UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
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14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant toss. 240.14a-11(c) orss. 240.14a-12
SELECT COMFORT CORPORATION
(Name of Registrant as Specified In Its Charter)
SELECT COMFORT CORPORATION
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
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paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
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[LOGO]
6105 Trenton Lane North
Minneapolis, Minnesota 55442
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 16, 2001
TO THE SHAREHOLDERS OF SELECT COMFORT CORPORATION:
The Annual Meeting of Shareholders of Select Comfort Corporation, a
Minnesota corporation (the "Company"), will be held on Wednesday, May 16, 2000,
at 3:00 p.m., local time, at the Hilton Hotel Minneapolis North, 2200 Freeway
Blvd., Brooklyn Center, Minnesota 55430, for the following purposes:
1. To elect three persons to serve as directors for three-year terms;
2. To consider and act upon a proposal to grant full voting rights to The St.
Paul Companies, Inc. and its affiliates related to the acquisition of
shares of common stock of the Company under the Minnesota Control Share
Acquisition Act;
3. To consider and act upon a proposal to amend the Select Comfort Corporation
1999 Employee Stock Purchase Plan to increase the number of shares of
common stock reserved for issuance by 500,000 shares from 500,000 shares to
a total of 1,000,000 shares;
4. To consider and act upon a proposal to approve the material terms of the
performance goals under the Select Comfort Corporation Executive and Key
Employee Incentive Plan;
5. To consider and act upon a proposal to ratify the appointment of KPMG LLP,
certified public accountants, as independent auditors for the Company for
the fiscal year ending December 29, 2001; and
6. To transact such other business as may properly come before the meeting or
any adjournment thereof.
Only shareholders of record at the close of business on March 28, 2001
will be entitled to notice of, and to vote at, the meeting and any adjournments
thereof. It is important that your shares be represented and voted at the
meeting. Please mark, sign, date and mail the enclosed proxy card in the
postage-paid envelope provided.
By Order of the Board of Directors,
/s/ Mark A. Kimball
Mark A. Kimball
Secretary
April 4, 2001
Minneapolis, Minnesota
TABLE OF CONTENTS
.................
Page
INTRODUCTION..................................................................2
Shareholders Entitled to Vote.................................................2
Revocation of Proxies.........................................................2
Quorum Requirements...........................................................3
Vote Required.................................................................3
Proxy Solicitation Costs......................................................3
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................................4
Security Ownership of Certain Beneficial Owners...............................4
Security Ownership of Management..............................................5
ELECTION OF DIRECTORS.........................................................7
Nomination....................................................................7
Vote Required.................................................................7
Board Recommendation..........................................................7
Information About Nominees and Other Directors................................8
Other Information About Nominees and Other Directors..........................9
Information About the Board and its Committees.............................. 10
Director Compensation....................................................... 11
Compensation Committee Interlocks and Insider Participation................. 12
EXECUTIVE COMPENSATION AND OTHER BENEFITS................................... 13
Summary of Cash and Certain Other Compensation.............................. 13
Option Grants and Exercises................................................. 14
Employment Agreements....................................................... 17
Change in Control Arrangements.............................................. 17
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION..................... 19
Compensation Philosophy and Objectives...................................... 19
Executive Compensation Program Components................................... 20
Chief Executive Officer Compensation........................................ 21
Section 162(m).............................................................. 22
AUDIT COMMITTEE REPORT...................................................... 23
COMPARATIVE STOCK PERFORMANCE............................................... 24
CERTAIN TRANSACTIONS........................................................ 25
Director Relationship....................................................... 25
i
Amended and Restated Registration Rights Agreement.......................... 25
Employment Agreements....................................................... 25
GE Financing and Restructuring of GE Warrants............................... 25
Acquisition of Assets of SleepTec, Inc...................................... 26
PROPOSAL TO GRANT VOTING RIGHTS WITH RESPECT TO SHARES OF THE
COMPANY'S COMMON STOCK PURSUANT TO THE CONTROL SHARE
ACQUISITION ACT............................................................. 27
Proposal.................................................................... 27
Background.................................................................. 27
Vote Required............................................................... 29
Board Recommendation........................................................ 29
AMENDMENT TO THE 1999 EMPLOYEE STOCK PURCHASE PLAN.......................... 30
Proposed Amendment.......................................................... 30
Purpose of the Amendment.................................................... 30
Summary of the Purchase Plan................................................ 31
Federal Income Tax Consequences............................................. 34
Vote Required............................................................... 35
Board Recommendation........................................................ 35
APPROVAL OF THE MATERIAL TERMS OF THE PERFORMANCE GOALS
UNDER THE SELECT COMFORT CORPORATION EXECUTIVE AND KEY
EMPLOYEE INCENTIVE PLAN..................................................... 36
Proposal.................................................................... 36
Description of the Incentive Plan........................................... 36
Reason for Shareholder Approval............................................. 37
Vote Required............................................................... 38
Board Recommendation........................................................ 38
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS........................... 39
Appointment of Auditors..................................................... 39
Audit Fees.................................................................. 39
All Other Fees.............................................................. 39
Vote Required............................................................... 39
Board Recommendation........................................................ 39
OTHER MATTERS............................................................... 40
Section 16(a) Beneficial Ownership Reporting Compliance..................... 40
Shareholder Proposals for 2002 Annual Meeting............................... 40
Other Business.............................................................. 41
Copies of 2000 Annual Report................................................ 41
ii
[LOGO]
6105 TRENTON LANE NORTH
MINNEAPOLIS, MINNESOTA 55442
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PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
MAY 16, 2001
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INTRODUCTION
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This proxy statement is being mailed to our shareholders beginning on or about
April 4, 2001 in connection with the solicitation of proxies by the Board of
Directors for use at the Annual Meeting of Shareholders. The meeting will be
held on Wednesday, May 16, 2001, at 3:00 p.m., local time, at the Hilton Hotel
Minneapolis North, 2200 Freeway Boulevard, Brooklyn Center, Minnesota 55430, for
the purposes set forth in the Notice of Meeting.
