET SALES. Net sales increased 48.7% from $68.6 million in 1995 to $102.0
million in 1996, primarily due to an increase in unit sales. The components of
the net sales increase were (i) a $21.5 million increase associated with the
opening of 77 new retail stores in 1996, (ii) a $6.4 million increase in direct
marketing sales, and (iii) a $4.7 million increase associated with an increase
of 26.1% in comparable store sales over the prior year, resulting primarily from
the continuing maturation of stores.
GROSS MARGIN. Gross margin increased from 58.0% in 1995 to 62.2% in 1996.
The increase in gross margin was primarily due to improved purchasing through
volume discounts and better relationships with key suppliers, the elimination of
supplier problems that adversely affected the second half of 1995 (during which
certain of the Company's former suppliers were unable to supply newly designed
components in a timely manner) and improved leverage of fixed manufacturing
costs over higher unit volumes.
SALES AND MARKETING. Sales and marketing expenses increased 60.4% from
$34.2 million in 1995 to $54.8 million in 1996, and increased as a percentage of
net sales from 49.8% in 1995 to 53.7% in 1996. The increase in the percentage of
net sales was primarily due to the opening of 77 new retail stores in 1996,
higher commissions, percentage rents and freight charges related to the higher
level of net sales and advertising expenditures to support the Company's growth.
The increase as a percentage of net sales was primarily due to advertising
expenditures increasing at a rate greater than the increase in net sales, and
retail store net sales (which have higher sales and marketing costs as a
percentage of net sales) increasing at a rate greater than overall net sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
21.9% from $10.2 million in 1995 to $12.5 million in 1996, but decreased as a
percentage of net sales from 14.9% in 1995 to 12.2% in 1996. The increase in the
dollar amount of general and administrative expenses was primarily due to
increased infrastructure to support overall net sales growth. The decrease as a
percentage of net sales was primarily due to improved leverage of fixed costs
over the increase in net sales.
24
<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly results of
operations for the Company's 11 fiscal quarters ended October 3, 1998. The
unaudited quarterly information includes all normal recurring adjustments which
management considers necessary for a fair presentation of the information shown.
The results of operation for any quarter will not necessarily be indicative of
the results that may be achieved for a full year or any future quarter.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MAR. 30, JUNE 29, SEPT. 28, DEC. 28, MAR. 29, JUNE 28, SEPT. 27,
1996 1996 1996 1996 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................. $ 22,263 $ 24,775 $ 24,302 $ 30,688 $ 36,004 $ 46,074 $ 44,392
Cost of sales......................... 8,757 9,516 9,460 10,788 12,839 16,157 15,890
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross margin........................ 13,506 15,259 14,842 19,900 23,165 29,917 28,502
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing................. 12,442 12,592 13,278 16,502 21,370 22,366 25,740
General and administrative.......... 3,094 3,090 2,968 3,305 3,618 4,471 3,504
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses.......... 15,536 15,682 16,246 19,807 24,988 26,837 29,244
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)............... (2,030) (423) (1,404) 93 (1,823) 3,080 (742)
Other income (expense), net........... 68 (14) 44 (19) (70) (1,784) (1,169)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes..... (1,962) (437) (1,360) 74 (1,893) 1,296 (1,911)
Income tax expense.................... -- -- -- -- 12 -- 4
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)..................... $ (1,962) $ (437) $ (1,360) $ 74 $ (1,905) $ 1,296 $ (1,915)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Cumulative preferred dividends........ $ (225) $ (225) $ (225) $ (225) $ (225) $ (225) $ (225)
Net income (loss) available to common
shareholders........................ $ (2,187) $ (662) $ (1,585) $ (151) $ (2,130) $ 1,071 $ (2,140)
Net income (loss) per share (1):
Basic............................... $ (1.34) $ (0.39) $ (0.87) $ (0.08) $ (1.02) $ 0.44 $ (0.88)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Diluted............................. $ (1.34) $ (0.39) $ (0.87) $ (0.08) $ (1.02) $ 0.07 $ (0.88)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Weighted average common shares (1):
Basic............................... 1,634 1,710 1,829 1,841 2,081 2,410 2,437
Diluted............................. 1,634 1,710 1,829 1,841 2,081 14,333 2,437
PERCENTAGE OF NET SALES
-----------------------------------------------------------------------------------------
Net sales............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales......................... 39.3 38.4 38.9 35.2 35.7 35.1 35.8
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross margin........................ 60.7 61.6 61.1 64.8 64.3 64.9 64.2
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing................. 55.9 50.8 54.6 53.8 59.4 48.5 58.0
General and administrative.......... 13.9 12.5 12.2 10.8 10.0 9.7 7.9
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses.......... 69.8 63.3 66.9 64.5 69.4 58.2 65.9
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)............... (9.1) (1.7) (5.8) 0.3 (5.1) 6.7 (1.7)
Other income (expense), net........... 0.3 (0.1) 0.2 (0.1) (0.2) (3.9) (2.6)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes..... (8.8) (1.8) (5.6) 0.2 (5.3) 2.8 (4.3)
Income tax expense.................... -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)..................... (8.8)% (1.8 )% (5.6 )% 0.2% (5.3 )% 2.8% (4.3)%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
JAN. 3, APR. 4, JULY 4, OCT. 3,
1998 1998 1998 1998
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Net sales............................. $ 57,960 $ 58,671 $ 60,129 $ 60,035
Cost of sales......................... 21,743 21,080 20,466 20,744
----------- ----------- --------- ---------
Gross margin........................ 36,217 37,591 39,663 39,291
----------- ----------- --------- ---------
Operating expenses:
Sales and marketing................. 29,742 32,260 31,695 31,276
General and administrative.......... 4,912 4,294 4,302 5,336
----------- ----------- --------- ---------
Total operating expenses.......... 34,654 36,554 35,997 36,612
----------- ----------- --------- ---------
Operating income (loss)............... 1,563 1,037 3,666 2,679
Other income (expense), net........... (1,760) (1,305) (1,050) (4,092)
----------- ----------- --------- ---------
Income (loss) before income taxes..... (197) (268) 2,616 (1,413)
Income tax expense.................... 125 150 706 492
----------- ----------- --------- ---------
Net income (loss)..................... $ (322) $ (418) $ 1,910 $ (1,905)
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Cumulative preferred dividends........ $ (225) $ (225) $ (225) $ (225)
Net income (loss) available to common
shareholders........................ $ (547) $ (643) $ 1,685 $ (2,130)
Net income (loss) per share (1):
Basic............................... $ (0.22) $ (0.26) $ 0.60 $ (0.72)
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Diluted............................. $ (0.22) $ (0.26) $ 0.11 $ (0.72)
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Weighted average common shares (1):
Basic............................... 2,475 2,478 2,820 2,938
Diluted............................. 2,475 2,478 15,088 2,938
Net sales............................. 100.0% 100.0% 100.0% 100.0%
Cost of sales......................... 37.5 35.9 34.0 34.6
----------- ----------- --------- ---------
Gross margin........................ 62.5 64.1 66.0 65.4
----------- ----------- --------- ---------
Operating expenses:
Sales and marketing................. 51.3 55.0 52.7 52.1
General and administrative.......... 8.5 7.3 7.2 8.9
----------- ----------- --------- ---------
Total operating expenses.......... 59.8 62.3 59.9 61.0
----------- ----------- --------- ---------
Operating income (loss)............... 2.7 1.8 6.1 4.5
Other income (expense), net........... (3.0) (2.2) (1.7) (6.8)
----------- ----------- --------- ---------
Income (loss) before income taxes..... (0.3) (0.5) 4.4 (2.4)
Income tax expense.................... 0.2 0.3 1.2 0.8
----------- ----------- --------- ---------
Net income (loss)..................... (0.6 )% (0.7 )% 3.2% (3.2)%
----------- ----------- --------- ---------
----------- ----------- --------- ---------
</TABLE>
- ----------------------------------
(1) Shares of preferred stock are excluded from the calculation of net income
(loss) per share for all periods for which the Company reported a net loss.
Upon the consummation of this offering, all shares of preferred stock will
be converted to shares of Common Stock and included in weighted average
shares outstanding for purposes of computing net income (loss) per share.
25
<PAGE>
The Company's quarterly operating results may fluctuate significantly as a
result of a variety of factors, including increases or decreases in comparable
store sales, the timing, amount and effectiveness of advertising expenditures,
any changes in return rates, the timing of new store openings and related
expenses, competitive factors, net sales contributed by new stores, any
disruptions in third party delivery services and general economic conditions and
consumer confidence. The Company's business is also subject to some seasonal
influences, with heavier concentrations of sales during the fourth quarter
holiday season due to higher mall traffic. During the third quarter of 1997, the
UPS work stoppage resulted in delayed delivery of the Company's products,
requiring that the Company use alternative carriers. Additionally, during that
period, the Company converted its manufacturing and financial operations to a
new integrated information system, which further contributed to delays in
fulfilling customer orders. These factors resulted in higher than normal
customer returns, canceled orders and substantially increased freight charges,
which had a material adverse effect on the Company's operating results in the
second half of 1997.
A substantial portion of the Company's operating expenses is related to
sales and marketing expenses, including costs associated with opening new stores
and advertising and marketing expenditures. The level of such spending cannot be
adjusted quickly and is based, in significant part, on the Company's
expectations of future customer inquiries and net sales. Furthermore, the
Company has often realized a substantial portion of its net sales in the last
month of a quarter, with such net sales frequently concentrated in the last
weeks or days of a quarter, due in part to its promotional schedule. If there is
a shortfall in expected net sales or in the conversion rate of customer
inquiries, the Company may be unable to adjust its spending in a timely manner
and the Company's business, financial condition and operating results may be
materially adversely affected. The Company's results of operations for any
quarter are not necessarily indicative of the results that may be achieved for a
full year or any future quarter.
The Company expects to incur certain charges in the period in which this
offering is consummated in connection with an outstanding put warrant and with
the repayment of certain indebtedness with a portion of the net proceeds of this
offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been the sale of equity
securities and a $15.0 million senior subordinated debt financing transaction
completed in March 1997. Primary uses of cash have been for the development and
manufacturing of the Company's air bed product line, sales and marketing
expenses, costs associated with the opening of new retail stores and
manufacturing facilities and other required infrastructure and general corporate
purposes, including working capital. The Company had working capital of
approximately $3.6 million at October 3, 1998.
Net cash used in operating activities for 1995 was approximately $404,000
and consisted primarily of a net loss adjusted for non-cash expenses and
increases in inventories and accounts receivable, partially offset by increases
in accounts payable and accruals. Net cash provided by operating activities in
1996 was approximately $3.1 million and consisted primarily of increases in
accounts payable and accruals, partially offset by a net loss adjusted for
non-cash expenses and increases in inventories, accounts receivable and prepaid
expenses. Net cash provided by operating activities in 1997 was approximately
$7.3 million and consisted primarily of increases in accounts payable, accruals
and net loss adjusted for non-cash expenses, partially offset by increases in
accounts receivable, inventories and prepaid expenses. Net cash provided by
operating activities in the first nine months of 1997 was approximately $5.5
million and consisted primarily of increases in accounts payable, accruals and
net loss adjusted for non-cash expenses, partially offset by increases in
inventories and prepaid expenses. Net cash provided by operating activities in
the first nine months of 1998 was approximately $2.6 million and consisted
primarily of net loss adjusted for non-cash expenses partially offset by
increases in accounts receivable and inventories.
Beginning in May 1997, the Company began offering an unsecured revolving
credit arrangement to finance purchases through a third party bank. Amounts owed
to the bank by the Company's customers
26
<PAGE>
aggregated $65.8 million at October 3, 1998. The bank's current commitment
extends to a maximum of $75.0 million of receivables outstanding. The Company
expects to increase the amount of this commitment before the end of 1998. In
connection with all purchases financed under these arrangements, the bank pays
the Company an amount equal to the total amount of purchases net of promotional
related discounts and less amounts retained for returned products and limited
recourse on bad debts. Pursuant to its agreement with the Company, the bank had
retained $1.9 million, $3.9 million and $10.1 million as of September 27, 1997,
January 3, 1998 and October 3, 1998, respectively.
Net cash used in investing activities was approximately $5.6 million, $10.1
million, $10.7 million, $9.0 million and $6.7 million in the years 1995, 1996,
1997 and the first nine months of 1997 and the first nine months of 1998,
respectively. Investing activities consisted of purchases of property and
equipment for new retail stores in all periods as well as for a new
manufacturing and distribution facility and the conversion to a new information
system in 1997.
Net cash provided by financing activities for 1995 was approximately $9.1
million and consisted primarily of proceeds from a preferred stock issuance. Net
cash provided by financing activities for 1996, 1997 and the first nine months
of 1997 was approximately $2.6 million, $13.6 million and $13.8 million,
respectively, and consisted primarily of proceeds from debt issuances, partially
offset by debt repayments. Net cash provided by financing activities for the
first nine months of 1998 was approximately $931,000 and consisted primarily of
proceeds from a Common Stock issuance, partially offset by debt repayments.
At October 3, 1998, the Company had 244 retail stores (including four leased
departments). The Company plans to have approximately 264 retail stores,
including 13 leased departments in Bed Bath & Beyond stores, by the end of 1998,
and plans to open approximately 50 retail stores in 1999. In addition, the
Company expects to expand its leased department concept within larger retail
stores in 1999. Management expects that new stores will be leased on terms
generally comparable to those of existing store leases. In addition, the Company
plans to open a third manufacturing and distribution facility in Salt Lake City
during the first half of 1999. The Company anticipates that capital expenditures
in 1998 and 1999 will be approximately $8.2 million and $15.0 million,
respectively, based on currently planned store openings, the planned new
manufacturing and distribution facility and the central office facilities and
systems necessary to support such additional stores.
The Company believes cash generated from operations will be sufficient to
satisfy its anticipated working capital needs and that capital expenditure
requirements through at least the end of 1999 will be funded primarily by
proceeds from the offering. The Company believes cash generated from operations
and proceeds from the offering remaining at the end of 1999 will be used to meet
long-term liquidity needs, although additional financing may be required.
IMPACT OF YEAR 2000
STATE OF READINESS. Beginning in early 1996, the Company included certain
Year 2000 initiatives and remediation plans in its broader information systems
strategic plan. In early 1998, the Company retained an independent consultant to
assess the adequacy of the Company's Year 2000 initiatives and remediation
plans. All of the Company's essential information technology ("IT") systems have
been inventoried and remediation plans for any Year 2000 issues have been
implemented. The Company's remediation plans included the development of Year
2000 compliant applications for the Company's order entry, customer service and
point of sale systems in Fall 1996. In the third quarter of 1997, the Company
purchased and implemented an enterprise information system used in manufacturing
operations, material planning, inventory management, order processing, financial
management and human resources applications, which system will be upgraded to be
Year 2000 compliant in the first half of 1999. The Company purchased Year 2000
compliant upgrades to the Company's payroll application in 1997 and the
Company's telephone system in 1998. The Company has purchased Year 2000
compliant upgrades for its software applications for customer inquiries and for
processing and tracking warranty claims and returns. The Company anticipates
these upgrades will be completed in the first half of 1999. With the
implementation of these
27
<PAGE>
applications and upgrades, the Company expects that all of its core applications
and IT systems will be Year 2000 compliant by the end of the second quarter of
1999.
In August 1998, the Company formed a Year 2000 project team ("Year 2000
Project Team") to identify and address Year 2000 compliance matters, including
the Company's significant non-IT systems which are comprised of the embedded
technology used in the Company's buildings, plant, equipment and other
infrastructure. The Year 2000 Project Team is currently in the process of
inventorying all material Year 2000 issues in the Company's non-IT systems.
Based on a general assessment of the Company's significant non-IT systems
performed prior to the formation of the Year 2000 Project Team, the Company
expects that remedial action for all of its non-IT systems will be completed by
the end of the second quarter of 1999.
During the first quarter of 1998, the Company initiated discussions with its
significant suppliers regarding their plans to remediate Year 2000 issues. The
Company sent each of its significant suppliers a questionnaire inquiring as to
the magnitude of their Year 2000 issues and the status of their readiness. The
Company has received assurances from a majority of its suppliers that such third
parties will become Year 2000 compliant in a timely manner. The Company has not
received responses from all of the third parties with whom it does business. In
addition to the questionnaires, the Company has established a supplier
certification program under which the Company's suppliers must meet rigorous
standards relating to quality, service, the ability to deliver materials on a
timely basis and Year 2000 compliance. To date, nine of the Company's key
suppliers were certified and other authorized suppliers are in the process of
seeking certification. All of the Company's key suppliers, including the
Company's Eastern European supplier of air chambers, have notified the Company
that they are or will be Year 2000 compliant during 1999.
In addition to suppliers, the Company also relies upon governmental
agencies, utility companies, telecommunication service companies and other
service providers outside of the Company's control. There can be no assurance
that such governmental agencies or other third parties will not suffer a Year
2000 business disruption that could have a material adverse effect on the
Company's business, financial condition and operating results.
COSTS TO ADDRESS THE YEAR 2000 ISSUE. The Company estimates it has
incurred, through October 3, 1998, approximately $165,000 to address Year 2000
issues. The Company estimates that by mid-1999 it will incur an additional
$100,000 to complete its remediation plans required for its IT systems, which
includes systems software costs and consulting fees. The Company does not have
an estimate on Year 2000 remediation costs that may be required for its non-IT
systems, but the Company believes that such costs will not have a material
adverse effect on the Company's business, financial condition and operating
results.
RISKS PRESENTED BY THE YEAR 2000 ISSUE. As the process of inventorying
non-IT systems proceeds, the Company may identify systems that present a Year
2000 risk. In addition, if any third parties who provide goods or services
essential to the Company's business activities fail to appropriately address
their Year 2000 issues, such failure could have a material adverse effect on the
Company's business, financial condition and operating results. For example, a
Year 2000 related disruption on the part of the financial institutions which
process the Company's credit card sales would have a material adverse effect on
the Company's business, financial condition and operating results.
CONTINGENCY PLANS. The Company's Year 2000 Project Team's initiatives
include the development of contingency plans in the event the Company has not
completed all of its remediation plans in a timely manner. In addition, the Year
2000 Project Team is in the process of developing contingency plans in the event
that any third parties who provide goods or services essential to the Company's
business fail to appropriately address their Year 2000 issues. The Year 2000
Project Team expects to conclude the development of these contingency plans by
the end of the second quarter of 1999.
28
<PAGE>
BUSINESS
OVERVIEW
Select Comfort, "The Air Bed Company," is the leading vertically integrated
manufacturer, specialty retailer and direct marketer of premium quality, premium
priced, innovative air beds and sleep-related products. Select Comfort believes
it is revolutionizing the mattress industry by offering a differentiated product
through a variety of service-oriented distribution channels. Select Comfort's
products have been clinically proven to address broad-based consumer sleep
problems through the Company's proprietary air bed technology and the ability to
customize the firmness on each side of the mattress at the touch of a button.
Extensive testing has confirmed that Select Comfort's proprietary technology
allows its air beds to provide greater comfort and support by more naturally
contouring to the body, thereby providing better spinal alignment, reduced
pressure points, greater relief of lower back pain, greater overall comfort and
better quality sleep in comparison with traditional mattress products. The
Company's air beds are marketed exclusively under the Select Comfort brand. The
Company seeks to build awareness of its air beds and brand as being synonymous
with a better night's sleep.
Unlike traditional mattress manufacturers, the Company sells its products
directly to consumers through three complementary, service-oriented distribution
channels, including Company-operated retail stores and leased departments within
larger retail stores, direct marketing operations and road show events. Each of
these channels is operated by knowledgeable Company employees trained in the
latest innovations in sleep technology and the benefits and features of the
Select Comfort product line. The Company's retail operations included 244 stores
in 43 states, including four leased departments (three in Bed Bath & Beyond
stores), at October 3, 1998. The Company plans to have approximately 264 retail
stores, including 13 leased departments in Bed Bath & Beyond stores, by the end
of 1998, and plans to open approximately 50 retail stores in 1999. In addition,
the Company expects to expand its leased department concept in 1999. The
Company's direct marketing operations include approximately 90 sales
professionals responsible for servicing customer inquiries and making outbound
calls. Road show events are held in selected markets where the Company has high
inquiry levels but does not have a retail presence, as well as at home shows and
consumer product shows, state fairs and similar events. The Company advertises
through targeted print, radio and television media which generate customer
inquiries that are converted into sales through each of the Company's three
distribution channels. The Company's net sales have grown from $14.0 million in
1993 to $184.4 million in 1997, and its comparable store sales have increased
26.1%, 36.8% and 26.9% for 1996, 1997 and the nine months ended October 3, 1998,
respectively.
INDUSTRY BACKGROUND
The U.S. mattress market is large and dominated by four large manufacturers
primarily focused on traditional innerspring mattresses. According to the
International Sleep Products Association ("ISPA"), 35.3 million mattress and
foundation units were sold in the U.S. in 1997, generating approximately $3.6
billion in wholesale sales, which the Company believes represented approximately
$6.7 billion in retail sales. ISPA estimates that innerspring mattresses
accounted for approximately 90% of total U.S. mattress sales in 1997 and,
according to FURNITURE/TODAY, the four largest manufacturers (Sealy, Serta,
Simmons and Spring Air) accounted for nearly 62% of wholesale dollar sales. The
balance of the mattress market is served by over 700 manufacturers, primarily
operating on a regional basis. The traditional mattress distribution channels
and the estimated market shares in 1997, according to FURNITURE/TODAY, were
furniture stores (42%), specialty bedding stores (24%), department stores (11%),
national chains (8%), wholesale clubs (6%) and others, including telephone and
electronic shopping channels (9%). Between 1993 and 1997, specialty bedding
stores increased their share of the market from 19% to 24%.
The Company believes there is increasing demand for products designed to
provide better quality sleep and promote overall wellness and that the
traditional mattress industry has not been responsive to
29
<PAGE>
these consumer preferences. The National Sleep Foundation estimates that
approximately 50% of U.S. consumers have suffered from sleep deprivation or poor
quality sleep from a variety of causes, including physical causes such as spinal
misalignment, pressure points or lower back pain. In addition, independent
researchers have reported that approximately 80% of all adults will experience
lower back pain at some point in their lives, with most of these cases
associated with spinal misalignment and aging. The Company believes that the
sleep surface is an important factor in sleep quality, and clinical research
verifies that an improved sleep surface can contribute to better quality sleep
and greater relief of lower back pain.
The Company believes that the market for mattresses and related accessories
has been changing as consumers are purchasing larger, higher quality and more
expensive mattresses, as well as more innovative and higher quality accessories.
Factors influencing this trend are the increasing awareness among consumers of
the importance of sleep as a component of health and the aging and increasing
affluence of the baby boom generation. The Company believes that consumers are
increasingly health conscious and motivated to purchase higher quality products
for the home.
THE SELECT COMFORT SOLUTION
Select Comfort believes it is revolutionizing the mattress industry by
offering a clinically proven, differentiated product through a variety of
service-oriented distribution channels. The Company's products address
broad-based consumer sleep problems, resulting in a better night's sleep. The
Company's proprietary technology allows its air beds to more naturally contour
to the body, thereby generally providing better spinal alignment, reduced
pressure points, greater relief of lower back pain, greater overall comfort and
better quality sleep in comparison with traditional mattress products. A
firmness control system allows customers to independently customize the firmness
on each side of the Select Comfort air bed to their optimal level of comfort and
support. Unlike traditional mattress manufacturers, the Company sells its
products directly to consumers through three complementary distribution
channels. These channels allow the Company to interact directly with consumers
to enhance customer satisfaction and build brand loyalty. These channels also
provide consumers with greater accessibility and convenience in purchasing
Select Comfort products.
Select Comfort has commissioned a number of independent clinical studies
which indicate that Select Comfort air beds provide consumers with substantial
benefits over traditional innerspring mattresses. A recent commissioned study
conducted at the Stanford University Sleep Research Center indicated that
participants using Select Comfort air beds fell asleep faster, experienced fewer
brainwave sleep disturbances and spent less time in the lighter sleep stages and
a greater percentage of overall sleep in deeper stages of sleep, including rapid
eye movement (REM) sleep, in comparison to alternative mattress products.
Another commissioned study conducted at the University of Memphis confirmed that
spinal misalignments were generally lower on Select Comfort air beds in
comparison with both a leading innerspring mattress and a leading waterbed. The
Company has also performed extensive testing which confirms that Select Comfort
air beds reduce pressure points in comparison with innerspring mattresses and
waterbeds. Three additional commissioned studies on the relationship between
lower back pain, sleep quality and the sleep surface have found, on average,
that 95% of lower back pain sufferers reported reduced pain, 88% experienced
improved sleep quality and 80% experienced increased physical functioning when
sleeping on a Select Comfort air bed in comparison with an innerspring mattress.
These findings support the Company's market research and customer testimonials
which indicate that sleeping on a Select Comfort air bed results in a
significant reduction in medical visits and fewer days of work lost due to back
pain.
The Company has been granted 16 U.S. patents, has applications pending for
seven U.S. patents and maintains an active research and development department.
Select Comfort plans to continue its research of sleep technology, testing of
the consumer benefits from sleeping on its air beds and development of new
products and product improvements designed to provide a better night's sleep.
30
<PAGE>
BUSINESS AND GROWTH STRATEGY
The Company is the leading vertically integrated manufacturer, specialty
retailer and direct marketer of innovative air beds and sleep-related products.
Select Comfort intends to leverage its position by increasing awareness of air
bed technology and further establishing the Select Comfort brand to be
synonymous with a better night's sleep, premium quality products and superior
customer service. Key elements of the Company's business strategy are set forth
below.
PROVIDE A SUPERIOR PRODUCT. Select Comfort's products differ from
traditional mattresses by addressing broad-based consumer sleep problems through
the greater comfort and support of sleeping on air and through the ability to
customize the firmness on each side of the mattress at the touch of a button.
Extensive testing has confirmed that Select Comfort air beds generally provide
better spinal alignment, reduced pressure points, greater relief of lower back
pain, greater overall comfort and better quality sleep in comparison with
traditional mattress products. The Company is committed to the continuing
development of new products to enhance the sleep experience and has recently
introduced the Imperial Series at the top of the product line, quieter firmness
control systems, remote control gauges with digital settings, finer fabrics and
covers, new generations of foams and foundation systems and enhanced border
walls.
EDUCATE CONSUMERS AND PROVIDE SUPERIOR CUSTOMER SERVICE. Traditionally, the
mattress industry has relied heavily on promotional pricing and has not been
characterized by high levels of customer service. Since consumer education and
customer service are critical to convey the features and benefits of Select
Comfort's innovative air beds and to achieve high levels of customer acceptance
and satisfaction, the Company seeks to provide a more friendly and informative
sales environment. In order to ensure superior customer satisfaction, retail,
direct marketing and road show sales professionals receive extensive training in
sleep technology and the Company's proprietary technology and products,
including features and benefits, assembly and service procedures and policies.
The Company also maintains a customer service department of approximately 50
employees who receive similar training. As part of its continuous efforts to
maximize convenience for consumers, the Company offers a 90 Night Trial, and has
recently begun testing in-home assembly services in selected markets.
INCREASE PRODUCT AWARENESS AND BRAND RECOGNITION. The Company believes that
the single most important factor in increasing sales is increasing consumer
awareness of the features and benefits of Select Comfort air beds. The Company's
highest brand awareness and market share is in Minneapolis, where it has its
largest advertising budget and largest number of retail stores. The Company
plans to increase product awareness and brand recognition nationwide through
continued investment in advertising and expansion of its retail store base. The
Company plans to expand its retail store base in both existing and new markets,
and through a combination of mall-based locations, leased departments and, to a
lesser extent, alternative locations such as strip shopping centers.
LEVERAGE COMPLEMENTARY DISTRIBUTION CHANNELS. The Company distributes
directly to customers through Company-operated retail stores, direct marketing
operations and road show events. The Company's control over its three
complementary distribution channels provides significant competitive advantages,
including the ability to (i) leverage the Select Comfort brand name to generate
inquiries and convert inquiries to sales, (ii) interact directly with consumers
to enhance customer satisfaction and build brand loyalty, (iii) train sales
professionals regarding the Company's products and to provide superior customer
service, (iv) utilize data from its direct marketing operations to support
retail and road show site selection, new store openings and road show events,
and (v) leverage advertising and marketing programs across multiple markets and
distribution channels. In addition, the Company's complementary distribution
channels provide customers with greater accessibility and convenience in the
purchase of its products.
CAPITALIZE ON VERTICALLY INTEGRATED OPERATIONS. The Company maintains
control over all phases of its business, including the design, manufacturing,
marketing, distribution and service of its air beds. This allows the Company to
maintain rigorous product quality standards, establish coordinated and
integrated
31
<PAGE>
sales and marketing efforts, carefully manage the presentation and pricing of
its products and focus on customer satisfaction and service. As a result of its
direct relationships with consumers, the Company is better positioned to
understand and respond to consumer needs and market trends.
PURSUE ADDITIONAL GROWTH OPPORTUNITIES. The Company has begun testing the
offering of in-home assembly services in selected markets through regional and
national providers in order to increase overall sales and enhance customer
satisfaction by providing greater convenience to the customer. The Company also
plans to introduce product enhancements and new products such as sofabeds,
adjustable frames, space saver foundations with storage compartments and sound
vibration mattresses providing relaxation and therapeutic effects. The Company
is also exploring opportunities to market the Company's products through health
care providers, including chiropractors and health maintenance organizations.
PRODUCTS
Select Comfort provides a line of high quality air beds, foundations and
sleep accessories. The current line of products represents over 10 years of
research and development by the Company designed to revolutionize the way people
sleep.
AIR BEDS
Select Comfort air beds have been engineered to more naturally contour to
the body, thereby generally providing better spinal alignment, reduced pressure
points, greater relief of lower back pain, greater overall comfort and better
quality sleep in comparison with traditional mattress products. Every Select
Comfort air bed has a patented air chamber as its functioning core and comes
with a firmness control system ("FCS") that allows the customer to easily and
instantly customize the firmness of the mattress at the touch of a button. All
of the Company's air beds, except twin size mattresses, are available with
independent air chambers for each side of the mattress, allowing customized
firmness for each sleep partner. The Company's Imperial and Ultra Series of air
beds feature a wireless remote control with a digital display of the user's
"Sleep Number," which reflects the level of firmness and allows the customer to
more easily adjust and readjust the firmness level to the customer's ideal Sleep
Number based on personal preference.
Select Comfort air beds feature either a traditional cover or a pillowtop
style cover that provides extra cushioning. The covers are constructed with
sanitized and hypoallergenic Damask ticking made from blends of
polyester/polypropylene or cotton/rayon, or from 100% rayon. Select Comfort air
beds are manufactured in a broad array of sizes and styles, including all
standard bed sizes and a waterbed replacement size that fits into a customer's
existing waterbed frame. The Company restaged its product line in the spring of
1998 to include new cover designs as well as the addition of a new zoned foam in
its pillowtop models. This restaging also included a newly redesigned, "whisper
quiet" FCS for the Imperial and Ultra Series and all new marketing materials.
The Company's air beds can be assembled by customers in a simple process
requiring no tools and can be moved more easily than a traditional mattress and
box spring. Furthermore, because air is the primary support material of the
mattress, Select Comfort air beds do not lose their shape or support over time
like a traditional mattress and box spring. Each air bed is accompanied with
instructional product brochures and easy to follow assembly instructions, is
certified by Underwriter's Laboratories and is backed by a 20-year limited
warranty and Select Comfort's 90 Night Trial and Better Night's Sleep Guarantee.
The following paragraphs describe the Select Comfort air bed product line.
CLASSIC SERIES. The Classic Series is the Company's entry level product
that is competitively priced with a broad array of mattress alternatives. The
Classic Series targets consumers seeking better support and comfort at the most
affordable price. The FCS for the Classic Series is equipped with two
individual, wired hand controls to instantly customize firmness. The Classic
Series mattress is 7 1/2 inches thick and features a traditional cover.
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ELITE SERIES. In comparison with the Classic Series, the Elite Series
features a quieter and more technologically advanced FCS with two individual,
ergonomically designed, wired hand controls for instant firmness adjustment. The
Elite Series mattress is 9 1/2 inches thick in the pillowtop model and features
more padding for greater comfort and foam sidewalls for greater stability. The
Elite Series is also available with a traditional cover.
ULTRA SERIES. The Ultra Series is the Company's most popular air bed,
featuring a new "whisper quiet" FCS with a single wireless, ergonomically
designed, hand control with a lighted digital display of each user's Sleep
Number for precisely customized firmness. This lighted digital display feature
allows the user to more easily adjust and readjust the firmness level to the
user's ideal Sleep Number based on personal preference. The Ultra Series
mattress is 11 1/2 inches thick in the pillowtop model that features a Belgian
Damask cover. The Ultra Series is also available with a traditional cover.
IMPERIAL SERIES. The Imperial Series is the Company's new premium air bed,
incorporating the Company's most advanced technology. The Imperial Series
mattress is 13 1/2 inches thick and has a unique multi-layer foam system for the
utmost in comfort and support. Available in pillowtop style only, the cover
features an ornate Belgian Damask ticking with a 1930s vintage antique pattern
and is filled with a blend of highly resilient fibrefill and cashmere. Like the
Ultra Series, the Imperial comes with the new "whisper quiet" FCS with a single
wireless, ergonomically designed, hand control with a lighted digital display of
each user's Sleep Number.
The current retail prices for the Company's air beds (excluding foundations)
are as follows:
<TABLE>
<CAPTION>
FULL/
TWIN DOUBLE QUEEN KING
--------- ----------- --------- ---------
<S> <C> <C> <C> <C>
CLASSIC SERIES
Traditional....................................... $ 299 $ 459 $ 549 $ 749
ELITE SERIES
Pillowtop......................................... $ 599 $ 849 $ 949 $ 1,199
Traditional....................................... $ 449 $ 699 $ 799 $ 1,049
ULTRA SERIES
Pillowtop......................................... $ 899 $ 1,149 $ 1,249 $ 1,499
Traditional....................................... $ 749 $ 999 $ 1,099 $ 1,349
IMPERIAL SERIES
Pillowtop......................................... $ 1,799 N/A $ 2,249 $ 2,599
</TABLE>
FOUNDATIONS
Select Comfort also offers matching foundations that enhance the performance
of its mattresses. A substantial majority of the Company's customers purchase
sets, which include a mattress and foundation. The Company's foundations are
assembled by the customer or by an assembly service provider from rigid plastic
components and provide solid, uniform support beneath the mattress to ensure
that the air bed provides the intended support. Due to their rigid plastic
component structure, Select Comfort foundations, unlike traditional box springs,
do not lose their shape or support over time and are stronger, lighter and more
easily moved. The foundations for the Imperial, Ultra and Elite Series also
feature a padded top for enhanced comfort. Retail prices for foundations
currently range from $199 to $399.
ACCESSORY PRODUCTS
Select Comfort also offers a line of accessory products, including high
quality mattress pads with zoned heating and specialty pillows, all of which are
hypoallergenic and designed to provide comfort and better quality sleep. The
Company's specialty pillows include a neck pillow designed to provide neck
support and comfort, a silent sleeper contoured pillow designed to reduce
snoring, a memory foam pillow
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that molds to the shape of the head and neck, a natural down pillow for superior
comfort and a side sleeper pillow. All of these specialty products are
manufactured by third parties and marketed under the Select Comfort brand name.
The Company also sells a line of bed frames manufactured by a third party.
SALES GENERATION
Select Comfort's vertically integrated operations and control over its three
separate but complementary distribution channels enable it to develop and
maintain direct customer relationships, as well as leverage its advertising
dollars. The Company's sales generation is driven by targeted print, radio and
television media which generate customer inquiries that historically were
pursued primarily through the Company's direct marketing operations. As the
Company's retail store base has expanded, the Company believes it has been able
to further leverage its direct marketing infrastructure and improve the process
of converting customer inquiries into sales. The Company is continually
assessing opportunities to further coordinate and leverage its three
distribution channels to direct potential customers to the channel which best
suits their needs and to increase conversion ratios.
RETAIL STORES
Since the Company's first retail stores were opened in 1992, an increasing
percentage of the Company's net sales has occurred at the Company's retail
stores, and retail store sales now account for a majority of the Company's net
sales. At October 3, 1998, the Company had 244 stores in 43 states, including
four leased departments (three in Bed Bath & Beyond stores). The Company plans
to have approximately 264 retail stores, including 13 leased departments in Bed
Bath & Beyond stores, by the end of 1998, and plans to open approximately 50
retail stores in 1999. The Company and Bed Bath & Beyond have agreed upon sites
for the 10 additional leased departments to be opened in 1998. The Company
expects to expand its leased department concept in 1999, with the magnitude of
the expansion depending on the performance of the leased departments opened in
1998. The expansion of the leased department concept may involve additional Bed
Bath & Beyond locations or locations within other retailers. The Company does
not currently have any commitment from Bed Bath & Beyond or any other retailer
regarding the opening of any leased departments in 1999.
SELECT COMFORT RETAIL STORE LOCATIONS
(AS OF OCTOBER 3, 1998)
[Map of United States Showing Retail Store Locations]
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STORE ENVIRONMENT. Select Comfort seeks to offer a unique and innovative
store environment that attracts consumers, showcases the Company's products and
encourages trial of its air beds. The Company's retail store design is intended
to convey a sense of innovation, sophistication and quality that reinforces the
Company's brand image and reputation as sleep experts. The Company's current
store design consists of graphically intriguing "dream walls" against a backdrop
of clouds designed to invite consumers to try the Company's innovative products.
The Company's retail stores are principally showrooms, averaging approximately
900 square feet, with several display models from the Company's line of air beds
and a full display of the Company's branded accessories. The retail stores
typically maintain an inventory of accessory products, but little or no
inventory of air beds. The Company's leased departments, at approximately 240
square feet, are significantly smaller than its retail stores.
The Company's sales professionals play an important role in creating an
inviting and informative retail environment. These professionals receive
extensive training regarding the features and benefits of the Company's
proprietary technology and products as well as on the overall importance of
sleep quality. This enables them to more effectively introduce consumers to the
Company's innovative air beds, emphasize the features and benefits that
distinguish Select Comfort air beds from traditional mattresses, determine the
consumers' needs, encourage consumers to experience the comfort and support of
the air beds and answer questions regarding the Company's products.
SITE SELECTION. The Company intends to continue to open retail stores in
both existing markets and new markets. New geographic markets that the Company
expects to enter in 1999 include Providence, Rhode Island, Burlington, Vermont,
Montgomery, Alabama, Savannah, Georgia, Augusta, Georgia and Sarasota, Florida.
In selecting new store sites, Select Comfort generally seeks high-traffic mall
locations of approximately 800 to 1,200 square feet within regional malls in
major metropolitan areas. The Company conducts extensive analyses of potential
store sites and bases its selection on a number of factors, including the
location within the mall, demographics of the trade area, the specifications of
the mall (including size, age, sales per square foot and the location of the
nearest competitive mall), the perceived strength of the mall's anchor stores,
the performance of other specialty retail tenants in the mall and the number of
direct marketing inquiries received from the area surrounding the mall.
Clustering of retail stores within a metropolitan retail market is also a key
consideration in order to leverage the Company's advertising.
The Company is also evaluating alternative locations for its retail stores,
such as strip shopping centers. The Company currently has two retail stores in a
strip shopping center and is evaluating the economics of such locations. If such
locations prove to be viable, future strip shopping center locations will be
selected on the basis of demographics in the market, the perceived quality of
the location within the market, the number of direct marketing inquiries
received from the area and the extent to which such a location would contribute
to the clustering of the Company's retail stores within an advertising market.
The Company expects that the retail stores in which its additional leased
departments will be opened will be in a variety of locations, including malls
and strip shopping centers.
NEW STORE ECONOMICS. The Company's 142 stores that were open for all of
1997 generated average net sales of approximately $576,000 and average net sales
per square foot of approximately $666 during 1997. The Company's newer stores
typically generate lower sales volumes than its more mature stores, although the
average first year sales of each new class of stores by year of opening has
increased each year since 1992. The Company's average cost for leasehold
improvements, furniture and fixtures for stores opened in 1997 was approximately
$101,000 per store. The Company's retail stores have an average payback period
of approximately two years. Pre-opening costs are expensed as incurred and
average under $10,000 per store. Working capital requirements are not
significant since the Company typically maintains relatively little inventory at
the retail stores.
MARKETING AND ADVERTISING. The Company has supported new store openings
with local print and radio advertisements and mailings to direct response
inquiries in the market. The Company also uses local radio personalities and
newspaper advertising in certain of the markets where it has multiple retail
stores.
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Local radio personalities have been particularly effective in driving inquiries
with personal endorsements that build product credibility. The Company also uses
local radio and print advertisements and promotional offers during high mall
traffic periods, such as three-day holiday weekends, and in-store events
including live remote broadcasts and promotional contests. The Company also
relies on its unique store design and word-of-mouth referrals to attract
potential customers. To encourage word-of-mouth referrals and build brand
loyalty, new customers are enrolled in the "Comfort Club," which entitles
members to receive $50 for each referral of a customer that puchases an airbed,
as well as special promotional offers.
MANAGEMENT AND EMPLOYEES. The Company's stores are currently organized into
four regional areas and 30 geographic districts, with approximately eight stores
in each district. Each regional sales manager oversees approximately eight
geographic districts. The regional sales managers average over 10 years of
multi-unit retail experience. Each district has a district sales manager who is
responsible for the sales and operations and who reports to a regional sales
manager. The district sales managers frequently visit stores to review
merchandise presentation, sales force product knowledge, financial performance
and compliance with operating standards. The district sales managers average
over six years of experience as an area or district manager in specialty
retailing. The typical staff of a Select Comfort store consists of one store
manager and two full-time sales professionals. In order to maintain high
operating standards, the Company recruits store managers who typically have one
to four years of experience as a store manager in specialty retailing. The sales
professionals devote substantially all of their efforts to sales and customer
service, which includes helping customers and generating and responding to
inquiries. In addition, to promote consumer education, ensure customer
satisfaction and generate referrals, the sales professionals place follow-up
calls to customers who have made recent purchases. Since minimal inventory is
maintained at the retail stores, store managers and sales professionals have
relatively few inventory management, store merchandising and related
administrative duties.
TRAINING AND COMPENSATION. All store personnel receive comprehensive
on-site training on the Company's technology and sleep expertise, the features
and benefits of the Company's air beds, sales and customer service techniques
and operating policies and guidelines. Initial training programs are reinforced
through detailed product and operating manuals and periodic performance
appraisals. All store sales professionals receive base compensation and are
entitled to commissions based on individual and store-wide performance. Regional
and district sales managers are eligible to receive, in addition to their base
compensation, incentive compensation for the achievement of performance
objectives by the stores within their respective regions and districts.
DIRECT MARKETING OPERATIONS
Many consumers' initial exposure to the Select Comfort air bed is through
the Company's direct marketing operations. Typically, an interested consumer
will respond to one of the Company's advertisements by calling the Company's
toll-free number. On this call, one of the direct marketing sales professionals
captures information from the consumer, begins the consumer education process,
takes orders, or, if appropriate, directs the consumer to the Company's other
distribution channels. The telemarketing operations are conducted by
knowledgeable and well-trained sales professionals, including a group of over 50
sales professionals who field incoming direct marketing inquiries, and over 30
sales professionals who make outbound calls to consumers who have previously
contacted the Company. The direct marketing operations also include a database
marketing department that is responsible for mailings of product and promotional
information to direct response inquiries.
INQUIRY GENERATION. In the direct marketing channel, the Company's
advertising message is communicated through targeted print, radio, infomercials
and television advertisements, as well as through product brochures, videos and
other product and promotional materials mailed in response to consumer inquiries
at various intervals. As the Company's advertising budget has expanded over the
last few years, the direct marketing channel has relied more heavily on
nationally syndicated radio personalities, such as
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<PAGE>
Paul Harvey and Rush Limbaugh, and more recently on television commercials and
infomercials. The Company's direct marketing operations continually monitor the
effectiveness and efficiency of the Company's advertising through tracking the
cost per inquiry ("CPI") and cost per order ("CPO") of its advertising, using
focus groups to evaluate the effectiveness of its advertising messages and using
sophisticated media buying techniques.
INQUIRY CONVERSION AND INTEGRATION WITH OTHER DISTRIBUTION CHANNELS. From
each inquiry, the Company's sales professionals strive to capture a variety of
information, including name, address, telephone number, the current mattress
product used, sleep habits and health issues that may be adversely affected by
poor quality sleep. The Company maintains a database of information on
approximately 3.7 million inquiries, including customers who have purchased an
air bed from the Company, from which the direct marketing channel is able to
take orders, or, if appropriate, direct the consumer to the Company's other
distribution channels. The database also provides valuable marketing
information. The Company's telemarketing sales professionals begin the consumer
education process during the initial call from the consumer. Subsequent to the
initial inquiry, the Company's database marketing department contacts the
consumer on a scheduled format through mailings of printed product and
educational information, a video on the features and benefits of Select Comfort
air beds, outbound telephone calls and periodic promotional offerings.
The direct marketing operations also support the Company's retail and road
show operations through referrals, as well as mailings to direct marketing
inquiries in selected markets in advance of retail store openings and road
shows. As the Company's base of retail stores has expanded, the direct marketing
sales professionals have increasingly been able to refer direct marketing
inquiries to a convenient retail store location, improving the process of
converting inquiries into sales and providing the consumer with a choice of
service venues. The Company intends to continue to pursue opportunities to
leverage its direct marketing infrastructure and expertise to enhance its retail
and road show distribution channels.
TRAINING AND COMPENSATION. The Company's direct marketing sales
professionals receive ongoing training and must pass various tests to move
through the four sales professional levels, each with a separate pay scale.
Direct marketing sales professionals are paid base compensation plus
commissions.
ROAD SHOW EVENTS
The Company's third distribution channel is road show events in selected
markets where the Company typically does not have a retail presence, as well as
at home shows and consumer product shows, state fairs and similar events. Select
Comfort sales professionals, supported by local print and radio advertising and
advance mailings to direct marketing inquiries, travel to various cities to
demonstrate the Company's products in temporary showrooms or in booths at trade
shows and educate consumers about the benefits of Select Comfort's air beds. The
Company uses inquiries generated from the direct marketing channel to determine
road show sites and typically will have approximately 10 road show events,
ranging from three days to two weeks in duration, in process at any given time.
The Company has found this distribution channel to be very effective in
converting direct response customers who want to see the product before
purchasing, but do not live close to a retail store location. The road show
events also provide the Company with valuable information for use in feasibility
analyses for retail store sites. The road show sales professionals receive both
base and incentive compensation.
MARKETING AND ADVERTISING
The primary objective of the Company's marketing and advertising strategy is
to create awareness of the features and benefits of Select Comfort air beds and
to build recognition of the Select Comfort brand as the leader in innovative air
beds, sleep expertise, superior quality and excellent customer service. The
Company's corporate marketing department is responsible for implementing a
coordinated, integrated and consistent marketing and advertising strategy across
the Company's three complementary distribution
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channels. The Company continues to spend the majority of its advertising budget
on direct marketing, which also drives traffic to the expanding base of retail
stores. As the base of retail stores continues to grow, the Company plans to
dedicate more of its advertising budget to the retail stores.
In 1997, the Company spent approximately $28.3 million on advertising
expenses. The majority of the Company's advertising budget is devoted to print
and long and short-form television advertising, with the balance primarily
devoted to radio advertising with well-known national personalities, such as
Paul Harvey and Rush Limbaugh, as well as local radio personalities in selected
retail markets. The Company also intends to continue to pursue various
alternative channels, such as catalogs, the Internet and targeted marketing
programs. Management believes that additional demand for the Company's products
will be created by increased consumer awareness of the benefits of Select
Comfort air beds.
CONSUMER EDUCATION AND CUSTOMER SERVICE
Select Comfort is committed to achieving its goal of world class customer
satisfaction and service. The Company intends to achieve this goal through a
variety of means designed to (i) educate consumers on the benefits of Select
Comfort products, (ii) deliver superior quality products, (iii) maximize the
Company's direct relationship with consumers, (iv) maximize convenience for the
consumer, and (v) respond quickly to consumer needs and inquiries. The Company
believes that educating consumers about the features and benefits of Select
Comfort air beds is critical to the success of its marketing and sales efforts,
and devotes considerable time and resources to training programs for its retail,
direct marketing and road show sales professionals. The retail stores also have
displays that provide customers with the latest information on sleep technology
and the features and benefits of Select Comfort air beds.
The Company's controlled distribution channels optimize the Company's direct
contact with its customers and allow the Company to respond quickly to customer
service inquiries and enhance customer satisfaction. The Company's multiple
distribution channels also enhance the convenience for the consumer to purchase
products through a variety of venues. In addition, the Company is currently
testing the offering of in-home assembly services in selected markets through
national and regional providers in order to provide greater convenience and
enhance customer satisfaction.
Select Comfort maintains an in-house customer service department of
approximately 50 customer service representatives who receive extensive training
in sleep technology and all aspects of the Company's products and operations.
The Company has recently implemented an interactive voice response system to
improve customer service. The Company's customer service representatives field
customer calls and also interact with each of the Company's retail stores to
address customer questions and concerns raised with retail sales professionals.
The customer service department makes outbound calls to new customers during the
90 Night Trial phase to answer questions and provide solutions to possible
problems in order to enhance customer education, build customer satisfaction and
reduce returns.
RESEARCH AND PRODUCT DEVELOPMENT
The Company has been granted 16 U.S. patents, has applications pending for
seven U.S. patents and maintains an active research and development department.
The Company's research and development department continuously seeks to enhance
the Company's knowledge of sleep dynamics and sleep technology, improve current
product performance and benefits and develop new products. The research and
development department also conducts clinical studies and product tests to
measure the benefits of the Company's air beds, enhance the Company's sleep
technology learning, develop product improvements and establish quality and
performance standards. The Company has performed extensive pressure point
testing in which Select Comfort air beds were tested against nationally
recognized innerspring mattress brands and found to be superior in reducing
pressure points. A commissioned study conducted at the University of Memphis
confirmed that spinal misalignments were generally lower on Select Comfort air
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beds in comparison with both a leading innerspring mattress and a leading
waterbed. A recent commissioned study conducted at the Stanford University Sleep
Research Center indicated that participants using Select Comfort air beds
experienced a significant improvement in the quality of their sleep in
comparison to alternative mattress products. Three additional commissioned
studies on the relationship between lower back pain, sleep quality and the sleep
surface have found, on average, that 95% of lower back pain sufferers reported
reduced pain, 88% experienced improved sleep quality and 80% experienced
increased physical functioning when sleeping on a Select Comfort air bed in
comparison with an innerspring mattress. Through customer surveys, Select
Comfort seeks consumer feedback on a regular basis to help enhance existing
products and develop new products. The Company's research and development
expenses for 1995, 1996 and 1997 were $1.4 million, $1.5 million and $1.8
million, respectively.
Since the introduction of the Company's first air bed, the Company has
continued to improve and expand its product line, including quieter firmness
control systems, remote control gauges with digital settings, finer fabrics and
covers, new generations of foams and foundation systems and enhanced border
walls. The Company is currently exploring and expects to develop, either
independently or with a strategic partner, additional product enhancements or
extensions, including adjustable frames, space saver foundations with storage
compartments and sound vibration mattresses providing relaxation and therapeutic
effects.
In August 1998, the Company entered into a license agreement with
Hillenbrand Industries, Inc. ("Hillenbrand"), a leading provider of high-end
beds used primarily in the medical market, and Hillenbrand's wholly owned
subsidiary, Sleep Options, Inc. ("Sleep Options"), pursuant to which the Company
has obtained a limited exclusive license to Sleep Options' technology relating
to various air and foam mattress structures, an articulating bed frame, a hand
control device for mattresses and related product knowledge. The license allows
the Company to leverage Hillenbrand's knowledge of sleep surface technology to
manufacture and sell these products in the North American consumer market. The
license does not permit the Company to sell these products to healthcare
institutions or through healthcare distributors. The Company is also not
permitted to manufacture or sell the articulating bed frame in combination with
an innerspring mattress. For this license, the Company has agreed to pay a
royalty based on a percentage of net sales, with certain minimum royalties. The
license agreement has an initial term of three years.
MANUFACTURING AND DISTRIBUTION
The Company's manufacturing operations are located in Minneapolis and in
Columbia, South Carolina and consist of quilting and sewing of the Company's
fabric covers for its air beds, assembly of firmness control systems and final
assembly and packaging of air beds and foundations from contract manufactured
components. The Company currently conducts its manufacturing operations on two
shifts (three shifts for sewing) and believes it has sufficient capacity to meet
anticipated increases in demand through the next 12 months. The Company plans to
open a third manufacturing and distribution facility in Salt Lake City in the
first half of 1999, primarily to serve West Coast and Southwest destinations.
The Company manufactures air beds to meet orders rather than to stock
inventory, which has enabled the Company to reduce inventory costs. Management
stresses total quality manufacturing techniques, including employee training and
team concepts designed to instill quality awareness and a performance and
customer service orientation. Select Comfort utilizes multiple employee teams to
accomplish its manufacturing objectives, rather than a continuous assembly line
approach, and seeks to enhance employee involvement, enthusiasm and concern for
quality through regular communication and meetings with employees regarding
performance objectives.
Orders are currently shipped from one of the Company's two distribution
centers, primarily via UPS, typically within 48 hours following order receipt,
and are usually received by the customer within five to eight business days
after shipment. The Company is continually evaluating alternative carriers on a
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national and regional basis, as well as recent tests in selected markets
involving providers of in-home assembly services. See "Risk Factors--Reliance on
Vendors; Foreign Sources of Supply" and "--Reliance Upon Carriers."
SUPPLIERS
The Company currently obtains all of the materials and components used to
produce its air beds from outside sources. Components for the firmness control
systems are obtained from a variety of primarily domestic sources. Quilting and
ticking materials are obtained from a supplier in Belgium and components for
foundation systems are obtained primarily from two domestic sources. The
Company's proprietary air chambers are produced to Company specifications by one
Eastern European supplier under a supply contract expiring in August 1999
(subject to automatic renewal if neither party gives 90 days' notice of non-
renewal), pursuant to which the Company is obligated to purchase certain minimum
quantities, but not all of its requirements. Either party can terminate the
contract upon 90 days notice if such party ceases to use the air chambers in its
business. The Company expects to continue the relationship with the Eastern
European supplier for the foreseeable future. The Company believes that it would
be able to procure an adequate supply of air chambers from other sources on a
timely basis if the supply contract is terminated or the Eastern European
supplier is otherwise unable to supply air chambers. The Company has recently
completed the development of an air chamber designed with new materials that
will be manufactured by a U.S. based company at a foreign manufacturing
facility. Full production of this new air chamber is expected to commence in the
fourth quarter of 1999. The Eastern European supplier is expected to provide a
second source of supply of this new air chamber during the first half of 2000.
The Company does not presently have any contract or commitment from either
supplier to manufacture the newly developed air chamber. The Company is
continuously searching for alternative designs and materials for all of its
components and materials, as well as alternative sources of supply. See "Risk
Factors--Reliance Upon Vendors; Foreign Sources of Supply."
The Company has a supplier certification program under which suppliers are
required to meet rigorous standards relating to quality, service and ability to
deliver materials on a basis compatible with the Company's demand manufacturing
system and Year 2000 compliance. To date, nine of the Company's key suppliers
have received certification and other authorized suppliers are in the process of
seeking certification. All of the Company's key suppliers, including the
Company's Eastern European supplier of air chambers, have notified the Company
that they are or will be Year 2000 compliant during 1999.
INFORMATION SYSTEMS
Since 1996, the Company has invested approximately $1.7 million in the
design, development and implementation of its integrated enterprise information
system. This system supports manufacturing operations, material planning,
inventory management, order processing, returns and warranty tracking, financial
management, human resources and distribution and tracking systems applications.
In addition, the Company's order capture and database marketing systems allow
each channel to gather inquiries and direct them to a central database, as well
as to share and develop those leads on a coordinated and efficient basis. The
Company also employs a point of sale system used at its retail operations. This
system provides for the reporting of retail orders to the manufacturing
department to speed order processing and allows retail stores to access and
interact with the Company's direct marketing database to obtain information
regarding inquiries and to report inquiries to the Company's central database.
The Company is in the process of internally developing and upgrading core
applications for customer inquiries and for processing and tracking warranty
claims and returns, which is scheduled for implementation in the first half of
1999. With the implementation of these applications, and the upgrade of the
Company's integrated enterprise systems also scheduled for the first half of
1999, all of the Company's core business applications are expected to be Year
2000 compliant. See "Risk Factors--Year 2000 Compliance"
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and "Management's Discussion and Analysis of Financial Condition Results of
Operations--Impact of Year 2000."
INTELLECTUAL PROPERTY
Certain elements of the design and function of the Select Comfort air beds
are the subject of United States and foreign patents and patent applications
owned by Select Comfort. The Company has 16 U.S. issued patents and seven U.S.
patent applications pending. The Company also held seven Canadian patents and
had six Canadian patent applications pending as of October 3, 1998.
Notwithstanding these patents and patent applications, no assurance can be given
that such rights will provide substantial protection or that others will not be
able to develop products that are similar to or competitive with the Select
Comfort air beds. The Company is not aware of any claims that any element of the
Company's air beds infringes or otherwise violates any intellectual property
rights of any third parties.
The name "Select Comfort" and the Company's logo are trademarks of the
Company registered with the United States Patent and Trademark Office. The
trademark "Select Comfort" is also registered, or the subject of pending
applications, in approximately 22 foreign countries. The Company has a number of
other registered marks, including the trademarks "Comfort Club" and "Sleep
Number," the service mark "Comfort Club," and a number of unregistered marks,
including the trademarks "90 Night Trial," "Better Night's Sleep Guarantee" and
"The Air Bed Company." The Company has a number of pending applications for
trademark registrations in the United States and selected foreign countries.
Each federally registered mark is renewable indefinitely if the mark is still in
use at the time of renewal. The Company is not aware of any material claims of
infringement or other challenges to the Company's right to use its marks. See
"Risk Factors--Intellectual Property Protection."
COMPETITION
The mattress industry is highly competitive. Participants in the mattress
industry compete primarily on price, quality, brand name recognition, product
availability and product performance, including the perceived levels of comfort
and support provided by a mattress. The Company's air beds compete with a number
of different types of mattress alternatives, including innerspring mattresses,
waterbeds, futons and other air-supported mattresses that are sold through a
variety of channels, including furniture stores, bedding specialty stores,
department stores, mass merchants, wholesale clubs, telemarketing programs,
television infomercials and catalogs. The Company believes that its success
depends in part on increasing consumer acceptance of existing products and the
continuing introduction of products that have qualities and benefits which
differentiate the Company's products from those offered by other manufacturers.
There can be no assurance that such products will receive consumer acceptance or
that the Company will continue to be able to successfully introduce such
products. See "Risk Factors--Competition."
The traditional mattress industry is characterized by a high degree of
concentration among the four largest manufacturers of innerspring mattresses
with nationally recognized brand names, including Sealy, which also owns the
Stearns & Foster brand name, Serta, Simmons and Spring Air. These manufacturers
were estimated by FURNITURE/TODAY to account for approximately 62% of wholesale
dollar sales in 1997. The balance of the mattress market is served by over 700
manufacturers, primarily operating on a regional basis. Many of these
competitors, and in particular the four largest manufacturers named above, have
greater financial, marketing and manufacturing resources and better brand name
recognition than the Company, and sell their products through broader and more
established distribution channels. The Company believes that a number of
companies, including two of the four largest manufacturers, have begun to offer
air beds. There can be no assurance that these or any other mattress
manufacturer will not aggressively pursue the air bed market. Any such
competition by the established manufacturers or new entrants into the market
could have a material adverse effect on the Company's business, financial
condition and operating results. In addition, should any of the Company's
competitors reduce prices on premium mattress products, the Company may be
required to implement price reductions in order to
41
<PAGE>
remain competitive, which could have a material adverse effect on its business,
financial condition and operating results.
There are no provisions in the Company's retail store leases that limit or
restrict competing businesses from operating in the malls in which the Company's
stores are located. The lack of such restrictions and the lack of significant
barriers to entry may result in new competition. Such competition could have a
material adverse effect on the Company's business, financial condition and
operating results.
EMPLOYEES
At October 3, 1998, the Company employed 1,466 persons, including 786 retail
store employees, 118 direct marketing employees, 50 customer service employees,
24 road show sales professionals, 343 manufacturing and distribution employees
and 145 management and administrative employees. Approximately 79 of the
Company's employees were employed on a part-time basis at October 3, 1998.
Except for managerial employees and professional support staff, all of the
Company's employees are paid on an hourly basis plus commissions for sales
associates. None of the Company's employees is represented by a labor union or
covered by a collective bargaining agreement. The Company believes that its
relations with its employees are good.
PROPERTIES
The Company currently leases all of its existing retail store locations and
expects that its policy of leasing, rather than owning, will continue as it
expands. The Company's store leases generally provide for an initial lease term
of 10 years with a mutual termination option if the Company does not achieve
certain minimum annual sales thresholds. Generally, the store leases require the
Company to pay minimum rent plus percentage rent based on net sales in excess of
certain thresholds, as well as certain operating expenses.
The Company leases 125,000 square feet of space in Minneapolis for one of
the Company's manufacturing and distribution centers, one of the Company's
direct marketing call centers, a customer service center, a research and
development center and corporate offices, which lease expires in 2004. The
Company also leases 105,000 square feet of space in Columbia, South Carolina,
for its other manufacturing and distribution center and a direct marketing call
center, which lease expires in 2003. The Company has agreed to lease
approximately 100,800 square feet in Salt Lake City for a third manufacturing
and distribution center that the Company expects to open in the first half of
1999, which lease expires in 2009.
CONSUMER CREDIT ARRANGEMENTS
In May 1997, the Company entered into an arrangement with Monogram Credit
Card Bank of Georgia (the "Bank"), an affiliate of General Electric Capital
Corporation, a creditor and warrantholder of the Company, pursuant to which the
Bank offers to the Company's qualified customers an unsecured revolving credit
arrangement to finance purchases from the Company. The Bank sets the rate,
annual fees, late fees and all other terms and conditions relating to the
customers' accounts, including collection policies and procedures, and is the
owner of the receivables. The effective interest rate is comparable to rates
generally available under similar consumer revolving credit arrangements. The
Bank's current commitment extends to a maximum of $75 million of receivables
outstanding. The Company expects to increase the amount of this commitment
before the end of 1998.
In connection with all purchases financed under these consumer credit
arrangements, the Bank pays the Company an amount equal to the total amount of
purchases net of promotional related discounts and less amounts retained for
returned products and limited recourse on bad debts. In addition, the Bank pays
to the Company service fee income equal to average receivables outstanding
multiplied by 3% through May 1997 and multiplied by 4% thereafter. During 1997
and for the nine months ended October 3, 1998, the Company had paid promotional
related discounts of $3.3 million and $4.7 million, respectively. Service
42
<PAGE>
fee income for 1997 and the nine months ended October 3, 1998 totaled $500,000
and $1.3 million, respectively. The Bank had retained $3.9 million and $10.1
million as of January 3, 1998 and October 3, 1998, respectively. As of October
3, 1998, the Bank had retained $6.3 million for returned products and $3.8
million for bad debts. Amounts retained are adjusted on a monthly basis. For
returned products, the amount retained is adjusted based on recent sales and
return rate experience. For bad debts, the amount retained is adjusted to an
amount equal to the average receivables outstanding for the most recent billing
period multiplied by 4.5%. In addition to amounts returned to the Company as a
result of these monthly adjustments, the Bank will return any remaining amounts
retained at such time as there are no receivables outstanding.
Under terms of the arrangement with the Bank, the Company is liable for all
amounts associated with returned products. The Company is also liable to the
Bank for amounts equal to net losses from bad debts, as determined under the
Bank's write-off policy, to the extent such net losses exceed 5.0% of average
receivables outstanding under the consumer credit arrangements but are less than
9.5% of such average receivables.
In the nine months ended October 3, 1998, approximately 51.0% of the
Company's net sales were financed by the Bank through these consumer credit
arrangements. The average receivable outstanding generated under these consumer
credit arrangements at September 30, 1998 was approximately $1,140, with an
aggregate amount outstanding at that date of approximately $65.8 million. As
part of its allowance for doubtful accounts, the Company maintains a reserve for
recourse that may result under its arrangement with the Bank. The amount of this
reserve at October 3, 1998 was approximately $2.6 million, representing
approximately 3.9% of the related receivables as of that date. For financial
statement purposes, the financing arrangement with the Bank has been accounted
for as a sale of receivables. See "Risk Factors-- Dependence on Consumer
Spending."
GOVERNMENTAL REGULATION
The Company's products and its marketing and advertising practices are
subject to regulation by various federal, state and local regulatory
authorities, including the Federal Trade Commission and the U.S. Food and Drug
Administration. The mattress industry also engages in advertising
self-regulation through certain voluntary forums, including the National
Advertising Division of the Better Business Bureau. The Company is also subject
to various other federal, state and local regulatory requirements, including
federal, state and local environmental regulation and regulations issued by the
U.S. Occupational Safety and Health Administration. See "Risk
Factors--Regulatory Matters."
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incident to the
ordinary course of its business. The Company believes that the outcome of all
pending legal proceedings in the aggregate will not have a material adverse
effect on its business, financial condition or operating results.
43
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
October 3, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- --- --------------------------------------------------------------------
<S> <C> <C>
H. Robert Hawthorne................... 53 President, Chief Executive Officer and Director
Daniel J. McAthie..................... 48 Executive Vice President, Chief Financial Officer, Chief Operating
Officer and Secretary
Charles E. Dorsey..................... 48 Senior Vice President of Direct Marketing and President of Select
Comfort Direct Corporation
Ronald E. Mayle....................... 40 Senior Vice President of Retail and President of Select Comfort
Retail Corporation
Gregory T. Kliner..................... 60 Senior Vice President of Operations
Ervin R. Shames(1)(2)................. 58 Chairman of the Board
Thomas J. Albani(3)................... 56 Director
Patrick A. Hopf(1)(2)................. 49 Director
Christopher P. Kirchen(1)(3).......... 55 Director
David T. Kollat(3).................... 60 Director
Kenneth A. Macke(2)................... 59 Director
Jean-Michel Valette(3)................ 38 Director
</TABLE>
- ------------------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
H. ROBERT HAWTHORNE has served as the President, Chief Executive Officer and
a Director of the Company since April 1997. From February 1992 to December 1997,
he served as President of The Pillsbury Brands Group, a subsidiary of The
Pillsbury Company, which is a subsidiary of Diageo PLC. From June 1990 to
January 1992, he was President and Chief Executive Officer of Alpo Petfoods,
then a subsidiary of Grand Metropolitan PLC. Prior to joining Alpo Petfoods, Mr.
Hawthorne was President and Chief Executive Officer of Pillsbury Canada, a
subsidiary of Diageo PLC.
DANIEL J. MCATHIE has served as Executive Vice President, Chief Financial
Officer and Secretary since October 1995. Mr. McAthie also served as Chief
Administrative Officer from October 1995 to October 1998, at which time he was
named Chief Operating Officer. From May 1990 to April 1995, Mr. McAthie held the
positions of Senior Vice President, Chief Financial Officer, Vice President and
Treasurer of Fingerhut Companies, Inc., a mail order catalog company.
CHARLES E. DORSEY has served as Senior Vice President of Direct Marketing
since January 1992 and President of Select Comfort Direct Corporation since
March 1996. From March 1988 to December 1991, Mr. Dorsey served as Chief
Operating Officer for DM Shelter, Inc., a custom packaged home company.
RONALD E. MAYLE has served as Senior Vice President of Retail of the Company
and President of Select Comfort Retail Corporation since December 1997. From
October 1996 to December 1997, Mr. Mayle served as Managing Member of Management
& Capital, a retail consulting firm. From May 1995 to October 1996, Mr. Mayle
served as an independent retail marketing consultant, primarily to a variety of
privately owned, start-up retail enterprises, advising on infrastructure and
sales and marketing strategies.
44
<PAGE>
From April 1992 to May 1995, Mr. Mayle was Vice President of Operations of
Petstuff, Inc., a subsidiary of PetsMart Inc.
GREGORY T. KLINER has served as Senior Vice President of Operations since
August 1995. From October 1986 to August 1995, Mr. Kliner served as Director of
Operations of the Irrigation Division for The Toro Company, a manufacturer of
lawn care and snow removal products and irrigation systems.
ERVIN R. SHAMES has served as a Director of the Company and Chairman of the
Board of Directors since April 1996. Since January 1995, Mr. Shames has served
as an independent management consultant to large and small consumer goods and
services companies, advising on management and sales and marketing strategies.
From December 1993 to January 1995, Mr. Shames served as the Chief Executive
Officer of Borden, Inc. and was President and Chief Operating Officer of Borden,
Inc. from July 1993 until December 1993. From June 1992 to July 1993, Mr. Shames
served as Chairman and Chief Executive Officer of The Stride Rite Corporation, a
footwear manufacturer, and was President and Chief Executive Officer of The
Stride Rite Corporation from June 1990 to June 1992. Mr. Shames is also a
director of the First Brands Corporation.
THOMAS J. ALBANI has served as a Director of the Company since February
1994. Mr. Albani served as President and Chief Executive Officer of Electrolux
Corporation, a manufacturer of premium floor care machines, from July 1991 to
May 1998. From September 1984 to April 1989, Mr. Albani was employed by
Allegheny International Inc., a home appliance manufacturing company, in a
number of positions, most recently as Executive Vice President and Chief
Operating Officer.
PATRICK A. HOPF has served as a Director of the Company since December 1991.
From August 1993 to April 1996, Mr. Hopf served as the Chairman of the Board of
Directors of the Company. Mr. Hopf was elected to the Board of Directors of the
Company in connection with the purchase agreement under which the Series A
Preferred Stock was purchased. See "Certain Transactions--Director
Relationships" and "--Voting Agreement and Stock Restriction Agreement." Mr.
Hopf has been President of St. Paul Venture Capital, Inc., a venture capital
firm, and Vice President of St. Paul Fire and Marine Insurance Company since
August 1988, and Managing General Partner of St. Paul Venture Capital IV, LLC
since its formation in January 1997. St. Paul Venture Capital IV, LLC and St.
Paul Venture Capital Affiliates Fund I, LLC, of which St. Paul Venture Capital,
Inc. is the manager for both, and St. Paul Fire and Marine Insurance Company are
investors in the Company. Mr. Hopf also serves as a director of a number of
privately held companies.
CHRISTOPHER P. KIRCHEN has served as a Director of the Company since
December 1991. Mr. Kirchen was elected to the Board of Directors of the Company
in connection with the purchase agreement under which the Series B Preferred
Stock was purchased. See "Certain Transactions--Director Relationships" and
"--Voting Agreement and Stock Restriction Agreement." Mr. Kirchen is currently
Managing General Partner of Brand Equity Ventures, a venture capital partnership
that he co-founded in March 1997. Mr. Kirchen is also a General Partner of
Consumer Venture Partners, an investor in the Company, a position he has held
since 1986. Mr. Kirchen also serves as a director of a number of privately held
companies.
DAVID T. KOLLAT has served as a Director of the Company since February 1994.
Mr. Kollat has served as President and Chairman of 22 Inc., a research and
consulting company for retailers and consumer goods manufacturers, since 1987.
From 1976 until 1987, Mr. Kollat served in various capacities for The Limited,
including Executive Vice President of Marketing and President of Victoria's
Secret Catalogue. Mr. Kollat also serves as a director of numerous companies,
including The Limited, Inc., Wolverine World Wide, Inc., Consolidated Stores,
Inc. and Cooker Restaurant Corporation.
KENNETH A. MACKE has served as a Director as a of the Company since
September 1994. Mr. Macke is General Partner of Macke Limited Partnership, a
venture capital firm and investor in the Company. He previously served as
Chairman and Chief Executive Officer of Dayton Hudson Corporation from 1984 to
1994, prior to which he was employed by Dayton Hudson in a variety of positions
beginning in 1961.
45
<PAGE>
Mr. Macke also serves as a director of Unisys Corporation, General Mills, Inc.
and Fingerhut Companies, Inc.
JEAN-MICHEL VALETTE has served as a Director of the Company since 1994. Mr.
Valette was elected to the Board of Directors of the Company in connection with
the purchase agreement under which the Series D Preferred Stock was purchased.
See "Certain Transactions--Director Relationships" and "--Voting Agreement and
Stock Restriction Agreement." Mr. Valette has served as President and Chief
Executive Officer of Franciscan Estates, Inc., a winery in Northern California,
since August 1998. Mr. Valette was a Managing Director of Hambrecht & Quist LLC
from October 1994 to August 1998 and a Senior Analyst of Hambrecht & Quist LLC
from November 1992 to October 1994. Mr. Valette is also a member of the general
partner of H&Q Select Comfort Investors, L.P., an investor in the Company and a
related party to Hambrecht & Quist LLC. Hambrecht & Quist LLC is one of the
Underwriters of this offering. From 1981 to 1983, Mr. Valette was a consultant
with The Boston Consulting Group. Mr. Valette also serves as a director of a
number of privately held companies.
BOARD OF DIRECTORS
Effective upon completion of this offering, the Board of Directors will
consist of three classes of directors, each class serving for a staggered
three-year term. The Class A directors, whose initial terms will expire at the
1999 annual shareholders meeting, will be Messrs. Kirchen, Macke and Valette.
The Class B directors, whose initial terms will expire at the 2000 annual
shareholders meeting, will be Messrs. Hopf and Shames. The Class C directors,
whose initial terms will expire at the 2001 annual shareholders meeting, will be
Messrs. Hawthorne, Kollat and Albani.
COMMITTEES
The Board of Directors has an Executive Committee, an Audit Committee and a
Compensation Committee. The Executive Committee has the authority to take all
actions that the Board as a whole is able to take, except as limited by
applicable law. The Audit Committee provides assistance to the Board in
satisfying its fiduciary responsibilities relating to accounting, auditing,
operating and reporting practices of the Company, and reviews the annual
financial statements of the Company, the selection and work of the Company's
independent auditors and the adequacy of internal controls for compliance with
corporate policies and directives. The Compensation Committee reviews general
programs of compensation and benefits for all employees of the Company and makes
recommendations to the Board concerning such matters as compensation to be paid
to the Company's officers and directors.
DIRECTOR COMPENSATION
Effective upon completion of this offering, all non-employee directors of
the Company (other than Ervin R. Shames, who is entitled to the compensation
described below) will receive $3,500 for each meeting of the Board of Directors
attended and $500 for each meeting of the Executive Committee, Audit Committee
or Compensation Committee attended. In addition, all non-employee directors
(other than Mr. Shames) will be granted, on an annual basis, an option to
purchase 2,000 shares of Common Stock exercisable at the fair market value of
the Common Stock on the date of grant for a period of up to 10 years, subject to
their continuous service on the Board of Directors. Directors who are officers
or employees of the Company do not receive additional compensation for their
services as directors. All directors are reimbursed for travel expenses for
attending meetings of the Board and any Board committees.
In April 1996, the Company entered into a Consulting Agreement with Ervin R.
Shames, Chairman of the Board, pursuant to which Mr. Shames renders certain
consulting services to the Company. Pursuant to the Consulting Agreement, Mr.
Shames received $120,000 in 1997 for consulting services rendered. See
"--Employment and Consulting Agreements."
46
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Hopf, Albani and Macke served as members of the Compensation
Committee of the Board of Directors during 1997. Mr. Hopf is the President of
St. Paul Venture Capital, Inc., Vice President of St. Paul Fire and Marine
Insurance Company and Managing General Partner of St. Paul Venture Capital IV,
LLC, and Mr. Macke is the General Partner of Macke Limited Partnership, each of
which is, directly or indirectly, an investor in the Company. For a description
of certain transactions involving these entities, see "Certain Relationships and
Related Transactions" and "Principal and Selling Shareholders." Mr. Hopf served
as Chairman of the Board of the Company from August 1993 to April 1996. No other
relationships existed during 1997 with respect to Messrs. Hopf, Albani or Macke
that would be required to be disclosed under the rules of the Securities Act.
Messrs. Hopf, Macke and Shames currently serve as members of the Compensation
Committee of the Board of Directors.
EXECUTIVE COMPENSATION
The following table describes the compensation earned in 1997 by (i) the
Chief Executive Officer of the Company; and (ii) each of the four other most
highly compensated executive officers of the Company whose salary and bonus
exceeded $100,000 in 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
- ------------------------------------------------- --------- ---------- ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
H. Robert Hawthorne(1) .......................... 1997 $ 225,000 $ 27,000 400,000 --
President and Chief Executive Officer
Mark L. de Naray(2) ............................. 1997 90,898 -- -- $ 148,515(3)
Former President and Chief Executive Officer
Daniel J. McAthie ............................... 1997 198,655 23,838 55,000 --
Executive Vice President, Chief Financial
Officer, Chief Operating Officer and Secretary
Charles E. Dorsey ............................... 1997 155,540 81,381 35,000 --
Senior Vice President of Retail and President
of Select Comfort Direct Corporation
John D. Watson(4) ............................... 1997 149,423 17,931 35,000 --
Former Senior Vice President of Corporate
Marketing
Gregory T. Kliner ............................... 1997 147,095 17,652 35,000 --
Senior Vice President of Operations
</TABLE>
- ------------------------
(1) Mr. Hawthorne became President and Chief Executive Officer of the Company
effective April 28, 1997.
(2) Mr. de Naray was President and Chief Executive Officer of the Company
through April 27, 1997.
(3) Represents severance payments in an aggregate amount of $147,115 and term
life insurance premiums in the aggregate amount of $1,400 paid by the
Company for the benefit of Mr. de Naray. See "--Separation Agreements."
(4) Mr. Watson resigned from the Company effective September 1, 1998. See
"--Separation Agreements."
47
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes stock option grants during 1997 to each of
the Company's Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME GRANTED (#) FISCAL YEAR PER SHARE DATE 5% ($) 10% ($)
- ----------------------------------- ----------- --------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
H. Robert Hawthorne................ 300,000(3) 31.3% $ 5.25 3/27/07 $ 990,509 $ 2,510,144
100,000(4) 10.4 5.25 3/27/07 330,170 836,715
Mark L. de Naray................... -- -- -- -- -- --
Daniel J. McAthie.................. 20,000(3) 2.1 5.25 3/27/07 66,034 167,343
35,000(4) 3.6 5.25 3/27/07 115,559 292,850
Charles E. Dorsey.................. 35,000(4) 3.6 5.25 3/27/07 115,559 292,850
John D. Watson..................... 35,000(4) 3.6 5.25 3/27/07 115,559 292,850
Gregory T. Kliner.................. 35,000(4) 3.6 5.25 3/27/07 115,559 292,850
</TABLE>
- ------------------------
(1) All of the options granted to the Named Executive Officers were granted
under the Company's 1997 Stock Incentive Plan. See "--Stock Option and
Incentive Plans" for a discussion of the material terms of option grants
under such plan.
(2) In accordance with the rules of the Commission, the amounts shown on this
table represent hypothetical gains that could be achieved for the respective
options if exercised at the end of the option term. These gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from
the date the respective options were granted to their expiration date and do
not reflect the Company's estimates or projections of future Common Stock
prices. The gains shown are net of the option price, but do not include
deductions for taxes or other expenses associated with the exercise. Actual
gains, if any, on stock option exercises will depend upon the future
performance of the Common Stock, the executive's continued employment with
the Company or its subsidiaries and the date on which the options are
exercised. The amounts represented in this table might not necessarily be
achieved.
(3) These options become exercisable in as nearly equal as possible monthly
installments over a 36-month period, so long as the executive remains
employed by the Company or one of its subsidiaries at that date. To the
extent not already exercisable, these options become immediately exercisable
in full upon certain changes in control of the Company and remain
exercisable for the remainder of their term. See "--Stock Option and
Incentive Plans."
(4) These options become exercisable in full upon the earlier of the following
to occur: (a) the date on which the average of the high and low sales prices
of the Company's Common Stock, as reported by the Nasdaq National Market
System, exceeds $22.00 per share for at least 30 consecutive trading days;
or (b) March 28, 2002, so long as the executive remains employed by the
Company or one of its subsidiaries at that date. To the extent not already
exercisable, these options become immediately exercisable in full upon
certain changes in control of the Company that result in consideration
received or to be received by the shareholders of the Company as a result of
such transaction exceeding $22.00 per share of Common Stock on a fully
diluted basis.
48
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table summarizes the number and value of options exercised
during 1997 and the value of options held by the Named Executive Officers at
January 3, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT JANUARY 3, 1998 AT JANUARY 3, 1998(1)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
H. Robert Hawthorne............ -- -- 75,000 325,000 $ 356,250 $ 1,543,750
Mark L. de Naray............... 180,000(2) $ 891,000 -- -- -- --
47,950(2) 237,353
84,340(2) 409,049
600(2) 2,910
173,110(2) 830,928
28,000(2) 119,000
16,000(2) 7,200
8,000(2) 0
Daniel J. McAthie.............. -- -- 80,266 84,734 408,887 413,113
Charles E. Dorsey.............. 2,000 19,400 100,490 40,910 931,592 204,738
John D. Watson................. -- -- 35,552 79,448 168,872 377,378
Gregory T. Kliner.............. -- -- 58,880 56,120 302,423 273,077
</TABLE>
- ------------------------
(1) Value based on the difference between the fair market value of one share of
Common Stock at January 3, 1998 ($10.00), as determined by the Board of
Directors, and the exercise price of the options ranging from $0.30 to $5.25
per share. Options are in-the-money if the market price of the shares
exceeds the option exercise price.
(2) Mr. de Naray exercised these options on February 20, 1997 and paid for the
shares by executing a full recourse promissory note in the amount of
$386,550. See "--Separation Agreements."
EMPLOYMENT AND CONSULTING AGREEMENTS
On April 3, 1997, the Company entered into a Letter Agreement with H. Robert
Hawthorne pursuant to which Mr. Hawthorne serves as President and Chief
Executive Officer as well as a director of the Company. Mr. Hawthorne's base
salary is $350,000 per year, and he is entitled to receive an incentive bonus if
certain performance criteria are met. Under the terms of the Letter Agreement,
Mr. Hawthorne was granted two ten-year options to purchase an aggregate of
400,000 shares of Common Stock at an exercise price of $5.25 per share. Of these
options: (i) an option to purchase 300,000 shares of Common Stock becomes
exercisable in as nearly equal as possible monthly installments over a 36-month
period, so long as Mr. Hawthorne remains employed by the Company or one of its
subsidiaries at such date and (ii) the other option is a "performance-based"
option and becomes exercisable as to 100,000 shares of Common Stock upon the
earlier of the following to occur: (a) the date on which the average of the high
and low sales prices of the Company's Common Stock, as reported by the Nasdaq
National Market System, exceeds $22.00 per share for at least 30 consecutive
trading days; or (b) March 28, 2002, so long as Mr. Hawthorne remains employed
by the Company or one of its subsidiaries at such date. Mr. Hawthorne is
entitled to a minimum severance payment of 24 months base salary in the event he
is terminated without cause.
On October 20, 1995, the Company entered into a Letter Agreement with Daniel
J. McAthie pursuant to which Mr. McAthie serves as Executive Vice President,
Chief Financial Officer and Chief Operating Officer of the Company. Mr. McAthie
receives a base salary and is entitled to receive an incentive bonus if certain
performance criteria are met. Under the terms of the Letter Agreement, Mr.
McAthie was granted
49
<PAGE>
a ten-year option to purchase 85,000 shares of Common Stock at an exercise price
of $4.80 per share. This option becomes exercisable in as nearly equal as
possible monthly installments over a 36-month period, so long as Mr. McAthie
remains employed by the Company or one of its subsidiaries at such date. Mr.
McAthie is also entitled to a minimum severance payment equal to his nine
month's then current base salary in the event of termination without cause.
On July 11, 1995, the Company entered into a Letter Agreement with Gregory
T. Kliner pursuant to which Mr. Kliner serves as Senior Vice President of
Operations of the Company. Mr. Kliner receives a base salary and is entitled to
receive an incentive bonus if certain performance criteria are met. Under the
terms of the Letter Agreement, Mr. Kliner was granted a ten-year option to
purchase 65,000 shares of Common Stock at an exercise price of $4.80 per share.
This option becomes exercisable in as nearly equal as possible monthly
installments over a 36-month period, so long as Mr. Kliner remains employed by
the Company or one of its subsidiaries at such date.
The Company and Mr. Shames entered into a Consulting Agreement and a related
Stock Option Agreement, each dated April 1, 1996, under which Mr. Shames serves
as a consultant to assist the Company in various executive and management
duties. The Consulting Agreement has a term of three years. Under the Consulting
Agreement, Mr. Shames is entitled to a monthly retainer of $10,000 and
reimbursement of certain expenses. In addition to the monthly retainer, Mr.
Shames was granted, effective April 1, 1996, a ten-year, non-qualified option to
purchase 150,000 shares of Common Stock at an exercise price of $5.25 per share,
50,000 shares of which became immediately exercisable and the remaining 100,000
shares of which become exercisable in as nearly equal as possible monthly
installments over the three-year term of the Consulting Agreement, so long as
Mr. Shames remains engaged as a consultant, officer or director of the Company.
Pursuant to the Consulting Agreement, Mr. Shames was also granted a ten-year,
non-qualified option effective April 1, 1997 to purchase 50,000 shares of Common
Stock at an exercise price of $6.50 per share which becomes exercisable in as
nearly equal as possible monthly installments over a 24-month period, and a
ten-year, non-qualified option, effective April 1, 1998 to purchase 25,000
shares of Common Stock at an exercise price of $11.00 per share which becomes
exercisable in as nearly equal as possible monthly installments over a 12-month
period. The Company also agreed to grant Mr. Shames, effective April 1, 1999,
subject to the Board of Directors' discretion, a non-qualified option to
purchase 25,000 shares of Common Stock at an exercise price equal to the fair
market value of the Common Stock on such date which option will become
immediately exercisable in full on such date. The Consulting Agreement provides
that Mr. Shames will not compete with the Company for a period of two years
after the termination of the Consulting Agreement.
SEPARATION AGREEMENTS
On February 20, 1997, the Company entered into a Separation Agreement with
Mark L. de Naray, the former President and Chief Executive Officer and a former
director of the Company. Under the Separation Agreement, the Company agreed to
provide Mr. de Naray with certain payments and benefits, including (i) payment
of Mr. de Naray's base salary through July 31, 1998, (ii) payment of a $50,000
cash bonus, (iii) continuation of health, dental and life insurance coverage
until July 31, 1998, (iv) loans from the Company in the amount necessary to
enable Mr. de Naray to exercise any outstanding options held by him and to pay
one-half of the income tax liability resulting therefrom. and (v) reimbursement
of certain other expenses in an amount not to exceed $10,000. The Company loaned
Mr. de Naray approximately $336,550, in addition to the $50,000 Mr. de Naray
previously owed the Company, in order to provide Mr. de Naray funds to exercise
his options. The original principal amount of the full recourse note was
$386,550 and it bears interest at the rate of 9 1/4% per annum. The entire
principal balance and all accrued interest on the note is due in full on the
earlier of (i) six months following the completion of this offering or (ii)
April 30, 1999. The loan is secured by Mr. de Naray's pledge of 150,000 shares
of Common Stock. The outstanding principal balance and accrued interest on the
note was approximately $417,700 as of January 3, 1998 and $446,407 as of October
3, 1998. Pursuant to the Separation Agreement, the Company loaned an additional
$425,000 to Mr. de Naray on April 13, 1998 to enable Mr. de Naray to pay
one-half of
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the income tax liability resulting from the exercise of his options in February
1997, which loan is evidenced by a note and a pledge agreement containing the
same terms and conditions as described above, including the pledge of an
additional 150,000 shares of Common Stock. The outstanding principal balance and
accrued interest on this note was approximately $443,633 as of October 3, 1998.
Under the Separation Agreement, the Company agreed to use its good faith efforts
to enable Mr. de Naray to sell up to 50,000 shares of Common Stock in this
offering. Under the Separation Agreement, Mr. de Naray agreed not to disclose
any confidential information of the Company until July 31, 2003, and until July
31, 1999, not to compete with the Company, interfere with the Company's
relationships with any of its current or potential vendors, suppliers,
distributors or customers and not to solicit any employees of the Company so
long as they remain employees of the Company.
On July 13, 1998, the Company entered into a Separation Agreement with John
D. Watson, the former Senior Vice President of Corporate Marketing of the
Company. Under the Separation Agreement, the Company agreed to provide Mr.
Watson with certain payments and benefits, including (i) payment of Mr. Watson's
base salary through August 1, 1999, (ii) payment of a cash bonus at the end of
1998 equal to 8/12 of Mr. Watson's bonus had he remained an employee during the
remainder of 1998, (iii) continuation of health, dental and life insurance
coverage until July 31, 1999, and (iv) reimbursement of certain other expenses
in an amount not to exceed $5,000. Under the Separation Agreement, Mr. Watson
agreed not to disclose any confidential information of the Company and, until
February 29, 2000, not to compete with the Company, interfere with the Company's
relationships with any of its current or potential vendors, suppliers,
distributors or customers and not to solicit any current employees of the
Company.
STOCK OPTION AND INCENTIVE PLANS
The Company grants options pursuant to its 1990 Omnibus Stock Option Plan
(the "1990 Plan") and its 1997 Stock Incentive Plan (the "1997 Plan"). Each of
the 1990 Plan and the 1997 Plan provides for the grant to eligible participants
of options to purchase shares of Common Stock that qualify as "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended ("Incentive Options"), as well as options that do not qualify as
Incentive Options ("Non-Statutory Options"). In addition, the 1997 Plan provides
for awards to eligible recipients of stock appreciation rights, restricted stock
awards, performance units and stock bonuses. Eligible participants under these
plans include employees, officers, directors, consultants and independent
contractors of the Company and its subsidiaries. Each of these plans is
administered by the Compensation Committee of the Board of Directors, which
determines the persons who are to receive awards, as well as the type, terms and
number of shares subject to each award. The 1990 Plan will terminate on May 29,
2000, and the 1997 Plan will terminate on March 28, 2007, in each case unless
earlier terminated by the Board of Directors.
The Company has reserved an aggregate of 2.8 million shares of Common Stock
for awards under the 1990 Plan. As of October 3, 1998, options to purchase an
aggregate of 720,868 shares of Common Stock were outstanding under the 1990
Plan, of which 562,994 were fully vested, and a total of 413,594 shares of
Common Stock remained available for grant under the 1990 Plan. The Company has
reserved an aggregate of 1.5 million shares of Common Stock for awards under the
1997 Plan. As of October 3, 1998, options to purchase an aggregate of 939,659
shares of Common Stock were outstanding under the 1997 Plan, of which 234,982
were fully vested, and a total of 457,701 shares of Common Stock remained
available for grant under the 1997 Plan. As of October 3, 1998, the outstanding
options under the plans were held by an aggregate of 145 individuals and were
exercisable at prices ranging from $0.45 to $19.00 per share of Common Stock.
Options granted under the plans generally become exercisable in as nearly equal
as possible monthly installments over a 36-month period. Shares subject to
options granted under the plans that lapse or are terminated may again be
subject to grants under the plans.
Prior to the consummation of this offering, the Company plans to grant
options to purchase an aggregate of up to 225,000 shares of Common Stock under
the 1997 Plan at an exercise price equal to the initial public offering price of
the shares of Common Stock offered hereby. Options to purchase an
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aggregate of 125,000 shares of Common Stock will be granted to full time
employees of the Company who have not previously received an option grant. These
grants will range from 50 to 200 shares, depending on years of service with the
Company and will vest in equal annual installments over three years. Options to
purchase an aggregate of 100,000 shares of Common Stock will be granted to
executive officers of the Company, with 25,000 of such options vesting in equal
monthly installments over 36 months, and 75,000 of such options vesting upon the
earlier to occur of: (a) the date on which the average of the high and low sales
prices of the Company's Common Stock, as reported by the Nasdaq National Market
System, exceeds two times the initial public offering price for at least 30
consecutive trading days; or (b) five years from the date of grant, so long as
the executive remains employed by the Company or one of its subsidiaries at that
date. Of such options, 50,000 will be granted to Mr. McAthie, including 25,000
options vesting monthly, 20,000 will be granted to each of Messrs. Dorsey and
Mayle, and 10,000 will be granted to Mr. Kliner.
Incentive Options granted under the plans may not have an exercise price
less than the fair market value of the Common Stock on the date of the grant
(or, if granted to a person holding more than 10% of the Company's voting stock,
at less than 110% of fair market value). Non-Statutory Options granted under the
plans may not have an exercise price less than 85% of fair market value on the
date of grant. Aside from the maximum number of shares of Common Stock reserved
under the plans, there is no minimum or maximum number of shares that may be
subject to options. However, the aggregate fair market value of the stock
subject to Incentive Options granted to any optionee that are exercisable for
the first time by an optionee during any calendar year may not exceed $100,000.
Options generally expire when the optionee's employment or other service is
terminated with the Company and its subsidiaries. Options generally may not be
transferred, other than by will or the laws of descent and distribution, and
during the lifetime of an optionee, may be exercised only by the optionee. The
term of each option, which is fixed by the Board at the time of grant, may not
exceed ten years from the date the option is granted (except that an Incentive
Option granted to a person holding more than 10% of the Company's voting stock
may be exercisable only for five years).
Each of the 1990 Plan and the 1997 Plan contains provisions under which
options would become fully exercisable following certain changes in control of
the Company, such as (i) the sale, lease, exchange or other transfer of all or
substantially all of the assets of the Company to a corporation that is not
controlled by the Company, (ii) the approval by the shareholders of the Company
of any plan or proposal for the liquidation or dissolution of the Company, (iii)
certain merger or business combination transactions, (iv) more than 50% of the
Company's outstanding voting shares are acquired by any person or group of
persons who did not own any shares of Common Stock on the effective date of the
respective plan, or (v) certain changes in the composition of the Board of
Directors of the Company. In addition, under the 1997 Plan, in the event of a
change in control of the Company, all stock appreciation rights will become
fully exercisable, all restricted stock awards will become immediately and fully
vested and all performance units and stock bonuses will vest and/or continue to
vest according to the terms of the agreements evidencing such awards. In
addition, under the 1997 Plan, in the event of such a change in control, the
Compensation Committee, in its sole discretion, may provide that some or all
participants holding outstanding options will receive for each share of Common
Stock subject to such options cash in an amount equal to the excess of the fair
market value of such shares immediately prior to the effective date of a change
in control over the exercise price per share of such options. The acceleration
of the exercisability of options under the Plans may be limited, however, if the
acceleration would be subject to an excise tax imposed upon "excess parachute
payments."
Payment of an option exercise price may be made in cash, or at the
Compensation Committee's discretion, in whole or in part by tender of a broker
exercise notice, a promissory note or previously acquired shares of Common Stock
of the Company having an aggregate fair market value on the date of exercise
equal to the payment required.
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PROFIT SHARING AND 401(K) SAVINGS PLAN
On January 1, 1994, the Company adopted a Profit Sharing and 401(k) Plan
(the "401(k) Plan"). Employees who are employed on a full time basis and are 21
years old or over are eligible to participate in the 401(k) Plan on the first
day of the first calendar month following their employment commencement date.
Employees who are employed on a less than full time basis and are 21 years old
or over are eligible to participate in the 401(k) Plan on the first day of the
first calendar month once such employees have completed at least 1,000 hours of
service during the 12 months following their employment commencement date or
have completed 1,000 hours of service during the preceding plan year. Employees
may make salary reduction contributions to the 401(k) Plan up to the maximum
amount permitted by law. The Company may make discretionary matching
contributions equal to a percentage of the amount of the salary reduction the
employee elected. This percentage is determined annually by the Company. During
the first nine months of 1998, the Company contributed $78,000 to the 401(k)
Plan. The Company did not make any contributions during 1995, 1996 and 1997.
Generally, employer matching contributions are vested at the rate of 20% per
year of service commencing after the employee has completed two years of
service. Employee salary reduction contributions under the 401(k) Plan are
always 100% vested.
NONQUALIFIED DEFERRED COMPENSATION PLAN
On October 1, 1998, the Company adopted a Nonqualified Deferred Compensation
Plan (the "DC Plan") for employees of the Company at or above director level
managers. Eligible employees are permitted to elect to defer a portion of their
compensation from the Company up to 50% of the employee's salary and 100% of the
employee's bonus in the initial plan year ending December 31, 1998, and up to
25% of the employee's salary and 100% of the employee's bonus for each calendar
year thereafter. The deferred compensation is credited to one or more accounts
designated by the employee. The Company is permitted, but is not obligated, to
make matching or discretionary contributions to participants' accounts. The
Company has not made any matching or discretionary contributions under the DC
Plan to date. Generally, employer matching or discretionary contributions are
vested at the rate of 20% per year of service commencing after the employee has
completed two years of service. Amounts deferred by election of a participant
are always 100% vested.
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CERTAIN TRANSACTIONS
DIRECTOR RELATIONSHIPS
Patrick A. Hopf, a director of the Company, is the President of St. Paul
Venture Capital, Inc., the Vice President of St. Paul Fire and Marine Insurance
Co. and the Managing General Partner of St. Paul Venture Capital IV, LLC. St.
Paul Venture Capital IV, LLC and St. Paul Venture Capital Affiliates Fund I, of
which St. Paul Venture Capital, Inc. is the manager for both, and St. Paul Fire
and Marine Insurance Co. are shareholders of the Company. Mr. Hopf was elected
to the Board of Directors of the Company in connection with the purchase
agreement under which the Series A Preferred Stock was purchased.
Christopher P. Kirchen, a director of the Company, is a general partner of
Consumer Venture Associates, L.P., which is the general partner of Consumer
Venture Partners I, L.P., a shareholder of the Company. Mr. Kirchen is also the
general partner of Consumer Venture Associates II, L.P., which is the general
partner of Consumer Venture Partners II, L.P., a shareholder of the Company. Mr.
Kirchen was elected to the Board of Directors of the Company in connection with
the purchase agreement under which the Series B Preferred Stock was purchased.
Jean-Michel Valette, a director of the Company, was a Managing Director of
Hambrecht & Quist LLC from October 1994 to August 1998 and a Senior Analyst of
Hambrecht & Quist LLC from November 1992 to October 1994. Mr. Valette is also a
member of the general partner of H&Q Select Comfort Investors, L.P., an investor
in the Company and a related party to Hambrecht & Quist LLC. Mr. Valette was
elected to the Board of Directors of the Company in connection with the purchase
agreement under which the Series D Preferred Stock was purchased. Hambrecht &
Quist LLC is one of the Underwriters of this offering.
CERTAIN SALES OF SECURITIES
Since January 1, 1995, the Company has sold shares of Series E Preferred
Stock, promissory notes convertible into shares of Common Stock and warrants to
purchase shares of Common Stock to various investors, including certain
directors, executive officers, greater-than 5% shareholders and entities
affiliated with directors at the time of sale. Such securities were sold to such
affiliated purchasers on the same terms as they were sold to non-affiliated
purchasers.
SERIES E FINANCING
On December 28, 1995, the Company sold an aggregate of 857,143 shares of
Series E Preferred Stock pursuant to the Company's Series E Convertible
Preferred Stock Purchase Agreement dated December 28, 1995 (the "Series E
Purchase Agreement"), at a price of $10.50 per share for an aggregate purchase
price of approximately $9.0 million. The Series E Purchase Agreement was amended
in April 1996 to provide for the issuance to such purchasers of Series E
Preferred Stock warrants to purchase an aggregate of 171,429 shares of Common
Stock exercisable through December 28, 2005 at an exercise price of $5.25 per
share. The following entities and individuals purchased shares of Series E
Preferred Stock and were issued warrants in the following amounts: Apex
Investment Fund, L.P. (19,380 shares of Series E Preferred Stock convertible
into 24,815 shares of Common Stock and a warrant to purchase 3,876 shares);
related parties to Hambrecht & Quist LLC (45,000 shares of Series E Preferred
Stock convertible into 57,620 shares of Common Stock and a warrant to purchase
9,000 shares); Macke Limited Partnership (11,900 shares of Series E Preferred
Stock convertible into 15,237 shares of Common Stock and a warrant to purchase
2,380 shares); Marquette Venture Partners II, L.P. and MVP Affiliates Fund, L.P.
(257,150 shares of Series E Preferred Stock convertible into 329,276 shares of
Common Stock and a warrant to purchase 51,430 shares); Norwest Equity Partners V
(257,150 shares of Series E Preferred Stock convertible into 329,277 shares of
Common Stock and a warrant to purchase 51,430 shares); St. Paul Fire and Marine
Insurance Co. (100,000 shares of Series E Preferred Stock convertible into
128,048 shares of Common Stock and a warrant to purchase 20,000 shares); John
Sculley (15,000 shares of Series E Preferred Stock
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convertible into 19,207 shares of Common Stock and a warrant to purchase 3,000
shares); Patrick A. Hopf (950 shares of Series E Preferred Stock convertible
into 1,216 shares of Common Stock and a warrant to purchase 190 shares); Mark L.
de Naray (500 shares of Series E Preferred Stock convertible into 640 shares of
Common Stock and a warrant to purchase 100 shares); and Daniel J. McAthie
(20,000 shares of Series E Preferred Stock convertible into 25,609 shares of
Common Stock and a warrant to purchase 4,000 shares).