Your vote is important. A proxy card is enclosed for your use. YOU ARE SOLICITED
ON BEHALF OF THE BOARD OF DIRECTORS, TO MARK, SIGN, DATE AND RETURN THE PROXY
CARD IN THE ACCOMPANYING ENVELOPE. No postage is required if mailed within the
United States.
Proxies will be voted as specified by you. Signed proxies that lack any such
specification will be voted in favor of the proposals set forth in the Notice of
Meeting and in favor of the election as directors of the three nominees for
directors listed in this proxy statement.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF THE PROPOSALS SET
FORTH IN THE NOTICE OF MEETING.
SHAREHOLDERS ENTITLED TO VOTE
Shareholders of record at the close of business on March 28, 2001 will be
entitled to vote at the meeting. As of that date, there were 18,055,633
outstanding shares of common stock. Each share is entitled to one vote on each
matter to be voted on at the Annual Meeting. Shareholders are not entitled to
cumulate voting rights.
REVOCATION OF PROXIES
Any shareholder giving a proxy may revoke it at any time prior to its use at the
Annual Meeting by:
o giving written notice of such revocation to the Secretary of the Company,
o filing a duly executed proxy bearing a later date with the Secretary of the
Company, or
o appearing at the Annual Meeting and filing written notice of revocation
with the Secretary of the Company prior to use of the proxy.
2
QUORUM REQUIREMENTS
The presence at the Annual Meeting, in person or by proxy, of the holders of a
majority of the outstanding shares of common stock entitled to vote at the
Annual Meeting (18,055,633 shares) will constitute a quorum for the transaction
of business at the Annual Meeting. In general, shares of common stock
represented by a properly signed and returned proxy card will be counted as
shares present and entitled to vote at the Annual Meeting for purposes of
determining a quorum, without regard to whether the card reflects abstentions
(or is left blank) or reflects a "broker non-vote" on a matter. A "broker
non-vote" is a card returned by a broker on behalf of its beneficial owner
customer that is not voted on a particular matter because voting instructions
have not been received, and the broker has no discretionary authority to vote.
VOTE REQUIRED
Assuming a quorum is represented at the Annual Meeting, either in person or by
proxy, the election of each of the nominees for director requires the
affirmative vote of the holders of a majority of the shares present and entitled
to vote in person or by proxy at the meeting. The proposal to approve the
acquisition by The St. Paul Companies, Inc. and certain of its affiliated
entities of 305,000 shares of the common stock of the Company under the
Minnesota Control Share Acquisition Act requires (1) the affirmative vote of the
holders of a majority of the voting power of all shares entitled to vote,
including all shares held by The St. Paul Companies, Inc. and its affiliates,
and (2) the affirmative vote of the holders of a majority of the voting power of
all shares entitled to vote excluding all shares held by The St. Paul Companies,
Inc. and its affiliates and excluding all shares held by any officer of the
Company. The approval of each of the other proposals described in this proxy
statement requires the affirmative vote of the holders of a majority of the
shares present and entitled to vote in person or by proxy at the meeting.
Shares represented by a proxy card that includes any broker non-votes on a
matter will be treated as shares not entitled to vote on that matter, and thus
will not be counted in determining whether that matter has been approved. Shares
represented by a proxy card voted as abstaining on any of the proposals will be
treated as shares present and entitled to vote that were not cast in favor of a
particular matter, and thus will be counted as votes against that matter. Signed
proxies that lack any specification will be voted in favor of each of the
proposals set forth in the Notice of Meeting and in favor of the election as
directors of each of the three nominees for directors listed in this proxy
statement.
PROXY SOLICITATION COSTS
The cost of soliciting proxies, including the preparation, assembly and mailing
of proxies and soliciting material, as well as the cost of forwarding such
material to the beneficial owners of our common stock will be borne by us. Our
directors, officers and regular employees may, without compensation other than
their regular compensation, solicit proxies by telephone, telegraph or personal
conversation. We may reimburse brokerage firms and others for expenses in
forwarding proxy materials to the beneficial owners of our common stock.
3
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information, as of December 31, 2000,
with respect to each person who was known by us to be the beneficial owner of
more than 5% of Select Comfort common stock.