1996 BRIDGE FINANCING
In November 1996, the Company borrowed an aggregate of approximately
$1,252,000 from certain existing shareholders and issued promissory notes
evidencing such loans. Interest on these notes accrued at an annual rate of 8%.
The Company granted each of these shareholders ten-year warrants to purchase a
number of shares of Common Stock equal to 25% of the principal amount of such
shareholder's note divided by $5.25 (an aggregate of 59,606 shares), at an
exercise price of $5.25 per share. The promissory notes were due on the earlier
of (i) the closing of an equity financing of $10.0 million or more, or (ii)
November 1, 1997. The Company paid off the promissory notes in full in March
1997 and granted each of these shareholders additional ten-year warrants to
purchase a number of shares equal to 5% of the principal amount of such
shareholder's note divided by $5.25 (an aggregate of 11,919 shares), exercisable
through October 31, 2006 at an exercise price of $5.25 per share. The following
entities purchased notes and warrants in the following amounts: Apex Investment
Fund, L.P. ($126,450 and warrants to purchase 7,226 shares); related parties to
Hambrecht & Quist LLC ($50,400 and warrants to purchase 2,880 shares); Macke
Limited Partnership ($6,000 and warrants to purchase 343 shares); Marquette
Venture Partners II, L.P. and MVP II Affiliates Fund, L.P. ($33,000 and warrants
to purchase 1,885 shares); Norwest Equity Partners V ($122,550 and warrants to
purchase 7,003 shares); and St. Paul Fire and Marine Insurance Co. ($835,150 and
warrants to purchase 47,723 shares).
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
All holders of Common Stock issuable upon conversion of the preferred stock
or upon exercise of certain warrants have certain demand and incidental
registration rights covering such shares of Common Stock pursuant to the Amended
and Restated Registration Rights Agreement dated December 28, 1995, as amended,
among the Company and the other parties thereto. See "Description of Capital
Stock-- Registration Rights--Amended and Restated Registration Rights
Agreement."
VOTING AGREEMENT AND STOCK RESTRICTION AGREEMENT
The Company and the purchasers of the preferred stock entered into a Voting
Agreement in connection with the purchase agreements under which the preferred
stock was purchased, pursuant to which Saint Paul Fire and Marine Insurance Co.,
Cherry Tree Ventures IV, Consumer Venture Partners, Apex Investment Fund, L.P.
and KCB BV, L.P. each was granted the right to designate one director to the
Board of Directors so long as each held at least 20% of the number of shares
originally purchased by such investor pursuant to the Series A Purchase
Agreement (in the case of Saint Paul Fire and Marine Insurance Co., Cherry Tree
Ventures IV and Consumer Venture Partners), Series B Purchase Agreement (in the
case of Apex Investment Fund, L.P.) or Series C Purchase Agreement (in the case
of KCB BV, L.P.). In connection with the Series D Purchase Agreement and the
Series E Purchase Agreement, related parties to Hambrecht & Quist LLC and
Marquette Venture Partners II, L.P., respectively, were granted a one-time right
to designate one director to the Board of Directors. All of the holders of the
preferred stock agreed to vote their shares of preferred stock and any other
shares of capital stock of the Company owned by such holder in favor of the
election of the persons designated by the respective shareholders. In addition,
in connection with the Series A Financing, the Company, the holders of the
Series A Preferred Stock, J.P. Poole and Robert A. Walker and JoAnn O. Walker
(collectively, the "Promoters") entered into a Stock Restriction Agreement. The
Stock Restriction Agreement was amended to include all subsequent purchasers of
preferred stock. Under this agreement, the Company, the holders of the preferred
stock and J.P. Poole had certain rights of first refusal to purchase and to
participate in any sales of shares of the
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Company's capital stock by the Promoters. In addition, until the holders of the
preferred stock recovered (by sale or other disposition) their aggregate
investment amount paid for all shares of preferred stock purchased from the
Company, the Promoters were prohibited from selling more than 20% of their
collective holdings of capital stock of the Company. The Stock Restriction
Agreement terminated on December 31, 1997, and the Voting Agreement will
terminate upon the consummation of this offering.
SEPARATION AGREEMENTS
On February 20, 1997, the Company entered into a Separation Agreement with
Mark L. de Naray, the former President and Chief Executive Officer and a former
director of the Company, pursuant to which the Company, among other things,
loaned Mr. de Naray an aggregate of $761,550 in addition to the $50,000 Mr. de
Naray previously owed the Company to provide Mr. de Naray funds to exercise his
options. On July 13, 1998, the Company entered into a Separation Agreement with
John D. Watson, the former Senior Vice President of Corporate Marketing of the
Company. For a discussion of these agreements, see "Management--Separation
Agreements."
CONSULTING AGREEMENTS
In April 1996, the Company entered into a Consulting Agreement with Ervin R.
Shames, Chairman of the Board, pursuant to which Mr. Shames renders certain
consulting services to the Company. See "Management--Director Compensation" and
"--Employment and Consulting Agreements."
In July 1997, the Company entered into a Letter Agreement with Richard
Clayton, a former director of the Company, pursuant to which Mr. Clayton
rendered certain consulting services to the Company through the end of March
1998 in connection with the establishment by the Company of several leased
departments within larger retail stores. Under the Letter Agreement, Mr. Clayton
received a consulting fee equal to $197,000 paid in eight monthly installments
and was granted an option to purchase 14,000 shares of Common Stock at an
exercise price of $7.50 per share.
For a discussion of the employment agreements entered into by the Company
and certain Named Executive Officers, see "Management--Employment and Consulting
Agreements."
GE FINANCING AND RESTRUCTURING OF GE WARRANTS
On March 27, 1997, the Company entered into a Purchase Agreement (the "GE
Purchase Agreement") with General Electric Capital Corporation ("GECC"),
pursuant to which the Company issued to GECC a senior subordinated promissory
note in the principal amount of $15.0 million (the "GE Note"). Interest on the
GE Note accrues at a rate equal to 11% per year and is payable quarterly in
arrears. The outstanding principal on the GE Note is due on or before March 31,
2003. Under the terms of the GE Purchase Agreement, the Company is required to
comply with certain affirmative and financial covenants so long as the GE Note
remains outstanding, including without limitation, the delivery of certain
financial and business information and maintaining a minimum ratio of EBITDA to
fixed charges, a minimum ratio of total indebtedness to EBITDA and a minimum
consolidated net worth. In addition, the Company is required to comply with
certain negative covenants so long as the GE Note remains outstanding, including
without limitation, refraining from consummating certain acquisitions,
investments, and sales of Company assets, issuing additional shares of preferred
stock, incurring additional indebtedness and permitting liens on any of its
assets. The Company intends to repay the GE Note in full with a portion of the
net proceeds of this offering. See "Use of Proceeds."
In addition to the GE Note, the Company issued to GECC a Series A Warrant
(the "Series A Warrant") to purchase 1,100,000 shares of Common Stock
exercisable through March 31, 2005 at an exercise price of $10.50 and a Series B
Warrant (the "Series B Warrant") providing contingent rights to purchase up to
1,000,000 shares of Common Stock at an exercise price of $.01 after May 1, 1999,
subject to adjustment and cancellation upon the occurrence of certain events.
Pursuant to an amendment to the GE
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Purchase Agreement effective as of March 31, 1998, the Company and GECC
restructured these warrants by combining them into one Series A Warrant to
purchase 1,309,583 shares of Common Stock at an exercise price of $8.82. In
November 1998, in connection with the reduction of the conversion price of the
Series E Preferred Stock, the Company agreed to issue an additional warrant to
GECC to purchase 5,513 shares of Common Stock at an exercise price of $8.82 per
share. See "--Series E Preferred Stock Shareholder Voting Agreement and
Irrevocable Proxy." GECC has certain demand and incidental registration rights
covering the shares of Common Stock issuable upon exercise of the new Series A
Warrant and the additional warrant. See "Description of Capital
Stock--Registration Rights--General Electric Warrants."
MONOGRAM BANK CREDIT CARD PROGRAM
GECC, which controls Monogram Credit Card Bank of Georgia (the "Bank"), has
an indirect interest in the Company's consumer credit arrangements with the
Bank. Under these arrangements, the Bank offers to the Company's qualified
customers an unsecured revolving credit arrangement to finance purchases from
the Company. For all purchases financed under these arrangements, the Bank pays
the Company an amount equal to the total amount of purchases net of promotional
related discounts and less amounts retained for returned products and limited
recourse on bad debts. The Bank had retained $3.9 million and $10.1 million as
of January 3, 1998 and October 3, 1998, respectively. The Company believes that
the terms of its arrangement with the Bank are at least as favorable to the
Company as terms the Company would expect to negotiate with an unaffiliated
third party. Upon commencement of the Company's consumer credit arrangements
with the Bank, the Bank paid a $500,000 incentive bonus to the Company, and the
Company paid $500,000 to the Bank as amounts to be retained by the Bank for
returned products. See "Business--Consumer Credit Arrangements."
SERIES E PREFERRED STOCK SHAREHOLDER VOTING AGREEMENT AND IRREVOCABLE PROXY
In November 1998, the Company and the holders of more than 60% of the
outstanding shares of Series E Preferred Stock entered into a Shareholder Voting
Agreement and Irrevocable Proxy pursuant to which such holders of Series E
Preferred Stock agreed to vote all of the shares of capital stock of the Company
held beneficially and of record by them in favor of an amendment of the
Company's Articles of Incorporation to decrease the public offering price at
which the Series E Preferred Stock would automatically convert into Common Stock
from $19.95 to $15.00 per share and reduce the conversion price of the Series E
Preferred Stock into Common Stock from $8.82 to $8.20 per share. In addition,
such holders of Series E Preferred Stock appointed H. Robert Hawthorne and
Daniel J. McAthie as proxies and authorized each of them to represent and vote
all of the shares of capital stock of the Company held beneficially and of
record by them in favor of such an amendment at the next annual or special
meeting of shareholders. The parties to the Shareholder Voting Agreement and
Irrevocable Proxy hold sufficient voting power to assure the approval of the
amendment by the holders of the Series E Preferred Stock voting as a separate
class. The amendment also required the approval of the holders of a majority of
the outstanding capital stock of the Company voting together as a single class.
The amendment was approved by the requisite vote of shareholders at a
shareholder meeting held on November 30, 1998.
In connection with the reduction of the conversion price of the Series E
Preferred Stock, the Company agreed to issue an additional warrant to GECC to
purchase 5,513 shares of Common Stock at an exercise price of $8.82 per share.
This additional warrant will be issued to GECC effective as of November 30, 1998
and is currently exercisable in full.
------------------------
All future transactions, including any loans from the Company to its
officers, directors, principal shareholders or affiliates, will be on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information known to the Company with respect
to beneficial ownership of the Common Stock as of November 10, 1998 and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, for
(i) each person who is known by the Company to own beneficially more than 5% of
the Common Stock, (ii) each of the Named Executive Officers, (iii) each of the
Company's directors, (iv) all directors and executive officers as a group, and
(v) each Selling Shareholder. Except as set forth in the footnotes below, none
of the Selling Shareholders has had any position, office or material
relationship with the Company or any of its predecessors or affiliates within
the past three years.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING(1)
------------------------- NUMBER OF SHARES -------------------------
NAME NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- ------------------------------------------------ ------------ ----------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
St. Paul Venture Capital, Inc.(2)............... 5,155,023 33.5% -- 5,155,023 28.3%
Consumer Venture Partners(3).................... 2,237,113 14.6 -- 2,237,113 12.3
Apex Investment Fund, L.P. and The Productivity
Fund II, L.P.(4).............................. 1,331,909 8.7 281,795 1,050,114 5.8
General Electric Capital Corporation(5)......... 1,315,096 7.9 82,590 1,131,051 5.8
Norwest Venture Capital(6)...................... 1,084,763 7.1 113,783 970,980 5.4
Cherry Tree Ventures IV Limited
Partnership(7)................................ 828,690 5.4 116,359 712,331 3.9
H. Robert Hawthorne(8).......................... 188,250 1.2 -- 188,250 1.0
Mark L. de Naray(9)............................. 549,000 3.6 143,635 405,365 2.2
Daniel J. McAthie(10)........................... 149,733 * 7,182 142,551 *
Charles E. Dorsey(11)........................... 110,698 * 1,149 109,549 *
John D. Watson(12).............................. 51,522 * -- 51,522 *
Gregory T. Kliner(13)........................... 79,594 * 8,514 71,080 *
Ervin R. Shames(14)............................. 204,174 1.3 -- 204,174 1.1
Thomas J. Albani................................ 37,595 * -- 37,595 *
Patrick A. Hopf(15)............................. 5,164,429 33.6 -- 5,164,429 28.4
Christopher P. Kirchen(16)...................... 2,237,113 14.6 -- 2,237,113 12.3
David T. Kollat(17)............................. 37,595 * -- 37,595 *
Kenneth A. Macke(18)............................ 90,405 * -- 90,405 *
Jean-Michel Valette(19)......................... 207,574 1.4 -- 207,574 1.1
All directors and executive officers as a group
(12 persons)(20).............................. 8,581,535 53.9% 16,845 8,564,690 45.7%
Other Selling Shareholders:
Alex. Brown & Sons Employees
Venture Fund LP(21)........................... 29,609 * 7,055 22,554 *
Theodore H. Ashford(22)......................... 68,718 * 12,632 56,086 *
Bayview Investors, Ltd.(23)..................... 29,609 * 12,715 16,894 *
Richard M. Downs(24)............................ 20,750 * 2,083 18,667 *
James D. Gaboury(25)............................ 20,743 * 506 20,237 *
Doug Hickman(26)................................ 3,479 * 947 2,532 *
Brent T. Hutton(27)............................. 86,311 * 2,124 84,187 *
Karen K. Jones(28).............................. 25,750 * 3,591 22,159 *
Terral Jordan(29)............................... 3,479 * 391 3,088 *
KCB BV, L.P..................................... 750,843 4.9 161,771 589,072 3.3
Douglas Keefer.................................. 15,000 * 129 14,871 *
Erwin A. Kelen(30).............................. 14,064 * 1,023 13,041 *
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING(1)
------------------------- NUMBER OF SHARES -------------------------
NAME NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- ------------------------------------------------ ------------ ----------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Richard Knase(31)............................... 9,500 * 3,232 6,268 *
Douglas H. Poole................................ 9,500 * 3,950 5,550 *
J.P. Poole(32).................................. 379,500 2.5 71,818 307,682 1.7
Suzanne Puerzer(33)............................. 13,118 * 360 12,758 *
John A. Rollwagen(34)........................... 16,064 * 2,873 13,191 *
John Sculley(35)................................ 154,602 1.0 22,065 132,537 *
Dewey K. Shay(36)............................... 3,479 * 2,161 1,318 *
JoAnn O. Walker(37)............................. 477,500 3.1 31,420 385,933 2.1
Robert A. Walker(38)............................ 477,500 3.1 60,147 385,933 2.1
Kenneth H. Walker(39)........................... 58,481 * 42,000 16,481 *
</TABLE>
- ------------------------
* Less than one percent.
(1) Except as otherwise indicated, the persons named in the table, based on
information provided by such persons, have sole voting and sole investment
power with respect to all shares of Common Stock shown as beneficially owned
by them. Shares of Common Stock subject to options or warrants currently
exercisable or exercisable within 60 days of November 10, 1998 are deemed
outstanding for computing the percentage of the person or group holding such
options or warrants but are not deemed outstanding for computing the
percentage of any other person.
(2) Includes 4,766,008 shares held by St. Paul Fire and Marine Insurance
Company, 321,017 shares held by St. Paul Venture Capital IV, LLC and 275
shares held by St. Paul Venture Capital Affiliates Fund I, LLC. Includes
59,769 shares issuable upon exercise of outstanding warrants held by St.
Paul Fire and Marine Insurance Co. and 7,954 shares issuable upon exercise
of outstanding warrants held by St. Paul Venture Capital IV, LLC. St. Paul
Venture Capital, Inc. is an affiliate of St. Paul Fire and Marine Insurance
Co. and the manager of St. Paul Venture Capital IV, LLC and St. Paul Venture
Capital Affiliates Fund I, LLC. Patrick A. Hopf, a director of the Company,
is the Vice President of St. Paul Fire and Marine Insurance Co., the
President of St. Paul Venture Capital, Inc. and the Managing General Partner
of St. Paul Venture Capital IV, LLC. Does not include shares held of record
by Mr. Hopf. See note (15) below. The address of St. Paul Venture Capital,
Inc. is 8500 Normandale Lake Boulevard, Suite 1940, Bloomington, Minnesota
55437.
(3) Includes 274,312 shares held by Consumer Venture Partners I, L.P. and
1,962,801 shares held by Consumer Venture Partners II, L.P. Christopher P.
Kirchen, a director of the Company, is the general partner of Consumer
Venture Associates L.P., which is the general partner of Consumer Venture
Partners I, L.P. Mr. Kirchen is also the general partner of Consumer Venture
Associates II, L.P., which is the general partner of Consumer Venture
Partners II, L.P. Does not include any shares held of record by Mr. Kirchen.
See note (16) below. The address of Consumer Venture Partners is Three
Pickwick Plaza, Greenwich, Connecticut 06830.
(4) Includes 920,353 shares held of record by Apex Investment Fund, L.P.
("Apex") and 395,519 shares held of record by The Productivity Fund II, L.P.
("TPF"). Also includes 11,102 and 4,935 shares issuable upon exercise of
outstanding warrants held by Apex and TPF, respectively. Apex intends to
sell 197,122 shares in the offering and will beneficially own 734,333 shares
after the offering. TPF intends to sell 84,673 shares in the offering and
will beneficially own 315,781 shares after the offering. First Analysis
Corporation is a general partner of each of the general partners of Apex and
TPF and may be deemed to be the beneficial owner of shares held by Apex and
TPF. First Analysis Corporation disclaims beneficial ownership of such
shares, except to the extent of its pecuniary interest therein. James A.
Johnson, George M. Middlemas and Paul J. Renze, by virtue of their
affiliation with Apex,
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<PAGE>
may be deemed to be the beneficial owner of shares held by Apex; however,
they disclaim beneficial ownership of such shares, except to the extent of
their individual pecuniary interest therein. Bret R. Maxwell, by virtue of
his affiliation with TPF, may be deemed to be the beneficial owner of shares
held by TPF; however, he disclaims beneficial ownership of such shares,
except to the extent of his pecuniary interest therein. Apex and TPF
participated in the Company's Series E financing and 1996 bridge financing.
See "Certain Transactions--Certain Sales of Securities." James A. Johnson,
an affiliate of Apex, is a former director of the Company. The address of
Apex and TPF is 233 South Wacker Drive, Suite 9500, Chicago, Illinois 60606.
(5) Includes 1,309,583 shares issuable upon exercise of an outstanding warrant
issued to General Electric Capital Corporation ("GECC") in connection with a
$15.0 million loan to the Company made in March 1997, and 5,513 shares
issuable upon exercise of a warrant the Company has agreed to issue to GECC.
The number of shares beneficially owned by GECC after the offering will vary
depending on the initial public offering price. The Company and GECC have
agreed under the terms of GECC's warrant that GECC will exercise its rights
to purchase such number of shares issuable under the warrant such that,
after the surrender of shares purchasable under the warrant valued at the
initial public offering price in payment of the exercise price of $8.82 per
share for all shares exercised, the Company will issue 82,590 shares to GECC
to be sold in the offering. Based on an assumed initial public offering
price of $16.00 per share, GECC would exercise its rights to purchase an
aggregate of 184,045 shares, surrender 101,455 of such shares in payment of
the exercise price, receive 82,590 shares to be sold in the offering and
continue to hold warrants to purchase an aggregate of 1,131,051 shares after
the offering. If the initial public offering price is above $16.00 per
share, GECC would be able to exercise its rights to purchase a lesser number
of shares under its warrants in order to receive 82,590 shares of Common
Stock to be sold in the offering and as a result would hold rights to
purchase more than 1,131,051 shares after the offering. GECC, through its
affiliation with Monogram Credit Card Bank of Georgia, has an indirect
interest in the Company's consumer credit arrangements with the bank. See
"Certain Transactions--GE Financing and Restructuring of GE Warrants." The
address of GECC is 260 Long Ridge Road, Stamford, Connecticut 06927.
(6) Includes 697,053 shares held by Norwest Equity Partners IV and 329,277
shares held by Norwest Equity Partners V. Also includes 58,433 shares
issuable upon exercise of outstanding warrants held by Norwest Equity
Partners V. Norwest Equity Partners IV intends to sell 71,818 shares in the
offering and will beneficially own 625,235 shares after the offering.
Norwest Equity Partners V intends to sell 41,965 shares in the offering and
will beneficially own 345,745 shares after the offering. Itasca Partners is
the general partner of Norwest Equity Partners IV and may be deemed to be
the beneficial owner of shares held by Norwest Equity Partners IV. Itasca
Partners V is the general partner of Norwest Equity Partners V and may be
deemed to be the beneficial owner of shares held by Norwest Equity Partners
V. John E. Lindahl and George J. Still, Jr. are each managing general
partners of, and John P. Whaley is the managing administrative partner of,
Itasca Partners and Itasca Partners V, respectively. By virtue of their
affiliation with Norwest Equity Partners IV and Norwest Equity Partners V
resulting from their positions with Itasca Partners and Itasca Partners V,
each may be deemed to be the beneficial owner of shares held by Norwest
Equity Partners IV and Norwest Equity Partners V; however they disclaim
beneficial ownership of such shares, except to the extent of their pecuniary
interest therein. Norwest Equity Partners V participated in the Company's
Series E financing and 1996 bridge financing. See "Certain
Transactions--Certain Sales of Securities." The address of Norwest Venture
Capital and the other named individuals is 2800 Piper Tower, 222 South Ninth
Street, Minneapolis, Minnesota 55402.
(7) The address of Cherry Tree Ventures IV Limited Partnership is 1400 Northland
Plaza, 3800 West 80th Street, Minneapolis, Minnesota 55431.
(8) Includes 76,250 shares issuable upon exercise of outstanding options. Also
includes 12,000 shares held by Mr. Hawthorne's children.
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<PAGE>
(9) Includes 37,000 shares held by Mr. de Naray's spouse and children. Mr. de
Naray is a former director and executive officer of the Company.
(10) Includes 61,930 shares issuable upon exercise of outstanding options and
4,000 shares issuable upon exercise of outstanding warrants. Also includes
29,097 shares held by Mr. McAthie's spouse, as to which Mr. McAthie shares
voting and investment power. Does not include shares issuable upon exercise
of options to purchase up to 50,000 shares of Common Stock granted in
connection with this offering, none of which are currently exercisable. Mr.
McAthie is currently an executive officer of the Company.
(11) Includes 4,942 shares issuable upon exercise of outstanding options. Also
includes 99,156 shares jointly held by Mr. Dorsey and his spouse, as to
which Mr. Dorsey shares voting and investment power, and an aggregate of
4,000 shares held by Mr. Dorsey's children, as to which Mr. Dorsey has sole
voting and investment power. Also includes 1,000 shares held by Mr. Dorsey's
daughter, as to which shares Mr. Dorsey disclaims beneficial ownership. Does
not include shares issuable upon exercise of options to purchase up to
20,000 shares of Common Stock granted in connection with this offering, none
of which are currently exercisable. Mr. Dorsey is currently an executive
officer of the Company.
(12) Includes 2,222 shares held by Mr. Watson's spouse.
(13) Includes 79,594 shares issuable upon exercise of outstanding options. Does
not include shares issuable upon exercise of options to purchase up to
10,000 shares of Common Stock granted in connection with this offering, none
of which are currently exercisable. Mr. Kliner is currently an executive
officer of the Company.
(14) Includes 85,174 shares issuable upon exercise of outstanding options held
by Mr. Shames and 100,000 shares issuable upon exercise of outstanding
options held by Louise G. Shames, Trustee of the Ervin R. Shames Estate
Reduction Family Trust U/A dated October 30, 1997.
(15) Includes 190 shares issuable upon exercise of outstanding warrants. Also
includes an aggregate of 1,216 shares held by Mr. Hopf's spouse and
children. Also includes shares beneficially owned by St. Paul Fire and
Marine Insurance Company, St. Paul Venture Capital Affiliates Fund I, LLC
and St. Paul Venture Capital IV, LLC. Mr. Hopf has the same business address
as St. Paul Venture Capital. See note (2) above.
(16) Includes shares beneficially owned by Consumer Venture Partners I, L.P. and
Consumer Venture Partners II, L.P., as to which Mr. Kirchen shares voting
and investment power. Mr. Kirchen has the same business address as Consumer
Venture Partners. See note (3) above.
(17) Includes 37,500 shares issuable upon exercise of outstanding options.
(18) Includes 12,500 shares issuable upon exercise of outstanding options. Also
includes 75,182 shares held by Macke Limited Partnership and 2,723 shares
issuable upon exercise of outstanding warrants held by Macke Limited
Partnership, of which Mr. Macke is the general partner.
(19) Includes 202,421 shares held by H&Q Select Comfort Investors, L.P., a
related party to Hambrecht & Quist LLC. Also includes 4,500 shares issuable
upon exercise of outstanding warrants held by H&Q Select Comfort Investors,
L.P. Mr. Valette by virtue of his affiliation with the general partner of
H&Q Select Comfort Investors, L.P. may be deemed to be the beneficial owner
of such shares; however, he disclaims beneficial ownership of such shares,
except to the extent of his pecuniary interest therein.
(20) Includes an aggregate of 611,401 shares issuable upon exercise of
outstanding options and warrants held by officers, directors and their
affiliates. Also includes all shares beneficially owned by St. Paul Venture
Capital, Inc. and Consumer Venture Partners. See notes (2) and (3) above.
(21) Includes 4,000 shares issuable upon the exercise of outstanding warrants.
(22) Includes 470 shares issuable upon the exercise of outstanding warrants.
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<PAGE>
(23) Includes 4,000 shares issuable upon the exercise of outstanding warrants. A
majority of the limited partners of Bayview Investors, Ltd. are directors or
employees of BancBoston Robertson Stephens.
(24) Includes 20,750 shares issuable upon the exercise of outstanding options.
Mr. Downs is currently an employee of the Company.
(25) Includes 11,136 shares issuable upon the exercise of outstanding options.
Mr. Gaboury is currently an employee of the Company.
(26) Includes 470 shares issuable upon the exercise of outstanding warrants.
(27) Mr. Hutton is a former executive officer of the Company.
(28) Includes 4,302 shares issuable upon the exercise of outstanding options.
Ms. Jones is currently an employee of the Company.
(29) Includes 470 shares issuable upon the exercise of outstanding warrants.
(30) Includes 1,900 shares issuable upon the exercise of outstanding warrants.
(31) Mr. Knase is a former employee of the Company.
(32) Includes 29,500 shares held by J.P. Poole and D.M. Poole. Mr. Poole was a
party to a Stock Restriction Agreement pursuant to which the holders of the
Company's preferred stock and Mr. Poole had certain rights of first refusal
to purchase and participate in any sales of shares of the Company's capital
stock by Mr. and Mrs. Robert and JoAnn Walker. This agreement terminated on
December 31, 1997. See "Certain Transactions--Voting Agreement and Stock
Restriction Agreement."
(33) Includes 9,118 shares issuable upon the exercise of outstanding options.
Ms. Puerzer is currently an employee of the Company.
(34) Includes 1,900 shares issuable upon the exercise of outstanding warrants.
(35) Includes 12,500 shares issuable upon the exercise of outstanding options.
Also includes 10,000 shares held by Sculley Brothers LLC and 2,000 shares
held by Sculley Investment Ltd. Partnership. Mr. Sculley is a former
director of the Company.
(36) Includes 470 shares issuable upon the exercise of outstanding warrants.
(37) Includes 258,750 shares held by Mrs. Walker's spouse. See note (38) below.
Mr. and Mrs. Walker were parties to a Stock Restriction Agreement pursuant
to which the holders of the Company's preferred stock and J.P. Poole had
certain rights of first refusal to purchase and participate in any sales of
shares of the Company's capital stock by Mr. and Mrs. Walker. This agreement
terminated on December 31, 1997. See "Certain Transactions--Voting Agreement
and Stock Restriction Agreement."
(38) Includes 218,750 shares held by Mr. Walker's spouse. See note (37) above.
Mr. and Mrs. Walker were parties to a Stock Restriction Agreement pursuant
to which the holders of the Company's preferred stock and J.P. Poole had
certain rights of first refusal to purchase and participate in any sales of
shares of the Company's capital stock by Mr. and Mrs. Walker. This agreement
terminated on December 31, 1997. See "Certain Transactions--Voting Agreement
and Stock Restriction Agreement."
(39) Includes 41,814 shares held by Mr. Walker's IRA.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Assuming the conversion of all outstanding shares of preferred stock into
Common Stock and the filing of the Articles upon completion of this offering,
the authorized capital stock of the Company will consist of 95,000,000 shares of
Common Stock and 5,000,000 shares of Undesignated Preferred Stock. The following
summary of the terms and provisions of the Company's capital stock does not
purport to be complete and is qualified in its entirety by reference to the
Company's Articles and applicable law.
COMMON STOCK
As of October 3, 1998, there were 15,322,249 shares of Common Stock issued
and outstanding, held of record by 180 shareholders. The holders of Common Stock
are entitled to one vote for each share held of record on all matters submitted
to a vote of shareholders, and are not entitled to cumulate votes. Subject to
preferences that may be applicable to any outstanding shares of Undesignated
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. Upon liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled to share ratably in all assets that are
legally available for distribution after payment of all debts and other
liabilities and subject to the prior rights of any holders of the outstanding
shares of Undesignated Preferred Stock. The holders of Common Stock have no
preemptive, subscription, redemption, sinking fund or conversion rights. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be issued upon completion of this offering will be
fully paid and nonassessable.
UNDESIGNATED PREFERRED STOCK
As of the date of this Prospectus, no shares of Undesignated Preferred Stock
were issued and outstanding. Under Minnesota law, no action by the Company's
shareholders is necessary, and only action by the Board of Directors is
required, to authorize the issuance of any of the shares of Undesignated
Preferred Stock. Subject to certain limitations, the Board of Directors is
empowered to establish, and to designate the name of each class or series of the
shares of Undesignated Preferred Stock and to set the terms of such shares
(including terms with respect to redemption, sinking fund, dividend,
liquidation, preemptive conversion and voting rights and preferences). The Board
of Directors can issue shares of such class or series to, among other
individuals, the holders of another class or series of Undesignated Preferred
Stock or to the holders of the Common Stock. Accordingly, the Board of
Directors, without shareholder approval, could issue Undesignated Preferred
Stock with dividend, voting and conversion rights which could adversely affect
the rights of the holders of Common Stock. The Undesignated Preferred Stock may
have the effect of discouraging an attempt, through acquisition of a substantial
number of shares of the Common Stock, to acquire control of the Company with a
view to effecting a merger, sale or exchange of assets or a similar transaction.
The Company has no present plans to issue Undesignated Preferred Stock.
OPTIONS AND WARRANTS
As of October 3, 1998, the Company had outstanding options to purchase an
aggregate of 1,660,527 shares of Common Stock at a weighted average exercise
price of $6.38 per share and warrants to purchase an aggregate of 1,589,780
shares of Common Stock at a weighted average exercise price of $8.27 per share.
All outstanding options and warrants provide for antidilution adjustments in the
event of certain mergers, consolidations, reorganizations, recapitalizations,
stock dividends, stock splits or other changes in the corporate structure of the
Company. Certain of the outstanding warrants provide for antidilution
adjustments if the Company sells any shares of capital stock or securities
exercisable for or convertible into shares of capital stock for less than $5.25
per share. Holders of the outstanding warrants have certain demand and
incidental registration rights with respect to the shares issuable upon exercise
of the warrants. See "--Registration Rights."
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<PAGE>
REGISTRATION RIGHTS
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
The holders of 12,332,364 shares of Common Stock and warrants to purchase an
aggregate of 239,954 shares of Common Stock (the "Registrable Securities") or
their transferees are entitled to certain rights with respect to the
registration of such shares under the Securities Act pursuant to the terms of
the Amended and Restated Registration Rights Agreement, dated as of December 28,
1995, as amended (the "Registration Rights Agreement"), among the Company and
the holders of Registrable Securities. If at any time the holders of specified
amounts of Registrable Securities request that the Company file a registration
statement covering the Registrable Securities, the Company will use its best
efforts to cause such securities to be registered. The Company is not required
to file more than two registration statements, other than on Form S-2 or Form
S-3, pursuant to such demand rights, or more than one registration statement,
other than on Form S-2 or Form S-3, in any twelve-month period. The holders of
specified amounts of Registrable Securities also have the right to require the
Company to file a registration statement on Form S-2 or Form S-3 an unlimited
number of times, provided that the Company is not required to register any
Registrable Securities which are freely transferable under the provisions of
Rule 144(k) under the Securities Act. In addition, the holders of Registrable
Securities are entitled to have Registrable Securities included in a
registration statement filed on behalf of the Company provided that the Company
is not required to include any Registrable Securities which are freely
transferable under the provisions of Rule 144(k) under the Securities Act. In
any underwritten public offering, the foregoing registration rights are limited
to the extent that the managing underwriter has the right (i) to limit the
number of Registrable Securities to be included in the registration statement,
(ii) to prohibit the sale of any securities of the Company other than those
registered and included in the underwritten offering for a period of 180 days,
and (iii) to require holders of Registrable Securities not to sell, make any
short sale of, loan, grant any option for the purchase of, or otherwise dispose
of any securities of the Company (other than the securities included in the
registration) without the prior written consent of such underwriters for a
period up to 180 days from the effective date of such registration. The Company
will bear the expenses of registration of any of the Registrable Securities,
except for any underwritten discounts and commissions which will be borne by the
participating shareholders in proportion to the number of shares sold and except
for any expenses incurred in connection with a registration statement on Form
S-2 or Form S-3 filed at the request of holders of Registrable Securities the
minimum offering of which is less than $1.0 million. The registration rights
granted under the Registration Rights Agreement terminate as to any Registrable
Securities when such Registrable Securities have been effectively registered and
sold by the holder thereof or when such Registrable Securities have been sold
pursuant to Rule 144 under the Securities Act. Although the foregoing
registration rights have been waived with respect to this offering, the
registration rights held by the holders of 690,725 shares of Common Stock and
warrants to purchase an aggregate of 41,965 shares of Common Stock will
terminate upon the consummation of this offering since such shares of Common
Stock will have been registered and sold by the holders thereof.
GENERAL ELECTRIC WARRANTS
General Electric Capital Corporation ("GECC") possesses certain rights to
register of up to 1,315,096 shares of Common Stock (the "GE Registrable
Securities") issuable upon exercise of a warrant granted in connection with the
Company's March 1997 debt financing and an additional warrant agreed to be
granted in November 1998. Commencing six months following the consummation of
this offering (assuming this offering constitutes a Qualified IPO, as defined
below), holders of an aggregate of 30% or more of the GE Registrable Securities
or holders of GE Registrable Securities having a minimum anticipated aggregate
offering price of at least $5.0 million, may request that the Company register
the GE Registrable Securities under the Securities Act, subject to the
limitations below. A "Qualified IPO" means a sale of the Company's Common Stock
pursuant to an initial public offering registered under the Securities Act which
yields net proceeds to the Company (after underwriting discounts and
commissions) of at least $20.0 million and which results in a post-offering
valuation of the Company's total equity of at least $200.0 million based on the
per share offering price and the number of issued and outstanding shares of the
64
<PAGE>
Company's Common Stock. The Company is not required to file more than two
registration statements pursuant to such demand rights unless the Company is
eligible to file a registration statement on Form S-3 in which event such
holders are entitled to an unlimited number of such registrations. In addition,
the holders of GE Registrable Securities are entitled to have GE Registrable
Securities included in a registration statement filed on behalf of the Company
(other than a registration statement on Form S-4 and Form S-8); provided, that
the Company is not required to include any GE Registrable Securities which are
transferable without registration under the Securities Act. The Company is not
required to register GE Registrable Securities pursuant to a holder's demand
right, if the Company has had a registration statement under which such holder
had a right to have its GE Registrable Securities included pursuant to its
demand and incidental rights declared effective within one year prior to the
date of the request pursuant to its demand rights; provided, however, that if
any holder elected to have GE Registrable Securities included under such
registration statement but some or all of such securities were excluded pursuant
to underwriter's advice, then such one-year period is reduced to six months. The
Company will bear the expenses of registration of any of the GE Registrable
Securities, except for any fees, discounts or commissions to any underwriter or
any fees or disbursements of counsel for any underwriter and all expenses
incurred in connection with any amendment or supplement to the registration
statement or prospectus filed more than 180 days after the effective date of
such registration statement because any holder of GE Registrable Securities has
not sold such GE Registrable Securities requested to be registered. Such
registration rights terminate when such GE Registrable Securities have been
effectively registered under the Securities Act and sold or when the Company has
received an opinion of counsel that such shares may be transferred without
registration under the Securities Act. Upon the consummation of this offering,
the registration rights with respect to 184,045 shares of Common Stock will
terminate since such shares of Common Stock will have been either surrendered to
the Company in a cashless exercise or registered and sold by GECC.
PROVISIONS WITH POTENTIAL ANTI-TAKEOVER EFFECT
The Company is subject to the provisions of Sections 302A.671 and 302A.673
of the Minnesota Business Corporation Act. These anti-takeover provisions may
eventually operate to deny shareholders the receipt of a premium on their Common
Stock and may also have a depressive effect on the market price of the Company's
Common Stock. In general, Section 302A.671 provides that the shares of a
corporation acquired in a "control share acquisition" have no voting rights
unless voting rights are approved by the shareholders in a prescribed manner. A
"control share acquisition" is defined as an acquisition of beneficial ownership
of shares that would, when added to all other shares beneficially owned by the
acquiring person, entitle the acquiring person to have voting power of 20% or
more in the election of directors. Section 302A.673 prohibits a public
corporation from engaging in a "business combination" with an "interested
shareholder" for a period of four years after the date of the transaction in
which the person became an interested shareholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions. An "interested
shareholder" is a person who is the beneficial owner, of 10% or more of the
corporation's voting stock. Reference is made to the detailed terms of Sections
302A.671 and 302A.673 of the Minnesota Business Corporation Act.
The Company's Articles provide for a classified Board of Directors serving
staggered terms of three years. In addition, shareholders are not entitled to
cumulative voting in the election of directors and may not remove a director
without cause. The Articles also require the approval of two-thirds of the
outstanding voting power of the Company entitled to vote in the event of any
sale or merger of the Company. The authorization of Undesignated Preferred Stock
makes it possible for the Board of Directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of the Company. The foregoing provisions of the
Company's Articles and the Minnesota Business Corporation Act may have the
effect of deterring hostile takeovers or delaying changes in control of
management of the Company.
65
<PAGE>
LIMITATION ON LIABILITY OF DIRECTORS AND INDEMNIFICATION
The Company's Articles limit the liability of its directors to the fullest
extent permitted by the Minnesota Business Corporation Act. Specifically,
directors of the Company will not be personally liable for monetary damages for
breach of fiduciary duty as directors, except liability for (i) any breach of
the duty of loyalty to the Company or its shareholders, (ii) acts or omissions
not in good faith or that involve intentional misconduct or a knowing violation
of law, (iii) dividends or other distributions of corporate assets that are in
contravention of certain statutory or contractual restrictions, (iv) violations
of certain Minnesota securities laws, or (v) any transaction from which the
director derives an improper personal benefit. Liability under federal
securities law is not limited by the Restated Articles.
The Company also maintains a directors and officers insurance policy
pursuant to which directors and officers of the Company are insured against
liability for certain actions in their capacity as directors and officers.
The Minnesota Business Corporation Act requires that the Company indemnify
any director, officer or employee made or threatened to be made a party to a
proceeding, by reason of the former or present official capacity of the person,
against judgments, penalties, fines, settlements and reasonable expenses
incurred in connection with the proceeding if certain statutory standards are
met. "Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including a derivative
action in the name of the Company. Reference is made to the detailed terms of
the Minnesota indemnification statute, Section 302A.521 of the Minnesota
Business Corporation Act, for a complete statement of such indemnification
rights. The Company's Articles also require the Company to provide
indemnification to the fullest extent of the Minnesota indemnification statute.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company is aware that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Norwest Bank
Minnesota, N.A.
66
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have 18,122,249
shares of Common Stock outstanding, assuming no exercise of options or warrants
after October 3, 1998. Of these shares, the 4,000,000 shares sold in this
offering will be freely tradable without restriction under the Securities Act,
unless purchased by an "affiliate" of the Company, as that term is defined in
Rule 144 under the Securities Act. The remaining 14,122,249 shares of Common
Stock held by existing shareholders are "restricted securities" as defined in
Rule 144 and may be sold in the public market only if registered, or pursuant to
an exemption from registration such as Rule 144, 144(k) or 701 under the
Securities Act. Holders of an aggregate of 13,797,022 shares of Common Stock,
have entered into lock-up agreements under which they have agreed that they will
not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or
otherwise dispose of, any shares of Common Stock, options or warrants to acquire
shares of Common Stock or securities exchangeable for or convertible into shares
of Common Stock owned by them during the 180-day period following the date of
this Prospectus. Hambrecht & Quist LLC may, in its sole discretion at any time
without notice, release any portion of the shares subject to the lock-up
agreements during the 180-day period. Upon expiration of these agreements,
13,747,722 shares of Common Stock will be eligible for immediate resale in the
public market subject to the limitations of Rule 144. Of such shares,
approximately 5,504,333 will be eligible for resale in the public market
pursuant to Rule 144(k) without regard to the volume and manner of sale
limitations in Rule 144. Of the 460,379 shares not subject to lock-up
agreements, 350,126 shares will be eligible for immediate resale in the public
market pursuant to Rule 144(k) and the remainder will be eligible for resale in
the public market subject to the limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least one year, within any three-month period commencing 90 days
after the date of this Prospectus, may sell a number of shares that does not
exceed the greater of (i) one percent of the number of shares of Common Stock
then outstanding (approximately 181,222 shares immediately after this offering)
or (ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are generally subject
to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, is entitled to sell such shares
without having to comply with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Under Rule 701 under the Securities
Act, persons who purchase shares upon exercise of options granted prior to the
effective date of this offering are entitled to sell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with the holding period requirements of Rule 144 and, in the case of
non-affiliates, without having to comply with the public information, volume
limitation or notice provisions of Rule 144.
As of October 3, 1998, options to purchase 1,660,527 shares of Common Stock
were outstanding under the Company's option plans. The Company expects to grant
options to purchase an aggregate of up to 225,000 shares of Common Stock in
connection with this offering. Options covering an aggregate of 1,465,687 shares
are subject to the lock-up agreements described above. Approximately 30 days
after the completion of this offering, the Company intends to file Registration
Statements on Form S-8 covering shares issuable under the Company's 1990 Omnibus
Stock Option Plan and 1997 Stock Incentive Plan (including shares subject to
then outstanding options), thus permitting the resale of such shares in the
public market without restrictions under the Securities Act after expiration of
the applicable lock-up agreements. In addition, as of October 3, 1998, warrants
to purchase 1,589,780 shares of Common Stock were outstanding. Warrants covering
an aggregate of 1,549,537 shares are subject to the lock-up agreements described
above.
67
<PAGE>
A total of 11,641,639 of the shares outstanding immediately following the
completion of this offering and the holders of warrants to purchase 1,329,040
shares of Common Stock will be entitled to registration rights with respect to
such shares. The number of shares sold in the public market could increase if
such rights are exercisable.
Because there has been no public market for shares of the Company's Common
Stock, the Company is unable to predict the effect that sales made under Rule
144, pursuant to future registration statements, or otherwise, may have on any
then prevailing market price for shares of the Common Stock. Nevertheless, sales
of a substantial amount of Common Stock in the public market, or the perception
that such sales could occur, could adversely affect market prices.
68
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC,
BancBoston Robertson Stephens Inc., Piper Jaffray Inc. and Charles Schwab & Co.,
Inc. have severally agreed to purchase from the Company and the Selling
Shareholders the following respective number of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- -----------
<S> <C>
Hambrecht & Quist LLC.............................................................
BancBoston Robertson Stephens Inc.................................................
Piper Jaffray Inc.................................................................
Charles Schwab & Co., Inc.........................................................
-----------
Total.........................................................................
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company, its counsel and independent
auditors. The nature of the Underwriters' obligation is such that they are
committed to purchase all shares of Common Stock offered hereby if any of such
shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow and such dealers may reallow a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the Representatives of the Underwriters. The
Representatives have informed the Company that the Underwriters do not intend to
confirm discretionary sales in excess of 5% of the Common Stock offered hereby.
The Company and the Selling Shareholders have granted to the Underwriters an
option, exercisable no later than 30 days after the date of this Prospectus, to
purchase up to 600,000 additional shares of Common Stock at the initial public
offering price, less the underwriting discount, set forth on the cover page of
this Prospectus. To the extent that the Underwriters exercise this option, each
of the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof which the number of shares of Common Stock to be
purchased by it shown in the above table bears to the total number of shares of
Common Stock offered hereby. The Company and the Selling Shareholders will be
obligated, pursuant to the option, to sell shares to the Underwriters to the
extent the option is exercised. The Underwriters may exercise such option only
to cover over-allotments made in connection with the sale of shares of Common
Stock offered hereby.
The offering of the shares are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The Selling Shareholders and certain other shareholders of the Company,
including the executive officers and directors, who will own in the aggregate
13,797,022 shares of Common Stock after the offering, have agreed that they will
not, without the prior written consent of Hambrecht & Quist LLC,
69
<PAGE>
offer, sell or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock owned by them during the 180-day period
following the date of this Prospectus. The Company has agreed that it will not,
without the prior written consent of Hambrecht & Quist LLC, offer, sell or
otherwise dispose of any shares of Common Stock, options or warrants to acquire
shares of Common Stock or securities exchangeable for or convertible into shares
of Common Stock during the 180-day period following the date of this Prospectus,
except that the Company may issue shares upon the exercise of options and
warrants granted prior to the date hereof, and may grant additional options
under its stock option plans, subject to the 180-day period described above.
Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation among the Company, the Selling Shareholders and the Representatives.
Among the factors to be considered in determining the initial public offering
price are prevailing market and economic conditions, revenues and earnings of
the Company, market valuations of other companies engaged in activities similar
to the Company's business operations, the Company's management and other factors
deemed relevant. The estimated initial public offering price range set forth on
the cover of this preliminary prospectus is subject to change as a result of
market conditions and other factors.
Certain persons participating in the offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq National Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discounted at any time.
H&Q Select Comfort Investors, L.P., H&Q London Ventures and Hambrecht &
Quist California, related parties to Hambrecht & Quist LLC, one of the
Representatives, own in the aggregate 405,495 shares of the Company's Common
Stock and warrants to purchase an aggregate of 11,880 shares of the Company's
Company's Common Stock.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Oppenheimer Wolff & Donnelly LLP, Minneapolis, Minnesota. Mark A.
Kimball, a partner in the law firm of Oppenheimer Wolff & Donnelly LLP,
beneficially owns 1,000 shares of Common Stock. Orrick, Herrington & Sutcliffe
LLP, San Francisco, California will pass upon certain legal matters for the
Underwriters.
EXPERTS
The consolidated financial statements of Select Comfort Corporation as of
December 28, 1996, January 3, 1998 and October 3, 1998, and for each of the
years in the three-year period ended January 3, 1998, and for the nine-month
period ended October 3, 1998 have been included herein and in the registration
statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
Certain information concerning the fair market value of a put warrant held
by GECC has been prepared and included in the consolidated financial statements
of the Company set forth herein in reliance upon the reports of Houlihan
Valuation Advisors and upon the authority of said firm as experts in valuation
matters.
70
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 under the Securities Act
with respect to the shares of Common Stock offered hereby. This Prospectus does
not contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement and the
exhibits and schedules thereto may be inspected without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington D.C. 20549, and at the Commission's regional offices at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of all or any part of the
Registration Statement may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements, and other information that has been
or will be filed by the Company.
The Company intends to furnish holders of the Common Stock with annual
reports containing audited financial statements certified by independent
auditors, and quarterly reports for each of the first three quarters of each
year containing unaudited financial information.
71
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Pro Forma Consolidated Financial Statements................................................................ F-2
Pro Forma Consolidated Statement of Operations for the year ended January 3, 1998 (unaudited)............ F-2
Pro Forma Consolidated Statements of Operations for the nine months ended September 27, 1997 and October
3, 1998 (unaudited).................................................................................... F-3
Pro Forma Consolidated Balance Sheet as of October 3, 1998 (unaudited)................................... F-4
Consolidated Financial Statements.......................................................................... F-5
Report of Independent Auditors........................................................................... F-5
Consolidated Balance Sheets as of December 28, 1996 and January 3, 1998 and October 3, 1998.............. F-6
Consolidated Statements of Operations for the years ended December 30, 1995, December 28, 1996 and
January 3, 1998 and the nine months ended September 27, 1997 (unaudited) and October 3, 1998........... F-7
Consolidated Statements of Shareholders' Deficit for the years ended December 30, 1995, December 28, 1996
and January 3, 1998 and the nine months ended October 3, 1998.......................................... F-8
Consolidated Statements of Cash Flows for the years ended December 30, 1995, December 28, 1996 and
January 3, 1998 and the nine months ended September 27, 1997 (unaudited) and October 3, 1998........... F-9
Notes to Consolidated Financial Statements............................................................... F-10
</TABLE>
F-1
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The pro forma consolidated statements of operations data set forth below for
the year ended January 3, 1998 and for the nine months ended September 27, 1997
and October 3, 1998 give effect to the offering as if it had occurred on
December 29, 1996. The pro forma adjustments are based upon currently available
information and certain assumptions that management of the Company believes are
reasonable under the circumstances.