SHARES OF COMMON STOCK
BENEFICIALLY OWNED (1)
------------------------
NAME AMOUNT PERCENT OF CLASS
- ------------------------------------------------------------ ---------- ----------------
St. Paul Venture Capital, Inc. (2) 7,015,406 37.3%
Consumer Venture Partners II, L. P. (3) 1,962,801 11.0%
General Electric Capital Corporation (4) 1,131,357 6.0%
- ------------------------
(1) Except as otherwise indicated in the footnotes to this table, the persons
named in the table have sole voting and dispositive power with respect to
all shares of common stock. Shares of common stock subject to options or
warrants currently exercisable or exercisable within 60 days 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 or group.
(2) Includes 4,806,022 shares held by St. Paul Fire and Marine Insurance
Company, 321,017 shares held by St. Paul Venture Capital IV, LLC and
955,900 shares held by St. Paul Venture Capital V, LLC. Includes (i) 59,769
shares issuable upon exercise of outstanding warrants held by St. Paul Fire
and Marine Insurance Co., (ii) 10,926 shares issuable upon exercise of
outstanding warrants and options held by St. Paul Venture Capital IV, LLC.,
(iii) 134,500 shares issuable upon exercise of outstanding options held by
St. Paul Venture Capital V, LLC, and (iv) 727,272 shares issuable upon
conversion of a convertible debenture held by St. Paul Venture Capital V,
LLC. The St. Paul Companies, Inc. owns all of the issued and outstanding
shares of capital stock of St. Paul Fire and Marine Insurance Co. The St.
Paul Fire and Marine Insurance Co. owns 99% of the membership interests in
St. Paul Venture Capital IV, LLC and St. Paul Venture Capital V, LLC.
Patrick A. Hopf, Chairman of the Board of Directors of the Company, is the
Managing General Partner of St. Paul Venture Capital IV, LLC and St. Paul
Venture Capital V, LLC. Does not include shares held of record by Mr. Hopf
or his family members. See "--Security Ownership of Management." The
address of St. Paul Venture Capital, Inc. is 10400 Viking Drive, Suite 550,
Eden Prairie, Minnesota 55344.
(3) Includes 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 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 "--Security Ownership of Management." The
address of Consumer Venture Partners II, L.P. is One Stamford Plaza, 263
Tresser Blvd., 16th Floor, Stamford, Connecticut 06901.
(4) Includes 1,131,357 shares issuable upon exercise of an outstanding warrant.
The address of General Electric Capital Corporation is 260 Long Ridge Road,
Stamford, Connecticut 06927.
4
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of Select Comfort common stock as of February 28, 2001 by each
director and nominee for director, by each executive officer named in the
Summary Compensation Table under the heading "Executive Compensation and Other
Benefits" and by all directors and executive officers of Select Comfort as a
group.
SHARES OF COMMON STOCK
BENEFICIALLY OWNED (1)
------------------------
NAME AMOUNT PERCENT OF CLASS
- ------------------------------------------------------------ ---------- ----------------
William R. McLaughlin (2) 127,333 *
Tracey T. Breazeale (3) 69,647 *
Mark A. Kimball (4) 108,248 *
Gregory T. Kliner (5) 122,597 *
Ronald E. Mayle (6) 205,352 1.1%
Patrick A. Hopf (7) 7,027,239 38.5%
Thomas J. Albani (8) 44,178 *
Christopher P. Kirchen (9) 2,009,387 11.1%
David T. Kollat (10) 44,178 *
Ervin R. Shames (11) 253,056 1.4%
Jean-Michel Valette (12) 19,914 *
All directors and executive officers
as a group (14 persons) (13) 10,117,317 52.8%
- ------------------------
* Less than 1% of the outstanding shares.
(1) Except as otherwise indicated in the footnotes to this table, the persons
named in the table have sole voting and dispositive power with respect to
all shares of common stock. Shares of common stock subject to options or
warrants currently exercisable or exercisable within 60 days 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 or group.
(2) Includes 108,333 shares issuable upon exercise of outstanding options.
5
(3) Includes 61,778 shares issuable upon exercise of outstanding options.
(4) Includes 84,694 shares issuable upon exercise of outstanding options.
(5) Includes 120,562 shares issuable upon exercise of outstanding options.
(6) Includes 194,556 shares issuable upon exercise of outstanding options.
(7) Includes (i) 8,000 shares held by Mr. Hopf's wife and children and (ii) an
aggregate of (A) 6,082,939 outstanding shares, (B) 209,028 shares issuable
upon exercise of outstanding options and warrants, and (C) 727,272 shares
issuable upon conversion of a convertible debenture, all of which are
beneficially owned by St. Paul Fire and Marine Insurance Company. See
"--Security Ownership of Certain Beneficial Owners." Mr. Hopf's address is
10400 Viking Drive, Suite 550, Eden Prairie, Minnesota 55344.
(8) Includes 6,583 shares issuable upon exercise of outstanding options.
(9) Includes 6,583 shares issuable upon exercise of outstanding options. Also
includes 1,962,801 shares beneficially owned by and Consumer Venture
Partners II, L.P., as to which Mr. Kirchen shares voting and dispositive
power. Mr. Kirchen has the same business address as Consumer Venture
Partners II, L. P. See "--Security Ownership of Certain Beneficial Owners."
(10) Includes 44,083 shares issuable upon exercise of outstanding options.
(11) Includes 103,056 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.
(12) Includes 6,583 shares issuable upon exercise of outstanding options. Also
includes 531 shares held by H&Q Select Comfort Investors, L.P., a related
party to Hambrecht & Quist LLC. 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.
(13) Includes an aggregate of 1,111,964 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 Fire
and Marine Insurance Company, Inc., H&Q Select Comfort Investors, L.P. and
Consumer Venture Partners II, L. P. See "--Security Ownership of Certain
Beneficial Owners."
6
ELECTION OF DIRECTORS
(PROPOSAL 1)
---------------------
NOMINATION
Article XIV of our Articles of Incorporation provides that the number of
directors must be at least one but not more than twelve and must be divided into
three classes as nearly equal in number as possible. The exact number of
directors is determined from time to time by the Board of Directors, and
currently consists of seven members. The term of each class is three years and
the term of one class expires each year in rotation.
The Board has nominated the following individuals to serve as directors of the
Company for terms of three years, expiring at the 2004 Annual Meeting of
Shareholders, or until their successors are elected and qualified:
o Thomas J. Albani
o David T. Kollat
o William R. McLaughlin
All of the nominees are current members of the Board.
VOTE REQUIRED
Assuming a quorum is represented at the Annual Meeting, either in person or by
proxy, the election of each nominee requires the affirmative vote of a majority
of the shares of common stock represented in person or by proxy at the Annual
Meeting.
BOARD RECOMMENDATION
The Board recommends a vote FOR the election of Messrs. Albani, Kollat and
McLaughlin. In the absence of other instructions, the proxies will be voted FOR
the election of each of Messrs. Albani, Kollat and McLaughlin.
If prior to the Annual Meeting the Board should learn that any nominee will be
unable to serve for any reason, the proxies that otherwise would have been voted
for such nominee will be voted for such substitute nominee as selected by the
Board. Alternatively, the proxies, at the Board's discretion, may be voted for
such fewer number of nominees as results from the inability of any such nominee
to serve. The Board has no reason to believe that any of the nominees will be
unable to serve.
7
INFORMATION ABOUT DIRECTORS
The following table sets forth certain information, as of March 31,
2001, that has been furnished to us by each director and each person who has
been nominated by the Board to serve as a director of the Company.
DIRECTOR
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE
- ----------------------------- ----- --------------------------------------- -----------
NOMINEES FOR THREE-YEAR TERMS EXPIRING IN 2004:
Thomas J. Albani (2) 58 Former President and Chief Executive 1994
Officer of Electrolux Corporation
David T. Kollat (2) 62 President and Chairman of 22 Inc. 1994
William R. McLaughlin 44 President and Chief Executive Officer 2000
of Select Comfort Corporation
DIRECTORS NOT STANDING FOR ELECTION THIS YEAR WHOSE TERMS EXPIRE IN 2002:
Christopher P. Kirchen (1)(3) 58 Managing General Partner of Brand 1991
Equity Ventures and General Partner
of Consumer Venture Partners
Jean-Michel Valette (3) 40 President and Chief Executive Officer 1994
of Franciscan Estates, Inc.
DIRECTORS NOT STANDING FOR ELECTION THIS YEAR WHOSE TERM EXPIRES IN 2003:
Patrick A. Hopf (1) 52 President of St. Paul Venture 1991
Capital, Inc.
Ervin R. Shames (1)(3) 60 Independent Management Consultant 1996
- ------------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
8
OTHER INFORMATION ABOUT DIRECTORS
THOMAS J. ALBANI has served as a director of Select Comfort 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. Mr. Albani also serves as a director of Dyersburg
Corporation.
DAVID T. KOLLAT has served as a director of Select Comfort 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, a
women's apparel retailer, 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 Corporation, Cooker Restaurant Corporation and Cone Mills
Corporation.
CHRISTOPHER P. KIRCHEN has served as a director of Select Comfort since December
1991. 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.
JEAN-MICHEL VALETTE has served as a director of Select Comfort since 1994. Mr.
Valette is an independent advisor to branded consumer companies. From August
1998 to May 2000, Mr. Valette served as President and Chief Executive Officer of
Franciscan Estates, Inc., the Fine Wine Division of Constellation Brands, Inc.
Mr. Valette was a Managing Director of Hambrecht & Quist LLC from October 1994
to August 1998 and served as a Senior Analyst at Hambrecht & Quist LLC from
November 1992 to October 1994. Hambrecht & Quist LLC was one of the underwriters
of the Company's initial public offering. Mr. Valette also serves as a director
of a number of privately held companies.
WILLIAM R. MCLAUGHLIN joined the Company in March 2000 as President and Chief
Executive Officer. From December 1988 to March 2000, Mr. McLaughlin served as an
executive of Pepsico Foods International in various capacities, including from
September 1996 to March 2000 as President of Frito Lay Europe, Middle East and
Africa, and from June 1993 to June 1996, as President of Grupo Gamesa, a cookie
and flour company based in Mexico.