SELECT COMFORT CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 3, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 3, 1998
------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net sales........................................................ $ 184,430 $-- $ 184,430
Cost of sales.................................................... 66,629 -- 66,629
---------- ----------- ---------
Gross margin................................................. 117,801 -- 117,801
---------- ----------- ---------
Operating expenses:
Sales and marketing............................................ 99,218 -- 99,218
General and administrative..................................... 16,505 -- 16,505
---------- ----------- ---------
Total operating expenses..................................... 115,723 -- 115,723
---------- ----------- ---------
Operating income................................................. 2,078 -- 2,078
---------- ----------- ---------
Other income (expense):
Interest income................................................ 682 -- 682
Interest expense............................................... (5,234) 3,250(1) (346)
1,638(2)
Other, net..................................................... (231) -- (231)
---------- ----------- ---------
Other income (expense), net.................................. (4,783) 4,888 105
---------- ----------- ---------
Income (loss) before income taxes................................ (2,705) 4,888 2,183
Income tax expense............................................... 141 459(2) 600
---------- ----------- ---------
Net income (loss)................................................ $ (2,846) $ 4,429 $ 1,583
---------- ----------- ---------
Cumulative preferred dividends................................... (900) 900(3) --
---------- ----------- ---------
Net income (loss) available to common shareholders............... $ (3,746) $ 5,329 $ 1,583
---------- ----------- ---------
---------- ----------- ---------
Net income (loss) per common share, diluted...................... $ (1.59) $ 0.08
---------- ---------
---------- ---------
Weighted average common shares, diluted.......................... 2,353 16,761(4) 19,114
</TABLE>
- ------------------------
(1) Includes a pro forma adjustment for the elimination of non-cash interest
expense associated with a put warrant, the put feature of which will be
terminated upon the consummation of this offering.
(2) Includes a pro forma adjustment for the elimination of interest expense
associated with the repayment of $15.0 million of the Company's outstanding
indebtedness from the proceeds of this offering and related tax effects.
(3) Gives effect to the elimination of cumulative preferred dividends as a
result of the conversion of outstanding shares of preferred stock into
Common Stock upon the consummation of this offering.
(4) Gives effect to the conversion of all outstanding shares of preferred stock
into Common Stock upon the consummation of this offering, the dilutive
effect of outstanding options and warrants, and shares to be issued upon the
consummation of this offering.
F-2
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 27, 1997 AND OCTOBER 3, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997 OCTOBER 3, 1998
------------------------------------ ------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales......................................... $ 126,470 $-- $ 126,470 $ 178,835 $-- $ 178,835
Cost of sales..................................... 44,886 -- 44,886 62,290 -- 62,290
---------- ----------- --------- ---------- ----------- ---------
Gross margin.................................... 81,584 -- 81,584 116,545 -- 116,545
---------- ----------- --------- ---------- ----------- ---------
Operating expenses:
Sales and marketing............................. 69,476 -- 69,476 95,231 -- 95,231
General and administrative...................... 11,593 -- 11,593 13,932 -- 13,932
---------- ----------- --------- ---------- ----------- ---------
Total operating expenses...................... 81,069 -- 81,069 109,163 -- 109,163
---------- ----------- --------- ---------- ----------- ---------
Operating income.................................. 515 -- 515 7,382 -- 7,382
---------- ----------- --------- ---------- ----------- ---------
Other income (expense):
Interest income................................. 484 -- 484 548 548
Interest expense................................ (3,251) 1,900(1) (259) (6,995) 5,222(1) (135)
1,092(2) 1,638(2)
Other, net...................................... (256) -- (256) -- -- --
---------- ----------- --------- ---------- ----------- ---------
Other income (expense), net................... (3,023) 2,992 (31) (6,447) 6,860 413
---------- ----------- --------- ---------- ----------- ---------
Income (loss) before income taxes................. (2,508) 2,992 484 935 6,860 7,795
Income tax expense................................ 16 306(2) 322 1,348 459(2) 1,807
---------- ----------- --------- ---------- ----------- ---------
Net income (loss)................................. $ (2,524) $2,686 $ 162 $ (413) $6,401 $ 5,988
Cumulative preferred dividends.................... (675) 675(3) -- (675) 675(3) --
---------- ----------- --------- ---------- ----------- ---------
Net income (loss) available to common
shareholders.................................... $ (3,199) $3,361 $ 162 $ (1,088) $7,076 $ 5,988
---------- ----------- --------- ---------- ----------- ---------
---------- ----------- --------- ---------- ----------- ---------
Net income (loss) per common share, diluted....... $ (1.39) $ 0.01 $ (0.40) $ 0.30
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Weighted average common shares, diluted........... 2,309 16,581(4) 18,890 2,746 16,948(4) 19,694
</TABLE>
- ------------------------
(1) Includes a pro forma adjustment for the elimination of non-cash interest
expense associated with a put warrant, the put feature of which will be
terminated upon the consummation of this offering.
(2) Includes a pro forma adjustment for the elimination of interest expense
associated with the repayment of $15.0 million of the Company's outstanding
indebtedness from the proceeds of this offering and related tax effects.
(3) Gives effect to the elimination of cumulative preferred dividends as a
result of the conversion of outstanding shares of preferred stock into
Common Stock upon the consummation of this offering.
(4) Gives effect to the conversion of all outstanding shares of preferred stock
into Common Stock upon the consummation of this offering, the dilutive
effect of outstanding options and warrants, and shares to be issued upon the
consummation of this offering.
F-3
<PAGE>
The pro forma consolidated balance sheet data set forth below at October 3,
1998 gives effect to the offering as if it had occurred on October 3, 1998. The
pro forma adjustments are based upon currently available information and certain
assumptions that management of the Company believes are reasonable under current
circumstances.
SELECT COMFORT CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
OCTOBER 3, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 9,579 $ 41,097(3) $35,676
(15,000)(4)
Accounts receivable, net...................................................... 8,977 -- 8,977
Inventories................................................................... 10,315 -- 10,315
Prepaid expenses.............................................................. 4,479 (433)(3) 4,046
Deferred tax assets........................................................... 388 -- 388
---------- ----------- ---------
Total current assets...................................................... 33,738 25,664 59,402
---------- ----------- ---------
Property and equipment, net..................................................... 28,255 -- 28,255
Other assets.................................................................... 1,330 (573)(4) 757
---------- ----------- ---------
Total assets.............................................................. $ 63,323 $ 25,091 $88,414
---------- ----------- ---------
---------- ----------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.......................................... $ 1,052 $ -- $ 1,052
Accounts payable.............................................................. 12,247 -- 12,247
Accruals:
Sales returns............................................................... 5,620 -- 5,620
Warranty costs.............................................................. 3,862 -- 3,862
Compensation, taxes and benefits............................................ 3,049 -- 3,049
Other....................................................................... 4,302 (669)(4) 3,633
---------- ----------- ---------
Total current liabilities................................................. 30,132 (669) 29,463
Long-term debt, less current maturities......................................... 24,244 (10,892)(1) 167
(13,185)(4)
Other liabilities............................................................... 1,691 -- 1,691
---------- ----------- ---------
Total liabilities......................................................... 56,067 (24,746) 31,321
---------- ----------- ---------
Series A-E mandatorily redeemable preferred stock, $1.00--$1.25 par value;
12,091,962 and no shares issued and outstanding, respectively................. 12,692 (12,692)(2) --
Additional paid-in capital...................................................... 14,920 (14,920)(2) --
---------- ----------- ---------
27,612 (27,612) --
---------- ----------- ---------
Common shareholders' equity (deficit):
Undesignated preferred stock; no shares issued and outstanding................ -- -- --
Common stock, $.01 par value; 2,989,885 and 18,122,249 shares issued and
outstanding, respectively................................................... 30 123(2) 181
28(3)
Additional paid-in capital.................................................... 3,328 27,489(2) 82,345
40,636(3)
10,892(1)
Accumulated deficit........................................................... (22,720) (1,719)(4) (24,439)
Notes receivable--investors................................................... (994) -- (994)
---------- ----------- ---------
Total common shareholders' equity (deficit)............................... (20,356) 77,449 57,093
---------- ----------- ---------
Total liabilities and shareholders' equity................................ $ 63,323 $ 25,091 $88,414
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
- ------------------------------
(1) As adjusted to give effect to the reclassification of a put warrant from
debt to common shareholders' equity upon the consummation of the offering.
(2) Reflects automatic conversion of preferred stock to common stock upon the
consummation of the offering.
(3) Reflects the net proceeds from the issuance of 2,800,000 shares at an
assumed initial public offering price of $16.00 per share.
(4) Reflects repayment of the Company's March 1997 $15.0 million indebtedness,
the expensing of certain deferred costs associated therewith, and related
tax effects.
F-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Select Comfort Corporation:
We have audited the accompanying consolidated balance sheets of Select
Comfort Corporation and subsidiaries (the Company) as of December 28, 1996,
January 3, 1998 and October 3, 1998, and the related consolidated statements of
operations, shareholders' deficit, and cash flows for each of the years in the
three-year period ended January 3, 1998 and for the nine months ended October 3,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Select
Comfort Corporation and subsidiaries as of December 28, 1996, January 3, 1998
and October 3, 1998, and the results of their operations and their cash flows
for each of the years in the three-year period ended January 3, 1998 and for the
nine months ended October 3, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 23, 1998
F-5
<PAGE>
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1996, JANUARY 3, 1998 AND OCTOBER 3, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 3,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 2,422 $ 12,670 $ 9,579
Accounts receivable, net of allowance for doubtful accounts of $200, $1,901,
and $2,817, respectively (note 2)......................................... 1,202 6,001 8,977
Inventories (note 3)........................................................ 5,582 7,749 10,315
Prepaid expenses............................................................ 1,689 4,256 4,479
Deferred tax assets......................................................... -- -- 388
---------- ---------- -----------
Total current assets.................................................... 10,895 30,676 33,738
Property and equipment, net (note 4).......................................... 18,316 25,183 28,255
Other assets.................................................................. 583 1,382 1,330
---------- ---------- -----------
Total assets............................................................ $ 29,794 $ 57,241 $ 63,323
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable to investors (note 6)......................................... $ 1,252 $ -- $ --
Current maturities of long-term debt (note 7)............................... 563 999 1,052
Accounts payable............................................................ 9,173 12,199 12,247
Accruals:
Sales returns............................................................. 2,795 5,324 5,620
Warranty costs............................................................ 2,036 3,257 3,862
Compensation, taxes and benefits.......................................... 1,723 3,149 3,049
Other..................................................................... 1,162 4,991 4,302
---------- ---------- -----------
Total current liabilities............................................... 18,704 29,919 30,132
Long-term debt, less current maturities (note 7).............................. 1,162 19,511 24,244
Other liabilities............................................................. 532 1,237 1,691
---------- ---------- -----------
Total liabilities....................................................... 20,398 50,667 56,067
---------- ---------- -----------
Series A-E mandatorily redeemable preferred stock, $1.00-$1.25 par value;
12,123,390 shares authorized, 12,091,962 shares issued and outstanding (note
8).......................................................................... 12,692 12,692 12,692
Additional paid-in capital.................................................... 14,920 14,920 14,920
---------- ---------- -----------
27,612 27,612 27,612
---------- ---------- -----------
Common shareholders' deficit (note 9):
Undesignated preferred stock; 5,000,000 shares authorized, no shares issued
and outstanding........................................................... -- -- --
Common stock, $.01 par value; 25,000,000 shares authorized, 1,847,146 and
2,477,660 and 2,989,885 shares issued and outstanding, respectively....... 19 25 30
Additional paid-in capital.................................................. 1,226 1,662 3,328
Accumulated deficit......................................................... (19,461) (22,307) (22,720)
Notes receivable--investors (note 14)....................................... -- (418) (994)
---------- ---------- -----------
Total common shareholders' deficit...................................... (18,216) (21,038) (20,356)
---------- ---------- -----------
Commitments (notes 5, 7 and 15)
Total liabilities and shareholders' deficit............................. $ 29,794 $ 57,241 $ 63,323
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996
AND JANUARY 3, 1998 AND NINE MONTHS
ENDED SEPTEMBER 27, 1997 AND OCTOBER 3, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
SEPTEMBER 27, OCTOBER 3,
1995 1996 1997 1997 1998
--------- ---------- ---------- ------------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.......................................... $ 68,629 $ 102,028 $ 184,430 $ 126,470 $ 178,835
Cost of sales...................................... 28,833 38,521 66,629 44,886 62,290
--------- ---------- ---------- ------------- ----------
Gross margin..................................... 39,796 63,507 117,801 81,584 116,545
--------- ---------- ---------- ------------- ----------
Operating expenses:
Sales and marketing.............................. 34,164 54,814 99,218 69,476 95,231
General and administrative....................... 10,221 12,457 16,505 11,593 13,932
--------- ---------- ---------- ------------- ----------
Total operating expenses..................... 44,385 67,271 115,723 81,069 109,163
--------- ---------- ---------- ------------- ----------
Operating income (loss)............................ (4,589) (3,764) 2,078 515 7,382
--------- ---------- ---------- ------------- ----------
Other income (expense):
Interest income.................................. 136 244 682 484 548
Interest expense (note 7)........................ (34) (88) (5,234) (3,251) (6,995)
Other, net....................................... (73) (77) (231) (256) --
--------- ---------- ---------- ------------- ----------
Other income (expense), net.................. 29 79 (4,783) (3,023) (6,447)
--------- ---------- ---------- ------------- ----------
Income (loss) before income taxes.................. (4,560) (3,685) (2,705) (2,508) 935
Income tax expense (note 10)....................... -- -- 141 16 1,348
--------- ---------- ---------- ------------- ----------
Net loss........................................... $ (4,560) $ (3,685) $ (2,846) $ (2,524) $ (413)
--------- ---------- ---------- ------------- ----------
--------- ---------- ---------- ------------- ----------
Cumulative preferred dividends..................... -- $ (900) $ (900) $ (675) $ (675)
--------- ---------- ---------- ------------- ----------
Net loss available to common shareholders.......... $ (4,560) $ (4,585) $ (3,746) $ (3,199) $ (1,088)
--------- ---------- ---------- ------------- ----------
--------- ---------- ---------- ------------- ----------
Net loss per common share (note 11)
Basic............................................ $ (3.16) $ (2.61) $ (1.59) $ (1.39) $ (0.40)
--------- ---------- ---------- ------------- ----------
--------- ---------- ---------- ------------- ----------
Diluted.......................................... $ (3.16) $ (2.61) $ (1.59) $ (1.39) $ (0.40)
--------- ---------- ---------- ------------- ----------
--------- ---------- ---------- ------------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996,
AND JANUARY 3, 1998
AND NINE MONTHS ENDED OCTOBER 3, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL NOTES
---------------------- PAID-IN ACCUMULATED RECEIVABLE -
SHARES AMOUNT CAPITAL DEFICIT INVESTORS TOTAL
--------- ----------- ----------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994................ 1,348,579 $ 13 $ 611 $ (11,216) $ -- $ (10,592)
Exercise of common stock options.......... 186,153 2 121 -- -- 123
Conversion of subordinated debenture...... 52,076 1 249 -- -- 250
Net loss.................................. -- -- -- (4,560) -- (4,560)
--------- ----------- ----------- ------------ ----- ---------
Balance at December 30, 1995................ 1,586,808 16 981 (15,776) -- (14,779)
Exercise of common stock options.......... 260,338 3 245 -- -- 248
Net loss.................................. -- -- -- (3,685) -- (3,685)
--------- ----------- ----------- ------------ ----- ---------
Balance at December 28, 1996................ 1,847,146 19 1,226 (19,461) -- (18,216)
Exercise of common stock options.......... 630,514 6 436 -- -- 442
Issuance of investor notes................ -- -- -- -- (418) (418)
Net loss.................................. -- -- -- (2,846) -- (2,846)
--------- ----------- ----------- ------------ ----- ---------
Balance at January 3, 1998.................. 2,477,660 25 1,662 (22,307) (418) (21,038)
Exercise of common stock options and
warrants................................ 512,225 5 1,666 -- -- 1,671
Issuance of investor notes ............... -- -- -- -- (576) (576)
Net loss.................................. -- -- -- (413) -- (413)
--------- ----------- ----------- ------------ ----- ---------
Balance at October 3, 1998 ................. 2,989,885 $ 30 $ 3,328 $ (22,720) $ (994) $ (20,356)
--------- ----------- ----------- ------------ ----- ---------
--------- ----------- ----------- ------------ ----- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996,
AND JANUARY 3, 1998
AND NINE MONTHS ENDED SEPTEMBER 27, 1997 AND OCTOBER 3, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
1995 1996 1997 ---------------
--------- --------- --------- SEPTEMBER 27,
1997
---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................................. $ (4,560) $ (3,685) $ (2,846) $ (2,524)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization.......................................... 1,090 2,094 4,030 2,744
Loss on disposal of property and equipment............................. 11 66 264 264
Deferred tax assets.................................................... -- -- -- --
Interest expense from put warrant valuation............................ -- -- 3,250 1,901
Change in operating assets and liabilities:
Accounts receivable, net............................................. (488) (421) (4,799) 60
Inventories.......................................................... (1,177) (500) (2,167) (2,760)
Prepaid expenses..................................................... (171) (781) (2,567) (1,413)
Accounts payable..................................................... 1,961 4,039 3,026 2,493
Accrued sales returns................................................ 1,102 888 2,529 1,766
Accrued warranty costs............................................... 782 646 1,221 1,178
Accrued compensation, taxes and benefits............................. 813 393 1,426 560
Other accrued liabilities............................................ 332 158 3,829 1,087
Other assets......................................................... (154) (91) (565) (507)
Other liabilities.................................................... 55 270 705 642
--------- --------- --------- -------
Net cash provided by (used in) operating activities................ (404) 3,076 7,336 5,491
--------- --------- --------- -------
Cash flows from investing activities:
Purchases of property and equipment.................................... (5,614) (10,122) (10,727) (9,031)
--------- --------- --------- -------
Net cash used in investing activities.............................. (5,614) (10,122) (10,727) (9,031)
--------- --------- --------- -------
Cash flows from financing activities:
Proceeds from issuance of debt........................................... 31 2,850 16,184 16,184
Principal payments on debt............................................... -- (523) (2,203) (1,968)
Debt issuance costs...................................................... -- -- (781) (781)
Proceeds from issuance of common stock................................... 123 292 439 399
Proceeds from issuance of redeemable preferred stock 8,956 (13) -- --
--------- --------- --------- -------
Net cash provided by financing activities.......................... 9,110 2,606 13,639 13,834
--------- --------- --------- -------
Increase (decrease) in cash and cash equivalents................... 3,092 (4,440) 10,248 10,294
Cash and cash equivalents, at beginning of period.......................... 3,770 6,862 2,422 2,422
--------- --------- --------- -------
Cash and cash equivalents, at end of period................................ $ 6,862 $ 2,422 $ 12,670 $ 12,716
--------- --------- --------- -------
--------- --------- --------- -------
<CAPTION>
-----------
<S> <C>
Cash flows from operating activities:
Net loss................................................................. $ (413)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization.......................................... 3,985
Loss on disposal of property and equipment............................. --
Deferred tax assets.................................................... (388)
Interest expense from put warrant valuation............................ 5,222
Change in operating assets and liabilities:
Accounts receivable, net............................................. (2,976)
Inventories.......................................................... (2,566)
Prepaid expenses..................................................... (223)
Accounts payable..................................................... 48
Accrued sales returns................................................ 296
Accrued warranty costs............................................... 605
Accrued compensation, taxes and benefits............................. (100)
Other accrued liabilities............................................ (689)
Other assets......................................................... (618)
Other liabilities.................................................... 454
-----------
Net cash provided by (used in) operating activities................ 2,637
-----------
Cash flows from investing activities:
Purchases of property and equipment.................................... (6,659)
-----------
Net cash used in investing activities.............................. (6,659)
-----------
Cash flows from financing activities:
Proceeds from issuance of debt........................................... --
Principal payments on debt............................................... (740)
Debt issuance costs...................................................... --
Proceeds from issuance of common stock................................... 1,671
Proceeds from issuance of redeemable preferred stock --
-----------
Net cash provided by financing activities.......................... 931
-----------
Increase (decrease) in cash and cash equivalents................... (3,091)
Cash and cash equivalents, at beginning of period.......................... 12,670
-----------
Cash and cash equivalents, at end of period................................ $ 9,579
-----------
-----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Select Comfort Corporation and its wholly owned subsidiaries (the Company)
develop, manufacture, and market air beds and sleep-related products. The
Company's fiscal year ends on the Saturday closest to December 31. Fiscal years
1995 and 1996 each had 52 weeks. Fiscal 1997 had 53 weeks. Certain prior year
amounts have been reclassified to conform to the current year presentation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
INTERIM FINANCIAL INFORMATION
The financial information presented for the nine months ended September 27,
1997 is unaudited. In the opinion of management, this unaudited financial
information contains all adjustments (which consist only of normal, recurring
adjustments) necessary for a fair presentation. Operating results for the nine
months ended October 3, 1998 are not necessarily indicative of results that may
be expected for the full year.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with initial
maturities of three months or less.
INVENTORIES
Inventories includes material, labor, and overhead and is 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, are depreciated using the
straight-line method over the estimated useful lives of the assets, which range
from three to seven years. Leasehold improvements are amortized over the shorter
of the life of the lease or ten years.
OTHER ASSETS
Other assets include security deposits, patents, trademarks, and debt
issuance costs. Patents and trademarks are amortized using the straight-line
method over a 17-year period and 15-year period, respectively. Debt issuance
costs are amortized using the straight-line method over the term of the debt.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-10
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
ACCRUED WARRANTY COSTS
The Company has a 20-year warranty on air beds, the last 15 years of which
are on a prorated basis. Estimated warranty costs are provided at the time of
sale of the warranted products. Estimates are based upon historical warranty
claims incurred by the Company. Given the limited history available, actual
results could differ from these estimates.
ACCRUED SALES RETURNS
Estimated sales returns are provided at the time of sale based upon
historical sales returns. Returns are allowed by the Company for 90 nights
following the sale.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents and accounts receivable
approximate fair value because of the short-term maturity of those instruments.
The fair value of long-term debt approximates carrying value based on the
Company's estimate of rates that would be available to it for debt of the same
remaining maturities. Warrants are recorded at fair value based on a third party
valuation. The Company believes it is not practical to estimate a fair market
value different from the redeemable preferred stock's carrying value, as this
security has numerous unique features (See Note 8).
REVENUE RECOGNITION
Revenue is recognized when products are shipped to customers net of
estimated returns.
STOCK COMPENSATION
The Company records compensation expense for option grants under its stock
option plan if the current market value of the underlying stock at the grant
date exceeds the stock option exercise price. Pro forma disclosure of the net
income impact of applying an alternative method of recognizing stock
compensation expense over the vesting period based on the fair value of all
stock-based awards on the date of grant is presented in Note 9.
F-11
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with research and development are charged to
expense as incurred. Research and development expense was $1,412,000, $1,464,000
and $1,819,000 in 1995, 1996 and 1997, respectively, and $1,310,000 and
$1,085,000 for the nine months ended September 27, 1997 and October 3, 1998,
respectively.
PRE-OPENING COSTS
Costs associated with the opening of new stores are expensed as incurred.
DIRECT RESPONSE ADVERTISING COSTS
The Company incurs direct response advertising costs associated with print
and broadcast advertisements. Such costs are charged to expense as incurred.
Advertising expense was $10,545,000, $16,224,000 and $28,281,000 in 1995, 1996
and 1997, respectively, and $20,851,000 and $24,120,000 for the nine months
ended September 27, 1997 and October 3, 1998, respectively.
INCOME TAXES
The Company recognizes 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.
EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing the
income available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share includes common
stock equivalents consisting of stock options and warrants determined by the
treasury stock method, and dilutive convertible securities.
(2) ACCOUNTS RECEIVABLE
In June 1997, the Company began utilizing a third party bank to offer its
qualified customers an unsecured revolving credit arrangement to finance
purchases from the Company. The bank sets the rates, fees and all other terms
and conditions of the customer accounts, including collection policies and
procedures, and is the owner of the accounts. In connection with all purchases
financed under these arrangements, the bank pays the Company an amount equal to
the total amount of such purchases, net of promotional related discounts and
less amounts retained for recourse related to returned products and limited
recourse related to bad debts. The bank's recourse for bad debts is limited to a
specified percent of receivables generated. The bank had retained $3,882,000 and
$10,080,000 as of January 3, 1998 and October 3, 1998, respectively, under terms
of the agreement. The Company has included such amounts in its accounts
receivable net of estimated allowance for doubtful accounts.
F-12
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)
(3) INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3, OCTOBER 3,
1996 1998 1998
------------- ----------- -----------
<S> <C> <C> <C>
Raw materials.......................................... $ 3,829 $ 5,891 $ 6,920
Work in progress....................................... 760 39 76
Finished goods......................................... 993 1,819 3,319
------ ----------- -----------
$ 5,582 $ 7,749 $ 10,315
------ ----------- -----------
------ ----------- -----------
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3, OCTOBER 3,
1996 1998 1998
------------ ----------- -----------
<S> <C> <C> <C>
Leasehold improvements...................................... $ 12,151 $ 18,164 $ 22,804
Office furniture and equipment.............................. 2,233 2,698 2,916
Production machinery and computer equipment................. 5,050 7,062 8,701
Other....................................................... 826 1,256 1,424
Property and equipment under capital lease.................. 1,870 2,971 2,966
Less accumulated depreciation and amortization.............. (3,814) (6,968) (10,556)
------------ ----------- -----------
$ 18,316 $ 25,183 $ 28,255
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
(5) LEASES
The Company rents office and manufacturing space under two operating leases
which, in addition to the minimum lease payments, require payment of a
proportionate share of the real estate taxes and building operating expenses.
The Company also rents retail space under operating leases which, in addition to
the minimum lease payments, require payment of percentage rents based upon sales
levels. Rent expense aggregated $2,550,000, $5,112,000 and $9,357,000 for 1995,
1996 and 1997, respectively, and $6,539,000 and $9,215,000 for the nine months
ended September 27, 1997 and October 3, 1998, respectively, including percentage
rents of $152,000, $237,000 and $892,000 for 1995, 1996 and 1997, respectively,
and $545,000 and $1,171,000 for the nine months ended September 27, 1997 and
October 3, 1998, respectively.
The Company also leases equipment under noncancelable operating leases.
Costs incurred under these operating leases aggregated $384,000, $402,000 and
$683,000 for 1995, 1996 and 1997, respectively, and $478,000 and $632,000 for
the nine months ended September 27, 1997 and October 3, 1998, respectively.
F-13
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)
(5) LEASES (CONTINUED)
The aggregate minimum rental commitments under operating leases for the
reminder of 1998 is $2,757,000 and for subsequent years are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
1999............................................................................... $ 11,162
2000............................................................................... 11,318
2001............................................................................... 11,352
2002............................................................................... 11,098
2003............................................................................... 10,375
Thereafter......................................................................... 29,370
---------
$ 84,675
---------
---------
</TABLE>
(6) NOTES PAYABLE TO INVESTORS
In November 1996, the Company borrowed $1,252,000 and issued short-term
notes payable to several related parties at 8% interest per annum. In connection
with these notes, the Company granted warrants to purchase 59,606 shares of the
Company's common stock at a purchase price of $5.25 per share. In accordance
with the note agreements, an additional 11,919 common stock warrants were issued
during 1997 at an exercise price of $5.25 per share. The notes were repaid in
full in March 1997.
(7) NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
In March 1997, the Company completed a financing under which it issued a
senior subordinated promissory note in the principal amount of $15,000,000, a
warrant to purchase 1,100,000 shares of the Company's common stock at $10.50 per
share and a warrant to purchase 1,000,000 shares of common stock at $0.01 per
share. These warrants were subsequently adjusted and combined, resulting in a
single warrant to purchase 1,309,583 shares of common stock at $8.82 per share,
exercisable at any time prior to March 31, 2005. (see Note 9). At October 3,
1998, the Company was in compliance with all financial covenants.
The warrant holder may require repurchase of the warrant if an IPO has not
been completed prior to March 27, 2002. The repurchase amount would be equal to
the excess of the estimated fair market value of the Company's common stock, as
determined by the warrant agreement, over the exercise price of the warrant. The
Company also has an option to repurchase the warrant if the warrant has not been
exercised prior to March 27, 2004. As required by Emerging Issues Task Force
Issue 96-13 (EITF 96-13), the warrant is recorded at fair value and recorded as
long-term debt. At January 3, 1998 and October 3, 1998, the fair value of the
warrant was $5,670,000 and $10,892,000, respectively.
In addition, EITF 96-13 requires that any change in fair value of the
warrant be reflected as interest expense. Accordingly, the financial statements
reflect interest expense of $3,250,000 for 1997 and $1,900,000 and $5,222,000
for the nine months ended September 27, 1997 and October 3, 1998, respectively.
In addition, in connection with the March 1997 $15.0 million debt issuance, the
Company recorded original issue discount equal to $2,420,000, which is being
amortized over the term of the note.
F-14
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)
(7) NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
Long-term obligations under notes and capital leases are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3, OCTOBER 3,
1996 1998 1998
------------- ----------- -----------
<S> <C> <C> <C>
Senior subordinated note payable to financing company
due March 2003 with interest payable quarterly at 11%
per annum. Face amount of $15,000,000 net of
$2,118,000 and $1,815,000, respectively, of debt
discount with an effective interest rate of 13.7%.... $ -- $ 12,882 $ 13,185
Warrant subject to put provision....................... -- 5,670 10,892
Notes payable under capital lease agreements, payable
in monthly installments through March 2000, with
interest at 9.75%--12.5% per annum. Financing
available under these agreements aggregates
$3,000,000, of which $2,966,000 had been utilized at
October 3, 1998. In connection with these notes, the
Company granted the vendor warrants to acquire 31,428
shares of the Company's Series E convertible
preferred stock (note 8)............................. 1,725 1,958 1,219
------ ----------- -----------
1,725 20,510 25,296
Less current maturities................................ 563 999 1,052
------ ----------- -----------
$ 1,162 $ 19,511 $ 24,244
------ ----------- -----------
------ ----------- -----------
</TABLE>
Aggregate annual maturities of long-term debt for the five years subsequent
to October 3, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999............................................................................... $ 1,052
2000............................................................................... 167
2001............................................................................... --
2002............................................................................... 10,892
2003............................................................................... 15,000
</TABLE>
F-15
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)
(8) MANDATORILY REDEEMABLE PREFERRED STOCK
The holders of the Series A, B, C, D, and E mandatorily redeemable preferred
stock are entitled to receive dividends out of funds legally available for
dividends if and when declared by the board of directors. No dividends can be
paid to common shareholders unless the dividend is allocated among the holders
of Series A, B, C, D, and E shares and the holders of common shares based on the
amount of the investment in the Company represented by each such class. In
addition, the holders of Series E preferred stock are entitled to a cumulative
dividend of $1.05 per share before dividends may be paid on any other class of
capital stock. At October 3, 1998, cumulative dividends in arrears equaled
$2,475,000. In the event of voluntary or involuntary liquidation, dissolution,
or winding up of the Company or in the event of a sale of the Company's assets
or a merger with another corporation, the holders of the Company's shares of
preferred stock are entitled to receive the following amounts in the following
order of priority: (1) Series E, $21.00 per share through December 31, 1997 and
$10.50 per share plus cumulative dividends thereafter, (2) Series D, $2.88 per
share, Series C, $2.27 per share, Series B, $1.25 per share, and Series A, $1.00
per share, respectively, before any distribution is made with respect to the
common stock. The Series A, B, C, D, and E shareholders have special voting
rights as defined by the Articles of Incorporation. However, in the event of an
underwritten public offering of the Company's common stock meeting certain
requirements, the special voting rights will terminate.
The Series A, B, C, D, and E are convertible into an aggregate of 12,255,209
shares of common stock at any time or can be automatically converted into common
stock upon the issuance of common stock in an underwritten public offering where
the gross proceeds received by the Company equal or exceed $20,000,000 and the
public offering price equals or exceeds $14.25 per share and, solely with
respect to Series E, $19.95 per share after 1997. The conversion price was
initially based on a one for one conversion of preferred to common shares.
Effective March 31, 1998, the Series E conversion price was adjusted from $10.50
per share to $8.82 per share as a result of its anti-dilution clause. The Series
A, B, C, D, and E must be redeemed by the Company, 1/3 each on or before
December 31, 1998, 1999, and 2000 at $1.00, $1.25, $2.27, $2.88, and $10.50 per
share, respectively. The holders of the Series A, B, C, D, and E have the option
to defer this redemption offer for successive one-year periods. The deferral
does not affect the Company's obligation to redeem in successive years. If the
holders of the Series A, B, C, D, and E elect to defer the redemption, the
Company has the right, but not the obligation, to redeem the Series A, B, C, D,
and E on December 31, 2000.
F-16
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)
(8) MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED)
Mandatorily redeemable preferred stock consisted of the following as of
December 28, 1996, January 3, 1998 and October 3, 1998 (in thousands):
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN
PAR VALUE CAPITAL
--------- -----------
<S> <C> <C>
Series A, $1.00 par value; 4,458,852 shares authorized, issued, and
outstanding.......................................................... $ 4,459 $ --
Series B, $1.25 par value; 2,400,000 shares authorized, issued, and
outstanding.......................................................... 3,000 --
Series C, $1.00 par value; 2,292,635 shares authorized, issued, and
outstanding.......................................................... 2,293 2,972
Series D, $1.00 par value; 2,083,332 shares authorized, issued, and
outstanding.......................................................... 2,083 3,862
Series E, $1.00 par value; 888,571 shares authorized and 857,143 shares
issued and outstanding............................................... 857 8,086
--------- -----------
Total mandatorily redeemable preferred stock......................... $ 12,692 $ 14,920
--------- -----------
--------- -----------
</TABLE>
Changes in mandatorily redeemable preferred stock are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN
SHARES AMOUNT CAPITAL TOTAL
------------ --------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 ..................................... 11,234,819 $ 11,835 $ 6,834 $ 18,669
Issuance of Series E preferred stock ........................... 857,143 857 8,099 8,956
------------ --------- ----------- ---------
Balance at December 30, 1995 ..................................... 12,091,962 12,692 14,933 27,625
Issuance of Series E preferred stock ........................... -- -- (13) (13)
------------ --------- ----------- ---------
Balance at December 28, 1996, January 3, 1998 and October 3, 1998
................................................................ 12,091,962 $ 12,692 $ 14,920 $ 27,612
------------ --------- ----------- ---------
------------ --------- ----------- ---------
</TABLE>
F-17
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)
(9) SHAREHOLDERS' DEFICIT
STOCK OPTIONS
The Board of Directors has reserved 4,300,000 shares of common stock for
options that may be granted to key employees, directors, or others under the
Company's stock option plans.
A summary of the status of the Company's stock option plans for the periods
ended October 3, 1998 is as follows:
<TABLE>
<CAPTION>
AVERAGE
EXERCISE
SHARES PRICE
---------- -----------
<S> <C> <C>
Outstanding at December 31, 1994........................................................... 1,355,775 $ 0.54
Granted.................................................................................. 545,500 3.79
Exercised................................................................................ 186,153 0.65
Canceled................................................................................. 79,939 0.66
---------- -----
Outstanding at December 30, 1995 (including 947,193 shares exercisable).................... 1,635,183 1.59
Granted.................................................................................. 443,850 5.25
Exercised................................................................................ 260,338 1.09
Canceled................................................................................. 139,522 2.29
---------- -----
Outstanding at December 28, 1996 (including 1,105,468 shares exercisable).................. 1,679,173 2.58
Granted.................................................................................. 1,073,750 6.20
Exercised................................................................................ 630,514 0.70
Canceled................................................................................. 26,800 4.29
---------- -----
Outstanding at January 3, 1998 (including 931,319 shares exercisable)...................... 2,095,609 4.98
Granted.................................................................................. 201,450 12.03
Exercised................................................................................ 509,225 3.17
Canceled................................................................................. 127,307 5.01
---------- -----
Outstanding at October 3, 1998 (including 797,971 shares exercisable)...................... 1,660,527 $ 6.38
---------- -----
---------- -----
</TABLE>
The following table summarizes information about options outstanding at
October 3, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------- OPTIONS EXERCISABLE
AVERAGE -----------------------
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE SHARES LIFE (YEARS) PRICE SHARES PRICE
- ---------------- ---------- --------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.45 - 0.45 6,148 4.69 $ 0.45 6,148 $ 0.45
0.75 - 1.00 75,530 5.96 0.94 72,688 0.93
4.80 - 6.50 1,181,022 7.98 5.25 590,434 5.19
7.50 - 11.00 360,702 9.27 10.25 121,446 9.91
14.00 - 19.00 37,125 9.74 16.70 7,260 16.45
---------- --- ----------- ---------- -----------
$ 0.45 - 19.00 1,660,527 8.20 $ 6.38 797,976 $ 5.59
---------- --- ----------- ---------- -----------
---------- --- ----------- ---------- -----------
</TABLE>
No compensation cost has been recognized in the financial statements for
stock options grants. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options
F-18
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)
(9) SHAREHOLDERS' DEFICIT (CONTINUED)
under an alternative accounting method, the Company's net loss would have been
adjusted as indicated below (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED OCTOBER
1995 1996 1997 3, 1998
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Net loss: As reported....................... $ (4,560) $ (3,685) $ (2,846) $ (413)
Pro forma........................... $ (4,892) $ (4,253) $ (3,563) $ (1,187)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Sholes option-pricing model with the following assumptions: expected
dividend yield--0%; expected stock price volatility--40%; risk-free interest
rate--6.4% for 1995, 1996 and 1997, and 4.6% for the nine months ended October
3, 1998; expected life of options--4.5 years, 3.0 years, 4.2 years and 3.0 years
for 1995, 1996, 1997, and the nine months ended October 3, 1998, respectively.
The per share weighted-average fair value of stock options granted during 1995,
1996, 1997 and the nine months ended October 3, 1998 was $1.80, $2.03, $1.92,
and $3.85, respectively.
WARRANTS
In connection with the financing completed in March 1997 (see Note 7), the
Company issued a warrant to purchase 1,100,000 shares of Common Stock at $10.50
per share (Series A Warrant) and a warrant to purchase 1,000,000 shares of
Common Stock at $0.01 per share (Series B Warrant). The Series B Warrant
provided that the number of shares exercisable could be reduced based on future
earnings levels or in the event the Company completed an initial public
offering. Effective March 31, 1998, the warrants were adjusted and combined,
resulting in a single warrant to purchase 1,309,583 shares of Common Stock at
$8.82 per share, exercisable at any time prior to March 31, 2005.
In April 1996, the Company amended the Series E Stock Purchase Agreement
dated December 28, 1995 to provide for the issuance of warrants to the holders
of Series E Preferred Stock to purchase an aggregate of 171,429 shares of Common
Stock at an exercise price of $5.25 per share. During September 1998, warrants
for 3,000 common shares were exercised. Warrants for 168,429 shares remained
outstanding at October 3, 1998.
In connection with a capital lease transaction with a vendor in 1997, the
Company granted the vendor warrants to acquire 31,428 shares of the Company's
Series E convertible preferred stock at a purchase price of $10.50 per share.
The warrants are exercisable for the shorter of (1) ten years from the grant
date, or (2) five years from the effective date of an initial public offering.
In connection with short-term debt issued to related parties in 1996, the
Company granted warrants to purchase 71,525 shares of the Company's common stock
at a purchase price of $5.25 per share. The warrants are exercisable for ten
years from the grant date.
F-19
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)
(10) INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED OCTOBER
1995 1996 1997 3, 1998
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Current:
Federal........................................................... $ -- $ -- $ 125 $ 1,192
State............................................................. -- -- 16 544
--------- --------- --------- ------
-- -- 141 1,736
--------- --------- --------- ------
Deferred:
Federal........................................................... -- -- -- (321)
State............................................................. -- -- -- (67)
--------- --------- --------- ------
-- -- -- (388)
--------- --------- --------- ------
Income tax expense.................................................. $ -- $ -- $ 141 $ 1,348
--------- --------- --------- ------
--------- --------- --------- ------
</TABLE>
Effective tax rates differ from statutory federal income tax rates as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED OCTOBER
1995 1996 1997 3, 1998
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Statutory federal income tax rate.............. (34.0)% (34.0)% (34.0)% 35.0%
Nondeductible interest expense, put warrants... -- -- 40.8 195.4
Change in valuation allowance.................. 36.0 33.0 (2.7) (211.0)
Effect of change in tax rate on deferred tax
asset........................................ 0.0 8.6 0.0 0.0
State income taxes, net of federal benefit..... (2.0) (4.0) 0.4 37.8
General business credits....................... 0.0 (2.6) 0.0 0.0
To adjust to annualized effective rate......... 0.0 0.0 0.0 83.5
Other.......................................... 0.0 (1.0) 0.7 3.5
--------- --------- --------- ------
0.0% 0.0% 5.2% 144.2%
--------- --------- --------- ------
--------- --------- --------- ------
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets at December 28, 1996, January 3, 1998 and October 3, 1998 are as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Current:
Inventory, warranty, and returns reserves................. $ 1,916 $ 3,361 $ 4,002
Allowance for doubtful accounts........................... 76 722 93
Advertising costs......................................... 300 -- --
Other..................................................... 113 214 734
Long term:
Net operating loss carryforwards.......................... 4,967 2,842 602
Other..................................................... 183 344 465
--------- --------- ---------
Total gross deferred tax assets......................... 7,555 7,483 5,896
Valuation allowance........................................... (7,555) (7,483) (5,508)
--------- --------- ---------
Total net deferred tax assets........................... $ -- $ -- $ 388
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-20
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)
(10) INCOME TAXES (CONTINUED)
At October 3, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $1,600,000. The Company expects
that approximately $1,400,000 of these carryforwards will expire unutilized due
to an Internal Revenue Code (IRC) Section 382 limitation resulting from a prior
ownership change. The remaining $200,000 may be available to offset future
taxable income and will expire between the years 2003 and 2006. The utilization
of the carryforwards may be further restricted in the event of future ownership
changes.
(11) NET LOSS PER COMMON SHARE
The following computations reconcile net loss with net loss per common
share--basic (dollars in thousands, except per share amounts).
<TABLE>
<CAPTION>
1995
----------------------------------
NET PER SHARE
LOSS SHARES AMOUNT
--------- ---------- -----------
<S> <C> <C> <C>
Net loss....................................................................... $ (4,560)
Less cumulative preferred dividends............................................ --
---------
BASIC EPS
Net loss available to common shareholders...................................... $ (4,560) 1,443,741 $ (3.16)
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------
NET PER SHARE
LOSS SHARES AMOUNT
--------- ---------- -----------
<S> <C> <C> <C>
Net loss....................................................................... $ (3,685)
Less cumulative preferred dividends............................................ (900)
---------
BASIC EPS
Net loss available to common shareholders...................................... $ (4,585) 1,753,484 $ (2.61)
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------
NET PER SHARE
LOSS SHARES AMOUNT
--------- ---------- -----------
<S> <C> <C> <C>
Net loss....................................................................... $ (2,846)
Less cumulative preferred dividends............................................ (900)
---------
BASIC EPS
Net loss available to common shareholders...................................... $ (3,746) 2,352,947 $ (1.59)
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 3, 1998
----------------------------------
NET PER SHARE
LOSS SHARES AMOUNT
--------- ---------- -----------
<S> <C> <C> <C>
Net loss....................................................................... $ (413)
Less cumulative preferred dividends............................................ (675)
---------
BASIC EPS
Net loss available to common shareholders...................................... $ (1,088) 2,745,602 $ (0.40)
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
F-21
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)
(11) NET LOSS PER COMMON SHARE (CONTINUED)
Net loss per common share--diluted was equal to net loss per common
share--basic for all periods presented. The following is a summary of those
securities outstanding during the respective periods which have been excluded
from the calculations because the effect on net loss per common share would not
have been dilutive:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
OCTOBER 3,
1995 1996 1997 1998
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Options............................ 1,635,183 1,679,173 2,095,609 1,660,527
Common stock warrants.............. -- 154,023 2,342,954 1,549,537
Preferred stock warrants........... -- 31,428 31,428 31,428
Convertible preferred stock........ 12,091,962 12,091,962 12,091,962 12,091,962
</TABLE>
Convertible preferred stock and preferred stock warrants were convertible
into 12,292,623; common shares during 1995, 1996, 1997 and the nine months ended
October 3, 1998.
(12) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Total cash paid for interest during 1995, 1996 and 1997 was $34,000, $44,000
and $1,512,000, respectively, and $710,000 and $1,372,000, respectively, for the
nine months ended September 27, 1997 and October 3, 1998. There were no cash
payments for income taxes during 1995 or 1996. Income tax payments during 1997
totaled $16,000 and during the nine month periods ended September 27, 1997 and
October 3, 1998 totaled $16,000 and $1,708,000, respectively.
During 1995, $250,000 of notes payable were converted to common stock.
(13) EMPLOYEE BENEFIT PLANS
Effective January 1, 1994, the Company adopted a profit sharing and 401(k)
plan for eligible employees. The plan allows employees to defer up to 15% of
their compensation on a pretax basis. Each year, the Company may make a
discretionary contribution equal to a percentage of the employee's contribution.
The Company did not make a contribution for 1995 and 1996. During 1997 and the
nine months ended October 3, 1998, the Company expensed $78,000 and $50,000,
respectively, relating to its contribution to the 401(k) plan.
(14) RELATED PARTY TRANSACTIONS
At December 28, 1996, the Company had a $50,000 note receivable due from a
former director and executive officer of the Company. The note plus interest at
6% per annum was due on August 31, 1997. On February 20, 1997, the former
director and executive officer signed a promissory note for $387,000, which
replaced the $50,000 note receivable. The note, with interest at 9.25% per
annum, is due and payable to the Company on the earlier of (1) six months
following the completion of an initial public offering of the Company's
securities, or (2) April 30, 1999. The full recourse note is secured by a pledge
of 150,000 shares of the Company's common stock. In April 1998, the former
director and executive officer borrowed an additional $425,000 from the Company
under the same terms as the February 1997 note. At October 3, 1998 the note
receivable, including interest, totaled $890,000.
F-22
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)
(14) RELATED PARTY TRANSACTIONS (CONTINUED)
At December 28, 1996 the Company had a $20,000 note receivable due from an
employee of the Company. This non-interest-bearing note was repaid in 1997.
(15) COMMITMENTS AND CONTINGENCIES
The Company is a party to various claims, legal actions, sales tax disputes,
and other complaints arising in the ordinary course of business. In the opinion
of management, any losses that may occur are adequately covered by insurance or
are provided for in the financial statements and the ultimate outcome of these
matters will not have a material effect on the financial position or results of
operations of the Company.
(16) INITIAL PUBLIC OFFERING
The Company is in the process of completing an initial public offering. Upon
consummation of the offering, mandatorily redeemable preferred shares will be
converted into common shares which will require an increase in authorized
shares. The Company anticipates amending its Articles of Incorporation to
increase authorized common shares from 25,000,000 to 95,000,000.
(17) SUBSEQUENT EVENT (UNAUDITED)
In November 1998, the Company adjusted the conversion price of the Series E
Mandatorily Redeemable Preferred Stock from $8.82 per share to $8.20 per share
(See Note 8). The adjustment was made in accordance with the Series E Stock
Purchase Agreement and is effective on the closing of the Company's initial
public offering. The adjustment would result in the issuance of an additional
77,155 shares of common stock upon conversion. For purposes of calculating net
income (loss) per share in the period in which the initial public offering is
completed, net income available to common shareholders will be reduced by an
amount equal to the 77,155 incremental shares issuable as a result in this
change multiplied by the initial public offering price.
In addition, in connection with antidilution provisions included in the
Company's Series A Warrant (See Note 9), the Company agreed to issue an
additional warrant to purchase 5,513 shares of common stock exercisable at $8.82
per share.
F-23
<PAGE>
[Inside back cover includes a picture of a cross-section of a Select Comfort air
bed, several pictures of people on Select Comfort air beds, a picture of a
Select Comfort air bed and a picture of a remote control unit for a Select
Comfort air bed]
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY
SELLING SHAREHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Consolidated Financial Data...................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 20
Business.................................................................. 29
Management................................................................ 44
Certain Transactions...................................................... 54
Principal and Selling Shareholders........................................ 58
Description of Capital Stock.............................................. 63
Shares Eligible for Future Sale........................................... 67
Underwriting.............................................................. 69
Legal Matters............................................................. 70
Experts................................................................... 70
Additional Information.................................................... 71
Index to Consolidated Financial Statements................................ F-1
</TABLE>
--------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
4,000,000 SHARES
[LOGO]
COMMON STOCK
-------------
PROSPECTUS
-------------
HAMBRECHT & QUIST
BANCBOSTON
ROBERTSON STEPHENS
PIPER JAFFRAY INC.
CHARLES SCHWAB & CO., INC.
, 1998
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All of the amounts shown are
estimates, except the SEC registration fee, the NASD filing fees and the Nasdaq
listing fee.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 32,450
NASD filing fee................................................. 11,500
Nasdaq listing fee.............................................. 95,000
Fees and expenses of counsel for the Company.................... 375,000
Fees and expenses of accountants for the Company................ 225,000
Blue sky fees and expenses...................................... 5,000
Printing expenses............................................... 100,000
Transfer agent fees............................................. 4,000
Miscellaneous................................................... 152,050
---------
Total....................................................... $1,000,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Minnesota Statutes, Section 302A.521 provides that a Minnesota business
corporation shall indemnify any director, officer, employee or agent of the
corporation made or threatened to be made a party to a proceeding, by reason of
the former or present official capacity (as defined) of the person, against
judgments, penalties, fines, settlements and reasonable expenses incurred by the
person in connection with the proceeding if certain statutory standards are met.
"Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including one by or in
the right of the corporation. Section 302A.521 contains detailed terms regarding
such right of indemnification and reference is made thereto for a complete
statement of such indemnification rights. The Company's Articles of
Incorporation also require the Company to provide indemnification to the fullest
extent of the Minnesota indemnification statute.
The Company also maintains a directors and officers insurance policy
pursuant to which directors and officers of the Company are insured against
liability for certain actions in their capacity as directors and officers.