PATRICK A. HOPF was elected Chairman of the Board of Directors in April 1999 and
has served as a director of Select Comfort since December 1991. Mr. Hopf also
served as the Chairman of the Board of Directors of the Company from August 1993
to April 1996. Mr. Hopf is President of St. Paul Venture Capital, Inc., a
venture capital firm, and is the Managing General Partner of St. Paul Venture
Capital IV, LLC and St. Paul Venture Capital V, LLC.
9
From August 1988 to January 1999, Mr. Hopf served as Vice President of St. Paul
Fire and Marine Insurance Company. St. Paul Venture Capital IV, LLC, St. Paul
Venture Capital V, LLC 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.
ERVIN R. SHAMES has served as a director of Select Comfort since April 1996.
From April 1996 to April 1999, Mr. Shames served as Chairman of the Board of
Directors. Since January 1995, Mr. Shames has served as an independent
management consultant to consumer goods and services companies, advising on
management and marketing strategy. Since 1996 he has been a visiting lecturer at
the University of Darden Graduate School of Business. 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. Mr. Shames serves as a director and as chairman of the
compensation committee of the board of directors of Online Resources
Corporation.
INFORMATION ABOUT THE BOARD AND ITS COMMITTEES
The Board of Directors met four times and took action by written consent on two
occasions during fiscal 2000. All of the current directors attended 75% or more
of the meetings of the Board and all such committees on which they served during
fiscal 2000.
The Board has a standing Executive Committee, a standing Audit Committee and a
standing Compensation Committee.
EXECUTIVE COMMITTEE. The Executive Committee consists of Messrs. Hopf, Kirchen
and Shames and has the authority to take all actions that the Board as a whole
is able to take, except as limited by applicable law. The Executive Committee
did not meet during fiscal 2000.
AUDIT COMMITTEE. 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 Audit Committee consisted of Messrs.
Albani, Kirchen and Kollat through March of 2000, and thereafter consisted of
Messrs. Kirchen, Shames and Valette. The Audit Committee met three times during
fiscal 2000.
COMPENSATION COMMITTEE. The Compensation Committee:
o reviews general programs of compensation and benefits for all employees of
the Company;
o makes recommendations to the Board concerning such matters as compensation
to be paid to the Company's officers and directors; and
o administers the Company's stock option and incentive plans, pursuant to
which stock options and other incentive awards may be granted to eligible
employees, officers, directors and consultants of the Company.
10
The Compensation Committee consisted of Messrs. Hopf, Shames and William J.
Lansing, a former director, through March of 2000, and thereafter consisted of
Messrs. Albani and Kollat. The Compensation Committee met or took action by
written consent on four occasions in fiscal 2000.
DIRECTOR COMPENSATION
MEETING FEES. All non-employee directors of the Company receive $3,500 for each
meeting of the Board of Directors attended and $500 for each committee meeting
attended.
STOCK OPTIONS. Each newly elected non-employee director is eligible for an
initial grant of options to purchase 20,000 shares of common stock at an
exercise price equal to the fair market value of the common stock on the date of
grant. These initial options become exercisable in equal monthly increments over
a 24-month period, so long as the director remains a director of Select Comfort.
After the vesting of this initial grant, each non-employee director is eligible
for an annual grant, subject to action by the Board and coincident with the
annual meeting of shareholders, of options to purchase 10,000 shares of common
stock at an exercise price equal to the fair market value of the common stock on
the date of the annual meeting of shareholders. These annual options become
exercisable in equal monthly increments over a 36-month period, so long as the
director remains a director of Select Comfort. All of the options granted to
directors remain exercisable for a period of up to 10 years after the date of
grant, subject to continuous service on the Board.
OPTION GRANTS FOR SERVICE AS CHAIRMAN OF THE BOARD. For service as Chairman of
the Board, in May 1999 the Board of Directors granted to St. Paul Venture
Capital V, LLC, an affiliate of Mr. Hopf's employer, St. Paul Venture Capital,
Inc., options to purchase a total of 250,000 shares exercisable at $15.38 per
share, of which 50,000 vest in equal monthly increments over 36 months, 50,000
vest at such time that the trading price of Select Comfort common stock has
exceeded $50.00 per share for at least 30 consecutive trading days, and 150,000
vest at such time that the trading price of Select Comfort common stock has
exceed $100.00 per share for at least 30 consecutive trading days.
OPTION GRANTS FOR SERVICE AS INTERIM PRESIDENT AND CEO. Mr. Hopf received no
cash compensation for his service as Interim President and CEO during 1999 or
2000. In consideration of such service, the Board of Directors granted to St.
Paul Venture Capital V, LLC, an affiliate of Mr. Hopf's employer, St. Paul
Venture Capital, Inc., 10,000 options per month for the months of July through
December 1999, and 27,000 options per month for the months of January and
February of 2000. Mr. Hopf's service as Interim President and CEO ceased after
February of 2000.
REIMBURSEMENT OF EXPENSES. All directors are reimbursed for travel expenses for
attending meetings of the Board and any Board committees.
NO DIRECTOR COMPENSATION FOR EMPLOYEE DIRECTORS. Directors who are employees of
the Company do not receive additional compensation for their services as
directors.
11
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Hopf, Lansing and Shames served as members of the Compensation Committee
of the Board of Directors through March of fiscal 2000, and thereafter the
Compensation Committee consisted of Messrs. Albani and Kollat. In the last half
of 1999 and the first two months of 2000, Mr. Hopf served as Interim President
and CEO of the Company pending the search for the successor to Mr. McAthie, who
resigned in July 1999. See "Election of Directors -- Director Compensation."
Mr. Hopf is the President of St. Paul Venture Capital, Inc. and Managing General
Partner of St. Paul Venture Capital IV, LLC, and St. Paul Venture Capital V,
LLC, which are investors in the Company. Mr. Hopf was elected Chairman of the
Board of Directors in April 1999 and previously served as Chairman of the Board
of Directors of the Company from August 1993 to April 1996.
For a description of certain transactions involving these entities, see "Certain
Transactions."
No other relationships existed during fiscal 2000 with respect to members of the
Compensation Committee that would be required to be disclosed under the rules of
the Securities Act of 1933.
12
EXECUTIVE COMPENSATION AND OTHER BENEFITS
-----------------------
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides summary information concerning cash and
non-cash compensation paid to or earned by each of the persons serving in the
capacity of Chief Executive Officer in 2000 and the four most highly compensated
executive officers other than the CEO serving as executive officers at the end
of 2000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ------------ ALL OTHER
SECURITIES COMPENSATION
UNDERLYING ------------
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)(1)
- --------------------------- ---- --------- ----------- ---------- ------
William R. McLaughlin (2) 2000 $ 390,372 $ 146,390 (3) 600,000 $ 123,428 (4)
President and Chief Executive 1999 -- -- -- --
Officer 1998 -- -- -- --
Patrick A. Hopf (5) 2000 -- -- 64,000 --
Interim President and Chief 1999 -- -- 50,000 --
Executive Officer 1998 -- -- -- --
Tracey T. Breazeale (6) 2000 200,000 30,808 36,000 2,400
Senior Vice President, 1999 71,923 30,000 100,000 105,008
Special Projects 1998 -- -- -- --
Mark A. Kimball (7) 2000 201,243 45,280 (3) 36,000 --
Senior Vice President, Chief 1999 117,788 -- 125,000 --
Administrative Officer, 1998 -- -- -- --
Secretary and General Counsel
Gregory T. Kliner 2000 186,992 42,073 (3) 28,000 2,400
Senior Vice President of 1999 183,197 -- 15,000 2,139
Operations 1998 157,574 52,204 15,000 2,628
Ronald E. Mayle (8) 2000 225,000 50,625 36,000 2,400
Senior Vice President of 1999 202,615 -- 80,000 13,077
Retail 1998 161,231 50,352 25,000 --
- ---------------------------
(1) Except as noted, the amounts disclosed for each individual represent Select
Comfort's contributions to the accounts of the named individuals in Select
Comfort's 401(k) defined contribution plan.
(2) Mr. McLaughlin became President and Chief Executive Office on March 21,
2000.
(3) Represents bonuses accrued in 2000, the payment of which is deferred
pending the achievement of quarterly profitability by the Company.
(4) Includes $2,106 in contributions to the account of Mr. McLaughlin in Select
Comfort's 401(k) defined contribution plan and $121,322 in payment for
reimbursement of relocation expenses.
13
(5) Mr. Hopf was Interim President and Chief Executive Officer of the Company
from July 19, 1999 to March 20, 2000. Includes 114,000 shares issuable upon
exercise of outstanding options issued to St. Paul Venture Capital IV, LLC.
(6) Ms. Breazeale became Senior Vice President of Strategic Planning and
Branding on August 2, 1999. On February 1, 2001 Ms. Breazeale became Senior
Vice President, Special Projects and her work schedule was reduced to 25%
of full time, with a proportionate reduction in salary.
(7) Mr. Kimball became Senior Vice President, Chief Administrative Officer,
Secretary and General Counsel on May 3, 1999.
(8) Mr. Mayle has resigned his position with the Company and will cease to
serve as an employee as of April 21, 2001.