Reference is also made to Section 7(a) of the Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of the
Company against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since August 1, 1995, the Company has issued and sold the following
securities without registration under the Securities Act:
1. On December 28, 1995, the Company sold an aggregate of 857,143
shares of Series E Preferred Stock at a price of $10.50 per share and issued
warrants to purchase an aggregate of 171,429 shares of Common Stock
exercisable through December 28, 2005 at an exercise price of $5.25 pursuant
to the Company's Series E Convertible Preferred Stock Purchase Agreement
dated December 28, 1995, as amended, for an aggregate purchase price of
approximately $9.0 million to 25 accredited investors and three
non-accredited investors, including shares and warrants sold to the
following entities and individuals in the following amounts: Apex Investment
Fund, L.P. (19,380 shares of Series E Preferred Stock convertible into
24,815 shares of Common Stock and a warrant to purchase 3,876 shares); Macke
Limited Partnership (11,900 shares of Series E Preferred Stock convertible
into 15,237 shares of Common Stock and a warrant to purchase 2,380 shares);
Norwest
II-1
<PAGE>
Equity Partners V (257,150 shares of Series E Preferred Stock convertible
into 329,277 shares of Common Stock and a warrant to purchase 51,430 shares)
St. Paul Fire and Marine Insurance Company (100,000 shares of Series E
Preferred Stock convertible into 128,048 shares of Common Stock and a
warrant to purchase 20,000 shares); John Sculley (15,000 shares of Series E
Preferred Stock convertible into 19,207 shares of Common Stock and a warrant
to purchase 3,000 shares); Patrick A. Hopf (950 shares of Series E Preferred
Stock convertible into 1,216 shares of Common Stock and a warrant to
purchase 190 shares); Mark L. de Naray (500 shares of Series E Preferred
Stock convertible into 640 shares of Common Stock and a warrant to purchase
100 shares); and Daniel J. McAthie (20,000 shares of Series E Preferred
Stock convertible into 25,609 shares of Common Stock and a warrant to
purchase 4,000 shares).
2. From August 1, 1995 through December 31, 1995, the Company issued an
aggregate of 119,782 shares of Common Stock to employees and directors of
the Company pursuant to the exercise of stock options by such individuals.
Of the 119,782 shares issued, 60,000 were issued at $1.00 per share; 4,782
were issued at $.45 per share; 25,000 were issued at $.40 per share; and
30,000 were issued at $.30 per share.
3. On August 27, 1996, the Company issued a warrant to Comdisco, Inc.
to purchase 7,619 shares of the Company's Series E Preferred Stock
exercisable for five years from the effective date of this offering at an
exercise price of $10.50 per share in connection with a Master Lease
Agreement dated as of August 27, 1996 and an Equipment Schedule No. VL-1
dated as of August 27, 1996. Upon consummation of this offering, the warrant
will automatically be amended to provide for the purchase of 9,756 shares of
Common Stock at an exercise price of $8.20 per share.
4. In November 1996, the Company borrowed an aggregate of $1,251,700
from certain existing shareholders and issued promissory notes evidencing
such loans. Interest on these notes accrued at an annual rate of 8%. In
connection with such loans, the Company granted each of these shareholders
warrants to purchase a number of shares of Common Stock equal to 25% of the
principal amount of such shareholder's note divided by $5.25 (an aggregate
of 59,606 shares of Common Stock), exercisable until October 31, 2006 at
$5.25 per share. The promissory notes were due on the earlier of the
following: (i) the closing date of an equity financing of $10.0 million or
more, or (b) November 1, 1997. The Company paid off the promissory notes in
full in March 1997 and at such time granted each of these shareholders
additional warrants to purchase a number of shares equal to 5% of the
principal amount of such shareholder's note divided by $5.25 (an aggregate
of 11,919 shares of Common Stock), exercisable through October 31, 2006 at
$5.25 per share. All of the purchasers of the notes and warrants were
accredited investors, including the following entities: Apex Investment
Fund, L.P. ($126,450 and warrants to purchase 7,226 shares); related parties
to Hambrecht & Quist LLC ($50,400 and warrants to purchase 2,880 shares);
Macke Limited Partnership ($6,000 and warrants to purchase 343 shares);
Marquette Venture Partners II, L.P. and MVP II Affiliates Fund, L.P.
($33,000 and warrants to purchase 1,885 shares); Norwest Equity Partners V
($122,550 and warrants to purchase 7,003 shares); and St. Paul Fire and
Marine Insurance Co. ($835,150 and warrants to purchase 47,723 shares).
5. On November 11, 1996, Company issued a warrant to Comdisco, Inc. to
purchase 23,809 shares of the Company's Series E Preferred Stock exercisable
for five years from the effective date of this offering at an exercise price
of $10.50 per share in connection with a Master Lease Agreement dated as of
August 27, 1996 and Equipment Schedule Nos. VL-2 and VL-3 dated as of
November 11, 1996. Upon consummation of this offering, the warrant will
automatically be amended to provide for the purchase of 30,487 shares of
Common Stock at an exercise price of $8.20 per share.
6. From January 1, 1996 through December 31, 1996, the Company issued
an aggregate of 261,598 shares of Common Stock to employees and directors of
the Company pursuant to the exercise of stock options by such individuals.
Of the 261,598 shares issued, 19,567 were issued at $5.25 per share; 9,713
were issued at $4.80; 61,814 were issued at $2.60 per share; 69,995 were
issued at $1.00;
II-2
<PAGE>
11,033 were issued at $.85 per share; 6,090 were issued at $.75 per share;
4,786 were issued at $.45 per share; 7,000 were issued at $.40 per share and
71,600 were issued at $.30 per share.
7. On March 27, 1997, the Company entered into a Purchase Agreement
dated March 27, 1997 (the "GE Purchase Agreement") with General Electric
Capital Corporation ("GECC"), pursuant to which the Company issued to GE a
senior subordinated promissory note in the principal amount of $15.0 million
(the "GE Note"). Interest on the GE Note accrues at a rate equal to 11% per
year and is payable quarterly in arrears. The outstanding principal on the
GE Note is due on or before March 31, 2003. In connection with the GE
Purchase Agreement, the Company issued to GE a Series A Warrant (the "Series
A Warrant") to purchase an aggregate of 1,100,000 shares of Common Stock
exercisable through March 31, 2005 at an exercise price of $10.50 and a
Series B Warrant (the "Series B Warrant") containing certain contingent
rights to purchase an aggregate of up to 1,000,000 shares of Common Stock at
an exercise price of $.01. Pursuant to an amendment to the GE Purchase
Agreement effective as of March 31, 1998, the Company and GECC restructured
these warrants by combining them into one Series A Warrant to purchase
1,309,583 shares of Common Stock at an exercise price of $8.82.
8. From January 1, 1997 through December 31, 1997, the Company issued
an aggregate of 630,094 shares of Common Stock to employees and directors of
the Company pursuant to the exercise of stock options by such individuals.
Of the 630,094 shares issued, 9,302 were issued at $5.25 per share; 26,042
were issued at $4.80 per share; 38,820 were issued at $1.00 per share; 8,588
were issued at $.85 per share; 50,160 were issued at $.75 per share; 178,792
were issued at $.45 per share; 88,440 were issued at $.40 per share; and
229,950 were issued at $.30 per share.
9. From January 1, 1998 through October 3, 1998, the Company issued an
aggregate of 511,385 shares of Common Stock to employees and directors of
the Company pursuant to the exercise of stock options and warrants by such
individuals. Of the 511,385 shares issued, 75 were issued at $16.50 per
share; 631 were issued at $11.00 per share; 100 were issued at $10.00 per
share; 166 were issued at $7.50 per share; 201,626 were issued at $5.25 per
share; 88,683 were issued at $4.80 per share; 33,288 were issued at $1.00
per share; 60,234 were issued at $.85 per share; 35,182 were issued at $.45
per share; 25,000 were issued at $.40 per share; and 66,400 were issued at
$.30 per share.
10. In November 1998, the Company agreed to issue a warrant to GECC to
purchase 5,513 shares of Common Stock at an exercise price of $8.82.
No underwriting commissions or discounts were paid with respect to the sales
of the unregistered securities described above. In addition, all of the above
sales were made in reliance on Rule 701, Regulation D and Section 4(2) under the
Securities Act. With regard to the reliance by the Company upon the exemptions
set forth in the previous sentence, certain inquiries were made by the Company
to establish that such sales qualified for such exemptions from the registration
requirements. In particular, the Company confirmed that (i) all offers of sales
and sales were made by personal contact from officers or directors of the
Company or other persons closely associated with the Company; (ii) each investor
made representations that he or she was sophisticated in relation to this
investment (and the Company has no reason to believe such representations were
incorrect); (iii) each purchaser gave assurance of investment intent and the
certificates for the shares bear a legend accordingly; and (iv) offers and sales
within any offering were made to a limited number of persons.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
1.1* Underwriting Agreement
3.1* Restated Articles of Incorporation of the Company (to be effective upon
effectiveness of Registration Statement)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
3.2* Restated Bylaws of the Company (to be effective upon effectiveness of
Registration Statement)
4.2* Form of Warrant issued in connection with the sale of Convertible
Preferred Stock, Series E
4.3* Form of Warrant issued in connection with the November 1996 Bridge
Financing
4.4* Amended and Restated Registration Rights Agreement dated December 28, 1995
4.5* First Amendment to Series E Stock Purchase Agreement and Amended and
Restated Registration Rights Agreement dated April 25, 1996
4.6* Second Amendment to Amended and Restated Registration Rights Agreement
dated as of November 1, 1996
4.7* Second (sic) Amendment to Amended and Restated Registration Rights
Agreement dated March 24, 1997
4.8* Series A Warrant effective as of March 31, 1998 issued to General Electric
Capital Corporation
4.9* Series E Preferred Stock Shareholder Voting Agreement and Irrevocable
Proxy dated as of November 11, 1998 by and among the Company and each of
the holders of Series E Convertible Prefered Stock signatory thereto
5.1* Opinion of Oppenheimer Wolff & Donnelly LLP
10.1* Net Lease Agreement dated December 3, 1993 between the Company and Opus
Corporation
10.2* Amendment of Lease dated August 10, 1994 between the Company and Opus
Corporation
10.3* Second Amendment to Lease dated May 10, 1995 between the Company and
Rushmore Plaza Partners Limited Partnership (successor to Opus
Corporation)
10.4* Letter Agreement dated as of October 5, 1995 between the Company and
Rushmore Plaza Partners Limited Partnership
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
10.6* Sublease dated as of March 27, 1997 between Select Comfort SC Corporation
and Bellsouth Telecommunications, Inc.
10.7* Master Lease Agreement dated August 27, 1996 between Comdisco, Inc. and
the Company and Equipment Schedules VL-1 dated August 27, 1996 and VL-2
and VL-3 dated November 11, 1996
10.8 Supply Agreement dated August 23, 1994 between the Company and Supplier(1)
10.9 Equipment Purchase and Software License Agreement dated February 6, 1996
between the Company and Supplier(1)
10.10* Purchase Agreement dated as of March 27, 1997 between the Company and
General Electric Capital Corporation
10.11* Senior Subordinated Note dated as of March 27, 1997 in the principal
amount of $15,000,000 by the Company in favor of General Electric
Capital Corporation
10.12 Consumer Credit Card Program Agreement dated as of May 22, 1997 among the
Company, Select Comfort Retail Corporation, Select Comfort Direct
Corporation, Select Comfort SC Corporation and Monogram Credit Card Bank
of Georgia(1)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.13* Major Merchant Agreement dated December 19, 1997 among First National Bank
of Omaha and the Company, Select Comfort SC Corporation, Select Comfort
Retail Corporation and Select Comfort Direct Corporation
10.14* 1990 Omnibus Stock Option Plan, as amended
10.15* 1997 Stock Incentive Plan
10.16* Form of Incentive Stock Option Agreement under the 1997 Stock Incentive
Plan
10.17* Form of Performance Based Stock Option Agreement under the 1997 Stock
Incentive Plan
10.18* Employment Letter Agreement dated April 3, 1997 between the Company and H.
Robert Hawthorne
10.19* Employment Letter Agreement dated October 20, 1995 between the Company and
Daniel J. McAthie
10.20* Employment Letter Agreement dated July 11, 1995 between the Company and
Gregory T. Kliner
10.21* Consulting Agreement and Stock Option Agreement dated April 1, 1996
between the Company and Ervin R. Shames
10.22* Separation Agreement dated February 20, 1997 between the Company and Mark
L. de Naray
10.23* Promissory Note dated February 20, 1997 in favor of the Company from Mark
L. de Naray
10.24* Pledge Agreement dated February 20, 1997 between the Company and Mark L.
de Naray
10.25* Promissory Note dated April 13, 1998 in favor of the Company from Mark L.
de Naray
10.26* Pledge Agreement dated April 13, 1998 between the Company and Mark L. de
Naray
10.27* Separation Agreement dated as of July 13, 1998 between the Company and
John D. Watson
10.28* Lease Agreement dated September 30, 1998 between the Company and ProLogis
Development Services Incorporated
10.29* Select Comfort Corporation Nonqualified Deferred Compensation Plan
21.1* Subsidiaries of the Company
23.1 Independent Auditors' Consent and Report on Financial Statement Schedule
of KPMG Peat Marwick LLP
23.2* Consent of Oppenheimer Wolff & Donnelly LLP (included in Exhibit 5.1)
23.3* Consent of Houlihan Valuation Advisors
24.1* Power of Attorney (included on pages II-9 hereto)
27.1* Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed.
(1) Confidential treatment has been requested with respect to designated
portions contained within this exhibit. Such portions have been omitted and
filed separately with the Commission pursuant to Rule 406 under the
Securities Act.
II-5
<PAGE>
(b) Financial Statement Schedules.
SELECT COMFORT CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
CHARGED TO DEDUCTIONS BALANCE AT
BALANCE AT COSTS AND FROM END OF
DESCRIPTION BEGINNING EXPENSES RESERVES PERIOD
- ----------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts--1998 (nine months).................... $ 1,901 $ 2,293 $ 1,377 $ 2,817
--1997..................................... $ 200 $ 2,101 $ 400 $ 1,901
--1996..................................... $ 261 $ 63 $ 124 $ 200
--1995..................................... $ 35 $ 237 $ 11 $ 261
Accrued warranty costs --1998 (nine months)..................... $ 3,257 $ 3,456 $ 2,851 $ 3,862
--1997..................................... $ 2,036 $ 3,274 $ 2,053 $ 3,257
--1996..................................... $ 1,390 $ 1,936 $ 1,290 $ 2,036
--1995..................................... $ 608 $ 1,492 $ 710 $ 1,390
</TABLE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Minnesota Business Corporation Act, the Restated
Articles of Incorporation or Bylaws of the Registrant, the Underwriting
Agreement, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) It will provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
(2) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 4 to the Registration Statement
on Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in Minneapolis, Minnesota on this 2nd day of December, 1998.
<TABLE>
<S> <C> <C>
SELECT COMFORT CORPORATION
By: /s/ H. ROBERT HAWTHORNE
-----------------------------------------
H. Robert Hawthorne
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
By: /s/ DANIEL J. MCATHIE
-----------------------------------------
Daniel J. McAthie
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
OFFICER, CHIEF OPERATING OFFICER AND
SECRETARY (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 4 to the Registration Statement has been signed by
the following persons in the capacities indicated, on December 2, 1998.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ H. ROBERT HAWTHORNE
- ------------------------------ President, Chief Executive
H. Robert Hawthorne Officer and Director
*
- ------------------------------ Chairman of the Board
Ervin R. Shames
*
- ------------------------------ Director
Thomas J. Albani
*
- ------------------------------ Director
Patrick A. Hopf
*
- ------------------------------ Director
Christopher P. Kirchen
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
*
- ------------------------------ Director
David T. Kollat
*
- ------------------------------ Director
Kenneth A. Macke
*
- ------------------------------ Director
Jean-Michel Valette
/s/ H. ROBERT HAWTHORNE
- ------------------------------ Attorney-in-fact
H. Robert Hawthorne
</TABLE>
II-8
<PAGE>
SELECT COMFORT CORPORATION
EXHIBIT INDEX TO REGISTRATION STATEMENT ON FORM S-1
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION METHOD OF FILING
- ----------- ------------------------------------------------------------------------------------ -----------------
<C> <S> <C>
1.1* Underwriting Agreement
3.1* Restated Articles of Incorporation of the Company (to be effective upon
effectiveness of Registration Statement)
3.2* Restated Bylaws of the Company (to be effective upon effectiveness of Registration
Statement)
4.2* Form of Warrant issued in connection with the sale of Convertible Preferred Stock,
Series E
4.3* Form of Warrant issued in connection with the November 1996 Bridge Financing
4.4* Amended and Restated Registration Rights Agreement dated December 28, 1995
4.5* First Amendment to Series E Stock Purchase Agreement and Amended and Restated
Registration Rights Agreement dated April 25, 1996
4.6* Second Amendment to Amended and Restated Registration Rights Agreement dated as of
November 1, 1996
4.7* Second (sic) Amendment to Amended and Restated Registration Rights Agreement dated
March 24, 1997
4.8* Series A Warrant effective as of March 31, 1998 issued to General Electric Capital
Corporation
4.9* Series E Preferred Stock Shareholder Voting Agreement and Irrevocable Proxy dated as
of November 11, 1998 by and among the Company and each of the holders of Series E
Convertible Prefered Stock signatory thereto
5.1* Opinion of Oppenheimer Wolff & Donnelly LLP
10.1* Net Lease Agreement dated December 3, 1993 between the Company and Opus Corporation
10.2* Amendment of Lease dated August 10, 1994 between the Company and Opus Corporation
10.3* Second Amendment to Lease dated May 10, 1995 between the Company and Rushmore Plaza
Partners Limited Partnership (successor to Opus Corporation)
10.4* Letter Agreement dated as of October 5, 1995 between the Company and Rushmore Plaza
Partners Limited Partnership
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
10.6* Sublease dated as of March 27, 1997 between Select Comfort SC Corporation and
Bellsouth Telecommunications, Inc.
10.7* Master Lease Agreement dated August 27, 1996 between Comdisco, Inc. and the Company
and Equipment Schedules VL-1 dated August 27, 1996 and VL-2 and VL-3 dated
November 11, 1996
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION METHOD OF FILING
- ----------- ------------------------------------------------------------------------------------ -----------------
<C> <S> <C>
10.8 Supply Agreement dated August 23, 1994 between the Company and Supplier(1)
10.9 Equipment Purchase and Software License Agreement dated February 6, 1996 between the
Company and Supplier(1)
10.10* Purchase Agreement dated as of March 27, 1997 between the Company and General
Electric Capital Corporation
10.11* Senior Subordinated Note dated as of March 27, 1997 in the principal amount of
$15,000,000 by the Company in favor of General Electric Capital Corporation
10.12 Consumer Credit Card Program Agreement dated as of May 22, 1997 among the Company,
Select Comfort Retail Corporation, Select Comfort Direct Corporation, Select
Comfort SC Corporation and Monogram Credit Card Bank of Georgia; as amended in
First Amendment to Consumer Credit Card Program Agreement dated November 18,
1987(1)
10.13* Major Merchant Agreement dated December 19, 1997 among First National Bank of Omaha
and the Company, Select Comfort SC Corporation, Select Comfort Retail Corporation
and Select Comfort Direct Corporation
10.14* 1990 Omnibus Stock Option Plan, as amended
10.15* 1997 Stock Incentive Plan
10.16* Form of Incentive Stock Option Agreement under the 1997 Stock Incentive Plan
10.17* Form of Performance Based Stock Option Agreement under the 1997 Stock Incentive Plan
10.18* Employment Letter Agreement dated April 3, 1997 between the Company and H. Robert
Hawthorne
10.19* Employment Letter Agreement dated October 20, 1995 between the Company and Daniel J.
McAthie
10.20* Employment Letter Agreement dated July 11, 1995 between the Company and Gregory T.
Kliner
10.21* Consulting Agreement and Stock Option Agreement dated April 1, 1996 between the
Company and Ervin R. Shames
10.22* Separation Agreement dated February 20, 1997 between the Company and Mark L. de
Naray
10.23* Promissory Note dated February 20, 1997 in favor of the Company from Mark L. de
Naray
10.24* Pledge Agreement dated February 20, 1997 between the Company and Mark L. de Naray
10.25* Promissory Note dated April 13, 1998 in favor of the Company from Mark L. de Naray
10.26* Pledge Agreement dated April 13, 1998 between the Company and Mark L. de Naray
10.27* Separation Agreement dated as of July 13, 1998 between the Company and John D.
Watson
10.28* Lease Agreement dated September 30, 1998 between the Company and ProLogis
Development Services Incorporated
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION METHOD OF FILING
- ----------- ------------------------------------------------------------------------------------ -----------------
<C> <S> <C>
21.1* Subsidiaries of the Company
23.1 Independent Auditors' Consent and Report on Financial Statement Schedule of KPMG
Peat Marwick LLP
23.2* Consent of Oppenheimer Wolff & Donnelly LLP (included in Exhibit 5.1)
23.3* Consent of Houlihan Valuation Advisors
24.1* Power of Attorney (included on pages II-9 hereto)
27.1* Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed.
(1) Confidential treatment has been requested with respect to designated
portions contained within this exhibit. Such portions have been omitted and
filed with the Commission pursuant to Rule 406 under the Securities Act.
<PAGE>
EXHIBIT 10.8
SUPPLY AGREEMENT
BY AND BETWEEN
SELECT COMFORT CORPORATION
AND
XXXXX
[Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this Exhibit with the portions intact has been filed
separately with the Securities and Exchange Commission]
August 23, 1994
<PAGE>
SUPPLY AGREEMENT
THIS SUPPLY AGREEMENT, made and entered into this 30th day of August 1994, by
and between SELECT COMFORT CORPORATION, a corporation organized and existing
under the laws of the State of Minnesota, having its principal place of
business and office at, 6105 Trenton Lane North, Minneapolis, Minnesota
55422, hereinafter referred to as "Select," and XXXXXXX, a.s., organized
under the laws of XXXXXX and having its principal place of
business at XXXXXXXXXX, hereinafter referred to as "Supplier."
[A portion of this recital has been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this exhibit with this recital intact has been filed
separately with the Securities and Exchange Commission]
WITNESSETH:
WHEREAS, Select is a user of the goods hereinafter described and
desires to establish a formal relationship for the purchase from Supplier of
such goods; and
WHEREAS, Supplier is a manufacturer and supplier of such goods and is
willing to provide and sell them to Select, all upon the terms and conditions
hereinafter stated.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein set forth, the parties hereby agree as follows:
ARTICLE
1.
DEFINITIONS
For purposes of this Agreement, the following terms, word and phrases, where
written with an initial capital letter shall have the following meanings:
1.1 "Products" shall mean air chambers for bedding purposes as manufactured
by Supplier according to Exhibit IV and enclosures numbers 1-11,
including improvements to such products as that term is defined below.
1.2 "North America" shall mean the United States of America, including its
territories and possessions, Canada and Mexico.
1.3 "Improvements" shall mean modifications and/or enhancements to the design
of patented products owned by Select, developed by either party during
the term of this Agreement.
ARTICLE
2.
SUPPLY AND PURCHASE
2.1 During the initial term of this Agreement, Select agrees to purchase from
Supplier, and Supplier agrees to supply to Select, at the prices
determined in accordance herewith, and subject to the terms and
conditions hereinafter set forth, the annual minimum volumes of Products
set forth in Exhibit I attached hereto.
<PAGE>
2.2 Supplier agrees that all air chamber "Products" as specified in
Enclosures 1-11, shall deliver exclusively to Select. Inquiries that
Supplier receives relative to air chambers as specified in Enclosures
1-11, shall be directed to Select.
ARTICLE
3.
ORDERS, DELIVERY AND MODIFICATION OF PRODUCTS
3.1 Purchase Orders. Select shall submit purchase orders for the Products 90
days prior to the requested delivery date. The delivery date will be the
date the order is expected to arrive at the German seaport. Supplier
shall confirm within one (1) week the purchase orders and delivery dates
in writing. All purchase orders shall be in accordance with the terms
and conditions of this Agreement and at the prices established herein.
3.2 Delivery of Products. Supplier shall deliver the Products within the
times (which is of the essence) specified on the individual purchase
orders, in the quantities specified on the individual purchase orders and
at the prices specified herein, all in accordance with Select's
instructions and specifications. Select reserves the right to adjust the
mix of the specifications on purchase orders up to 45 days prior to the
scheduled ship date.
3.3 Shipping Terms. The initial shipping term for Products delivered by
Supplier to Select pursuant to this Agreement shall be the shipping term
set forth in Exhibit II attached hereto. Such shipping term may be
changed by the parties upon mutual agreement in writing at any time
during the term of this Agreement. The shipping terms stipulated by the
Parties shall be interpreted in accordance with the terms of Incoterm '90
defined by the International Chamber of Commerce. In the event of a
change in the shipping term, the parties shall adjust the prices for
Products set forth in Exhibit II to reflect the changed shipping term.
Such changed shipping term and prices shall be substituted for the
shipping term and prices then set forth in Exhibit II, and a new Exhibit
II, as so modified, shall be attached to the Agreement.
3.4 Packing and shipping will be done according to the Master Specification
(Exhibit IV) and Select instructions which will be in conformity with the
other paragraphs of this Agreement.
ARTICLE
4.
QUALITY OF PRODUCTS
The quality of all Products delivered by Supplier shall be in accordance with
the Master Specifications (Exhibit IV) and meet any and all applicable laws
and regulations promulgated by any federal, state, local or municipal
governmental authority or agency, including, but not limited to, public
safety, health and environmental standards, to be clearly defined by Select
from time to time.
2
<PAGE>
ARTICLE
5.
COOPERATION
REVISED 9/25/95
The parties agree to cooperate in research and development efforts relating to
quality improvement and cost reduction of the Products. Such research and
development shall take the form and extent as mutually agreed to by the parties
from time to time.
ARTICLE
6.
PRICES AND PAYMENT
REVISED 9/25/95 6.2
6.1 Prices and Adjustments. The initial prices to be paid by Select for the
Products purchased hereunder shall be the prices set forth in Exhibit II
attached hereto. In addition to any changes to such prices pursuant to
Paragraph 3.3 hereof, such prices may be subject to annual adjustments as
agreed to by the parties hereto in writing. Such adjusted prices shall
be substituted for the prices then set forth in Exhibit II, and a new
Exhibit II, as so modified, shall be attached to this Agreement.
6.2 Payment Terms. Payment for delivered Products shall be made via a wire
transfer by Select in United States Dollars thirty (30) days from the
date of the Bill of Lading for Products ordered and delivered. From time
to time Select may wish to pay for delivered Products prior to sea
shipment at a discounted price as set forth in Exhibit II.
Select Comfort Corporation XXXXXXX
By:_________________________________ By:____________________________________
Title:______________________________ Title:_________________________________
Date:_______________________________ Date:__________________________________
[A portion of this Section has been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this Exhibit with this Section intact has been filed
separately with the Securities and Exchange Commission]
ARTICLE 4.
QUALITY OF PRODUCTS
The quality of all Products delivered by Supplier shall be in accordance with
the Master Specifications (Exhibit IV) and meet any and all applicable laws
and regulations promulgated by any federal, state, local or municipal
governmental authority or agency, including, but not limited to, public
safety, health and environmental standards, to be clearly defined by Select
from time to time.
3
<PAGE>
ARTICLE 5.
COOPERATION
The parties agree to cooperate in research and development efforts relating to
quality and costs of the Products and to improvement in the quality of the
Products. Such research and development shall take the form and extent as
mutually agreed to by the parties from time to time.
ARTICLE 6.
PRICES AND PAYMENT
6.1 Prices and Adjustments. The initial prices to be paid by Select for the
Products purchased hereunder shall be the prices set forth in Exhibit II
attached hereto. The prices will be in effect on a calendar basis running from
January 1 through December 31 of each year. In addition to any changes to such
prices pursuant to Paragraph 3.3 hereof, such prices may be subject to annual
adjustments as agreed to by the parties hereto in writing. Such adjusted prices
shall be substituted for the prices then set forth in Exhibit II, and a new
Exhibit II, as so modified, shall be attached to this Agreement.
6.2 Payment Terms. Payment for delivered Products shall be made by Select in
United States Dollars no later than thirty (30) days from the date of the Bill
of Lading for Products ordered and delivered. Select shall open an L/C minimum
15 days in advance before each shipment. From time to time Select may wish to
pay for delivered Products prior to sea shipment at a discounted price as set
forth in Exhibit II.
ARTICLE
7.
TAXES
Except as otherwise provided in this Agreement, Supplier shall be responsible
for and shall pay any and all (a) export duties, (b) gross receipt, income and
pre-sale taxes and (c) other governmental charges which relate to the
production, delivery and sale of the Products, as such are now or may hereafter
be imposed under or by any state, local or municipal governmental authority or
agency in XXXXXXX. Supplier shall not be responsible and shall not
pay any taxes or charges as outlined in above levied after delivery to Select.
ARTICLE
8.
ACCEPTANCE AND WARRANTY
8.1 Acceptance of Products. Select shall conduct any acceptance tests at the
time the Products are being prepared for shipment to Select's customers
at its principal place of business in Minneapolis, Minnesota, not later
than one (1) year from the date of receipt. Any Products not rejected by
Select by written notice to Supplier within such period shall be deemed
accepted. Any Products rejected by Select shall be reported in
accordance with the Claim Procedure (Exhibit III).
4
<PAGE>
8.2 Warranty.
8.2.1 Supplied warrants to Select for a period of twelve (12) months
from the date of delivery of the Products to Select in accordance
with Section 3.2 of this Agreement that all Products sold
hereunder shall (i) be free from any defects in design (if such
design was created by Supplier), material or workmanship and be of
good and merchantable quality, (ii) conform to Select's
specifications or any sample or prototype approved by Select and
(iii) comply and have been produced, processed and delivered in
conformity with Article 4 herein.
8.2.2 Supplier warrants that all Products to be delivered hereunder and
all property to be returned to Select shall be free and clear of
any and all liens and encumbrances whatsoever.
8.2.3 The foregoing warranties shall survive inspection of, delivery of
and payment for the Products and shall run in favor of Select and
its customers. If Supplier breaches any of the foregoing
warranties during the twelve-month period, or if Supplier fails to
perform or comply with any provision of this Agreement, Supplier
shall be liable to Select for any and all costs, expenses
(including reasonable attorneys' fees, court costs and litigation
expenses) and damages arising therefrom.
8.3 Quantity obligations.
8.3.1 Select undertakes to purchase annually minimum volumes as
indicated in Exhibit I of this Agreement.
8.3.2 Supplier undertakes to produce annually minimum volumes as
indicated in Exhibit 1 of this Agreement.
ARTICLE
9.
PROPRIETARY RIGHTS
9.1 Select retains all proprietary rights in and to all designs of air
chambers, as specified in Enclosures 1-11.
9.2 The Supplier undertakes to continuously develop an activity of research
concerning the quality improvements of the Products taking into
consideration the market requirements and the economical production.
The development costs are to be borne by the Supplier.
9.3 The Supplier undertakes to develop the product according to special
request of Select. Such improvements are made for consideration on basis
of mutual written agreements of
5
<PAGE>
the parties. The costs of these development activities are to be borne
as agreed upon in writing by both parties prior to the actual development
activities.
9.4 Supplier retains all proprietary rights in and to all designs,
engineering details and other data pertaining to its manufacturing
technology as specified in the Master Specification (Exhibit IV) and
Enclosures 1-11.
ARTICLE
10.
TRADEMARKS
Nothing contained in this Agreement will be deemed to grant either party any
right, title or interest in the trademarks, trade name, service marks,
proprietary words, or symbols which the other may have adopted or used at any
time in the course of its business.
ARTICLE
11.
CONFIDENTIALITY
Each party agrees that all information disclosed to it or any of its
affiliates by the other, whether verbally or in writing, shall be presumed to
be proprietary and confidential to such party, unless otherwise stated in
writing. Each party shall prevent the disclosure of any such proprietary
information to any third person or party by maintaining such proprietary
information in strictest confidence absent service of compulsory process.
Each party shall not during the term of this Agreement or thereafter, use any
such proprietary information for any purpose other than as specifically set
forth in this Agreement.
ARTICLE
12.
COMPETITIVE ACTIVITIES
During the term of this Agreement, Supplier will not (a) participate in the
management or operations of any enterprise engaged in any activities in
competition with the business of Select, or (b) cause or permit any enterprise
in which Supplier participates or invests to engage in any such activities.
ARTICLE
13.
TERM AND TERMINATION
13.1 Term of Agreement. This Agreement shall take effect as of the date
hereof and shall continue in full force and effect for a period of three
(3) years and thereafter shall be automatically renewed for successive
terms of one (1) year each, unless either party provides written notice
to the other party at least ninety (90) days prior to the expiration
6
<PAGE>
of the initial term or any renewal term of its desire not to renew this
Agreement upon the expiration of the relevant term.
13.2 Termination. This Agreement may be terminated only in accordance with
the following provisions:
13.2.1 This Agreement may be terminated at any time upon the
mutual written consent of the parties hereto;
13.2.2 Either party hereto may terminate this Agreement by giving
notice in writing to the other party in the event that the
other party is in material breach of this Agreement and
shall have failed to cure such breach within thirty (30)
days of receipt of written notice thereof from the first
party specifying the nature of the breach; or
13.2.3 Either party hereto may terminate this Agreement at any
time by giving notice in writing to the other party, if (1)
the other party shall at any time (i) file or have filed
against it a petition of any type as to its bankruptcy,
(ii) be adjudged bankrupt or insolvent, (iii) make an
assignment for the benefit of its creditors or (iv) go into
liquidation or receivership; (2) a trustee, receiver or
other equivalent officer is appointed for the other party
by any court or governmental authority or any third party
to administer or liquidate, who is not dismissed within
sixty (60) days of the date of appointment; or (3)
dissolution proceedings are commenced by or against the
other party, which are not dismissed within sixty (60) days
of commencement.
13.2.4 This Agreement may be terminated by Select or Supplier with
minimum 90 days written notice if either party discontinues
using the Products in its business.
13.3 Rights and Obligations on Termination. In the event of the termination
of this Agreement, the parties hereto shall have the following rights and
obligations:
13.3.1 The obligations of Supplier under the terms of Sections 4,
7, 8, 9, 10 and 11 hereof shall survive the termination of
this Agreement.
13.3.2 Within twenty (20) days after the termination of this
Agreement, each party shall return to the other any and all
proprietary and confidential information of such party then
in its possession or under its control.
13.3.3 Termination or expiration of this Agreement shall not
release either party from the obligation to make payment to
the other party of all amounts then and thereafter due and
payable under this Agreement within thirty (30) days of
termination.
7
<PAGE>
ARTICLE
14.
FORCE MAJEURE
14.1 Definition. Force Majeure shall mean any event or condition, not
existing as of the date of signature of this Agreement, not reasonably
foreseeable as of such date and not reasonably within the control of
either party, which prevents in whole or in material part the performance
by one of the parties of its obligations hereunder or which renders the
performance of such obligations so difficult or costly as to make such
performance commercially unreasonable. Without limiting the foregoing,
the following shall constitute events or conditions of Force Majeure:
acts of State or, governmental action, riots, disturbance, war,
strikes, lockouts, slowdowns, prolonged shortage of energy supplies,
epidemics, fire, flood, hurricane, typhoon, earthquake, lightning and
explosion.
14.2 Notice. Upon giving notice to the other party, a party affected by an
event of Force Majeure shall be released without any liability on its
part from the performance of its obligations under this Agreement, except
for the obligation to pay any amounts due and owing hereunder, but only
to the extent and only for the period that its performance of such
obligations is prevented by the event of Force Majeure. Such notice
shall include a description of the nature of the event of Force Majeure,
its cause and possible consequences. The party claiming Force Majeure
shall promptly notify the other party of the termination of such event.
14.3 Suspension of Performance. During the period that the performance by one
of the parties of its obligations under this Agreement has been suspended
by reason of an event of Force Majeure, the other party may likewise
suspend the performance of all or part of its obligations hereunder.
ARTICLE
15.
DISPUTES AND GOVERNING LAW
15.1 Disputes.
15.1.1 The parties hereto shall submit any disputes arising under
this Agreement to arbitration. Any disputes submitted to
arbitration shall be finally determined by arbitration
before a single arbitrator conducted in Minneapolis,
Minnesota under the Commercial Arbitration Rules of the
American Arbitration Association. The award in such
arbitration shall be final and enforceable in any court of
competent jurisdiction.
15.1.2 Select and Supplier shall each pay its own costs, expenses,
and reasonable attorneys' fees incurred in such arbitral
proceedings and shall share equally any fees for
arbitration, provided, however, that if the arbitrator
deems it more equitable to otherwise divide the costs,
expenses, attorneys' fees and arbitral fees between the
parties in dispute, the arbitrator shall designate in his
award which
8
<PAGE>
party is entitled to recover all or a portion of its costs
necessarily incurred in the arbitration procedures.
15.2 Governing Law. This Agreement shall be governed by, and interpreted and
construed in accordance with, the laws of the State of Minnesota.
ARTICLE
16.
GENERAL TERMS AND CONDITIONS
16.1 Relationship. This Agreement does not make either party hereto the
employee, agent or legal representative of the other party for any
purpose whatsoever. Neither party hereto is granted any right or
authority to assume or to create any obligation or responsibility,
express or implied, on behalf of or in the name of the other party. In
fulfilling its obligations pursuant to this Agreement, each party hereto
shall act as an independent contractor.
16.2 Assignment. Each party shall not assign or otherwise transfer any of its
rights or obligations under this Agreement without the prior written
consent of the other party. This Agreement and the rights and obligation
arising hereunder shall not be affected by any change in the corporate
structure of ownership of the parties.
16.3 Notices. All notices permitted or required to be given hereunder shall
be delivered personally or sent by telecopy or registered or certified
air mail, postage prepaid, return receipt requested, addressed to the
addresses of the parties hereto as set forth above or to such other
addresses as the parties may designate by like notice from time to time.
Notices so given shall be effective (a) upon the date of personal
delivery, (b) if sent by telecopy, concurrently with the transmission
thereof if the sender's machine produces a transmission report
without notice of a communication fault, (c) on the third (3rd)
business day following the date on which such notice is mailed by
registered or certified air mail.
16.4 Entire Agreement. This Agreement, including the Exhibits attached hereto
and by this reference made an integral part hereof, constitute the entire
agreement of the parties hereto with respect to the subject matter hereof
and thereof, and supersede all previous proposals, verbal or written,
expressed or implied, and all negotiations, conversations or discussions
heretofore between the parties hereto related to the subject matter of
this Agreement.
16.5 Amendment. This Agreement shall not be deemed or construed to be
modified, amended, rescinded, canceled or waived, in whole or in part,
except by written statement signed by both parties hereto.
16.6 Severability. In the event that any of the terms of this Agreement are
in conflict with any rule of law or statutory provision or otherwise
unenforceable under the laws or regulations of any government or
subdivision thereof, such terms shall be deemed
9
<PAGE>
stricken from this Agreement, but such invalidity or
unenforceability shall not invalidate any of the other terms of this
Agreement, and this Agreement shall continue in force, unless the
invalidity or unenforceability of any such provisions hereof does
substantial violence to, or where the invalid or unenforceable
provisions comprise an integral part of, or are otherwise inseparable
from, the remainder of this Agreement.
16.7 Compliance with Applicable Laws. The parties to this Agreement shall at
all times conduct their activities hereunder in accordance with all
applicable federal, state and local laws, rules and governmental
regulations.
16.8 Waiver. No failure by either party hereto to take any action or assert
any right hereunder shall be deemed to be a waiver of such right in the
event of the continuation or repetition of the circumstances giving rise
to such right.
16.9 Counterparts. This Agreement may be executed in two (2) or more
counterparts in the English language, each of which shall be deemed an
original, but all of which shall constitute one (1) and the same
instrument.
16.10 Remedies Cumulative. Each of the rights and remedies of the parties set
forth in this Agreement shall be cumulative with all other such rights
and remedies, as well as with all rights and remedies of the parties
hereto otherwise available at law or in equity.
16.11 Indemnification. Each party shall indemnify the other and hold it
harmless from and against any and all costs including reasonable
attorneys' fees, court costs and litigation expenses, losses, expenses
and damages incurred by the other party in connection with any claim or
cause of action brought by any third person or party against it which, in
whole or in part is based upon or arises out of any breach of any of its
obligations hereunder.
16.12 Captions. The captions of Articles and Sections of this Agreement are
included for convenient reference only, shall not be construed as part of
this Agreement and shall not be used to define, limit, extend or
interpret the terms hereof.
16.13 Offset. In the event that any amount shall be due by either party
hereunder, the other party may, after providing written notice thereof
and a reasonable opportunity to cure, at its option, either (a) seek
reimbursement directly from the non-paying party or (b) set off any
amount that it owes to the non-paying party pursuant to this Agreement
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first written above.
SELECT COMFORT CORPORATION XXXXXXX
By /s/ By /s/
---------------------------------- -------------------------------------
Title President & CEO Title General Manager
------------------------------- ----------------------------------
[A portion of this signature page has been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this Exhibit with this signature page intact has been filed
separately with the Securities and Exchange Commission]
10
<PAGE>
Exhibit I.
ANNUAL MINIMUM VOLUME
Revised 9/25/95
<TABLE>
<CAPTION>
Fiscal Minimum Number
Year Chambers(pcs)
- ------ -------------
<S> <C>
* Fiscal 1995 77,000
Fiscal 1996 200,000
**Fiscal 1997 230,000
</TABLE>
Best effort will be made to place orders for approximately equal monthly
quantities.
FISCAL YEAR means the twelve month period from January 1 through December 31.
* Period from 7/1/94 - 12/31/95.
** For planning purposes, volumes for 1997 and beyond will include a minimum of
a 15% increase over the prior year. Final volumes for 1997 will be negotiated
in March of 1996.
Select Comfort Corporation Supplier
By: /s/ Mark L. de Naray By: /s/ Illegible
------------------------------------ --------------------------------
Title: CEO Title: General Director
--------------------------------- -----------------------------
Date: October 13, 1995 Date: October 3, 1995
---------------------------------- ------------------------------
<PAGE>
EXHIBIT II.
PRICES AND SHIPPING TERMS
Revised 9/25/95
<TABLE>
<CAPTION>
Part Number Price
----------- -----
<S> <C>
100270 US $ xxxx
100271 US $ xxxx
100272 US $ xxxx
100273 US $ xxxx
100274 US $ xxxx
100275 US $ xxxx
100276 US $ xxxx
100277 US $ xxxx
100278 US $ xxxx
100279 US $ xxxx
100281 US $ xxxx
</TABLE>
[Portions of this section have been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this section with the omissions intact has been filed
separately with the Securities and Exchange Commission.]
SHIPPING TERMS
- - FOB German Sea Port, full 20' or 40 container delivered.
- - If the goods are delivered costs will be according to Select's request by
air, the air freight costs will be added to the invoice.
- - Validity: January 1, 996
- - 1990 Incoterms as defined by the International Chamber of Commerce
PAYMENT TERMS
- - See article 6, prices and payment 6.2
- - If payment by Select is made prior to sea shipment prices will be reduced by
1.5%.
Select Comfort Corporation Supplier
By: /s/ Mark L. de Naray By: /s/ Illegible
------------------------------------ --------------------------------
Title: CEO Title: General Director
--------------------------------- -----------------------------
Date: October 13, 1995 Date: October 23, 1995
---------------------------------- ------------------------------
<PAGE>
EXHIBIT III
CLAIM PROCEDURE FOR DEFECTIVE GOODS
1.1 As air cores are identified in our assembly process which are defective
and do not meet Select Comforts quality standards, the serial number will be cut
out of the air core in a dimension of 2" x 3" which will ensure destruction of
the air core. The air core will then be disposed of immediately.
1.2 Select Comfort announces on a monthly basis (e.g. for the period of 1 -
31 May 1993) all the claims that have risen during the period in writing to
Supplier specifying the following data:
- -Date of announcement
- -Period of the claims collected
- -Serial numbers per size of the products being claimed
- -Codes of defects for each product as follows:
The following code will be indicated on the form for all claims that are being
submitted by Select Comfort.
B-Baffle D-Damaged OD-Outdated
H-Hole L-Leak
S-Stain Z-Size
For the same type of defects, but in the case of being returned by a customer to
Select Comfort.
RB RD ROD
RH RL
RS RZ
(i.e., L = Claimed by Select Comfort due to leak, RL = Being returned to Select
Comfort by a customer due to a leak.)
The claim code "O" (others) is not used and accepted, unless the specific nature
of the claim is described.
Claims will be submitted to Supplier within the first week of the following
month of the period discussed.
1.3 The serial number tags for that period will be returned to Supplier and
the cost of returning the tags will be borne by Supplier.
<PAGE>
1.4 The next letter of credit that is established immediately following
notification of the claim will be reduced by the value of the air cores in
addition to the cost of the return for the serial number tags, the original
incoming freight charge for the defective air core ($1.25 U.S. Dollars each) as
well as the original incoming customs and brokerage fees ($0.25 U.S. Dollars
each).
1.5 In the event that the number of defective products exceed 3%, Select will
notify Supplier in writing with the quantity and description of defects,
according to point 1.2. (Exhibit III), and Select will keep the air chambers in
tact. Supplier may request return of the defective air chambers at the expense
of the Supplier for evaluation. Pending notification and/or evaluation,
Supplier will respond in writing as to the disposition of the defective products
no later than 2 weeks after the defect notice is issued and/or evaluation has
been completed.
<PAGE>
EXHIBIT IV
MASTER SPECIFICATION
Air Chambers for Bedding Purposes
I. PREFACE
The air chamber is an inflatable product made of rubberized textile that can
best be described as a "box" or "gusseted" design.
The internal structure is maintained through the use of a series of inner
parallel I-beams running parallel to the sidewalls, perpendicular to the inner
I-beams to stabilize the unit. The material used in this construction is 24
gauge rubber calendared to a cotton fabric and assembled before curing. The
internal I-beams are a tri-laminated cotton/double layer rubber/cotton design to
provide strength.
II. MANUFACTURING TECHNOLOGY
1. CONSTRUCTION
The upper and lower cover as well as the four sidewalls of the product
are made of rubberized textile.
Inner elements:
-ribs forming the air chambers - they determine the structure of the
product.
-cover strip which is made of the same rubberized cotton as the ribs.
-one piece of extruded cured rubber hose for connecting the compressor.
2. MATERIAL OF THE PRODUCT
2.1. Rubberized fabric cover consisting of cotton, latex bonding layer
and double layer rubber film.
CHARACTERISTICS OF COTTON: Technical parameters are determined by the Supplier
chosen according to the requirements against the final products.
CHARACTERISTICS OF LATEX: Mixture of natural and artificial latex.
CHARACTERISTICS OF RUBBER FILM: Natural caputchouc based, especially airtight
compound with Jasmine fragrance.
2.2 Rubberized cotton (for ribs and cover strip)
<PAGE>
Characteristics are as follows:
Material of inner element: cotton or polyamid
Rubber film: compound from natural and artificial caoutchouc.
2.3 Port (cured, extruded rubber hose connection)
Made of natural and artificial caoutchouc based compound by pressing technology.
2.4 Corner and valve reinforcing by rubber film inserted to corners, the
material of which is the same as that of one of the above listed compounds.
xxxxx
[Portions of this section have been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this section with the omissions intact has been filed
separately with the Securities and Exchange Commission.]
<PAGE>
4. IDENTIFICATION
Serial number of the product with 11 characters where the characters:
2nd and 3rd represent the year of manufacture
4th and 5th represent the week of manufacture
6th represents the day of the week
Place: on the short side at 3 - 6 cm from the valve
<PAGE>
Explanation of the whole number:
294203 04360
2 - number of the manufacturing line
94 - year
20 - week
3 - day of the week
04 - month, in which the semi-finished product was prepared
360 - semi-finished product number
5. PACKING
Liner foil and box. Only one type is allowed to be packed in one box. Packing
instructions given by Select - Enclosure number 1.
6. STORING INSTRUCTIONS
The product must be stored in a warehouse. The product has to be protected by a
plastic foil. The maximum allowed temperature of the warehouse should be 25
degrees C (77 degrees F). The product cannot be exposed to sunlight, and
ultra-violet rays.
<PAGE>
Enclosure #1
Select's Packing Instructions
<TABLE>
<CAPTION>
Ref. # Pcs/box Box size (mm) Liner foil size (mm)
------ ------- ------------- --------------------
<S> <C> <C> <C>
A8-043 6 550x380x260 570x200x800
A8-048 5 550x380x260 570x200x800
A8-046 6 550x380x260 570x200x800
A8-040 7 550x380x260 570x200x800
A8-045 6 550x380x260 570x200x800
A8-044 6 550x380x260 570x200x800
A8-049 4 550x380x260 570x200x800
A8-041 4 550x380x260 570x200x800
A8-047 4 550x380x260 570x200x800
A8-042 4 550x380x260 570x200x800
</TABLE>
Marking instruction of the box of Select's air cores
Select Comfort part number
Purchase order number
Quantity
Box number
Date
Made in Czech Republic
<PAGE>
III. Design and engineering details
Select Comfort Air Chamber Sizes
<TABLE>
<CAPTION>
Size/inflated Size/inflated Rib # Rib #
Ref. no. condition condition Length Width Bed Name
<S> <C> <C> <C> <C> <C>
A8-043 72x26x6 1/4" 183x66x16 mm 2 17 Queen dual
A8-048 84x30x6 1/4" 213x76x16 mm 2 20 Super Queen
A8-046 72x31x6 1/4" 183x79x16 mm 2 17 Twin Long
A8-040 67x31x6 1/4" 170x79x16 mm 2 16 Twin
A8-045 76x32x6 1/4" 193x81x16 mm 2 18 Calif. King
A8-044 72x34x6 1/4" 183x86x16 mm 2 17 Eastern King
A8-049 84x36x6 1/4" 213x91x16 mm 2 20 Super King
A8-041 67x46x6 1/4" 170x117x16 mm 2 16 Full
A8-047 84x48x6 1/4" 213x122x16 mm 2 21 Super Single
A8-042 72x52x6 1/4" 183x132x16 mm 2 18 Queen Single
</TABLE>
Designs: According to enclosures 2-11.
<PAGE>
EXHIBIT 10.9
[Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this Exhibit with the portions intact has been filed
separately with the Securities and Exchange Commission.]
EQUIPMENT PURCHASE AND SOFTWARE LICENSE AGREEMENT
THIS AGREEMENT is made as of this 6th day of February, 1996 by and
between SELECT COMFORT CORPORATION, a Minnesota corporation (the "CUSTOMER"),
with an address of 6105 Trenton Lane North, Suite 100, Minneapolis, Minnesota
55442-3240, and XXXXX, organized under the laws of XXXXXX (the "SUPPLIER"),
with an address at XXXXXXXXXX.