OPTION GRANTS AND EXERCISES
The following tables summarize option grants and exercises during the
fiscal year ended December 30, 2000 to or by the Named Executive Officers and
the potential realizable value of the options held by such persons at December
30, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS (1)
-----------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES
SECURITIES GRANTED TO EXERCISE OF STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES OR BASE FOR OPTION TERM (2)
OPTIONS IN FISCAL PRICE EXPIRATION ----------------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5% 10%
- ---------------------- ------------ ----------- ---------- ---------- ----------------------------
William R. McLaughlin 50,000 (3) 3.8% $5.91 03/21/10 $ 185,473 $ 470,271
100,000 (4) 7.6% 5.91 03/21/10 370,945 940,542
150,000 (5) 11.5% 5.91 03/21/10 556,418 1,410,813
300,000 (6) 22.9% 5.91 03/22/10 1,113,222 2,822,826
Patrick A. Hopf (8) 27,000 (6) 2.1% 3.61 01/15/10 79,527 201,641
10,000 (7) 0.8% 4.72 01/28/10 28,774 72,947
27,000 (6) 2.1% 4.58 02/15/10 80,094 203,023
Tracey T. Breazeale 16,000 (6) 1.2% 4.38 02/02/10 44,349 112,129
20,000 (3) 1.5% 4.82 02/08/10 60,360 153,183
Mark A. Kimball 16,000 (6) 1.2% 4.38 02/02/10 44,349 112,129
20,000 (3) 1.5% 4.82 02/08/10 60,360 153,183
Gregory T. Kliner 8,000 (6) 0.6% 4.38 02/02/10 22,175 56,065
20,000 (3) 1.55 4.82 02/08/10 60,360 153,183
Ronald E. Mayle 16,000 (6) 1.2% 4.38 02/02/10 44,349 112,129
20,000 (3) 1.5% 4.82 02/08/10 60,360 153,183
- ----------------------
(1) All of the options granted to the Named Executive Officers were granted
under the Company's 1990 and 1997 Stock Incentive Plan.
14
(2) In accordance with the rules of the Securities and Exchange 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 when the average of the high and low sales
prices of the Company's common stock, as reported by the Nasdaq National
Market System, exceeds $12.00 per share for at least 30 consecutive trading
days.
(4) These options become exercisable when the average of the high and low sales
prices of the Company's common stock, as reported by the Nasdaq National
Market System, exceeds $24.00 per share for at least 30 consecutive trading
days.
(5) These options become exercisable when the average of the high and low sales
prices of the Company's common stock, as reported by the Nasdaq National
Market System, exceeds $36.00 per share for at least 30 consecutive trading
days.
(6) These options become exercisable in as nearly equal as possible monthly
installments over a 36-month period, so long as the executive remains
employed by the Company or one of its subsidiaries at that date. To the
extent not already exercisable, these options become immediately
exercisable in full upon certain changes in control of the Company and
remain exercisable for the remainder of their term.
(7) These options became immediately exercisable at the date of grant.
(8) Represents options granted to St. Paul Venture Capital V, LLC, an affiliate
of St. Paul Venture Capital, Inc., Mr. Hopf's employer.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES REALIZED OPTIONS AT DECEMBER 30, 2000 AT DECEMBER 30, 2000 (2)
ACQUIRED ON --------- ------------------------------ ----------------------------
NAME EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- ------------ --------- ----------- ------------- ----------- -------------
William R. McLaughlin --- --- 75,000 525,000 --- ---
Patrick A. Hopf --- --- 75,750 38,250 --- ---
Tracey T. Breazeale --- --- 48,889 87,111 --- ---
Mark A. Kimball --- --- 69,028 91,972 --- ---
Gregory T. Kliner --- --- 117,450 43,695 --- ---
Ronald E. Mayle --- --- 183,332 92,668 --- ---
- ----------------------
(1) Value based on the difference between the fair market value of one share of
common stock on the date of exercise and the exercise price of the option.
15
(2) Value based on the difference between the fair market value of one share of
common stock at December 30, 2000 ($1.4375) and the exercise price of the
options ranging from $4.08 to $17.00 per share. Options are in-the-money if
the market price of the shares exceeds the option exercise price.
(3) Includes 114,000 shares issuable upon exercise of outstanding options
granted to St. Paul Venture Capital V, LLC.
16
EMPLOYMENT AGREEMENTS
WILLIAM R. MCLAUGHLIN. We have entered into a letter agreement with William R.
McLaughlin pursuant to which he serves as President and CEO. Mr. McLaughlin
receives a base salary and is entitled to participate in the Company's incentive
compensation plans. Upon involuntary termination of Mr. McLaughlin's employment
by the Board or constructive dismissal, Mr. McLaughlin is entitled to one year's
salary as severance compensation and the unvested portion of his initial grant
of 300,000 options would become fully vested. Upon an involuntary termination or
constructive dismissal of Mr. McLaughlin's employment following a change in
control of the of Company, Mr. McLaughlin would be entitled to two years' salary
as severance compensation and his stock options would become fully vested.
TRACEY T. BREAZEALE. We have entered into a letter agreement with Tracey T.
Breazeale pursuant to which she serves as a Senior Vice President of the
Company. Ms. Breazeale receives a base salary and is entitled to participate in
the Company's incentive compensation plans. In February 2001, Ms. Breazeale's
work schedule was reduced to 25% of full time, with a proportionate reduction in
salary.
MARK A. KIMBALL. We have entered into a letter agreement with Mark A. Kimball
pursuant to which he serves as Senior Vice President, Chief Administrative
Officer, General Counsel and Secretary of the Company. Mr. Kimball receives a
base salary and is entitled to participate in the Company's incentive
compensation plans. Upon termination of Mr. Kimball's employment without cause,
Mr. Kimball is entitled to one year's salary as severance compensation.
GREGORY T. KLINER. We have entered into a letter agreement with Gregory T.