WHEREAS, the Supplier is the manufacturer of certain air chambers that
are used by the Customer in the manufacture of Customer's air sleep systems; and
WHEREAS, the Customer has acquired certain equipment and has developed
certain software and testing procedures, which equipment, software and testing
procedures are useful in testing the air chambers sold by the Supplier to the
Customer, which testing may result in substantial savings to the Supplier; and
WHEREAS, the Supplier desires to purchase from the Customer the equipment
and to license from the Customer the software and testing procedures, all as
hereinafter described and subject to the terms and conditions of this Agreement;
and
WHEREAS, the Customer desires to obtain reasonable protection of its
proprietary and confidential information that has been developed by the Customer
at considerable expense;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto do hereby agree
as follows:
1. PURCHASE AND SALE OF EQUIPMENT. The Supplier hereby agrees to
purchase from the Customer, and the Customer hereby agrees to sell to the
Supplier, the equipment described on Exhibit I attached hereto and made a part
hereof, for an aggregate purchase price of $20,454.69 US Dollars, payable
immediately upon receipt of the equipment by the Supplier. Supplier hereby
acknowledges that the Customer is not the manufacturer of the equipment. The
Customer does hereby assign to the Supplier, subject to and effective only upon
receipt by the Customer of the purchase price for the equipment set forth above,
all of the Customer's rights under the original equipment manufacturer's
warranty relating to the equipment, a copy of which warranty will be included
with the equipment delivered to the Supplier. Select Comfort will provide
warranty support to XXXXX as outlined in the original equipment manufacturers
warranty. EXCEPT AS EXPRESSLY SET FORTH ABOVE, THE CUSTOMER DISCLAIMS ALL
WARRANTIES ON PRODUCTS FURNISHED HEREUNDER, EXPRESS OR IMPLIED, INCLUDING
WITHOUT LIMITATION IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. THE EXPRESS PROVISIONS OF THIS SECTION ARE IN LIEU OF ALL
OBLIGATIONS OR LIABILITIES ON THE PART OF THE CUSTOMER FOR DAMAGES, INCLUDING
BUT NOT LIMITED TO, SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES ARISING OUT OF
OR IN CONNECTION WITH THE USE OR PERFORMANCE OF THE EQUIPMENT ACQUIRED BY THE
SUPPLIER HEREUNDER.
2. GRANT OF A LICENSE FOR LIMITED USE OF SOFTWARE AND TESTING
PROCEDURES.
(a) GRANT OF LICENSE. For and in consideration of the
agreements of the Supplier set forth in this Agreement, and subject to
the fulfillment by the Supplier of all of its obligations set
<PAGE>
forth in this Agreement, the Customer hereby grants to the Supplier a
non-exclusive, non-transferable, license to use the software and the
testing procedures described on Exhibit 2 attached hereto and made a
part hereof (the "LICENSED TECHNOLOGY") solely and exclusively to
enable the Supplier to test the air cell bladders to be sold by the
Supplier to the Customer, and for no other use or purpose of any kind.
The Supplier may not sell, lease, license or otherwise transfer any
of the Licensed Technology or any rights therein, nor otherwise use or
exploit the Licensed Technology for any use or purpose except as
expressly set forth above. Specifically, and not in limitation of the
foregoing, the Supplier acknowledges and agrees that it is not
authorized to use the Licensed Technology for the purpose of testing
any products of the supplier that may be held for sale to any party
other than the Customer.
(b) OWNERSHIP OF LICENSED TECHNOLOGY. The Supplier hereby
acknowledges and agrees that the Licensed Technology constitutes
proprietary and confidential trade secret information of the Customer,
and acknowledges and agrees that the Customer has enforceable trade
secret protection with respect to the Licensed Technology and enforceable
copyright protection in the documentation relating to the Licensed
Technology.
(c) CONFIDENTIALITY. The Supplier acknowledges and agrees that
the Licensed Technology, and all embodiments thereof in whatever form,
constitute "CONFIDENTIAL INFORMATION" as such term is used in this
Agreement. The Supplier agrees that it shall not use the Confidential
Information for any purpose other than solely and exclusively for the
purpose of testing air cell bladders to be sold to the Customer as
ordered and specified by the Customer in connection with the business
relationship between the Customer and the Supplier. The Supplier hereby
agrees that it will not at any time, whether during the term of this
Agreement or thereafter, use the Confidential Information for any use or
purpose not expressly authorized by this Agreement, and will not disclose
the Confidential Information to any person or entity not expressly
authorized by the Customer to receive such Confidential Information,
except that the Supplier may disclose the Confidential Information to any
of its employees who have a need to know such Confidential Information
solely for the purpose of enabling such employees to perform the tests of
the air cell bladders to be sold by the Supplier to the Customer, and
provided that the Supplier advises each such employee that the
Confidential Information is proprietary and confidential trade secret
information of the Customer and that such employees are obligated to
maintain the confidentiality of all such Confidential Information. Upon
the termination of the license granted hereunder for any reason, the
Supplier agrees to promptly return to the Customer all of the
Confidential Information, including all copies or other reproductions
thereof in whatever form in Supplier's possession or control.
(d) DERIVATIVES. The term "DERIVATIVES" as used in this
Agreement shall mean any software developed in part by the Supplier which
is a derivative or modification of any of the Licensed Technology. So
long as the license granted by the Customer to the Supplier pursuant to
this Agreement remains in effect, the Supplier shall notify the Customer
promptly of any Derivative of which it becomes aware, and the Supplier
shall provide any such Derivative, including all documentation and source
code relating thereto, to the Customer as soon as reasonably practicable
thereafter.
(e) RIGHTS OF INSPECTION AND AUDIT. The Supplier hereby agrees
that the Customer and its representatives shall have full access to the
premises, facilities, books, records and operations of the Supplier
during the term of the license granted hereunder for the purpose of
enabling the
2
<PAGE>
Customer to verify compliance by the Supplier with all of the terms and
conditions of this Agreement as it pertains to the operation of this
equipment and software.
(f) TERM. The license granted by the Customer to the Supplier
hereunder shall become effective upon the execution and delivery of this
Agreement by each of the parties hereto and shall continue for as long as
the Supplier continues to produce and sell to the Customer air chambers,
subject to earlier termination as hereinafter set forth.
Upon termination of this agreement, Supplier agrees to return to the
customer, all equipment and software described in Exhibit I attached
hereto. The supplier will depreciate the equipment and software based on
a five (5) year depreciation schedule (60 equal months). If termination
of this agreement occurs prior to the full depreciation of the equipment,
the customer will issue payment to the supplier based on the balance of
the depreciation value prior to the supplier returning the equipment and
software to the customer.
(g) TERMINATION. Notwithstanding the provisions of Section
2(f) above, this Agreement and the limited license to use the Licensed
Technology granted by the Customer to the Supplier pursuant to this
Section 2 may be terminated:
(1) By either party upon the failure of the other party
hereto to perform or fulfill, at the time and in the manner herein
provided, any material obligation or condition required to be
performed or fulfilled by such party hereunder. Any such failure,
upon its occurrence, shall constitute a breach, and termination
shall be effective immediately following not less than [thirty
(30)] days after written notice thereof from the non-breaching
party; or
(2) The assignment by the supplier of its business or
substantially all of its assets for the benefit of creditors, or
the appointment of a receiver, trustee in bankruptcy or
appointment of a similar officer to take charge of all or any
substantial part of such property, or if the supplier is
adjudicated as bankrupt, and such other condition or conditions
are not corrected to the satisfaction of the customer within [ten
(10)] days following written notice thereof.
Notwithstanding the foregoing, upon any termination of this
Agreement pursuant to this Section 2(g), the obligations of the
Supplier pursuant to Section 2(c) above shall continue in full and
effect following such termination.
(h) DISCLAIMER OF WARRANTIES. THE LIMITED LICENSE GRANTED
HEREUNDER IS GRANTED "AS IS" WITHOUT ANY WARRANTY OF ANY KIND. THE
CUSTOMER DISCLAIMS ANY WARRANTIES OF ANY KIND, EXPRESSED OR IMPLIED,
INCLUDING WITHOUT LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE.
3. MISCELLANEOUS TERMS AND CONDITIONS.
(a) ASSIGNMENT. Neither party shall have the right to assign
or otherwise transfer any of its rights or obligations under this
Agreement, except with the written consent of the other party. Any
prohibited assignment or attempted assignment shall be null and void.
3
<PAGE>
(b) ENTIRE AGREEMENT. This Agreement, including the Exhibits
attached hereto and incorporated herein by reference, constitutes the
entire Agreement of the parties with respect to the subject matter
hereof, and supersedes all previous proposals, oral or written, and all
negotiations, conversations or discussions heretofore had between the
parties related to this Agreement.
(c) AMENDMENT AND MODIFICATION. This Agreement shall not be
modified, amended, rescinded, canceled or waived, in whole or in part,
except by written amendment signed by each of the parties hereto.
(d) NOTICES. Any notice required or permitted to be given
hereunder shall be deemed sufficient if given by facsimile or by
reputable international courier, addressed as indicated below or to such
other address as the respective parties may designate by like notice from
time to time by notice so given shall be deemed to be effective upon
receipt by the addressee.
In the case of the Customer:
Select Comfort Corporation
6105 Trenton Lane North
Suite 100
Minneapolis, Minnesota 55442-3240
Fax Number: (612) 551-7826
Attention: Procurement Director
In the case of the Supplier:
XXXXX
XXXXX
XXXXXX
Fax Number: XXXXXX
Attention: Managing Director
[Portions of this section have been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this Exhibit with this section intact has been filed
separately with the Securities and Exchange Commission]
(e) SEVERABILITY. In the event that any of the terms of this
Agreement are in conflict with any rule of law or statutory provision or
otherwise unenforceable under the laws or regulations of any
jurisdiction, such terms shall be deemed stricken from this Agreement,
but such invalidity or unenforceability shall not invalidate any of the
other terms of this Agreement, and this Agreement shall continue in
force, unless the invalidity or unenforceability of any such provisions
hereof does substantial violence to, or where the invalid or
unenforceable provisions comprise an integral part of, or other
inseparable from, the remainder of this Agreement.
(f) GOVERNING LAW. The English language version of this
Agreement, if it shall have been translated into any other language,
shall be the controlling version of this Agreement. This Agreement shall
be governed by and constituted in accordance with the laws of the State
of Minnesota. Each of the parties hereto hereby consents to the personal
jurisdiction of the state and federal courts located in Hennepin County,
State of Minnesota, and to the use of the English language, for the
adjudication of any claim or controversy arising under this Agreement.
4
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
SELECT COMFORT CORPORATION
By /s/
----------------------------------------------
Its Senior Vice President, Operations
--------------------------------------------
XXXXX
By /s/
----------------------------------------------
Its Managing Director
--------------------------------------------
[Portions of this signature page have been omitted pursuant to a request
for confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this Exhibit with this signature page intact has been filed
separately with the Securities and Exchange Commission]
5
<PAGE>
EXHIBIT I
January 25, 1996
<TABLE>
<CAPTION>
DESCRIPTION QUANTITY UNIT COST TOTAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5 Station test stand including 1 13,675.25 13,675.25
schematics and 4 hand held
meters
Spare part kits 3 811.48 2,434.11
Hand held gauge connections and 8 12.25 98.00
spares
Pigtail hose connection, male 800 5.20 4,160.00
insert
Tube connections on the test 10 8.70 87.00
stand
TOTAL 20,454.36
</TABLE>
6
<PAGE>
MANUFACTURERS LIMITED WARRANTY
for AIR LEAK TEST SYSTEM
2/1/96
All warranty claims will be processed through Select Comfort. Select Comfort
will process all warranty claims with the original equipment manufacturer on
behalf of Supplier.
The limited warranty is for one (1) year from date of the system delivery to
Select Comfort. The warranty covers all products for an entire year used under
proper conditions. There are inherent causes of component failure due to
contamination of the air supply if the proper filtering is not installed. A
clean air supply is considered a proper condition requirement. This warranty
does not imply Select Comfort will conduct service at the site of Supplier. If
for some reason the system was to fail at Supplier, the spare components that
are shipped with the initial system will get the system functioning again. The
defective parts must be returned to Select Comfort to the attention of: Nancy
Buchholz, who in turn will ship the defective part to the original manufacturer
for inspection, where a returns report will be generated. Based on the cause of
the failure, the part or component will be replaced, if under the one year
warranty. In no way is Select Comfort, or the original manufacturer liable for
incidental or consequential damages or production loss. Select Comfort and the
original manufacturer will help in any way possible to insure the system is
understood so servicing can be accomplished to maintain the system. The are
components that will have routine wear after a period of time such as the
connectors. All returned components will be inspected for any abuse, misuse or
improper application prior to replacing the component at the expense of the
manufacturer.
7
<PAGE>
CONSUMER CREDIT CARD PROGRAM AGREEMENT
BY AND AMONG
SELECT COMFORT CORPORATION
SELECT COMPORT RETAIL CORPORATION
SELECT COMFORT DIRECT CORPORATION
SELECT COMFORT SC CORPORATION
AND
MONOGRAM CREDIT CARD BANK OF GEORGIA
DATED AS OF
MAY 22, 1997
[Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this Exhibit with the portions intact has been filed
separately with the Securities and Exchange Commission]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I DEFINITIONS 1
Section 1.01 Certain Defined Terms 1
Section 1.02 Miscellaneous 10
ARTICLE II ESTABLISHMENT OF PROGRAM 11
Section 2.01 Commencement of Program; Retailers to honor
Credit Cards 11
Section 2.02 Bank to Extend Credit 11
Section 2.03 Promotion of Program 13
ARTICLE III ADMINISTRATION OF PROGRAM 14
Section 3.01 Preparation of Documents 14
Section 3.02 Account Administration; Credit Criteria 15
Section 3.03 Ownership of Accounts 15
Section 3.04 Insurance Solicitation of Accounts 15
Section 3.05 Value-Added Solicitation of Accounts 16
Section 3.06 Use of Cardholder List 17
Section 3.07 In-Store Payments; Payments at Bank
Locations 18
Section 3.08 Inserts; Statement Messages 18
ARTICLE IV OPERATING PROCEDURES 19
Section 4.01 General 19
Section 4.02 New Cardholder Account Establishment
Procedures 19
Section 4.03 Purchase Authorization Procedures 20
ARTICLE V SETTLEMENTS, SERVICE FEES AND ADJUSTMENTS 20
Section 5.01 Settlement Procedures 20
Section 5.02 Other Adjustments 21
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Section 5.03 Payment Terms and Rights of Set Off and
Recoupment 22
ARTICLE VI CREDIT TERMS; RESERVES; LOSSES ON ACCOUNTS; SECURITY 22
Section 6.01 Credit Terms 22
Section 6.02 Promotion Reserve 23
Section 6.03 Liquidation Reserve 24
Section 6.04 Return Reserve 26
Section 6.05 Losses on Accounts 28
Section 6.06 Grant of Security Interest;
Precautionary Filing 29
Section 6.07 Returns of Merchandise 30
Section 6.08 Limited Guarantee 30
ARTICLE VII CHARGEBACK 31
Section 7.01 Bank's Right to Chargeback 31
Section 7.02 Limitation of Chargeback 31
Section 7.03 Exercise of Chargeback 32
ARTICLE VIII WARRANTIES AND COVENANTS OF RETAILER 32
Section 8.01 Presentment Warranties 32
Section 8.02 Account Covenants 33
Section 8.03 General Representations and Warranties 34
Section 8.04 Additional Affirmative Covenants of Retailer 36
Section 8.05 Additional Negative Covenants of Retailer 37
ARTICLE IX WARRANTIES OF BANK 38
Section 9.01 Representations and Warranties of Bank 38
ARTICLE X EVENTS OF DEFAULT; RIGHTS AND REMEDIES 39
Section 10.01 Events of Default 39
Section 10.02 Remedies 41
ARTICLE XI TERM/TERMINATION 42
Section 11.01 Commitment Period 42
Section 11.02 Termination 42
Section 11.03 Purchase of Accounts by Retailers Upon
Termination 43
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Section 11.04 Termination for Force Majeure 45
Section 11.05 Liquidation of Accounts 46
ARTICLE XII INDEMNIFICATION 47
Section 12.01 Indemnification by Retailer 47
Section 12.02 Indemnification by Bank 48
Section 12.03 Payment of Indemnified Amounts 49
Section 12.04 Notice 49
ARTICLE XIII OTHER AGREEMENTS 50
Section 13.01 Retailer Acquisitions; New Retailer
Subsidiaries 50
Section 13.02 Retailer Primary Divestitures 51
Section 13.03 Retailer Secondary Divestitures 52
Section 13.04 Other Programs 54
ARTICLE XIV MISCELLANEOUS 54
Section 14.01 Assignability 54
Section 14.02 Amendment 54
Section 14.03 Non-Waiver 54
Section 14.04 Severability 55
Section 14.05 Governing Law 55
Section 14.06 Captions 55
Section 14.07 Use of Retailer Names and Marks 55
Section 14.08 Securitization/Participation 55
Section 14.09 Further Assurances 56
Section 14.10 Entire Agreement 56
Section 14.11 Notices 56
Section 14.12 Power of Attorney 56
Section 14.13 Confidential Information 57
Section 14.14 No Partnership 57
Section 14.15 Third Parties 57
Section 14.16 Interpretation 58
Section 14.17 Meetings of Parties 58
Section 14.18 Joint and Several Obligations 58
Section 14.19 Multiple Counterparts 58
</TABLE>
EXHIBITS
- --------
Exhibit A - Operating Procedures
SCHEDULES
- ---------
4
<PAGE>
Schedule 1 - Initial Approved Credit-Based Promotions
Schedule 2 - Legal Name/Principal Place of Business for Retailers
Schedule 3 - Retailers' Names
Schedule 4 - Notice Addresses
5
<PAGE>
CONSUMER CREDIT CARD PROGRAM AGREEMENT
This CONSUMER CREDIT CARD PROGRAM AGREEMENT (hereinafter the "Agreement")
is made as of the 22nd day of May, 1997 by and among Monogram Credit Card Bank
of Georgia, a Georgia banking corporation with its principal place of business
at 7840 Roswell Road, Building 100, Suite 210, Atlanta, Georgia 30350 (together
with its successors, assigns and transferees, the "Bank") and Select Comfort
Corporation, Select Comfort Retail Corporation, Select Comfort Direct
Corporation, and Select Comfort SC Corporation, each a Minnesota corporation and
each having its principal place of business at 6105 Trenton Lane North,
Minneapolis, Minnesota 55442 (jointly and severally, the "Retailers").
W I T N E S S E T H
WHEREAS, Bank has established programs to extend customized revolving
credit to qualified customers for the purchase of goods and services from
various merchants for personal, family or household purposes;
WHEREAS, Retailers are engaged, among other activities, in the retail sale
of consumer goods and services and desire to create a customized revolving
credit card program, as more particularly set forth herein;
WHEREAS, Retailers have requested that Bank extend credit to qualified
customers of Retailers for the purchase of certain goods and services; and
WHEREAS, subject to the terms and conditions of this Agreement, Bank has
agreed to provide Retailers with such a program for credit extension;
NOW, THEREFORE, in consideration of the terms, conditions and mutual
covenants contained herein, and for good and valuable consideration the receipt
and sufficiency of which are hereby acknowledged, Bank and Retailers agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1.01 CERTAIN DEFINED TERMS. As used in this Agreement, the
following terms shall have the following meanings:
"ACCOUNT" means and includes the following: (i) any open-end revolving
Credit Card Agreement, whether now existing or hereafter created between a
Cardholder and Bank under the Program, pursuant to which such Cardholder may
finance Purchases on credit pursuant to the terms of such Credit Card Agreement,
together with any modifications or amendments which now or hereafter may be made
to such Credit Card Agreement; (ii) any and all Account Documentation; (iii) all
of the accounts, accounts receivable, Indebtedness, other receivables, contract
rights, choses in action, general intangibles, chattel paper, instruments,
documents and
6
<PAGE>
notes, Program Documents and contract rights related to, comprising, securing
or evidencing the obligation, or the receivables arising from or under any
Credit Card Agreement or any other Account Documentation and all proceeds of
all of the foregoing, (iv) any and all rights as to any goods or other
property which is represented thereby or is security or collateral therefor;
(v) all guarantees, claims, security interests, or other security held by or
granted to Bank to secure payment by any person with respect thereto; (vi)
proceeds relating to Insurance Programs and Value-Added Programs; and (vii)
any and all other rights, remedies, benefits, interests and titles, both
legal and equitable, to which Bank may now or at anytime hereafter be
entitled in respect of the foregoing.
"ACCOUNT DOCUMENTATION" means with respect to an Account, any and all
documentation relating to such Account, including without limitation, Program
Documents, Credit Cards, Credit Card Applications, Credit Card Agreements,
Charge Transaction Data, Charge Slips, Credit Slips, checks and stubs, credit
bureau reports, adverse action information, change of terms notices,
correspondence, memoranda, documents, instruments, certificates, agreements,
invoices, and any other written information relating to such Account, in each
case including any and all amendments or modifications thereto, and in each
case, however stored or kept, PROVIDED, HOWEVER, that "Account Documentation"
shall not include materials used for advertising or solicitations including,
without limitation, advertising or solicitations of credit-based promotions.
"ACTIVE ACCOUNT" means, for any Billing Period, any Account other than an
Defaulted Account, which at any time during such Billing Period had a debit or
credit balance.
"AFFILIATE" means, with respect to any person, each person that controls,
is controlled by or is under common control with such person. For the purpose
of this definition, "control" of a person shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of its management or
policies, whether through the ownership of voting securities, by contract or
otherwise.
"ANNUAL LOSS RATE" shall have the meaning given to such term in Section
6.05 hereof.
"ANNUAL LOSS SHARE" shall have the meaning given to such term in Section
6.05 hereof.
"APPROVED CREDIT-BASED PROMOTIONS" means until the first anniversary of the
Program Commencement Date, the promotional credit and billing terms and such
other credit-based promotions as are described on the attached Schedule 1 and at
all times after the Program Commencement Date, such other promotional credit and
billing terms and such other credit-based promotions as may be agreed to from
time to time in writing by Bank and Retailers.
"AVERAGE NET RECEIVABLES" means, for any Billing Period, the sum of the
aggregate Indebtedness for all Accounts (other than Defaulted Accounts) for each
day during such period divided by the number of days in such period.
7
<PAGE>
"BANK" means Monogram Credit Card Bank of Georgia and its permitted
successors, transferees and assigns.
"BANK TERMINATION EVENT" means any of the following events: (i) Bank shall
fail to pay any amount when due hereunder and the same shall remain unpaid for a
period of fifteen (15) days after the Retailers, acting collectively, shall have
made written demand therefor PROVIDED, HOWEVER, that the failure to make a
payment due hereunder shall not constitute a "Bank Termination Event" if the
amount which Bank has failed to pay is less than XXXXXXXXX Dollars ($XXXXX) and
Bank, acting in good faith, has delivered a written notice to Retailers
contesting its obligation to make such payment; (ii) Bank shall materially fail
or neglect to perform, keep, or observe any other term, provision, condition, or
covenant contained in this Agreement that is required to be performed, kept, or
observed by it, and such failure or neglect shall continue for a period of
thirty (30) days after Retailers, acting collectively, shall have given written
notice thereof; (iii) any representation, warranty or statement, made, delivered
or deemed made by Bank hereunder shall prove not to have been true and correct
in all material respects as of the date when made, delivered or deemed made and
such failure to be true and correct has a material adverse effect on Bank's
ability to perform its obligations hereunder; (iv) Bank shall assign its rights
and obligations hereunder to General Electric Capital Corporation and Retailers,
acting collectively, shall notify Bank of their election to characterize such
assignment as a "Bank Termination Event" under this Agreement within thirty (30)
days of the date on which any Retailer is first notified of such assignment; or
(v) Bank (A) shall no longer be Solvent; (B) shall generally not pay its debts
as such debts become due or shall admit in writing its inability to pay its
debts generally; (C) shall make a general assignment for the benefit of its
creditors; (D) shall institute or have instituted against it any proceeding
seeking to adjudicate it a bankrupt or insolvent or seeking liquidation, winding
up, reorganization, arrangement, adjustment, protection, relief, or composition
of it or its debts under any law relating to bankruptcy, insolvency, or
reorganization or relief of debtors, or seeking the entry of an order for relief
or the appointment of a receiver, trustee, custodian or other similar official
for it or for any substantial part of its property, and, in the case of any
proceeding instituted against it (but not instituted by it), either such
proceeding shall remain undismissed or unstayed for a period of thirty (30)
days, or any of the actions sought in such proceeding (including, without
limitation, the entry of an order for relief against, or the appointment of a
receiver, trustee, custodian or other similar official for, it or any
substantial part of its property) shall occur; or (E) shall take any corporate
action to authorize any of the actions set forth above in this subclause (iv).
[A portion of this section has been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this section with the portion intact has been filed
separately with the Securities and Exchange Commission]
"BILLING PERIOD" means the elapsed time between the dates on which Bank
elects to send billing statements in respect of Accounts, which time is usually
between twenty-eight (28) and thirty-two (32) days in length.
"BUSINESS DAY" means any day, except Saturday, Sunday, or a day on which
banks are required or permitted to be closed in Georgia.
8
<PAGE>
"CARDHOLDER" means any natural person who has entered into a Credit Card
Agreement with Bank or who is or may become obligated under or with respect to
an Account.
"CARDHOLDER LIST" has the meaning given to it in Section 3.06 hereof.
"CHANGE OF CONTROL" has the meaning given to it in Section 10.01(f) hereof.
"CHARGE SLIP" means a sales receipt, register receipt tape or other invoice
or documentation, in each case evidencing a Purchase that gives rise to an
Account.
"CHARGE TRANSACTION DATA" means Account/Cardholder identification and
transaction information with regard to each Purchase by a Cardholder on credit
and each return of a Purchase for credit to the Account/Cardholder, which data
will be transmitted by Retailers to Bank in accordance with the applicable
Operating Procedures.
"COMMERCIAL PAPER RATE" has the meaning given to it in Section 6.03(c)
hereof.
"COMMITMENT PERIOD" means the period commencing on the Program Commencement
Date and ending on the termination or expiration date established pursuant to
Section 11.01 or 11.02 hereof.
"CREDIT CARD" or "CARD" means the plastic card issued and owned by Bank
under the Program exclusively for use with the Program which evidences a
Cardholder's right to make Purchases under the Program.
"CREDIT CARD AGREEMENT" means the open-end revolving credit agreement
between Bank and each Cardholder pursuant to which such Cardholder may make
Purchases on credit provided by Bank, together with any modifications or
amendments which may be made to such agreement.
"CREDIT CARD APPLICATION" means Bank's credit application form which must
be completed by applicants who wish to become Cardholders and must be submitted
to Bank for its review and approval.
"CREDIT REVIEW POINT" means, except as adjusted pursuant to Section 2.02,
Seventy-five Million Dollars ($75,000,000), or such other higher amount as Bank,
in its sole discretion, shall from time to time specify to Retailers in writing.
"CREDIT SLIP" means a sales credit receipt evidencing a return or exchange
of Goods or an adjustment for Services rendered or not rendered by a Retailer to
a Cardholder for credit on an Account.
"DAILY RETENTION AMOUNT" shall have the meaning given to such term in
Section 5.01 hereof.
9
<PAGE>
"DEFAULT" means any event the occurrence of which, with the passage of time
or the giving of notice or both, would constitute an Event of Default.
"DEFAULTED ACCOUNT" means an Account which has been written off in
accordance with Bank's write-off policies.
"EVENT OF DEFAULT" shall have the meaning given to such term in Section
10.01 hereof.
"FINAL LIQUIDATION DATE" shall mean the first date after the termination or
expiration of the Commitment Period on which Bank no longer owns any Active
Accounts.
"FULLY-FUNDED DATE" means the first Settlement Date on which the net amount
credited to the Return Reserve is equal to or greater than the product of (i)
the then applicable Return Percentage and (ii) an amount equal to the total
amount of all Purchases on Accounts made by Cardholders and identified in Charge
Transaction Data received during the immediately preceding three (3) Billing
Periods.
"GOODS" and/or "SERVICES", separately or cumulatively, means (i) all
merchandise and services, respectively, which may be purchased by a Cardholder
from a Retailer; (ii) all Value-Added Programs to the extent that the purchase
thereof gives rise to an Account; and (iii) all Insurance Programs to the extent
that the purchase thereof gives rise to an Account. Notwithstanding the
foregoing to the contrary, neither "Goods" nor "Services" shall include extended
warranties offered for sale by or through any Retailer.
"INDEBTEDNESS" means any and all amounts owing from time to time with
respect to an Account whether or not billed, including, without limitation, any
unpaid balance, finance charges (inclusive of finance charges subject to
possible reversals due to unexpired credit-based promotions), late charges, NSF
fees, charges for Value-Added and Insurance Programs, and any other charges with
respect to an Account.
"IN-STORE PAYMENTS" means any payment on an Account made by a Cardholder
(or by any person acting on behalf of a Cardholder) at a Retailer Location.
"INSURANCE PROGRAM" means any program which may be offered through Bank
pursuant to Section 3.04 under which Bank, any insurance company, or any other
third party makes available insurance coverage to Cardholders.
"LIQUIDATION RESERVE" means the record created on the books of the Bank in
accordance with Section 6.03 hereof.
"LIQUIDATION RESERVE FACTOR" means a factor which shall be established and
modified by Bank in its sole discretion from time to time PROVIDED, HOWEVER,
that in no event may such factor exceed .03 and PROVIDED FURTHER, that Bank may
not make changes to the Liquidation Reserve Factor unless and until Retailers
shall have requested in writing that Bank, in the
10
<PAGE>
exercise of its sole discretion, make adjustments to the credit standards
applicable to requests for extension of credit to Cardholders. The
"Liquidation Reserve Factor" shall be based, from time to time upon Bank's
then-applicable credit standards for requests for extension of credit to
Cardholders (the "Applicable Credit Standards"). The "Liquidation Reserve
Factor" shall be set as Bank's good faith estimate of the amount by which the
Annual Loss Rate would exceed .05 had the Bank approved requests for
extensions of credit to Cardholders at all times since the Program
Commencement Date in accordance with the Applicable Credit Standards.
Initially, the Liquidation Reserve Factor shall be zero (0).
"LOSSES" shall have the meaning given to such term in Section 12.01 hereof.
"MARKETING FUND" shall have the meaning given to such term in Section
2.03(c).
"MONTHLY LOSS RATE" shall have the meaning given to such term in Section
6.05.
"MONTHLY PROMOTIONAL PAYMENT" means an amount equal to the sum of (i) an
amount equal to the accrued but unpaid finance charges in respect of each
Account subject to an "After-the-Fact Free" (as such phrase is defined in
Schedule 1 hereto) Approved Credit-based Promotion where the Cardholder (A) has
paid the total cash price thereof prior to the expiration of the applicable
promotional period and during the immediately preceding Billing Period; or (B)
has returned Goods to a Retailer for credit prior to the expiration of the
promotional period and during the immediately preceding Billing Period; and (ii)
an amount equal to ninety-two percent (92%) of the applicable APR which would
have accrued in respect of each Account subject to an "Interest Free" or "Equal
Pay" (as such phrases are defined in Schedule 1 hereto) Approved Credit-based
Promotion during the immediately preceding Billing Period had such Account not
been subject to such Approved Credit-based Promotion.
"NET RECOVERIES" shall have the meaning given to such term in Section 6.05.
"NEW RETAILER" means any person engaged in the operation of retail stores
or the making of direct sales in the United States, together with any other
person directly or indirectly controlled by such person and any franchisees of
such person using such person's name, logo, trademarks and service marks or
similar proprietary designations.
"OPERATING PROCEDURES" means the instructions and procedures to be followed
by Retailers in connection with the Program, a copy of which is set forth as
Exhibit A hereto, as such instructions and procedures may be amended from time
to time.
"PRIMARY DIVESTITURE DATE" shall have the meaning given to such term in
Section 13.02 (a).
"POSTAGE BASE RATE" means Thirty-two Cents ($.32).
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"PROGRAM COMMENCEMENT DATE" means May 27, 1997.
"PROGRAM" means the credit card program established by Bank pursuant to
this Agreement and made available to qualified customers of Retailers to make
Purchases. The term "Program" includes the extension of credit by Bank to
Cardholders, billings, collections, accounting between the parties, and all
aspects of the customized revolving credit plan contemplated herein.
"PROGRAM DOCUMENTS" has the meaning given to it in Section 3.01 hereof.
"PROMOTION RESERVE" means the record created on the books of the Bank in
accordance with Section 6.02 hereof.
"PROMOTION RESERVE HOLDBACKS" means (i) with respect to the Approved
Credit-based Promotions identified on Schedule 1 hereto, (A) for the period
commencing on the Program Commencement Date and ending on the first anniversary
thereof, the promotion reserve holdbacks identified on Schedule 1 and (B) for
the period after the first anniversary of the Program Commencement Date, program
reserve holdbacks established by Bank in its sole discretion as Bank's good
faith estimate of the amounts needed to be held back from remittances otherwise
to be made by Bank under Section 5.01(b) in order that the amounts in the
Promotion Reserve will be sufficient to pay the applicable Monthly Promotion
Payment on each Settlement Date and (ii) with respect to all other Approved
Credit-based Promotions, the promotion reserve holdbacks agreed to by all
parties hereto at the time such promotions are approved.
"PROMOTIONAL RESERVE REQUIRED BALANCE" shall mean, as of any date of
determination, an amount to be established by Bank in its sole discretion as a
good faith estimate of the sum of the Monthly Promotion Payments to be due on
each Settlement Date after such date of determination.
"PURCHASE(S)" means the purchase by a Cardholder of any of the Goods and/or
Services which may be purchased from a Retailer at a Retailer Location.
"RETAILER LOCATION(S)" means retail stores within the United States that
are owned or operated by a Retailer. The definition of "Retailer Location(s)"
shall also include the locations within the United States from which mail order
sales and catalog sales of Goods and/or Services are made by a Retailer and from
which telemarketing and other marketing of Goods and/or Services may be
conducted by a Retailer.
"RETAILER NAMES" has the meaning given to it in Section 14.07 hereof.
"RETAILER PRIMARY DIVESTITURE" means the sale or other transfer for value
by any Retailer, directly or indirectly, in one transaction or in a series of
related transactions, of (i) all or substantially all of the assets, or fifty
percent (50%) or more of the outstanding voting securities,
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of any other Retailer or (ii) Retailer Locations which during the 12-month
period immediately prior to determination accounted for twenty-five percent
(25%) or more of such Retailer's net sales proceeds from sales of Goods and
Services.
"RETAILER SECONDARY DIVESTITURE" means the sale or other transfer for
value by any Retailer, directly or indirectly, in one transaction or in a
series of related transactions, of one or more Retailer Locations, which sale
or other transfer for value is not a Retailer Primary Divestiture.
"RETAILERS' ANNUAL SHARE" has the meaning given to it in Section 6.05
hereof.
"RETAILERS' MONTHLY SHARE" has the meaning given to it in Section 6.05
hereof.
"RETENTION FACTOR" has the meaning given to it in Section 5.01 hereof.
"RETURN PERCENTAGE" means the percentage of Goods sold on Account which are
returned for credit to Retailers as determined from time to time by Bank. The
"Return Percentage" shall be initially set at XXXXX percent (XX%) and shall be
recalculated on the third Settlement Date after the Program Commencement Date
and on every third Settlement Date thereafter. Each such recalculation shall
determine the percentage of Goods sold on Account which were returned for credit
to Retailer during the three (3) immediately preceding Billing Periods as of
such Settlement Date. [A portion of this section hase been omitted pursuant to
a request for confidential treatment under Rule 406 under the Securities Act of
1933, as amended. A copy of this section with the portion intact has been filed
separately with the Securities and Exchange Commission]
"RETURN RESERVE" means the record created on the books of the Bank in
accordance with Section 6.04 hereof.
"SECOND SOURCE PROGRAM" has the meaning given to it in Section 8.05(b)
hereof.
"SERVICE FEE PERCENTAGE" has the meaning given to it in Section 5.02
hereof.
"SETTLEMENT DATE" means a date selected by Bank after each Billing Period
which date shall be no more than fifteen (15) days after the last day of such
Billing Period.
"SOLVENT" means, as to any person, (a) that the present fair salable value
of such person's assets is in excess of the total amount of its liabilities, (b)
that such person is presently generally able to pay its debts as they become
due, and (c) that such person does not have unreasonably small capital to carry
on such person's business as theretofore operated and or the business in which
such person is about to engage. The phrase "present fair salable value" of a
person's assets is intended to mean that value which could be obtained if the
assets were sold within a reasonable time in arm's-length transactions in an
existing and not theoretical market.
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"TERMINATION NOTICE DATE" means the first date on which any party hereto
shall deliver a notice of non-extension under Section 11.01 or a notice of
termination under Section 11.02 to any other party hereto.
"UCC" means the Uniform Commercial Code of Georgia as in effect from time
to time.
"UNPAID RETURNED GOODS" means any Goods that are returned to any Retailer
if such return results in an obligation of the Retailer to make any payment to
Bank under this Agreement (including, without limitation, any obligation to
repurchase any Account created by the sale of such Goods) or gives Bank any
right to reduce the amount of any payments which would otherwise have been made
under Section 5.01 hereof; PROVIDED, HOWEVER, that such Goods shall cease to be
"Unpaid Returned Goods" when Bank has received from the Retailers full payment
of such obligation or has reduced a payment made under Section 5.01 in respect
thereof.
"VALUE-ADDED PROGRAM" means any products or services which may be offered
by or through Bank to Cardholders pursuant to Section 3.05 that enhance the
features of the Program or any Account including, without limiting the
foregoing, credit card protection plans, legal services and auto clubs;
PROVIDED, HOWEVER, that "Value-Added Programs" shall not include credit
insurance or any other Insurance Program.
SECTION 1.02 MISCELLANEOUS. As used herein, (i) all references to the
plural number shall include the singular number (and vice versa); (ii) all
references to the masculine gender shall include the feminine gender (and vice
versa) and (iii) all references to "herein," "hereof," "hereunder,"
"hereinbelow," "hereinabove" or like words shall refer to this Agreement as a
whole and not to any particular section, subsection or clause contained in this
Agreement. References herein to any document including, without limitation,
this Agreement shall be deemed a reference to such document as it now exists,
and as from time to time hereafter the same may be amended. References herein
to a "person" or "persons" shall be deemed to be references to an individual,
corporation, limited liability company, partnership, trust, unincorporated
association, joint venture, joint-stock company, or any other form of entity.
All other undefined terms contained herein shall, unless the context indicates
otherwise, have the meanings provided for by the UCC to the extent the same are
used or defined therein.
ARTICLE II
ESTABLISHMENT OF PROGRAM
SECTION 2.01 COMMENCEMENT OF PROGRAM; RETAILERS TO HONOR CREDIT CARDS.
(a) Pursuant to the terms and conditions of this Agreement,
Retailers and Bank hereby establish the Program for the purpose of making
open-end credit available during the Commitment Period (up to such credit
limits as Bank may from time to time establish and modify) to qualified
customers of Retailers for Purchases from Retailer Locations.
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(b) During the Commitment Period, with respect to each applicant
under the Program who qualifies for credit under the standards unilaterally
established by Bank, Bank will open an Account, issue to such qualified
applicant a Credit Card, activate such applicant's Credit Card in accordance
with the Operating Procedures and grant credit to such applicant for any
Purchases. The terms and conditions upon which a Cardholder may use the
Credit Card and upon which Bank may extend credit to a Cardholder shall be
governed by the Credit Card Agreement between the Cardholder and Bank.
(c) Bank will pay to Retailers a bonus ("Incentive Bonus") in
the amount of Five Hundred Thousand Dollars ($500,000) on the Program
Commencement Date as an incentive to enter into this Agreement.
(d) Retailers will participate in the Program and honor any valid
Credit Card issued by Bank for Purchase(s) at each Retailer Location. Only
the cash selling price, including related sales and use taxes and shipping
costs, of Goods and/or Services sold or rendered by Retailers shall be
charged to Accounts. Sales of extended warranties offered by or through any
Retailer shall not be charged to Accounts. Retailers shall permit customers
with Accounts to charge Goods and/or Services to their Accounts, subject to,
and in accordance with, the Operating Procedures.
SECTION 2.02 BANK TO EXTEND CREDIT.
(a) Subject to (i) the terms of this Agreement, (ii) the credit
limits applicable to each Account and (iii) the terms and conditions in the
Credit Card Agreements, Bank shall extend credit to Cardholders in amounts
set forth as the total for any Purchase(s) for personal, family or household
purposes reflected in Charge Transaction Data received and accepted by Bank
during the Commitment Period.
(b) Under no circumstances shall Bank be required to advance funds
in respect of Charge Transaction Data submitted to it by any Retailer, if,
after giving effect to such advance, the then-outstanding aggregate
Indebtedness with respect to all Accounts would exceed the Credit Review
Point. If on any date the aggregate Indebtedness with respect to all
Accounts equals or exceeds eighty percent (80%) of the Credit Review Point
then in effect, Bank shall promptly so advise Retailers and within one
hundred and twenty (120) days of such date, Bank shall give Retailers written
notice of its election of one of the following options:
(i) Bank may, in its sole discretion, increase the Credit
Review Point to an amount Bank deems acceptable, but in any event to an
amount higher than one hundred twenty-five percent (125%) of the
aggregate Indebtedness with respect to all Accounts as of the date of
the election of this option. If Bank elects this option, then Bank's
written notice to Retailers shall include the amount of the increased
Credit Review Point.
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(ii) Bank may elect not to increase the Credit Review Point to
the amount required by Section 2.02(b) (i); in such event, Retailers,
acting collectively, shall be entitled to terminate this Agreement in
accordance with the provisions of Section 11.02.
After the Bank first notifies Retailers that the aggregate Indebtedness with
respect to all Accounts equals or exceeds eighty percent (80%) of the Credit
Review Point then in effect, Bank shall provide Retailers with a monthly
statement comparing the aggregate Indebtedness with respect to all Accounts
to the Credit Review Point, PROVIDED, HOWEVER, that Bank shall have no
further obligation to provide such monthly notice if it elects to increase
the Credit Review Point to an amount required by Section 2.02(b) (i).
(c) Retailers expressly acknowledge Bank's right to establish a
Credit Review Point as described in this Section 2.02 and, in this regard,
hereby release Bank from, and indemnify Bank against, any and all Losses
incurred as a result of Bank's refusal to advance credit to Cardholders in
accordance with this Section 2.02, and from and against any and all Losses
incurred as a result of Bank's refusal to increase the Credit Review Point.
SECTION 2.03 PROMOTION OF PROGRAM.
(a) During the term of this Agreement, Retailers agree to actively
promote the Program including, without limitation, providing proper training
to their respective employees in the use and marketing of the Program to
their customers. Without limiting the foregoing, prior to the expiration or
termination of the Commitment Period, Retailers agree to expend at least
XXXXXXXXXX Dollars ($XXXXXXX) for (i) point-of-sale promotional materials and
store signage; and (ii) other marketing promotions which have been approved
by Bank. Retailers shall provide Bank -with invoices and other documents
establishing the amount of all such expenditures. [A portion of this section
has been omitted pursuant to a request for confidential treatment under
Rule 406 under the Securities Act of 1933, as amended. A copy of this section
with the portion intact has been filed separately with the Securities and
Exchange Commission]
(b) Retailers shall include Program information and/or actual
Credit Card Aplications and Credit Card Agreements in their general and
specialized advertising brochures when deemed appropriate by the management
of the Retailers. Retailers shall make Credit Card Applications and Credit
Card Agreements to be used in connection with the Program prominently and
conspicuously available at all Retailer Locations in such manner as is
mutually agreed by Retailers and Bank PROVIDED, HOWEVER, that such Credit
Card Applications and Credit Card Agreements need not be made available at
any location from which Retailers make only mail order and catalog sales. No
Account Documentation shall be publicly distributed or disseminated without
the prior written consent of Retailers and Bank; PROVIDED, HOWEVER, that Bank
reserves the right to make or require Retailers to make any change in the
Account Documentation as may in Bank's reasonable judgment be required by or
appropriate to comply with, any applicable law, rule or regulation. In the
event any Retailer proceeds with promoting or offering any billing or credit
terms, insurance or other products for use with any Credit Card without prior
written approval by Bank, Retailers shall indemnify Bank for any and all
Losses arising from such materials or program. Retailers may not, without
Bank's prior written consent,
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use Bank's name or logo type (or the name or logo type of any Affiliate of
the Bank) in any advertisement, press release or promotional materials except
as may otherwise be required by applicable law. The Bank's approval of any
billing and credit terms for any credit-based promotion is not intended to be
and will not be construed to be an approval of any materials used in
advertising or soliciting participation in such promotions.
(c) Beginning on the first Settlement Date after the end of the
thirteenth (13th) Billing Period and continuing on each Settlement Date
thereafter until the Termination Notice Date, and PROVIDED there exists no
Default or Event of Default on any such date, Bank shall credit an amount
equal to one-twelfth (1/12) of the product of the Average Net Receivables for
the immediately preceding Billing Period and XXXXXXX percent (XXXX%), to a
record maintained on the books of the Bank. Such record is referred to
herein as the "Marketing Fund." Except for the right to require Bank to make
payments from such account from time to time in accordance with Section
2.03(d) hereof, Retailers have no right, title or interest in or to the
Marketing Fund or in and to any amounts which have been credited thereto. [A
portion of this section has been omitted pursuant to a request for confidential
treatment under Rule 406 under the Securities Act of 1933, as amended. A copy
of this section with the portion intact has been filed separately with the
Securities and Exchange Commission]
(d) After the later of (i) the first anniversary of the Program
Commencement Date and (ii) the date on which Retailers shall have fully
expended the XXXXXXXX Dollars ($XXXXX) in point-of-sale promotional
materials, store signage and other approved marketing promotions as required
pursuant to Section 2.03(a) and continuing until the expiration or
termination of the Commitment Period, the cost and expenses of marketing
promotions proposed by any party hereto and approved by all other parties
hereto (which approvals shall not be unreasonably withheld) shall be paid on
a matching basis, whereby Retailers, acting collectively, shall direct Bank
to pay XXXXX (XXX) of the costs of any such promotions from the Marketing
Fund and Retailers shall pay directly XXXXX (XXX) of such costs. During such
period of time, Retailers shall have the right to use the Marketing Fund on a
matching basis for such mutually agreed upon marketing promotions until it is
fully expended. Any amounts remaining credited to the Marketing Fund at the
expiration or termination of the Commitment Period may be retained by Bank
for its own account without obligation to account therefor to Retailers.
[Portion of this section have been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this section with the portion intact has been filed
separately with the Securities and Exchange Commission]
ARTICLE III
ADMINISTRATION OF PROGRAM
SECTION 3.01 PREPARATION OF DOCUMENTS.
(a) Bank shall provide Retailers with the form and content of
Credit Card Applications, Credit Card Agreements, Credit Cards, credit card
mailers and such other documents as are required by law or by the Operating
Procedures (hereinafter collectively, the "Program Documents"). Bank shall
establish the nature and quantities of any such documents.
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All Account Documentation (including, without limitation, the Program
Documents) and all other documents, advertisements or promotional materials
used by Retailers in connection with the Program shall clearly disclose that
Bank is extending credit directly to Cardholders.
(b) Bank shall be responsible for the direct costs of preparing
and distributing billing statements, Credit Cards (including costs of
embossing) and carriers, and of establishing and maintaining a host-to-host
computer link between Bank and Select Comfort Corporation.
(c) Retailers shall be solely responsible for all other costs and
expenses of preparing and distributing Account Documentation, including,
without limitation, the costs of preparing Credit Card Applications, and
shall be solely responsible for all costs and expenses of credit advertising,
in-store point-of-purchase promotional materials, credit marketing, and other
expenses related to the promotion of the Program.
SECTION 3.02 ACCOUNT ADMINISTRATION; CREDIT CRITERIA.
(a) Bank, in its sole discretion, (i) shall determine the
creditworthiness of individual applicants under the Program, the range of
credit limits to be made available to individual Cardholders, whether to
suspend or terminate credit privileges of any Cardholder, and the credit
criteria to be used in evaluating applicants in connection with the Program;
(ii) shall establish the terms and conditions of the Credit Card Agreements
and the terms and conditions under which credit will be extended to
Cardholders; and (iii) may modify such terms and conditions from time to time.
(b) Except to the extent resulting from a failure of the Bank or
the Program Documents to comply with all applicable laws where such failure
would give rise to an indemnity obligation of the Bank under Section
12.02(d), the rejection for credit of any applicant under the Program, or any
number of applicants, shall not give rise to any claim, liability, demand,
offset, defense, counterclaim or other right or action by any Retailer
against Bank or its Affiliates, and each Retailer hereby waives and releases
any such claim that it may have against Bank or its Affiliates.
SECTION 3.03 OWNERSHIP OF ACCOUNTS. Bank shall be the sole and
exclusive owner of all Accounts and Account Documentation, including without
limitation, all Program Documents, Cardholder data, Charge Transaction Data,
Charge Slips, Credit Slips, and receipts or evidences of payments or
purchases by Cardholders. Bank shall be entitled to receive all payments made
by Cardholders on Accounts and each Retailer acknowledges and agrees that it
has no right, title or interest in any of the foregoing and no right to any
payments made by Cardholders on Accounts or any proceeds in respect of the
Accounts. All collection procedures shall be under the sole control and
discretion of Bank and may be modified from time to time by Bank in its sole
discretion.
SECTION 3.04 INSURANCE SOLICITATION OF ACCOUNTS. Bank, or its agents,
may solicit Cardholders for Insurance Programs. Bank shall be entitled to
retain for its account all proceeds of Insurance Programs and Retailers shall
have no rights with respect thereto. Notwithstanding
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the foregoing, provided no Default or Event of Default shall have occurred
and be continuing, Bank shall pay to Retailers as an administrative fee, on
each Settlement Date occurring prior to the expiration or termination of the
Commitment Period, an amount equal to XXXXX percent (XXX%) of the Bank's Net
Insurance Income received during the immediately preceding Billing Period.
If as of any Settlement Date, any amounts would have been payable to
Retailers under this Section 3.04 but for the existence of a Default (but not
an Event of Default) on such date, Bank agrees to pay to Retailers the amount
which would otherwise have been paid on such Settlement Date if Retailers
cure such Default prior to the occurrence of an Event of Default. Any such
deferred payment shall be made on the Settlement Date next succeeding the
date on which such Default is cured. Unless otherwise requested in writing
by all Retailers, no solicitation regarding any Insurance Program shall state
or imply that such Insurance Program is offered or endorsed by any Retailer.
As used herein, "Net Insurance Income" shall mean the credit insurance
charges billed each month less (i) credit insurance charges reversals; (ii)
all claims and claims expenses, including all claims adjustment expenses;
(iii) all premium and other applicable taxes, including but not limited to
applicable federal, state and municipal taxes, licensing fees, special ceding
assessment fees, and the proportional amounts of guaranty fund applicable to
the credit insurance charges; and (iv) administrative fees, if any. For the
purposes of item (ii) in the preceding sentence, "claims" shall include, but
not be limited to, any amounts Bank becomes obligated to pay to any third
party arising out of or related to claims made under credit insurance,
including, but not limited, damages, court awards or judgments of any kind or
nature assessed against the Bank. On each Settlement Date prior to the
expiration or termination of the Commitment Period, Bank will provide
Retailers with an accounting of the Net Insurance Income to be paid to
Retailers hereunder. Upon reasonable notice and request, and not more
frequently than once a year, Retailers shall be entitled to audit the books
and records of Bank pertaining to such Net Insurance Income. [A portion of
this section has been omitted pursuant to a request for confidential treatment
under Rule 406 under the Securities Act of 1933, as amended. A copy of this
section with the portion intact has been filed separately with the Securities
and Exchange Commission]
SECTION 3.05 VALUE-ADDED SOLICITATION OF ACCOUNTS. Bank, or its agents,
may solicit Cardholders for Value-Added Programs. Bank shall be entitled to
retain for its account all proceeds of Value-Added Programs and Retailers
shall have no rights with respect thereto. Notwithstanding the foregoing,
provided no Default or Event of Default shall have occurred and be
continuing, Bank shall pay to Retailers, on each Settlement Date occurring
prior to the expiration or termination of the Commitment Period, an amount
equal to XXXXX percent (XXX%) of the Bank's Net Value-Added Income received
during the immediately preceding Billing Period. If as of any Settlement
Date, any amounts would have been payable to Retailers under this Section
3.05 but for existence of a Default (but not an Event of Default) on such
date, Bank agrees to pay to Retailers the amount which would otherwise have
been paid on such Settlement Date if Retailers cure such Default prior to the
occurrence of an Event of Default. Any such deferred payment shall be made
on the Settlement Date next succeeding the date on which such Default is
cured. Unless otherwise requested in writing by all Retailers, no
solicitation regarding any Value-Added Program shall state or imply that such
Value-Added Program is offered or endorsed by any Retailer. As used herein,
"Net Value-Added Income"
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shall mean the amount of commissions paid to Bank from third-party vendors
offering the Value-Added Programs less the sum of (a) commissions charged
back to Bank by such third-party vendors due to customer returns,
cancellations, or other causes; (b) all charges billed to Bank in respect of
such Value-Added Programs; and (c) administrative fees, if any. On each
Settlement Date prior to the expiration or termination of the Commitment
Period, Bank will provide Retailers with an accounting of the Net Value-Added
Income to be paid to Retailers hereunder. Upon reasonable notice and
request, and not more frequently than once a year, Retailers shall be
entitled to audit the books and records of Bank pertaining to such Net
Value-Added Income. [A portion of this section has been omitted pursuant to a
request for confidential treatment under Rule 406 under the Securities Act of
1933, as amended. A copy of this section with the portion intact has been
filed separately with the Securities and Exchange Commission]
SECTION 3.06 USE OF CARDHOLDER LIST. Retailer acknowledges and agrees
that Bank is the sole owner of all lists of applicants for Credit Cards and
Cardholders (including the names and addresses thereof) and all credit
information (including credit information for approved and declined
applicants) (hereafter collectively the "Cardholder List"). Notwithstanding
the foregoing to the contrary, however, Bank expressly agrees that it will
not sell, rent or use such Cardholder List except in connection with its
administration and operation of the Program as provided in this Agreement;
PROVIDED, HOWEVER, that upon the termination or expiration of the Commitment
Period however caused, Bank shall be entitled to use the Cardholder List in
connection with the liquidation or sale of the portfolio as provided in
Section 11.05. Bank agrees that to the extent permitted by applicable law,
during the term of this Agreement, each Retailer may utilize the Cardholder
List at no charge for promotion of this Program and its Goods and Services
(including, without limitation, use in determining customers eligible for the
Second Source Program); PROVIDED, HOWEVER, that until the Final Liquidation
Date in no event shall any Retailer or its Affiliates be entitled to use such
Cardholder List (i) to solicit Cardholders with respect to any other debit,
credit or charge programs that are in competition with Bank or its
Affiliates; or (ii) to solicit Cardholders to charge Goods and Services which
constitute financial products that compete with financial products offered by
Bank or its Affiliates (except for extended warranties or service contracts
in respect of any Retailer's Goods or Services); or (iii) to send
solicitations with respect to Goods and Services that (x) cannot be charged
to Accounts and (y) which Goods and Services constitute financial products
that are in competition with the financial products offered by Bank or its
Affiliates, and which solicitations identify the solicitee as an Account
holder. Nothing in this Section 3.06 shall preclude Retailers' use of any
list of Retailer's customers maintained by any Retailer PROVIDED, that no
information on such list was obtained through the operation of the Program.
SECTION 3.07 IN-STORE PAYMENTS; PAYMENTS AT BANK LOCATIONS. No Retailer
shall accept any In-Store Payment. Retailers shall make available to
Cardholders at all Retailer Locations the address to be used for making
payments on Accounts directly to Bank. If notwithstanding the foregoing, any
Retailer inadvertently receives any In-Store Payment, Retailers agree that
they shall receive and hold such payment in trust for the Cardholder making
the In-Store Payment and shall promptly (but not later than one (1) Business
Day after receipt thereof) deliver same to Bank in the form received together
with such endorsements or other
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documents of assignment as may be necessary to permit the Bank to receive the
benefit thereof to the same extent as if payment had been made directly to
the Bank.
SECTION 3.08 INSERTS; STATEMENT MESSAGES.
(a) Retailers, acting collectively, may elect to provide to Bank
(at the address so stated by Bank and using Bank's insert requirements as
outlined in the Operating Procedures) up to eight (8) inserts per Active
Account billing statement (if such a billing statement is generated by Bank)
per month. Retailers are responsible for the proper delivery, size and weight
requirements of inserts and for the supply of insert stock, all as specified
in the Operating Procedures. In the event the inserts cause the postage
payable to exceed the postage otherwise payable by Bank, then Retailers shall
reimburse Bank for such excess postage cost. Should it be necessary for Bank
to change such requirements, then it shall give Retailers written notice at
least ninety (90) days prior to such change. Retailers will be solely
responsible for the costs of producing such inserts. The insertion service
by Bank will be at no cost to Retailers (up to a maximum of eight (8)
inserts, per billing statement per month) as long as all insert requirements
set forth in the Operating Procedures have been met by Retailers.
Notwithstanding the foregoing, any insert required by law or regulation shall
take precedence over any or all inserts provided by Retailers. Bank's
insertion service will not be available after the termination or expiration
of the Commitment Period.
(b) Subject to any statement message utilization requirements that
Bank deems advisable or appropriate, during the Commitment Period Bank shall
make available to Retailers, acting collectively, a space for a message to be
provided by Retailers on each billing statement for an Active Account sent to
a Cardholder during such month. If more than one space is available for a
message on each such billing statement, then during the Commitment Period
Bank agrees to grant Retailers the option of utilizing such additional space
for additional messages. Any such messages shall be included at no charge to
Retailers. Bank agrees to use reasonable efforts to advise Retailers if
billing statement messages will not be available to Retailers during any
Billing Period.
ARTICLE IV
OPERATING PROCEDURES
SECTION 4.01 GENERAL. Retailers shall follow all applicable Operating
Procedures relative to the Program including, but not limited to, procedures
for distributing Credit Card Applications, seeking authorizations for
Accounts, handling credit transactions with Cardholders and transmitting
Charge Transaction Data. The Operating Procedures may be amended from time
to time by Bank in its sole discretion. For example, the parties recognize
and agree that from time to time modifications and improvements will be made
in hardware, software, and data communications facilities that may, in Bank's
sole discretion, require changes in the Operating Procedures. Bank shall
provide Retailers with reasonable prior notice of material modifications to
the Operating Procedures. Upon receipt of any such notice, Retailers, acting
collectively, may request that the proposed modifications be reconsidered and
Bank agrees to confer in good faith
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with Retailers to determine if such proposed changes can be made in a manner
which would impose less costs or administrative inconvenience upon Retailers.
SECTION 4.02 NEW CARDHOLDER ACCOUNT ESTABLISHMENT PROCEDURES.
(a) During the Commitment Period, all Credit Card Applications
will be reviewed by Bank for approval and credit line assignment.
(b) During the Commitment Period, Bank will forward Credit Cards
to approved Cardholders and will activate such Credit Cards.
(c) Retailers will not knowingly submit any Credit Card
Applications for corporate accounts. Retailers will not knowingly include in
any Charge Transaction Data any Charge Slips for Accounts arising from
purchases for other than personal, family or household purposes. Nothing in
this Section 4.02(c) shall be deemed to limit any presentment warranty deemed
made pursuant to Section 8.01 hereof.
SECTION 4.03 PURCHASE AUTHORIZATION PROCEDURES. Retailers agree that
all purchase authorizations shall be obtained in accordance with the
Operating Procedures.
ARTICLE V
SETTLEMENTS, SERVICE FEES AND ADJUSTMENTS
SECTION 5.01 SETTLEMENT PROCEDURES.
(a) All Charge Transaction Data will be electronically transmitted
to Bank using an electronic communication system established between
Retailers and Bank to facilitate the operation of the Program. Retailers, or
an agent of the Retailers, will retain a copy of each Charge Slip for at
least twenty-five (25) months after such Charge Slip is created.
(b) Upon receipt, verification and processing of any Charge
Transaction Data by Bank during the Commitment Period, Bank will remit to the
Retailers in respect of such Charge Transaction Data, an amount equal to the
total amount (including any applicable sales and use tax and shipping
charges) of the Purchases on Accounts identified in such Charge Transaction
Data less the sum of (i) the total amount reflected on any Credit Slips
included in such Charge Transaction Data; (ii) the Daily Retention Amount;
(iii) any Promotion Reserve Holdbacks applicable to Purchases included in
such Charge Transaction Data; (iv) an amount equal to the product of (A) the
Liquidation Reserve Factor and (B) the total amount (including any applicable
sales and use tax and shipping charges) of the Purchases on Accounts
identified in such Charge Transaction Data and (v) at Bank's election, any
other amounts due and owing by any Retailer to Bank, including, without
limitation, amounts owing under Sections 5.02, 5.03 and 7.01 hereof. As used
herein "Daily Retention Amount" shall mean (i) from the Program Commencement
Date until the Fully-funded Date, an amount equal to the product of (A) the
applicable Retention Factor and (B) the total amount of the Purchases on
Accounts identified in the applicable Charge Transaction Data; and (ii) at
all times after the Fully-funded Date, zero ($0). As used herein,
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"Retention Factor" shall mean .90% unless Bank, acting reasonably and in good
faith, determines that a higher Retention Factor is necessary to ensure that
the Fully-funded Date occurs before the thirteenth (13th) Settlement Date
after the Program Commencement Date. Bank will transfer funds via wire
transfer to an account maintained in the name of all Retailers and designated
in a writing delivered to Bank by Retailers. If Charge Transaction Data is
received by Bank's processing center before 6:00 a.m. (Atlanta, Georgia
time) on a Business Day, Bank will initiate such wire transfer on the same
Business Day. In the event that the Charge Transaction Data is received
after 6:00 a.m. (Atlanta, Georgia time), then Bank will initiate such
transfer on the following Business Day.
(c) Retailers acknowledge that the Bank may in its sole discretion
microfilm (or copy using any other reasonable method) all Account
Documentation and destroy all original Account Documentation in the ordinary
course of business. To the extent required, each Retailer consents to the
making of such copies and the destruction of the corresponding original
documents.
(d) In connection with the settlement procedures outlined above,
the parties agree that all settlements made hereunder shall be net of any and
all other adjustments contemplated by this Agreement, including but not
limited to credits and chargebacks. Bank shall have the right to set off any
amounts due to it pursuant to this Agreement against any amounts to be
transmitted to any Retailer hereunder.
SECTION 5.02 OTHER ADJUSTMENTS.
(a) On each Settlement Date prior to the expiration or termination
of the Commitment Period, Bank shall pay to Retailers an amount equal to the
product of (i) the Service Fee Percentage and (ii) the Average Net
Receivables for the immediately preceding Billing Period, all divided by
twelve (12) PROVIDED, HOWEVER, that until the Fully-funded Date, the amount
payable to Retailers hereunder shall be deposited to the Return Reserve in
lieu of being disbursed to Retailers and PROVIDED, FURTHER, that after the
Fully-funded Date, all or a portion of the amount payable to Retailers
hereunder shall be deposited to the Return Reserve in lieu of being disbursed
to Retailers to the extent necessary to cause the net amount credited to the
Return Reserve to equal the product of (i) the then applicable Return
Percentage and (ii) the total amount of all Purchases on Accounts made by
Cardholders and identified in Charge Transaction Data received during the
immediately preceding three (3) Billing Periods. As used herein, "Service
Fee Percentage" shall mean three percent (3%) until the first Settlement
Date after the end of the thirteenth (13th) Billing Period and four percent
(4%) at all times thereafter.
(b) If the United States first class postal rate is increased at
any time above the Postage Base Rate, Retailers shall pay to Bank on each
Settlement Date immediately following a
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Billing Period during which such postal rate exceeded the Postage Base Rate,
an amount equal to the product of (i) the amount by which the United States
first class postal rate then in effect exceeds the Postage Base Rate, and
(ii) the number of Active Accounts during such Billing Period.
(c) On each Settlement Date, Retailers shall pay to Bank an amount
equal to the Monthly Promotional Payment. To the extent available to Bank,
payments of amounts due under this Section 5.02(c) shall be made by debiting
the Promotion Reserve pursuant to Section to Section 6.02 hereof.
(d) Any costs or expenditures by the parties to this Agreement
other than as expressly set forth herein shall be at the sole expense of the
party incurring such costs or other expenditures and shall not entitle that
party to seek reimbursement of such costs or other expenditures from the
other parties to this Agreement. Accordingly, subject to the reimbursement
provisions of this Agreement, if any, each of the parties shall be liable for
the payment of all sums due third parties retained by such party in
performing its obligations hereunder.
SECTION 5.03 PAYMENT TERMS AND RIGHTS OF SET OFF AND RECOUPMENT. Unless
specifically provided for in another Section of this Agreement, any amount(s)
payable by a Retailer to Bank under this Agreement shall be paid within ten
(10) Business Days of any Retailer's receipt of an invoice rendered by Bank.
Any such payments shall be made by wire transfer to Bank to an account
designated in writing by Bank from time to time. Notwithstanding the
foregoing, Bank may at any time deduct, net against, set-off, or appropriate
and apply, any amounts owing to Bank from any Retailer hereunder or any money
or other property of any Retailer held by Bank from any amounts otherwise
payable by Bank hereunder. Bank may exercise such rights of deduction,
netting, and set-off without regard to whether an invoice for the amounts
owing from the Retailers has been sent, and, if such an invoice has been
sent, without regard to whether the ten (10) Business Day period referred to
in the first sentence of this Section shall have expired.
ARTICLE VI
CREDIT TERMS; RESERVES; LOSSES ON ACCOUNTS; SECURITY
SECTION 6.01 CREDIT TERMS. Bank shall have the sole right to establish
the rate, annual fees, late fees and all other terms and conditions relating
to the Accounts, and to amend or modify such rate, fees and/or other terms
and conditions from time to time.
SECTION 6.02 PROMOTION RESERVE.
(a) Bank shall create, on its books, a record known as the
"Promotion Reserve." Amounts credited to the Promotion Reserve shall be
applied solely in accordance with the provisions of this Section 6.02. No
interest or other earnings on amounts credited to the Promotion Reserve shall
accrue or be paid for the benefit of Retailers.
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(b) As provided in Section 5.01, in connection with each Account
which is subject to an Approved Credit-based Promotion, Bank shall deduct
from amounts otherwise payable to Retailers in respect thereof, the Promotion
Reserve Holdbacks. Each Promotional Reserve Holdback shall be credited to
the Promotion Reserve.
(c) On each Settlement Date, Bank shall debit the Promotional
Reserve for the lesser of (i) the Monthly Promotional Payment; or (ii) the
entire amount remaining credited to the Promotional Reserve as of such
Settlement Date (where the amount credited to such Reserve is determined
prior to giving effect to any debits or credits to be made in respect of such
Reserve on such Settlement Date pursuant to Sections 6.02(d) or (e) hereof).
(d) Bank shall also have the right, in its sole discretion, from
time to time and on any day, to debit the Promotion Reserve for amounts past
due and payable to Bank from any Retailer PROVIDED, HOWEVER, that Bank shall
not debit the Promotion Reserve for any such past due amount, if on such day,
Bank was obligated to remit an amount to Retailers under Section 5.01(b) in
excess of such past due amount, it being the intent of the parties hereto
that to the extent reasonably possible, Bank will exercise its right to
reduce its payment obligations under Section 5.01(b) (v) in lieu of
exercising its rights to debit the Promotion Reserve under this Section
6.02(d). No debit of the Promotion Reserve or application of such funds to
outstanding obligations shall be deemed to cure any Default or Event of
Default hereunder. If Bank debits any amounts from the Promotion Reserve
under this Section 6.02(d), then on or before the next Settlement Date, Bank
shall provide notice thereof to Retailers. If Bank debits any amounts from
the Promotion Reserve under this Section 6.02(d), Retailers shall pay to Bank
an amount equal to the amount debited hereunder and upon receipt of such
funds, Bank will credit the Promotion Reserve with the amount thereof.
(e) On the twelfth (12th) Settlement Date and on each third (3rd)
Settlement Date thereafter, Bank shall calculate the required Promotional
Reserve Required Balance and notify Retailers of the amount thereof. If
after taking into account all amounts to be credited or debited to the
Promotion Reserve on such Settlement Date pursuant to Sections 6.02(c) and
(d) hereof, the amount remaining credited to the Promotion Reserve exceeds
the Promotional Reserve Required Balance, Bank shall debit the Promotion
Reserve by the amount of such excess and, unless a Default or Event of
Default shall have occurred and be continuing, shall pay an amount equal to
such excess to Retailers. If after taking into account all amounts to be
credited or debited to the Promotion Reserve on such Settlement Date pursuant
to Sections 6.02(c) and (d) hereof, the amount remaining credited to the
Promotion Reserve is less than the Promotional Reserve Required Balance,
Retailers shall immediately pay to Bank an amount equal to such shortfall and
upon receipt of such payment Bank shall credit the Promotion Reserve by the
amount thereof.
(f) If Retailers purchase or arrange for the purchase of all of
the Accounts (other than Defaulted Accounts) and related Indebtedness from
Bank in accordance with Section 11.03 hereof, and if as of the date of such
purchase, Retailers shall have paid all other amounts owing hereunder, Bank
shall pay to Retailers an amount equal to the amount remaining credited to
the Promotion Reserve on the date of such purchase. If Retailers do not
purchase or arrange for the
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purchase of all the Accounts (other than Defaulted Accounts) and related
Indebtedness in accordance with Section 11.03 hereof, and if as of the Final
Liquidation Date, Retailers shall have paid all other amounts owing
hereunder, Bank shall pay to Retailers an amount equal to the amount
remaining credited to the Promotion Reserve on the Final Liquidation Date.
SECTION 6.03 LIQUIDATION RESERVE.
(a) Bank shall create, on its books, a record known as the
"Liquidation Reserve." Amounts credited to the Liquidation Reserve shall be
applied solely in accordance with the provisions of this Section 6.03.
Except as set forth in Section 6.03(c) below, no interest or other earnings
on amounts credited to the Liquidation Reserve shall accrue or be paid for
the benefit of Retailers.
(b) As provided in Section 5.01, in connection with each Purchase,
Bank shall deduct from amounts otherwise payable to Retailers in respect
thereof, an amount equal to the product of (i) the Liquidation Reserve Factor
and (ii) the total amount (including any applicable sales and use tax and
shipping charges) of the Purchase. Such amounts shall be credited to the
Liquidation Reserve.
(c) On each Settlement Date, Bank shall also credit to the
Liquidation Reserve an amount equal to the product of (i) the Average
Liquidation Reserve Balance and (ii) the Commercial Paper Rate all divided by
twelve (12). As used herein, "Average Liquidation Return Reserve Balance"
means, for any Billing Period, one-half (1/2) of the sum of the net amount
credited to the Liquidation Reserve as of the first day of such Billing
Period and the net amount credited to the Liquidation Reserve as of the last
day of such Billing Period. As used herein, "Commercial Paper Rate" means,
in respect of any Billing Period, a per annum rate equal to the rate of
so-called ninety (90) day high grade unsecured notes sold through dealers by
major corporations in multiples of one thousand dollars ($1,000) as published
by THE WALL STREET JOURNAL in its "Money Rates" section under the heading
"Commercial Paper" as of the last Business Day of such Billing Period (or if
such publication is discontinued, such other publications of similar type
designated by Bank).
(d) Bank shall have the right, in its sole discretion, from time
to time and on any day, to debit the Liquidation Reserve for amounts past due
and payable to Bank from any Retailer PROVIDED, HOWEVER, that Bank shall not
debit the Liquidation Reserve for any such past due amount, if on such day,
Bank was obligated to remit an amount to Retailers under Section 5.01(b) in
excess of such past due amount, it being the intent of the parties hereto
that to the extent reasonably possible, Bank will exercise its right to
reduce its payment obligations under Section 5.01(b) (v) in lieu of
exercising its rights to debit the Liquidation Reserve under this Section
6.03(d). No debiting of funds from the Liquidation Reserve or application of
such funds to outstanding obligations shall be deemed to cure any Default or
Event of Default hereunder. If Bank debits any amounts from the Liquidation
Reserve under this Section 6.03(d), then on or before the next Settlement
Date, Bank shall provide notice thereof to Retailers. If Bank debits any
amounts from the Liquidation Reserve under this Section 6.03(d), Retailers
shall pay to
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Bank an amount equal to the amount withdrawn hereunder and upon receipt of
such funds, Bank will credit the Liquidation Reserve with the amount thereof.
(e) If Retailers purchase or arrange for the purchase of all of
the Accounts (other than Defaulted Accounts) and related Indebtedness from
Bank in accordance with Section 11.03 hereof, and if as of the date of such
purchase, Retailers shall have paid all other amounts owing hereunder, Bank
shall simultaneously pay to Retailers an amount equal to the amount then
remaining credited to the Liquidation Reserve on the date of such purchase.
If Retailers do not purchase or arrange for the purchase of all the Accounts
(other than Defaulted Accounts) and related Indebtedness in accordance with
Section 11.03 hereof, and if as of the Final Liquidation Date, Retailers
shall have paid all other amounts owing hereunder, Bank shall pay to
Retailers an amount equal to the amount remaining credited to the Liquidation
Reserve on the Final Liquidation Date.
(f) On each Settlement Date, Bank shall calculate an amount equal
to the product of (i) the then applicable Liquidation Reserve Factor and (ii)
the Average Net Receivables for the immediately preceding Billing Period. If
the amount then credited to the Liquidation Reserve (including interest
credited to the Liquidation Reserve as of such Settlement Date) exceeds this
calculated amount, Bank shall debit the Liquidation Reserve for the amount of
such excess and if no Default or Event of Default shall have occurred and be
continuing, shall deliver an amount equal to such excess to Retailers.
SECTION 6.04 RETURN RESERVE.
(a) Bank shall create, on its books, a record known as the "Return
Reserve." Amounts credited to the Return Reserve shall be applied solely in
accordance with the provisions of this Section 6.04. Except as set forth in
Section 6.04(c) below, no interest or other earnings on amounts credited to
the Return Reserve shall accrue or be paid for the benefit of Retailers.
(b) On the Program Commencement Date, Retailers shall pay to Bank
an amount equal to Five Hundred Thousand Dollars ($500,000) and upon receipt
of such payment, Bank shall credit the Return Reserve by the amount thereof.
(c) As provided in Sections 5.01 and 5.02(a), from time to time,
Bank shall credit to the Return Reserve certain amounts otherwise payable to
Retailers thereunder.
(d) On each Settlement Date, Bank shall also credit to the Return
Reserve an amount equal to the product of (i) the Average Return Reserve
Balance and (ii) the Commercial Paper Rate all divided by twelve (12). As
used herein, "Average Return Reserve Balance" means, for any Billing Period,
one-half (1/2) of the sum of the net amount credited to the Return Reserve as
of the first day of such Billing Period and the net amount credited to the
Return Reserve as of the last day of such Billing Period.
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(e) Bank shall have the right, in its sole discretion, from time
to time and on any day, to debit the Return Reserve for amounts past due and
payable to Bank from any Retailer PROVIDED, HOWEVER, that Bank shall not
debit the Return Reserve for any such past due amount, if on such day, Bank
was obligated to remit an amount to Retailers under Section 5.01(b) in excess
of such past due amount, it being the intent of the parties hereto that to
the extent reasonably possible, Bank will exercise its right to reduce its
payment obligations under Section 5.01(b) (v) in lieu of exercising its
rights to debit the Return Reserve under this Section 6.04(e). No debiting
of amounts from the Return Reserve or application of such funds to
outstanding obligations shall be deemed to cure any Default or Event of
Default hereunder. If Bank debits any amounts from the Return Reserve under
this Section 6.04(e), then on or before the next Settlement Date, Bank shall
provide notice thereof to Retailers. If Bank debits any amounts from the
Return Reserve under this Section 6.04(e), Retailers shall pay to Bank an
amount equal to the amount debited hereunder and upon receipt of such funds,
Bank will credit the Return Reserve with the amount thereof.
(e) If Retailers purchase or arrange for the purchase of all of
the Accounts (other than Defaulted Accounts) and related Indebtedness from
Bank in accordance with Section 11.03 hereof, and if as of the date of such
purchase, Retailers shall have paid all other amounts owing hereunder, Bank
shall pay to Retailers an amount equal to the amount remaining credited to
the Return Reserve on the date of such purchase. If Retailers do not
purchase or arrange for the purchase of all the Accounts (other than
Defaulted Accounts) and related Indebtedness in accordance with Section 11.03
hereof, and if as of the Final Liquidation Date, Retailers shall have paid
all other amounts owing hereunder, Bank shall pay to Retailers an amount
equal to the amount remaining credited to the Return Reserve on the Final
Liquidation Date.
(f) On each Settlement Date, Bank shall calculate an amount equal
to the product of (i) the then applicable Return Percentage and (ii) an
amount equal to the total amount of all Purchases on Accounts made by
Cardholders and identified in Charge Transaction Data received during the
immediately preceding three (3) Billing Periods. If the amount then credited
to the Return Reserve (including interest credited to the Return Reserve and
amounts credited to the Return Reserve in accordance with Section 5.02 (a)
hereof as of such Settlement Date) exceeds such calculated amount, Bank shall
debit the amount of such excess from the Return Reserve and if no Default or
Event of Default shall have occurred and be continuing, deliver an amount
equal to such excess to Retailers. If this calculated amount exceeds the
amount then credited to the Return Reserve (including interest credited to
the Return Reserve and amounts credited to the Return Reserve in accordance
with Section 5.02 (a) hereof as of such Settlement Date), Retailers shall
deliver an amount equal to such excess to Bank, and Bank shall credit the
Return Reserve with such amount. Notwithstanding the foregoing to the
contrary, however, Retailers shall have no obligation to pay any amounts to
Bank under this Section 6.04(f) (except as otherwise provided in Sections
5.01 and 5.02(a)) if the amount owing by Retailers to Bank in accordance with
this Section 6.04(f) is determined on a Settlement Date prior to the
Fully-funded Date and prior to the thirteenth (13th) Settlement Date.
SECTION 6.05 LOSSES ON ACCOUNTS.
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(a) Except for (i) any chargebacks allowed pursuant to Section
7.01; (ii) any losses incurred after the Accounts are purchased by Retailers
in accordance with Section 11.03 hereof; and (iii) the sharing of losses
provided for in subsections (b) and (c) of this Section 6.05, all losses on
Accounts shall be borne solely by Bank.
(b) On each Settlement Date, if the Monthly Loss Rate for the
immediately preceding Billing Period is greater than .004167, Retailers shall
pay to Bank an amount equal to the product of Retailers' Monthly Share and an
amount equal to the Average Net Receivables for such Billing Period. As used
herein, "Retailers' Monthly Share" shall mean the lesser of (i) the Monthly
Loss Rate for the immediately preceding Billing Period less .004167 and (ii)
.00250. As used herein, "Monthly Loss Rate" means for any Billing Period, an
amount equal to the amount of the Indebtedness for Accounts first becoming
Defaulted Accounts during such period less the amount of Net Recoveries
received during such period all divided by the Average Net Receivables for
such period. As used herein "Net Recoveries" means for any period, the net
amount (including deduction for outside attorneys' fees or other collection
costs) of cash recoveries received by Bank during such period in respect of
Defaulted Accounts (regardless of when such Accounts first became Defaulted
Accounts).
(c) On each anniversary of the Program Commencement Date,
Retailers shall pay to Bank an amount equal to the amount by which the Annual
Loss Share exceeds the sum of all amounts paid by Retailers under Section
6.05(b) during the immediately preceding year. On each anniversary of the
Program Commencement Date, if no Default or Event of Default shall have
occurred and be continuing, Bank shall pay to Retailers an amount equal to
the amount by which the sum of all amounts paid by Retailers under Section
6.05(b) during the immediately preceding year exceeds the Annual Loss Share.
As used herein, "Annual Loss Share" shall mean zero ($0) unless the Annual
Loss Rate is greater than .05 in which event, "Annual Loss Share" shall mean
the product of Retailers' Annual Share and an amount equal to the sum of the
Average Net Receivables calculated for each of the twelve (12) immediately
preceding Billing Periods all divided by twelve (12) (the "Annual Average Net
Receivables"). As used herein, "Retailers' Annual Share" shall mean the
lesser of (i) the Annual Loss Rate less .05 and (ii) .03. As used herein,
"Annual Loss Rate" means an amount equal to the amount of the Indebtedness
for Accounts first becoming Defaulted Accounts during the twelve (12)
immediately preceding Billing Periods less the Net Recoveries received during
such period, all divided by the Annual Average Net Receivables for such
period.
SECTION 6.06 GRANT OF SECURITY INTEREST; PRECAUTIONARY FILING. The
parties hereto agree that the transactions contemplated herein shall
constitute a program for the extension of consumer credit and service to
customers of the Retailers. Both (i) against the possibility that it
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is determined that Article 9 of the UCC applies or may apply to the
transactions contemplated hereby, and (ii) to secure payment of and
performance by Retailers of any and all indebtedness, liabilities or
obligations, now existing on hereafter arising pursuant to this Agreement,
including indebtedness, liabilities and obligations that may be deemed to
exist in the event of the applicability of Article 9 of the UCC to, and any
recharacterization of, any transactions contemplated hereby, each Retailer
hereby grants to Bank a first priority continuing security interest in and to
all of such Retailer's right, title and interest, if any, now owned or
existing or hereafter acquired or arising in, to and under the following
property (in each case, existing at any time, past, present or future)
(collectively, the "Bank Property"): (A) all Accounts, Account Documentation
and Indebtedness; (B) all deposits, credit balances and reserves on Bank's
books (including without limitation, the Marketing Fund, the Promotion
Reserve, the Liquidation Reserve and the Return Reserve) relative to any
Accounts; (C) all Unpaid Returned Goods; and (D) all proceeds of the
foregoing. The Retailers, jointly and severally, represent and warrant that
no Retailer has, on or before the date of this Agreement, granted any
Potentially Competing Security Interests or signed any Potentially Competing
Financing Statements other than any security interests or financing
statements that have lapsed or been terminated. Each Retailer agrees that it
will not, on or after the date of this Agreement, grant any Potentially
Competing Security Interest or sign any Potentially Competing Financing
Statement unless the secured party thereunder first signs an intercreditor
agreement with Bank subordinating such secured party's interest in any Unpaid
Returned Goods and disclaiming such secured party's interest in the other
Bank Property. Such intercreditor agreement shall be in form and substance
acceptable to Bank. As used herein, "Potentially Competing Security
Interest" means any security interest in favor of any person that attaches to
any of the Bank Property or, in the case of any Bank Property other than
Unpaid Returned Goods, that would attach to such property if, contrary to the
intent of the parties hereto, the Retailers were determined to have any
rights therein. As used herein, "Potentially Competing Financing Statement"
mean any financing statement in favor of any person that covers any of the
Bank Property or, in the case of any Bank Property other than Unpaid Returned
Goods, that would cover any such property if, contrary to the intent of the
parties hereto, the Retailers were determined to have any rights therein.
Retailers agree to cooperate fully with Bank as Bank may reasonably request
in order to give effect to the security interests granted by this Section
6.06, including, without limitation, the filing of UCC-l or comparable
statements in order to perfect such security interests. Each Retailer agrees
to provide Bank with not less than thirty (30) days prior written notice of
any change in location of its executive offices or principal place of
business or any change of its corporate name and, notwithstanding the
foregoing, no such change shall be effected before such Retailer shall have
supplied Bank with signed copies of all filings and actions as Bank may
reasonably determine to be necessary or appropriate to preserve and maintain
at all times the perfection and priority of the security interests granted or
purported to be granted to Bank hereunder.
SECTION 6.07 RETURNS OF MERCHANDISE. Each Retailer may settle or adjust
any dispute or claim, grant any discount, credit, or allowance, or accept any
return of Goods purchased under a Credit Card Agreement in the ordinary
course of business. The Retailers shall notify Bank of all credits issued to
Cardholders by any Retailer with respect to such Goods. Each such
notification shall indicate the Account to which it relates and the amount of
credit issued to the Cardholder. Except as otherwise provided in the
Operating Procedures, such notification shall be given to
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Bank within one (1) Business Day of the date on which such credit is given
and, if consistent with this timing requirement, may be included in the next
transmission of Charge Transaction Data. The amount of all such credits may,
at Bank's option, be deducted from the daily settlement amounts paid under
Section 5.1 hereof. Bank may also elect to invoice Retailers for such
credits. When any Retailer receives Unpaid Returned Goods, it holds such
Goods on behalf of the Bank and subject to Bank's interest therein.
SECTION 6.08 LIMITED GUARANTEE.
(a) Each Retailer hereby unconditionally and irrevocably
guarantees, as primary obligor and not as surety only, and promises to pay to
Bank when due, any amounts due and payable to Bank by any other Retailer
pursuant to this Agreement. This guarantee is a guarantee of payment when
due and not of collection.
(b) Each Retailer waives any subrogation or similar type right or
claim it may have for any payment made pursuant to Section 6.08(a) and waives
(i) presentment, demand, protest, notice of protest, notice of dishonor and
notice of nonpayment with respect to claims guaranteed by such guarantor
pursuant to Section 6.08(a) and (ii) the right to require Bank to proceed
against the party whose obligations are being guaranteed by such Retailer or
to pursue any other remedy against such party.
ARTICLE VII
CHARGEBACK
SECTION 7.01 BANK'S RIGHT TO CHARGEBACK. Bank shall have the right, at
its option, to chargeback to any Retailer the Indebtedness of any Account if
with respect to such Account or the underlying transaction:
(a) Any presentment warranty made by a Retailer pursuant to
Section 8.01 proves to have been false or inaccurate in any respect, as
determined by Bank;
(b) The Cardholder asserts any claim or defense against Bank as a
result of any act or omission of any Retailer allegedly in violation of any
applicable law, statute, ordinance, rule or regulation provided any such
claim or defense constitutes a bona fide claim or defense presented by the
Cardholder in good faith in the reasonable opinion of Bank, after inquiry to
Retailers;
(c) The Cardholder disputes the amount or existence of such
Account or refuses to pay alleging dissatisfaction with Goods and/or Services
received (other than dissatisfaction with Insurance or Value-Added Programs),
a breach of any warranty, representation or covenant made by any Retailer in
connection with the transaction, or an offset or counterclaim against Bank
based on an act or omission of any Retailer, provided any such disputes
constitute bona fide claims presented by Cardholders in good faith in the
reasonable opinion of Bank, after inquiry to Retailers; and
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(d) In the case of Accounts arising from sales other than
telemarketing sales, if Cardholder disputes an Account (other than a dispute
relating to Insurance and Value-Added Programs) and Retailers cannot supply
Bank with a copy of the Charge Slip and documents evidencing delivery within
fifteen (15) days of Bank's written request and, in the case of Accounts
arising from telemarketing sales, if Cardholder disputes an Account (other
than a dispute relating to Insurance and Value-Added Programs) and Retailers
cannot supply Bank with a copy of the written documentation made by Retailer
at the time of such sale and evidencing such sale and documents evidencing
delivery within fifteen (15) days of Bank's written request.
SECTION 7.02 LIMITATION OF CHARGEBACK. In its reasonable discretion,
Bank may compromise and settle any claim made by any Cardholder in respect of
his Account or any Indebtedness. No such compromise or settlement will
impair Bank's rights to charge back under Section 7.01 hereof PROVIDED that
the amount Bank will be entitled to charge back to Retailers following any
such compromise or settlement is limited to the amount of the Indebtedness on
the Account being charged back after taking into account all amounts actually
received by Bank from Cardholder in compromise or settlement thereof.
SECTION 7.03 EXERCISE OF CHARGEBACK. If Bank exercises its right of
chargeback in accordance with this Agreement, Bank may set-off amounts
charged back against any sums due any Retailer under this Agreement or Bank
may demand payment from any Retailer for all or any portion of the amount to
be charged back. Any Account which is charged back to Retailers shall cease
to be an "Account" for all purposes of this Agreement after Bank receives
full payment from Retailers in respect thereof. If all or any portion of the
face amount of any Charge Slip is charged back to Retailers hereunder, Bank
shall simultaneously be deemed to have assigned to Retailers all right to
payments for such Charge Slip or portion thereof. Any such assignment shall
be without recourse, except that Bank shall be deemed to have represented and
warranted that such right of payment is being assigned free and clear of any
lien, encumbrance or claim of title arising by, through or under Bank.
ARTICLE VIII
WARRANTIES AND COVENANTS OF RETAILER
SECTION 8.01 PRESENTMENT WARRANTIES. Each Retailer represents and
warrants to Bank with respect to each Account and each related Charge Slip
and Charge Transaction Data (and the following shall be deemed restated,
renewed and reaffirmed each time Bank receives Charge Transaction Data from
any Retailer relative to an Account):
(a) That except in the case of Insurance Programs and Value-Added
Programs, each Charge Slip represents a bona fide sale by a Retailer of the
Goods and/or Services described in such Charge Slip, that each Charge Slip
has not been included in any Charge Transaction Date previously transmitted
to Bank, and that Retailer has delivered all the Goods and fully performed
all the Services listed on such Charge Slip;
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(b) That except in the case of telemarketing sales, each Credit
Card Application and each Charge Slip have been signed and the signatures are
similar to the signature of the Cardholder on the Credit Card or on another
item of valid identification examined by Retailer;
(c) That each Charge Slip has not been materially altered;
(d) That the transaction did not involve a cash advance or Goods
or Services not listed on the Charge Slip and other than Insurance Programs
and Value-Added Programs, only Goods and Services sold by a Retailer are the
subject of the transaction;
(e) That the transaction giving rise to the Charge Transaction
Data was conducted by Retailer in accordance with the Operating Procedures;
(f) That the Account number of the Cardholder has been accurately
printed on each Charge Slip;
(g) That no Retailer has received, directly or indirectly, and
that each Retailer will refuse to accept, any reimbursement, payment or
trade-in for the charges listed on such Charge Slip (other than from Bank)
and that no Retailer has or will, either directly or indirectly, take or
grant or purport to take or grant any right or security interest in such
Charge Slip or any related Credit Slip (other than to the Bank);
(h) That the transactions giving rise to the Charge Transaction
Data were conducted by Retailers in compliance with all material laws and
regulations applicable to the sales of Goods and/or Services by Retailers
(except to the extent that such non-compliance was the result of Retailers
use of Program Documents in the forms provided by Bank and in accordance with
all Operating Procedures or the result of Bank's failure to comply with all
material laws and regulations) and that the Charge Transaction Data is not
invalid, illegible, inaccurate or incomplete;
(i) That the balance in each such Account (except to the extent
that such balance relates to Insurance and Value-Added Programs) is valid and
enforceable against the Cardholder and that there is no fact, nor any claim
or defense of a Cardholder (except to the extent that such claim or defense
is based solely on the form of the Program Documents provided by Bank or is
based solely on the failure of Bank to comply with its obligations under this
Agreement or applicable law) that would impair the validity, enforceability,
or collectibility of the obligation of the Cardholder evidenced by each
Charge Slip;
(j) That the Goods and/or Services (other than Insurance Programs
and Value-Added Programs) were sold by Retailer in the ordinary course of
business and that each such sale was made to a Cardholder for personal,
family or household purposes; and
(k) That Retailers have no knowledge (i) of the filing of any
petition under any bankruptcy or insolvency laws by or against the
Cardholder, (ii) of the death or incompetence of the Cardholder, and (iii) of
the Cardholder's lack of a valid United States address.
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SECTION 8.02 ACCOUNT COVENANTS. Until the Final Liquidation Date,
Retailers covenant to do the following with respect to each transaction
involving an Account or the Program:
(a) Retailers shall respond to, and cooperate with, Bank promptly
in connection with the resolution of disputes with Cardholders;
(b) Retailers shall maintain a policy for the exchange and return
of Goods and adjustments for Services rendered or not rendered that is in
accordance with all applicable laws and include credit for such return or
adjustment in the Charge Transaction Data in accordance with the terms of
this Agreement and the Operating Procedures in the event the return/exchange
has been authorized in accordance with Retailers' policies;
(c) Retailers shall not seek or obtain any special agreement or
condition from, nor discriminate in any way against, Cardholders with respect
to the terms of any transaction;
(d) Retailers shall comply with all Retailers' warranties, if any,
with respect to Goods and/or Services sold under an Account; and
(e) Retailers shall do nothing to prevent an Account from being
valid and enforceable against the Cardholder obligated for the payment and
performance of such Account.
SECTION 8.03 GENERAL REPRESENTATIONS AND WARRANTIES. To induce Bank to
originate Accounts, each Retailer jointly and severally makes the following
representations and warranties to Bank, each of which shall survive the
execution and delivery of this Agreement, and each of which shall be deemed
to be restated and remade on each date on which Bank originates any Account
or extends any credit hereunder:
(a) Each Retailer (i) is duly organized, validly existing, and in
good standing under the laws of the State of Minnesota, (ii) is duly
qualified and in good standing under the laws of each jurisdiction where its
ownership or lease of property or the conduct of its business require such
qualification and where the failure to so qualify could have a material
adverse effect on the business, operations, prospects, property, or financial
or other condition of such Retailer; (iii) has the requisite power and
authority and the legal right to own and operate its properties, to lease the
properties it operates under lease, and to conduct its business as now
conducted and as it is contemplated to be conducted hereafter; (iv) has all
necessary licenses, permits, consents, or approvals from or by, and has made
all necessary notices to, all governmental authorities having jurisdiction,
to the extent required for such current ownership and operations or for such
further operations as are proposed to be conducted except where the failure
to obtain such licenses, permits, consents, or approvals or the failure to
give such notices would not have a material adverse effect on the business,
operations, prospects, property, or financial or other condition of such
Retailer; and (v) is in compliance with its organizational documents.
(b) The execution, delivery, and performance of this Agreement and
all instruments and documents to be delivered by each Retailer hereunder: (i)
are within its corporate power; (ii)
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have been duly authorized by all necessary and proper corporate action; (iii)
do not and will not contravene any provisions of its organizational
documents; (iv) do not and will not violate any law or regulation or any
order or decree of any court or governmental instrumentality; (v) do not and
will not conflict with or result in the breach of, or constitute a default
under any indenture, mortgage, deed of trust, lease, agreement, or other
instrument to which it is a party or by which it or any of its assets or
property are bound; and (vi) do not require any filing or registration with
or the consent or approval of any governmental body, agency, authority, or
any other person which has not been made or obtained. This Agreement has
been duly executed and delivered by each Retailer and constitutes a legal,
valid, and binding obligation of such Retailer, enforceable against such
Retailer in accordance with its terms.
(c) Each Retailer is Solvent.
(d) No Retailer is in default with respect to any material
contract, agreement, lease or other instrument to which it is a party nor has
any Retailer received any notice of default under any material contract,
agreement, lease or other instrument.
(e) No contract, agreement, lease, or other instrument to which
any Retailer is a party or by which any Retailer is bound, and no provision
of any applicable law or governmental regulation, materially and adversely
affects or may reasonably be expected to materially and adversely affect the
business, operations, prospects, property, or financial or other condition of
any Retailer.
(f) All information furnished by the Retailers to Bank for
purposes of or in connection with this Agreement or any information hereafter
furnished by any Retailer to Bank, is and will be true and correct in all
material respects and no such information omits to state a material fact
necessary to make the information so furnished not misleading. There is no
fact known to any Retailer which the Retailer has not disclosed to Bank which
could materially and adversely affect the financial condition, business,
operations, property, or prospects of any Retailer.
(g) No Event of Default or Default has occurred and is continuing.
(h) The chief executive office and principal place of business of
each Retailer is accurately set forth on Schedule 2 hereto. The correct
legal name of each Retailer is set forth on Schedule 2 hereto. Such name,
together with the other Retailer Names, are the only names under which such
Retailer currently conducts or has heretofore conducted business.
(i) There are no actions, suits or proceedings existing or pending
before any court, arbitrator or governmental administrative body or agency,
or, to the knowledge of any Retailer, threatened against any Retailer which
could affect the validity or enforceability of any Account, could affect the
validity or enforceability of this Agreement or which could have a material
adverse effect on the ability of any Retailer to perform its obligations
hereunder.
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(j) No Retailer has licensed the use of all or any portion of any
Retailer Location for the sale of goods or services by any person other than
a Retailer and no Retailer sells any goods or services which it has received
on consignment from any person.
SECTION 8.04 ADDITIONAL AFFIRMATIVE COVENANTS OF RETAILER. Until the
Final Liquidation Date, unless Bank shall otherwise consent in writing,
Retailers will:
(a) For each Retailer which is subject to the reporting
requirements of Section 13 or Section 15(d) of the Securities Exchange Act of
1934, as amended (i) as soon as reasonably available and in any event within
ninety (90) days after the close of its fiscal year, submit to Bank an
audited annual report of such Retailer's annual earnings, including its
audited consolidated balance sheets, income statements and statement of cash
flows and changes in financial position and (ii) promptly after the filing
thereof, submit to Bank copies of all proxy statements, and all reports on
Forms 10-K, 10-Q, and 8-K filed with the Securities and Exchange Commission
by such Retailer;
(b) For each Retailer which is not subject to the reporting
requirements of Section 13 or Section 15(d) of the Securities Exchange Act of
1934, as amended (i) as soon as reasonably available and in any event within
ninety (90) days after the close of its fiscal year, submit to Bank an
audited annual report of such Retailer's annual earnings, including its
audited consolidated balance sheets, income statements and statement of cash
flows and changes in financial position and (ii) as soon as reasonably
available and in any event within forty-five (45) days after the close of
each of its fiscal quarters, submit to Bank an unaudited quarterly report of
such Retailer's earnings, including its consolidated balance sheets, income
statements and statement of cash flows and changes in financial position,
accompanied by the certification on behalf of such Retailer by such
Retailer's chief financial officer that such financial statements were
prepared in accordance with generally accepted accounting principles applied
on a consistent basis and present fairly the consolidated financial position
and the results of operations of such Retailer as of the end of such fiscal
quarter;
(c) Comply in all material respects with all laws applicable to
Retailers, their respective businesses, and their respective properties
including, without limitation, all laws relating to (i) descriptions of Goods
and/or Services, pricing, charges, and related wording and content of the
Program Documents where such wording or content is furnished by a Retailer,
(ii) Retailers' sales material or practices, including, but not limited to,
the sales order forms, sales invoices, promotional and advertising materials
and similar forms and/or (iii) actions or omissions (at the point-of-sale or
otherwise) of a Retailer or it's employees, agents or representatives;
provided that the foregoing shall not apply to any Retailer's use of a
Program Documents where such document is in the form prepared and provided by
Bank without additions, deletions or modifications and where such form is
used in accordance with the requirements of the Operating Procedures.
(d) Promptly upon receipt, deliver to Bank copies of any
communications relating to an Account received from a Cardholder or from any
governmental or regulatory authority.
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(e) Permit Bank, during normal business hours and upon reasonable
notice, to visit the offices of each Retailer from time to time, and shall
permit Bank from time to time to discuss the Program with Retailers and their
respective officers, directors and employees and to examine the books and
records of Retailers relating to the Program or to have the same examined by
Bank's attorneys and/or accountants. In connection therewith, Retailers
agree, subject to applicable privacy and other laws, to make data regarding
the Program available to Bank and in connection therewith to permit Bank to
make copies of such documentation.
SECTION 8.05 ADDITIONAL NEGATIVE COVENANT OF RETAILERS. Until the
expiration or termination of the Commitment Period, unless Bank shall
otherwise consent in writing, Retailers will not advertise, promote, sponsor,
solicit, permit solicitation of, or make available to customers of Retailers
or otherwise provide at any Retailer Location any program for open-end or
closed-end consumer accounts or any other credit program, credit facility,
credit card program, charge program or debit or secured card program or
facility which is similar in purpose or effect to this Program (whether
open-end, closed-end, private label or third party), other than (i) credit
provided in connection with the Program hereunder; (ii) credit provided by
generally accepted multi-purpose credit or charge cards such as American
Express, Mastercard, Visa and the Discover card or by any generally accepted
multi-purpose debit or secured cards (provided that none of the cards
referred to in this clause (ii) may be "co-branded", "sponsored" or
"co-sponsored" with a Retailer and provided that no Retailer Name or any
variation thereof may appear on such cards); (iii) credit provided under a
Second Source Program during the Commitment Period to customers who have
first applied and been rejected for credit under the Program established by
this Agreement; (iv) credit provided on or before June 30, 1997 under the
credit program maintained by Retailers as of the date of this Agreement with
a third-party provider; and (v) credit for add-on sales provided on or before
November 30, 1997 under the credit program maintained by Retailers as of the
date of this Agreement with a third-party provider. As used herein, "Second
Source Program" shall mean any credit program, credit facility, credit card
program, charge program or debit or secured card program or facility which is
similar in purpose or effect to this Program (whether open-end, closed-end,
private label or third party) offered by a third-party or a Retailer where
Bank was first offered the opportunity to provide such program on the same or
substantially similar terms and conditions as such third-party is willing to
provide.
ARTICLE IX
WARRANTIES OF BANK
SECTION 9.01 REPRESENTATIONS AND WARRANTIES OF BANK. To induce
Retailers to participate in the Program and to promote the extension of
credit thereunder, Bank makes the following representations and warranties to
Retailers, each of which shall survive the execution and delivery of this
Agreement, and each of which shall be deemed to be restated and remade on
each date on which Bank originates Accounts or extends credit hereunder:
(a) Bank (i) is a banking corporation duly organized, validly
existing, and in good standing under the laws of the State of Georgia; (ii)
has the requisite corporate power and
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authority and the legal right to own, pledge, mortgage, and operate its
properties, to lease the properties it operates under lease, and to conduct
its business as now conducted and as it is contemplated to be conducted
hereafter; and (iii) is in compliance with its articles of incorporation and
bylaws.
(b) The execution, delivery, and performance of this Agreement and
all instruments and documents to be delivered by Bank hereunder: (i) are
within Bank's corporate power; (ii) have been duly authorized by all
necessary and proper corporate action; (iii) do not and will not contravene
any provision of Bank's certificate of incorporation or bylaws; (iv) do not
and will not violate any law or regulation or an order or decree of any court
or governmental instrumentality to which Bank is subject; (v) do not and will
not conflict with or result in the breach of, or constitute a default under,
any indenture, mortgage, deed of trust, lease, agreement, or other instrument
to which Bank is a party or by which Bank or any of its assets or property
are bound; and (vi) do not require any filing or registration by Bank with or
the consent or approval of any governmental body, agency, authority, or any
other person which has not been made or obtained. This Agreement has been
duly executed and delivered by Bank and constitutes the legal, valid, and
binding obligation of Bank, enforceable against Bank in accordance with its
terms.
(c) Bank is Solvent.
ARTICLE X
EVENTS OF DEFAULT; RIGHTS AND REMEDIES
SECTION 10.01 EVENTS OF DEFAULT. The occurrence of any one or more of
the following events (regardless of the reason therefor) shall constitute an
"Event of Default" hereunder:
(a) Any Retailer shall fail to pay Bank any amount when due and
payable and the same shall remain unpaid for a period of fifteen (15) days
after Bank shall have made written demand therefor.
(b) Any Retailer shall fail or neglect to perform, keep, or
observe any term, provision, condition, or covenant contained in this
Agreement that is required to be performed, kept, or observed by it and such
failure or neglect shall continue for a period of thirty (30) days after Bank
shall have given written notice thereof.
(c) Any representation, warranty or statement, made, delivered or
deemed made by any Retailer or by any officer of a Retailer shall prove not
to have been true and correct in any material respect as of the date when
made, delivered or deemed made and the failure to be true and correct has a
material adverse effect on any Retailer's ability to perform its obligations
hereunder.
(d) Any Retailer (i) shall no longer be Solvent; (ii) shall
generally not pay its debts as such debts become due, or shall admit in
writing its inability to pay its debts generally; (iii) shall
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make a general assignment for the benefit of its creditors; or (iv) any
proceeding shall be instituted by or against it seeking to adjudicate it a
bankrupt or insolvent or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or its
debts under any law relating to bankruptcy, insolvency, or reorganization or
relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee, custodian or other similar official for
it or for any substantial part of its property, and, in the case of any
proceeding instituted against it (but not instituted by it), either such
proceeding shall remain undismissed or unstayed for a period of thirty (30)
days, or any of the actions sought in such proceeding (including, without
limitation, the entry of an order for relief against, or the appointment of a
receiver, trustee, custodian or other similar official for, it or any
substantial part of its property) shall occur; or (v) any Retailer shall take
any corporate action to authorize any of the actions set forth above in this
paragraph (d).
(e) A default shall occur under any other agreement, document or
instrument to which any Retailer is a party or by which any Retailer or any
of its property is bound, and such default (i) involves the failure to make
any payment (whether of principal, interest or otherwise) due (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise)
in respect of any indebtedness of any Retailer in an aggregate amount
exceeding $2,000,000, or (ii) causes (or permits any holder of such
indebtedness or a trustee to cause) such indebtedness or a portion thereof in
an aggregate amount exceeding $2,000,000, to become due prior to its stated
maturity or prior to its regularly scheduled dates of payment.
(f) Any of the following events (a "Change of Control") shall
occur: (i) Any person or group of persons shall acquire beneficial ownership
of fifty percent (50%) or more of the combined voting power of the then
outstanding voting securities of Select Comfort Corporation entitled to vote
generally in the election of directors; (ii) individuals who, as of the date
hereof, constitute the Board of Directors of Select Comfort Corporation (the
"Incumbent Board") shall cease to constitute at least a majority of such
Board, PROVIDED that any individual becoming a director subsequent to the
date hereof whose election or nomination for election by Select Comfort
Corporation's stockholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board; (iii) the
stockholders of Select Comfort Corporation shall approve a reorganization,
merger or consolidation (each a "Reorganization"), in each case through which
all or substantially all the persons who were the respective beneficial
owners of the voting securities of Select Comfort Corporation immediately
prior to such Reorganization do not beneficially own, following such
Reorganization, directly or indirectly, more than fifty percent (50%) of the
combined voting power of the then outstanding voting securities entitled to
vote generally in the election of directors of the corporation, as a result
of such Reorganization; (iv) all or substantially all the assets or property
of any Retailer shall be sold or otherwise disposed of in one transaction or
series of related transactions; (v) Select Comfort Corporation or another
wholly-owned subsidiary thereof shall cease to own all of the outstanding
legal and beneficial interests in each other Retailer (other than the capital
stock of any such Retailer owned by its key management employees provided
such management employees do not own in the aggregate more than ten percent
(10%) of the capital stock of such Retailer); or (vi) any person
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other than Select Comfort Corporation shall have, directly or indirectly, the
power to direct or cause the direction of the management or policies of any
other Retailer, by contract or otherwise.
(g) Final judgment or judgments for the payment of money shall be
rendered against any Retailer and the same shall not be either (i) covered by
insurance where the insurer has affirmatively and expressly accepted
liability therefor (with reasonable deductibles, if any, having been paid by
Retailers) or (ii) vacated, stayed, bonded, paid, or discharged prior to
expiration of the applicable appeal period.
(h) A material adverse change has occurred in the operations,
financial condition, business or prospects of any Retailer which Bank has
determined, in good faith and in its commercially reasonable judgment, has
impaired or is reasonably likely to impair, the ongoing operation or
continued viability of the Program.
(i) Accounts, indebtedness, Charge Slips or proceeds thereof shall
be (or shall purportedly be) (i) attached, seized, levied upon or subject to
a writ by a creditor of any Retailer, or shall come within the possession of
any receiver, trustee, custodian, or assignee for the benefit of creditors of
any Retailer or (ii) subject to any lien or right of any third party directly
or indirectly arising by, through or on account of any Retailer or any
creditor thereof.
SECTION 10.02 REMEDIES.
(a) If any Event of Default shall have occurred and be continuing,
all of the Retailers' payment obligations hereunder shall, in the Bank's sole
discretion, be deemed immediately due and payable.
(b) If any Event of Default shall have occurred and be continuing,
Bank shall have the right to discontinue originating or offering Accounts,
accepting Charge Slips, or otherwise extending credit, may declare the
Commitment Period terminated and may exercise all such other rights and
remedies as Bank may have under this Agreement and under all applicable laws.
ARTICLE XI
TERM/TERMINATION
SECTION 11.01 COMMITMENT PERIOD. The Commitment Period shall continue
until the fifth anniversary of the Program Commencement Date (the "Initial
Term"). Unless a party shall provide written notice of non-extension to the
other parties hereto at least six (6) months prior to the expiration of the
initial Term (or, where applicable, the expiration of any extension term) the
Commitment Period shall thereafter be extended automatically for successive
5-year periods. If any party does provide written notice of non-extension in
a timely manner to all other parties hereto, the Commitment Period will
expire at the end of the Initial Term or any extension term then in effect.
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SECTION 11.02 TERMINATION. Notwithstanding anything in
Section 11.01 to the contrary, the Commitment Period shall terminate on the
date provided below without need of any prior judicial declaration:
(a) Retailers, acting collectively, shall have the right to
terminate the Commitment Period upon thirty (30) days written notice if a
Bank Termination Event shall occur and be continuing.
(b) Bank shall have the right to terminate the Commitment Period
upon thirty (30) days written notice if an Event of Default shall occur and
be continuing.
(c) Retailers, acting collectively, shall have the right, upon
thirty (30) days prior written notice, to terminate the Commitment Period at
any time after Bank makes an election pursuant to Section 2.02(b) (ii) hereof.
(d) As provided in Section 13.02, Bank shall have the right to
terminate the Commitment Period upon written notice if a Retailer Primary
Divestiture shall occur.
(e) As provided in Section 11.04, either Bank or Retailers, acting
collectively, shall have the right to terminate the Commitment Period.
(f) Bank shall have the right to terminate the Commitment Period
upon written notice if all of the following have occurred: (i) usury rates
for the State of Georgia change, laws regulating Bank's rate structure
change, or federal or state laws, regulations or other authority preempt the
exportation of Bank's rate structure; and (ii) Bank has sought to engage
Retailers in a good faith renegotiation of the terms of this Agreement; and
(iii) the parties hereto have not agreed to modifications to the terms of
this Agreement which the Bank reasonably believes necessary to prevent a
material adverse effect on Bank (or on its ability to perform the
transactions contemplated by this Agreement) resulting from the change in
usury rates or other laws regulating Bank's rate structure or the exportation
thereof; and (iv) either Bank is required to initiate changes to the Program
to comply with applicable law or more than one hundred fifty (150) days have
passed since the Bank first sought to engage Retailers in a good faith
renegotiation of the terms of this Agreement. Bank shall give Retailers at
least thirty (30) days prior notice of any termination under this Section
11.02(f) unless Bank is required to initiate changes to the Program to comply
with applicable law before the expiration of such a thirty-day period.
SECTION 11.03 PURCHASE OF ACCOUNTS BY RETAILERS UPON TERMINATION.
(a) Subject to Section 14.08 hereof, Retailers, acting
collectively, shall have the option, exercisable as provided below, to
purchase or to arrange for the purchase of the portfolio of Accounts (other
than Defaulted Accounts) (including the Cardholder List to the extent
relating to such Accounts) upon the termination or expiration of the
Commitment Period for a purchase price payable in immediately available funds
and in an amount equal to the sum of (i) an amount
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equal to (A) in the case of an expiration or termination of the Commitment
Period other than a termination pursuant to Section 11.02 (d) hereof, one
hundred three percent (103%) of the then aggregate Indebtedness of all
Accounts (other than Defaulted Accounts) or (B) in the case of a termination
of the Commitment Period pursuant to Section 11.02(d) above, one hundred four
percent (104%) of the then aggregate Indebtedness of all Accounts (other than
Defaulted Accounts), and (ii) the product of (A) Eight Thousand Three Hundred
and Thirty-three Dollars and Thirty-three Cents ($8,333.33) and (B) the
number of months, if any, (rounded up to the next integer), remaining before
the fifth anniversary of the Program Commencement Date PROVIDED, HOWEVER,
that any amounts previously paid under Sections 13.02(c) (iv), 13.02(e) (ii),
13.03(c) (iv) or 13.03(d) (ii) hereof shall be credited against the purchase
price which Retailers would otherwise be obligated to pay hereunder.
(b) If the Commitment Period is expiring as a result of a notice
of non-extension given by Bank or by Retailers under Section 11.01 hereof,
Retailers, acting collectively, shall, if they determine to do so, exercise
their option to purchase the Accounts and related Cardholder List as set
forth in 11.03(a) by giving notice of such election not later than the
ninetieth (90th) day following the Termination Notice Date. Retailers shall
thereafter complete such purchase on the first Business Day after expiration
of the Commitment Period.
(c) If the Commitment Period is terminating as a result of a
notice of termination given under Section 11.02 (other than a notice given in
respect of a Retailer Primary Divestiture), Retailers, acting collectively,
shall, if they determine to do so, exercise their option to purchase the
Accounts and related Cardholder List as set forth in 11.03(a), by giving
notice of such election not later than the forty-fifth (45th) day following
the date on which the Commitment Period terminates, which notice shall
specify a date for the purchase of such Accounts and Cardholder List which is
not more than ninety (90) days after the date Retailers first give their
notice exercising their option to purchase. Retailers shall thereafter
complete such purchase on the date specified in the notice exercising their
option to purchase.
(d) If the Commitment Period is terminating as a result of a
notice of termination given by Bank in respect of a Retailer Primary
Divestiture, Retailers, acting collectively, shall, if they determine to do
so, exercise their option to purchase the Accounts and related Cardholder
List as set forth in 11.03(a), by giving notice of such election not later
than the tenth (10th) day prior to the Primary Divestiture Date. Retailers
shall thereafter complete such purchase on the Primary Divestiture Date.
(e) If Retailers, acting collectively:
(i) fail to deliver a notice within the terms required by
this Section 11.03; or
(ii) fail to complete a purchase of the Accounts and related
Cardholder List on the date designated for the closing of such purchase;
or
(iii) prior to completing a purchase of the Accounts and
related Cardholder List, make available to customers of Retailers or
otherwise provide at any Retailer
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Location any credit program, credit facility, credit card program,
charge program or debit or secured card program or facility which is
similar in purpose or effect to this Program (whether open-end,
closed-end, private label or third party), other than (A) credit
provided in connection with the Program hereunder, (B) credit provided
by generally accepted multi-purpose credit or charge cards such as
American Express, Mastercard, Visa and the Discover card or by any
generally accepted multi-purpose debit or secured cards (provided that
none of the cards referred to in this clause (B) may be "co-branded",
"sponsored" or "co-sponsored" with a Retailer and provided that no
Retailer Name or any variation thereof may appear on such cards) and (C)
credit provided under a Second Source Program during the Commitment
Period to customers who have first applied and been rejected for credit
under the Program established by this Agreement;
then the option herein provided to purchase the Accounts and the related
Cardholder List shall expire.
SECTION 11.04 TERMINATION FOR FORCE MAJEURE.
(a) The Commitment Period may be terminated by Retailers, acting
collectively by written notice to the Bank, or by Bank by written notice to
the Retailers without penalty after the passing of sixty (60) days following
the notice by one party to the others that its performance hereunder is
prevented or materially impeded, without the ability to cure, by one of the
following force majeure events: acts of God, fire, explosion, accident, war,
nuclear disaster, riot or material changes in applicable laws or regulations
rendering it illegal or impossible for the notifying party to perform as
contemplated in this Agreement. Such sixty (60) day period may be shortened
upon written agreement executed by duly-authorized officers of each party or
if required by applicable law or regulation. This Agreement may also be
terminated by any party hereto on thirty (30) days' prior written notice to
the other parties hereto if the performance of another party has been
prevented by such a force majeure event for a period of at least sixty
consecutive (60) days.
(b) Any failure to perform caused by a force majeure event shall not be
considered a breach of this Agreement during the period of such disability if
the disabled party promptly advises the other parties in writing that it is
unable to perform due to such a force majeure event, setting forth: (i) the
nature of the event; (ii) its expected effect(s) and duration; (iii) any
expected development which may further affect performance hereunder; and (iv)
the efforts, if any, which will be made to cure such force majeure or provide
substitute performance.
SECTION 11.05 LIQUIDATION OF ACCOUNTS.
(a) Except as is expressly provided to the contrary in this Agreement
all of the terms, conditions and covenants of this Agreement shall continue
in effect following the expiration or termination of the Commitment Period
until the Final Liquidation Date. Upon the termination or expiration of the
Commitment Period, Bank shall continue to own the Accounts unless and until
Retailers shall have purchased such Accounts pursuant to Section 11.03
hereof. As is expressly provided elsewhere in this Agreement, and without
limiting other express provisions of this
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Agreement, following the expiration or termination of the Commitment Period,
Bank shall have no further obligation to originate any Accounts or extend
further credit and shall not be required to provide insert or message
services in connection with any billings statements. In addition, from and
after the Termination Notice Date, Bank shall have no further obligation to
credit amounts to the Marketing Fund. Notwithstanding anything herein to the
contrary, however, (i) all warranties, representations and indemnities
contained herein and (ii) Retailers' and Bank's obligations under Section
14.13 shall survive the termination of the Agreement and the Final
Liquidation Date.
(b) Upon any termination or expiration of the Commitment Period, if
Retailers, acting collectively, do not exercise their option to purchase or
arrange for a purchase of all Accounts (other than Defaulted Accounts) from
Bank, then:
(i) Bank shall have the right, in addition to and retaining all
other rights it may have under the terms of this Agreement or applicable
law to:
(A) liquidate the remaining Accounts in any lawful manner
which may be expeditious or economically advantageous to Bank
including the issuance of a replacement or substitute bank or
industry credit card; and
(B) use the Retailer Names in accordance with the provisions
of this Agreement in communicating with existing Cardholders.
(ii) Retailers expressly agree that in complying with their
obligations to accept a replacement or substitute bank or industry
credit card, Retailers will cooperate with Bank in order to effectuate
any such liquidation or replacement or substitute card issuance in an
orderly manner.
ARTICLE XII
INDEMNIFICATION
SECTION 12.01 INDEMNIFICATION BY RETAILERS. Retailers agree to protect,
indemnify, and hold harmless Bank, its Affiliates, and their respective
employees, officers, and directors, from and against any and all losses,
damages, liabilities, costs, and expenses (including reasonable attorneys'
fees and expenses), judgments, damages, claims, demands, offsets, defenses,
counterclaims, actions, or proceedings ("Losses") by whomsoever asserted,
including, without limitation: (i) the Cardholders or other persons
responsible for the payment of Accounts; (ii) any person or persons who
prosecute or defend any proceedings as representatives of or on behalf of a
class or interest group; (iii) any governmental instrumentality; or (iv) any
other third party, arising out of, connected with or resulting from:
(a) any transaction, contract, understanding, promise, representation,
or any other relationship, actual, asserted, or alleged, between a Retailer
and any Cardholder relating to an Account;
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(b) any Goods and Services the purchase of which was financed by an
Account (including, without limitation, sales thereof and any product
liability or warranty claims with respect thereto);
(c) any act, or any omission where there was a duty to act, by a
Retailer or its employees, officers, directors, shareholders, agents,
lessees, franchisees or independent contractors, relating to an Account or
any item of Indebtedness;
(d) any breach by a Retailer of any of the terms, covenants, or other
provisions contained in this Agreement or any other instrument or document
delivered by a Retailer to Bank in connection herewith;
(e) any representation or warranty made by any Retailer in this
Agreement or in any other instrument or document delivered by a Retailer to
Bank which proves to have been untrue or incorrect in any material respect as
of the date when made or deemed made hereunder;
(f) the failure of a Retailer to comply in all material respects with
any law, rule or regulation applicable to such Retailer; or
(g) any advertisements, solicitations or other promotions of the
Program including credit-based promotions by or at the direction of any
Retailer. Excluded from the foregoing indemnity shall be any Losses to the
extent the same (i) arise out of or result from any violation by Bank or any
of its Affiliates of any law; (ii) arise out of or result from any violation
by Bank of any term of this Agreement, any Credit Card Agreement or any
agreement, understanding or promise between Bank and any Cardholder relating
to such Cardholder's Account; or (iii) arise solely out of a Retailer's use
of a Program Document (solely and only to the extent such document is in the
form prepared and provided by Bank without additions, deletions or
modifications) and in accordance with the requirements of the Operating
Procedures.
SECTION 12.02 INDEMNIFICATION BY BANK. Bank agrees to protect,
indemnify, and hold harmless Retailers, their Affiliates, and their
respective employees, officers, and directors, from and against any and all
Losses by whomsoever asserted, including, but not limited to, (i) the
Cardholders or other persons responsible for the payment of Accounts; (ii)
any person or persons who prosecute or defend any proceedings as
representatives of or on behalf of a class or interest group; (iii) any
governmental instrumentality; or (iv) any other third party, arising out of,
connected with or resulting from:
(a) any breach by Bank of any of the terms, covenants, or other
provisions contained in this Agreement;
(b) any representation or warranty made by Bank in this Agreement which
proves to have been untrue or incorrect in any material respect as of the
date when made or deemed made hereunder;
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(c) any act (including any exercise of the power of attorney provided
Bank pursuant to Section 14.12 hereof), or omission where there was a duty to
act, by Bank or its employees, officers, directors, shareholders, agents,
licensees or independent contractors relating to an Account or any item of
Indebtedness; or
(d) the failure of Bank (including any failure of Bank in the exercise
of the power of attorney provided Bank pursuant to Section 14.12 hereof) or
the failure of any Program Document to comply in all material respects with
all applicable federal, state and local statutes, regulations, ordinances or
administrative rulings, including, but not limited to, the Federal Truth in
Lending Act and Regulation Z thereunder, the Federal Equal Credit Opportunity
Act and Regulation B thereunder, and the Federal Fair Credit Reporting Act,
PROVIDED that Bank shall have no liability for Losses resulting from any act
or omission by any Retailer or by any other person acting at the direction of
or on behalf of a Retailer not taken or omitted at the direction of Bank or
pursuant to the requirements of the Operating Procedures including without
limitation Losses resulting from (i) descriptions of Goods and/or Services,
pricing, charges, and related wording and content of the Program Documents
where such wording or content is furnished by a Retailer, (ii) Retailers'
sales material or practices, including, but not limited to, the sales order
forms, sales invoices, promotional and advertising materials and similar
forms and/or (iii) actions or omissions (at the point-of-sale or otherwise)
of a Retailer's employees, agents or sales representatives including
unauthorized changes or omissions in Program Documents provided by Bank.
Excluded from the foregoing indemnity shall be any Losses to the extent the
same arise out of or result from (i) any violation by a Retailer or its
Affiliates of any law except where such violation is caused solely by a
Retailer's use of a Program Document where such document is in the form
prepared and provided by Bank without additions, deletions or modifications
and where such form is used in accordance with the requirements of the
Operating Procedures; (ii) any violation by a Retailer of any term of this
Agreement, any Credit Card Agreement or any agreement, understanding or
promise between such Retailer and any Cardholder relating to such
Cardholder's Account; or (iii) any exercise by Bank of the power of attorney
granted pursuant to Bank pursuant to Section 14.12 where such power is
exercised to perform an obligation of one or more Retailers hereunder or
under applicable law which such Retailers failed to perform.
SECTION 12.03 PAYMENT OF INDEMNIFIED AMOUNTS. After any final judgment
or award shall have been rendered by a court, arbitration board, or
administrative agency of competent jurisdiction and the time for an appeal of
such judgment or award has expired without an appeal being taken by any
party, or after any settlement agreed to by the parties shall have been
consummated, the party seeking indemnification shall forward to the other
party notice of any sums due and owing by such other party with respect to
such matter and such party shall be required to pay all of the sums so owing
to the party seeking indemnification within thirty (30) days after the date
of such notice unless otherwise mutually agreed to in writing by the parties.
SECTION 12.04 NOTICE. Each party shall promptly notify the other party
of any claim, demand, suit or threat of suit of which that party becomes
aware (except with respect to a threat of suit any party might institute
against another party hereto) which may give rise to a right of
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indemnification pursuant to this Agreement. The indemnifying party will be
entitled to participate in the settlement or defense thereof and, if the
indemnifying party elects, to take over and control the settlement or defense
thereof with counsel satisfactory to the indemnified party. In any case, the
indemnifying party and the indemnified party shall cooperate (at no cost to
the indemnified party) in the settlement or defense of any such claim,
demand, suit or proceeding.
ARTICLE XIII
OTHER AGREEMENTS
SECTION 13.01 RETAILER ACQUISITIONS; NEW RETAILER SUBSIDIARIES.
(a) In the event that any Retailer or any of its Affiliates, directly or
indirectly, acquires (i) all or substantially all of the assets of a New
Retailer, (ii) more than 50% of the outstanding voting securities of a New
Retailer or (iii) the power to direct or cause the direction of any New
Retailer's management or policies, whether through the ownership of securities,
control of its board of directors, contract or otherwise, then, Retailers shall
engage in good faith discussions with Bank regarding the possibility of adding
such New Retailer as a "Retailer" hereunder or of Bank's providing a private
label credit card program to such New Retailer on additional or different terms
and conditions. If the parties are unable to mutually agree on terms and
conditions pursuant to which Bank will provide a private label credit card
program to the New Retailer, Retailers agree that they will not enter into any
such program with any other person unless they shall have first offered Bank the
opportunity to provide such program to the New Retailer on the same or
substantially similar terms and conditions as such other person would be willing
to provide. Notwithstanding anything herein to the contrary, however,
Retailers' obligations under this Section 13.01(a) shall be subject to the terms
and conditions of any private label credit card program to which a New Retailer
is party as of the date it is acquired by a Retailer, it being agreed that
Retailers shall use their best efforts to terminate any such program as soon as
possible after any such acquisition if Bank is willing to provide a comparable
program on the same or substantially similar terms.
(b) Subject to Section 13.01(a), in the event that any direct or indirect
subsidiary of Retailer that is not a party to this Agreement on the date hereof
(whether such subsidiary is now existing or hereafter created), shall be engaged
in the ownership or operation of a retail store or the sale of Goods and/or
Services through retail stores, mail orders or otherwise, Retailers shall cause
such subsidiary to execute and deliver to Bank instruments satisfactory to Bank
pursuant to which such subsidiary shall agree to join the Program and be bound
by the terms and conditions of this Agreement. Upon the execution and delivery
of such documents, such subsidiary shall be an additional "Retailer" for all
purposes of this Agreement.
SECTION 13.02 RETAILER PRIMARY DIVESTITURES.
(a) Retailers shall deliver written notice to Bank not later than
forty-five (45) days prior to the consummation of any Retailer Primary
Divestiture (the date of such consummation being referred to as the "Primary
Divestiture Date"). Such notice (the "Primary Divestiture
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Notice") shall set forth in reasonable detail the circumstances of the
impending Retailer Primary Divestiture (including, without limitation, the
identity of all acquirors).
(b) Bank shall deliver written notice to Retailers not later than thirty
(30) days after receipt from Retailers of the Primary Divestiture Notice, which
notice shall either (i) state that Bank shall, simultaneously with the
consummation of the Retailer Primary Divestiture, require Retailers to cause the
acquiror(s) to enter into an agreement on the same terms as this Agreement (with
such changes to non-financial terms as may be necessary to reflect changes in
facts) pursuant to which the acquiror(s) will assume all of Retailer's
obligations under this Agreement with respect to the Primary Divestiture Stores
unless Retailers elect to exercise the option provided in Section 13.02(c) (ii)
hereof or (ii) include a notice of termination of the Commitment Period pursuant
to Section 11.02(a) (iv) or (iii) include a notice of termination of the
Commitment Period with respect to the Accounts and Indebtedness of the Primary
Divestiture Stores (a "Partial Termination Notice"). As used herein, "Primary
Divestiture Stores" shall mean, in the case of a Retailer Primary Divestiture
resulting from the sale of Retailer Locations, the Retailer Locations being
sold, or in the case of a Retailer Primary Divestiture resulting from the sale
of all or substantially all of the assets, or fifty percent (50%) or more of the
outstanding voting securities, of any Retailer, the Retailer Locations at which
such Retailer makes or has made sales of Goods and Services.
(c) If Bank's notice states that Bank intends to require Retailers to
cause the acquiror(s) to assume all of Retailers' obligations under this
Agreement with respect to the Primary Divestiture Stores, Retailers shall not
consummate the Retailer Primary Divestiture unless either (i) all documents and
agreements reasonably required by Bank to effect such assumption have been
executed and delivered by the applicable parties or (ii) all Accounts (other
than Defaulted Accounts) and Indebtedness owned by Bank as of the Primary
Divestiture Date relating to the Primary Divestiture Stores are simultaneously
purchased by Retailers or their assignee. The purchase price to be paid to Bank
by Retailers (or such assignee) shall be payable in immediately available funds
and in an amount equal to the sum of (iii) one hundred four percent (104%) of
the then aggregate Indebtedness of all such Accounts, and (iv) the product of
(A) Eight Thousand Three Hundred and Thirty-three Dollars and Thirty-three Cents
($8,333.33); (B) the number of months, if any, (rounded up to the next integer)
remaining before the fifth anniversary of the Program Commencement Date; and (C)
a fraction, the numerator of which is the sum of the aggregate Indebtedness for
all Accounts relating to the Primary Divestiture Stores for each day during the
immediately preceding Billing Period and the denominator of which is the sum of
the aggregate Indebtedness for all Accounts for each day during the immediately
preceding Billing Period.
(d) If Bank's notice includes a notice of termination of the Commitment
Period, Retailers shall have the option to purchase the Accounts (other than
Defaulted Accounts) together with the related Cardholder List and Indebtedness
as provided in Section 11.03.
(e) If Bank's notice includes a Partial Termination Notice, Retailers
shall not consummate the Retailer Primary Divestiture unless all Accounts (other
than Defaulted Accounts) and Indebtedness owned by Bank as of the Primary
Divestiture Date relating to the
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Primary Divestiture Stores are simultaneously purchased by Retailers or their
assignee. The purchase price to be paid to Bank by Retailers (or such
assignee) for such Accounts and Indebtedness shall be payable in immediately
available funds and in an amount equal to the sum of (i) one hundred four
percent (104%) of the then aggregate Indebtedness of all such Accounts, and
(ii) the product of (A) Eight Thousand Three Hundred and Thirty-three Dollars
and Thirty-three Cents ($8,333.33); (B) the number of months, if any, rounded
up to the next integer, remaining before the fifth anniversary of the Program
Commencement Date; and (C) a fraction, the numerator of which is the sum of
the aggregate indebtedness for all Accounts relating to the Primary
Divestiture Stores for each day during the immediately preceding Billing
Period divided by the number of days in such period and the denominator of
which is the Average Net Receivables for the immediately preceding Billing
Period.
SECTION 13.03 RETAILER SECONDARY DIVESTITURES.
(a) Retailers shall deliver written notice to Bank not later than
forty-five (45) days prior to the consummation of any Retailer Secondary
Divestiture (the date of such consummation being referred to as the
"Secondary Divestiture Date"). Such notice (the "Secondary Divestiture
Notice") shall set forth in reasonable detail the circumstances of the
impending Retailer Secondary Divestiture (including, without limitation, the
identity of all acquiror(s).
(b) Bank shall deliver written notice to Retailers not later than thirty
(30) days after receipt from Retailers of the Secondary Divestiture Notice,
which notice shall either (i) state that Bank shall, simultaneously with the
consummation of the Retailer Secondary Divestiture, require Retailers to cause
the acquiror(s) to enter into an agreement on the same terms as this Agreement
(with such changes to non-financial terms as may be necessary to reflect changes
in facts) pursuant to which the acquiror(s) will assume all of Retailers'
obligations under this Agreement with respect to the Retailer Locations that are
the subject of the Retailer Secondary Divestiture (the "Secondary Divestiture
Stores") unless Retailers elect to exercise the option provided in Section
13.03(c) (ii) hereof, or (ii) include a notice of termination of the Commitment
Period with respect to the Accounts and Indebtedness of the Secondary
Divestiture Stores (a "Partial Termination Notice").
(c) If Bank's notice states that Bank intends to require Retailers to
cause the acquiror(s) to assume all of Retailer's obligations under this
Agreement with respect to the Secondary Divestiture Stores, Retailers shall not
consummate the Retailer Secondary Divestiture unless either (i) all documents
and agreements reasonably required by Bank to effect such assumption have been
executed and delivered by the applicable parties or (ii) all Accounts (other
than Defaulted Accounts) and Indebtedness owned by Bank as of the Secondary
Divestiture Date relating to the Secondary Divestiture Stores are simultaneously
purchased by Retailers or their assignee. The purchase price to be paid to Bank
by Retailers (or such assignee) shall be payable in immediately available funds
and in an amount equal to the sum of (iii) one hundred four percent (104%) of
the then aggregate Indebtedness of all such Accounts, and (iv) the product of
(A) Eight Thousand Three Hundred and Thirty-three Dollars and Thirty-three Cents
($8,333.33); (B) the number of months, if any, (rounded up to the next integer)
remaining before the fifth anniversary of the Program Commencement Date; and (C)
a fraction, the numerator of which is
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the sum of the aggregate Indebtedness for all Accounts relating to the
Secondary Divestiture Stores for each day during the immediately preceding
Billing Period and the denominator of which is the sum of the aggregate
Indebtedness for all Accounts for each day during the immediately preceding
Billing Period.
(d) If Bank's notice includes a Partial Termination Notice, Retailers
shall not consummate the Retailer Secondary Divestiture unless all Accounts
(other than Defaulted Accounts) and Indebtedness owned by Bank as of the
Secondary Divestiture Date relating to the Secondary Divestiture Stores are
simultaneously purchased by Retailers or their assignee. The purchase price to
be paid to Bank by Retailers (or such assignee) shall be payable in immediately
available funds and in an amount equal to the sum of (i) one hundred four
percent (104%) of the then aggregate Indebtedness of all such Accounts, and (ii)
the product of (A) Eight Thousand Three Hundred and Thirty-three Dollars and
Thirty-three Cents ($8,333.33); (B) the number of months, if any, rounded up to
the next integer, remaining before the fifth anniversary of the Program
Commencement Date; and (C) a fraction, the numerator of which is the sum of the
aggregate Indebtedness for all Accounts relating to the Secondary Divestiture
Stores for each day during the immediately preceding Billing Period divided by
the number of days in such period and the denominator of which is the Average
Net Receivables for the immediately preceding Billing Period.
SECTION 13.04 OTHER PROGRAMS. If during the term of this Agreement, any
Retailer desires to make arrangements for the provision by any person of either
(i) any private label commercial or business credit program or facility for use
at Retailer Locations or (ii) any private label credit program or facility for
use outside of the United States, then Retailers shall engage in good faith
discussions with Bank regarding the possibility of Bank providing either or both
of such programs. If the parties are unable to mutually agree on terms and
conditions pursuant to which Bank will provide one or both such programs,
Retailers agree that they will not enter into any such programs with any other
person unless they shall have first offered Bank the opportunity to provide such
program(s) on the same or substantially similar terms and conditions as such
other person would be willing to provide.
ARTICLE XIV
MISCELLANEOUS
SECTION 14.01 ASSIGNABILITY. Neither Bank nor any Retailer may assign its
rights and obligations under this Agreement without the prior written consent of
the other party, which consent shall not be unreasonably withheld; except that
Bank may, without such prior written consent (i) assign all or part of its
rights and obligations under this Agreement to an Affiliate; (ii) engage third
parties to perform services pursuant to this Agreement; and (iii) securitize all
or any portion of the Accounts or any related rights under this Agreement or
sell participation interests therein.
SECTION 14.02 AMENDMENT. This Agreement may not be amended except by
written instrument signed by the parties hereto.
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SECTION 14.03 NON-WAIVER. No delay by any party hereto in exercising any
of its rights hereunder, or in the partial or single exercise of such rights,
shall operate as a waiver of that or any other right. The exercise of one or
more of any party's rights hereunder shall not be a waiver of, nor preclude the
exercise of, any other rights or remedies available to such party under this
Agreement or in law or equity.
SECTION 14.04 SEVERABILITY. If any provision of this Agreement is held to
be invalid, void or unenforceable, all other provisions shall remain valid and
be enforced and construed as if such invalid provision were never a part of this
Agreement.
SECTION 14.05 GOVERNING LAW. This Agreement and all rights and obligations
hereunder, including, but not limited to, matters of construction, validity and
performance, shall be governed by and construed in accordance with the laws of
the state of Georgia without regard to internal principles of conflict of laws.
SECTION 14.06 CAPTIONS. Captions of the Sections of this Agreement are for
convenient reference only and are not intended as a summary of such Sections and
do not affect, limit, modify or construe the contents thereof.
SECTION 14.07 USE OF RETAILER NAMES AND MARKS. Subject to the provisions
of this Agreement, Retailers hereby grant Bank a non-exclusive license to
create, develop, market and administer the Program and to use the names set
forth on Schedule 3 hereto, the related marks, tradestyles, trademarks, service
marks, logos or similar proprietary designations and such additional names,
marks, tradestyles, logos and other designations as may be adopted by Retailers
from time to time (collectively, the "Retailer Names") , in the creation,
development, marketing and administration of the Program PROVIDED, HOWEVER, that
with respect to the initial Program Documents and the initial other Account
Documentation prepared by Bank, Bank may not use the Retailer Names without the
prior consent of Retailers which consent will not be unreasonably withheld. If
from time to time prior to the Final Liquidation Date, Retailers should change
their names, marks, tradestyles, trademarks, service marks, logos or similar
proprietary designations, Retailers agree to promptly inform Bank thereof and
Bank and Retailers shall cooperate to make the appropriate changes and additions
to the Program Documents and other Account Documentation in a timely and cost
efficient manner. This license shall extend to all aspects of Bank's operation
and administration of the Program and the discharge of its obligations under the
Agreement, including but not limited to its use in connection with Cardholder
services; adverse action letters; billing statements and inquiries; credit card
applications, agreements, mailers, and card carriers; and matters incidental to
collection and recovery.
SECTION 14.08 SECURITIZATION/PARTICIPATION. Any rights to purchase the
Accounts which Retailers may have hereunder shall be subject to Bank's right to
securitize or participate the Accounts and Indebtedness. Purchase rights shall
be available to Retailers only with respect to Accounts and Indebtedness owned
by Bank at the time Retailers elect to exercise their option to purchase
pursuant to Section 11.03 hereof.
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SECTION 14.09 FURTHER ASSURANCES. Each party hereto agrees to execute all
such further documents and instruments and to do all such further things as any
other party may reasonably request in order to give effect to and to consummate
the transactions contemplated hereby.
SECTION 14.10 ENTIRE AGREEMENT. This Agreement is the entire agreement of
the parties with respect to the subject matter hereof and supersedes all other
prior understandings and agreements whether written or oral.
SECTION 14.11 NOTICES. All notice, demands and other communications
provided for in this Agreement shall be in writing or (unless otherwise
specified) by telex or telephonic facsimile transmission and shall be sent by
certified mail or nationally-recognized overnight courier, or delivered to the
other party at the address set forth opposite its name on Schedule 4 hereof, or
at such other address as shall be designated by such party in a written notice
given to all other parties in accordance with the terms of this Section 14.11.
All such notices and communications if duly given or made, when sent by
certified mail, shall be effective three (3) Business Days after deposit in the
mails, when sent by overnight courier, shall be effective one (1) Business Day
after delivery to such overnight courier, and otherwise shall be effective upon
receipt.
SECTION 14.12 POWER OF ATTORNEY. Retailers authorize and empower Bank and
grant to Bank a power of attorney (i) to sign and endorse any Retailer's name on
checks, drafts, money orders or other forms of payment in respect of Accounts;
(ii) to do all the things reasonably necessary to carry out or enforce the
Accounts; (iii) to sign any Retailer's name on any notices to any Cardholder in
connection with the collection of Accounts; (iv) to send requests for
verification of any Account to Cardholders; (v) to sue Cardholders for the
collection of Accounts in the name of Bank or any Retailer; (vi) to do any and
all things Bank determines may be necessary or appropriate to carry out or
enforce the obligations of Cardholders under Credit Card Agreements; and (vii)
to take any action which any Retailer is obligated to take hereunder if
Retailers fail to take such action, including without limitation, the execution
of Uniform Commercial Code financing statements. The limited power of attorney
conferred hereby is deemed a power coupled with an interest and shall be
irrevocable.
SECTION 14.13 CONFIDENTIAL INFORMATION.
(a) All proprietary and non-public material and information supplied by
any Retailer to Bank or vice versa heretofore or hereafter, or supplied to any
Retailer or Bank by Cardholders or applicants for Credit Cards, including,
without limitation, (i) the pricing and other financial terms of this Agreement,
(ii) information concerning the parties' marketing plans, objectives, financial
results and employee compensation and benefits, and (iii) the Cardholder List,
is confidential and proprietary ("Confidential Information"). Notwithstanding
the foregoing, however, Confidential Information shall not include any
information which (i) at the time of disclosure by one party hereto or
thereafter is generally available or known to the public (other than as a result
of an unauthorized disclosure by another party hereto); (ii) was available to
one party on a non-confidential basis from a source other than another party
(provided that such source, to the best of such party's knowledge, was not
obligated to another party to keep such
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information confidential); or (iii) was in one party's possession prior to
disclosure by another party to it.
(b) Confidential Information shall be used by each party solely in the
performance of its obligations or the exercise of its rights pursuant to this
Agreement. Each party shall receive Confidential Information in confidence and
not disclose Confidential Information to any third party, except (i) as may be
necessary to perform its obligations or exercise its rights pursuant to this
Agreement or to effect a securitization or participation, (ii) as may be agreed
upon in writing by the other parties, or (iii) as otherwise required by law or
judicial or administrative process. Each party will use its best efforts to
ensure that its officers, employees, and agents take such action as shall be
necessary or advisable to preserve and protect the confidentiality of
Confidential Information. Upon written request or upon the termination of this
Agreement, each party shall destroy or return to the other party all
Confidential Information in its possession or control, subject to each party's
respective document retention policies with respect to information required to
be maintained by regulatory authorities and subject to the Bank's rights to
retain information and documents necessary to administer and operate the
Program.
SECTION 14.14 NO PARTNERSHIP. Nothing contained in this Agreement shall be
construed to constitute Bank and any Retailer (or Parent) as partners, joint
venturers, principal and agent, or employer and employee.
SECTION 14.15 THIRD PARTIES. Bank shall have the right to engage third
parties to perform services pursuant to this Agreement. Notwithstanding the
foregoing, this Agreement is not for the benefit of any third party and shall
not be deemed to give any right or remedy to any such third party.
SECTION 14.16 INTERPRETATION. As each of the parties have contributed to
the drafting of the language of this Agreement, it is agreed and understood that
in any interpretation of this Agreement, the language utilized will be construed
equally as and between the parties without regard to which party provided the
language of any particular provision.
SECTION 14.17 MEETINGS OF PARTIES. From time to time, upon the request of
any party hereto, the parties agree to meet and confer in good faith regarding
any aspect of the Program including, without limitation, any proposed changes in
operating procedures, reserve requirements, and Promotion Reserve Holdbacks.
Except as expressly provided elsewhere in this Agreement, however, no party
hereto shall be required to take any action, refrain from taking any action or
make any changes to the Program except as is acceptable to such party in its
sole discretion and except as expressly provided elsewhere in this Agreement, no
party's refusal to take such action, to refrain from taking such action or to
making any proposed change shall be subject to challenge by any other party
hereto.
SECTION 14.18 JOINT AND SEVERAL OBLIGATIONS. Each obligation of a Retailer
hereunder shall be a joint and several obligation of all Retailers. For all
purposes of this Agreement, notice given to or demand made upon any Retailer
shall be deemed to be notice given to or demand
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made upon all Retailers. Retailers covenant for the benefit of Bank to enter
into such agreements and to make such other arrangements as may be necessary
to ensure that each Retailer receives copies of all such notices or demands
from the other Retailers hereunder. Whenever this Agreement requires that
payments be made to any Retailer, Bank may make such payments directly to any
Retailer, which Retailer shall receive such payment in trust for itself and
all other Retailers entitled to all or any portion thereof. Bank shall have
no obligation to ensure and no liability for the correct application of any
payments made by it among the different Retailers.
SECTION 14.19 MULTIPLE COUNTERPARTS. This Agreement may be executed in any
number of multiple counterparts, all of which shall constitute but one and the
same original.
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IN WITNESS WHEREOF, Bank and Retailers have caused this Agreement to be
executed by their respective officers thereunto duly authorized as the date
first above written.
SELECT COMFORT CORPORATION
By /s/ Tom Erickson
-------------------------------------
Its Vice President and Controller
-------------------------------
SELECT COMFORT RETAIL CORPORATION
By /s/ Tom Erickson
-------------------------------------
Its Vice President & Controller
-------------------------------
SELECT COMFORT DIRECT CORPORATION
By /s/ Tom Erickson
-------------------------------------
Its Vice President & Controller
-------------------------------
SELECT COMFORT SC CORPORATION
By /s/ Tom Erickson
-------------------------------------
Its Vice President & Controller
-------------------------------
MONOGRAM CREDIT CARD BANK OF GEORGIA
By /s/ Richard A. Hayes
-------------------------------------
Its Vice Chairman
-------------------------------
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FIRST AMENDMENT TO CONSUMER CREDIT CARD PROGRAM AGREEMENT
THIS FIRST AMENDMENT TO CONSUMER CREDIT CARD PROGRAM AGREEMENT
("Amendment") is made as of the 18th day of November, 1997, by and among
Monogram Credit Card Bank of Georgia, a Georgia banking corporation with its
principal place of business at 7840 Roswell Road, Building 100, Suite 210,
Atlanta, Georgia 30350 (together with its successors, assigns and transferees,
the "Bank") and Select Comfort Corporation, Select Comfort Retail Corporation,
Select Comfort Direct Corporation, and Select Comfort SC Corporation, each a
Minnesota corporation and each having its principal place of business at 6105
Trenton Lane North, Minneapolis, Minnesota 55442 (jointly and severally, the
"Retailers").
R E C I T A L S
A. Retailers and Bank are parties to that certain Consumer Credit Program
Agreement dated as of May 22, 1997 (the "Program Agreement") pursuant to which
Bank has agreed to extend credit to qualified customers of Retailers for the
purchase of certain goods and services.
B. Pursuant to the terms of the Program Agreement, Retailers and Bank
have agreed to share losses incurred by Bank on accounts originated by Bank
under the Program Agreement based upon an agreed loss sharing formula. The
parties hereto now desire to amend the loss sharing formula and to provide
additional reserves in support thereof in order to induce Bank to make
adjustments to the credit standards applied in evaluating applications for new
accounts and requests for credit thereunder.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree as follows:
AGREEMENT
1. AMENDMENT TO PROGRAM AGREEMENT.
a. AMENDMENT TO DEFINITIONS. The definition of "Liquidation Reserve
Factor" in Section 1.01 of the Program Agreement is hereby deleted and the
following substituted in its stead:
"Liquidation Reserve Factor" means .045.
b. AMENDMENT TO SECTION 5.01(b). Section 5.01(b) of the Program
Agreement is hereby amended as follows:
(i) Subclause (iv) is hereby deleted and the following
substituted in its stead:
(iv) an amount equal to the sum of (A)
the product of (1) the In-Store Sale
Factor and (2) the total amount
(including any applicable sales and use
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tax and shipping charges) of the
Purchases on Accounts identified in such
Charge Transaction Data other than
Purchases made in respect of
telemarketing, mail order or catalog
sales ("In-Store Purchases") and (B) the
product of (1) the Direct Sale Factor
and (2) the total amount (including any
applicable sales and use tax and
shipping charges) of the Purchases on
Accounts identified in such Charge
Transaction Data which were Purchases
made in respect of telemarketing, mail
order or catalog sales ("Direct
Purchases").
(ii) The following two sentences shall be added to the end of
Section 5.01(b):
As used herein "Direct Sale Factor" and
"In-Store Sale Factor" shall mean .06
and .03, respectively. Retailers agree
not to submit Charge Transaction Data to
Bank under this Agreement if the
weighted average for any Billing Period
of the Direct Sale Factor and the In-Store
Sale Factor (based upon the sales volumes
for Direct Purchases and In-Store Purchases
for such Billing Period, respectively)
would exceed .0465.
c. AMENDMENT TO SECTION 6.03(b). Section 6.03(b) of the Program
Agreement is hereby deleted and the following substituted in its stead:
(b) As provided in Section 5.01, in connection with each Purchase,
Bank shall deduct from amounts otherwise payable to Retailers in
respect thereof, an amount equal to the sum of (i) the product of (A)
the In-Store Sale Factor and (B) the total amount (including any
applicable sales and use tax and shipping charges) of the In-Store
Purchases on Accounts identified in such Charge Transaction Data and
(ii) the product of (A) the Direct Sale Factor and (B) the total
amount (including any applicable sales and use tax
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and shipping charges) of the Direct Purchases on Accounts identified
in such Charge Transaction Data. Such amounts shall be credited to
the Liquidation Reserve.
d. AMENDMENT TO SECTION 6.05(b). Section 6.05(b) of the Program
Agreement is hereby amended by deleting the reference to ".00250" and
substituting a reference to ".00375" in its stead.
e. AMENDMENT TO SECTION 6.05(c). Section 6.05(c) of the Program
Agreement is hereby amended by deleting the reference to ".03" and substituting
a reference to ".045" in its stead.
2. CONDITIONS TO EFFECTIVENESS. Notwithstanding anything contained
herein to the contrary, this Amendment shall not become effective until each of
the following conditions is fully and simultaneously satisfied on or prior to
November 21, 1997:
a. CORPORATE AUTHORITY. Bank shall have received in form and
substance reasonably satisfactory to it such evidence of Retailers' corporate
authority to execute, deliver and perform the Program Agreement as amended
hereby as Bank shall request.
b. REPRESENTATIONS TRUE; NO DEFAULT. The representations and
warranties of Retailers in Section 8.03 of the Program Agreement shall be true
on and as of the effective date of this Amendment with the same force and effect
as if made on and as of such date. No Event of Default or Default (as such
terms are defined in the Program Agreement) shall have occurred and be
continuing or will occur as a result of the execution of this Amendment.
3. NO FURTHER AMENDMENT. Except as expressly modified by this Amendment,
the Program Agreement shall remain unmodified and in full force and effect and
the parties hereby reaffirm and ratify their respective obligations thereunder.
4. MISCELLANEOUS.
a. ENTIRE AGREEMENT; ETC. This Amendment comprises the entire
agreement of the parties with respect to the subject matter hereof and
supersedes all prior oral or written agreements, representations or commitments.
b. GOVERNING LAW. This Amendment and the rights and obligations of
the parties hereto shall be construed and interpreted in accordance with the
laws of the State of Georgia.
c. COUNTERPARTS. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original, and all of which taken
together shall constitute one and the same agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers or agents thereunder duly authorized as of
the date first above written.
SELECT COMFORT CORPORATION
By /s/ D. J. McAthie
-----------------------------------------------
Its Executive Vice President, CFO and CEO
-----------------------------------------
SELECT COMFORT RETAIL CORPORATION
By /s/ Thomas Erickson
-----------------------------------------------
Its VP - Finance
-----------------------------------------
SELECT COMFORT DIRECT CORPORATION
By /s/ Charles Dorsey
-----------------------------------------------
Its President
-----------------------------------------
SELECT COMFORT SC CORPORATION
By /s/ D. J. McAthie
-----------------------------------------------
Its Executive Vice President, CFO and CEO
-----------------------------------------
MONOGRAM CREDIT CARD BANK OF GEORGIA
By /s/ Richard A. Hayes
-----------------------------------------------
Its Vice Chairman
-----------------------------------------
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Select Comfort Corporation:
The audits referred to in our report dated October 23, 1998, included the
related consolidated financial statement schedule as of December 28, 1996,
January 3, 1998, and October 3, 1998, and for each of the years in the
three-year period ended January 3, 1998, and the nine-month period ended
October 3, 1998, included in the registration statement. This consolidated
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this consolidated
financial statement schedule based on our audits. In our opinion, such
consolidated financial statement schedule, when considered in relation to the
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
December 2, 1998
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