Kliner pursuant to which he serves as Senior Vice President of Operations of the
Company. Mr. Kliner receives a base salary and is entitled to participate in the
Company's incentive compensation plans.
RONALD E. MAYLE. We have entered into a letter agreement with Ronald E. Mayle
pursuant to which he serves as Senior Vice President of Retail. Mr. Mayle
receives a base salary and is entitled to participate in the Company's incentive
compensation plans.
CHANGE IN CONTROL ARRANGEMENTS
Under the Company's 1990 Omnibus Stock Option Plan (the "1990 Plan") and the
1997 Stock Incentive Plan (the "1997 Plan"), if a "change in control" of the
Company occurs, then, unless the Compensation Committee decides otherwise either
at the time of grant of an incentive award or at any time thereafter, all
outstanding options will become immediately exercisable in full and will remain
exercisable for the remainder of their terms, regardless of whether the
participant to whom such options have been granted remains in the employ or
service of the Company or any subsidiary.
In addition, under the 1997 Plan, if a "change in control" of the Company
occurs, then, unless the Compensation Committee decides otherwise either at the
time of grant of an incentive award or at any time thereafter:
o all outstanding stock appreciation rights will become immediately
exercisable in full and will remain exercisable for the remainder of their
terms, regardless of whether the participant to whom such stock
appreciation rights have been granted remains in the employ or service of
the Company or any subsidiary;
17
o all outstanding restricted stock awards will become immediately fully
vested and non-forfeitable; and
o all outstanding performance units and stock bonuses will vest and/or
continue to vest in the manner determined by the Compensation Committee and
set forth in the agreement evidencing such performance units or stock
bonuses.
In addition, the Compensation Committee may pay cash for all or a portion of the
outstanding options. The amount of cash the participants would receive will
equal (a) the fair market value of such shares immediately prior to the change
in control minus (b) the exercise price per share and any required tax
withholding. The acceleration of the exercisability of options under the 1990
and 1997 Plans may be limited, however, if the acceleration would be subject to
an excise tax imposed upon "excess parachute payments."
Under the 1990 and 1997 Plans, a "change in control" will include any of the
following:
o a merger involving the Company where the pre-merger shareholders own less
than 50% of the surviving company's voting stock (whether or not approved
by the Board of Directors);
o a transfer of substantially all of the Company's assets or liquidation of
the Company;
o ownership by any person or group of more than 50% of the Company's voting
stock;
o the "continuity" directors (directors as of the effective date of the Plan
and their future nominees) ceasing to constitute a majority of the Board of
Directors; or
o any change of control that is required by the Securities and Exchange
Commission to be reported.
Notwithstanding anything in the foregoing to the contrary, solely for purposes
of options granted under such plans prior to July 27, 1999, no change in control
will be deemed to have occurred for purposes of the 1990 and 1997 Plans by
virtue of any transaction which was approved by the affirmative vote of at least
a majority of the "continuity" directors, as defined above. For options granted
on or after July 27, 1999, each of the transactions constituting a change in
control as defined above will constitute a change in control for purposes of the
plans regardless of whether the transaction was approved by the continuity
directors.
18
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
---------------------------------
The Compensation Committee is comprised solely of non-employee directors and
consisted of Ervin R. Shames, Patrick A. Hopf and William J. Lansing through
March of 2000, and thereafter consisted of Thomas J. Albani and David T. Kollat.
The Compensation Committee makes recommendations to the Board of Directors
concerning the compensation and benefits of the Company's directors, executive
officers and key employees, and acts on such other matters relating to their
compensation as it deems appropriate. The Compensation Committee administers our
stock option plans, pursuant to which incentive stock options, non-statutory
stock options, restricted stock awards, stock appreciation rights, performance
units and stock bonuses may be granted to eligible employees, officers,
directors and consultants. The Compensation Committee also administers our
executive and key employee incentive plan, pursuant to which eligible employees
may be granted incentive compensation for achievement of Company and individual
performance targets.
COMPENSATION PHILOSOPHY AND OBJECTIVES
The philosophy underlying the decisions and recommendations of the Compensation
Committee is to encourage, recognize and reward results and achievements, at
both Company and individual levels, that are aligned with the interests of our
shareholders. Consistent with this philosophy, the objectives for the Company's
executive compensation programs are to:
o Motivate executives to achieve desired Company performance goals by
rewarding such achievements.
o Provide compensation that is competitive with comparable companies to
enable the Company to attract and retain key executive talent.
o Align the interests of the Company's executives with the interests of the
Company's shareholders.
In determining its recommendations as to the compensation of the Company's
executives, the Compensation Committee considers factors, such as Company
performance, both in isolation and in comparison to companies of comparable
size, development and complexity; the individual performance of executive
officers; historical compensation levels at the Company; the overall competitive
environment for executives and the level of compensation necessary to attract
and retain the talent necessary to achieve the Company's objectives. The
Compensation Committee places primary emphasis on Company performance (rather
than individual performance) as measured against goals approved by the
Compensation Committee. In analyzing these factors, the Compensation Committee
from time to time reviews competitive compensation data gathered in comparative
surveys or collected by independent consultants.
19
EXECUTIVE COMPENSATION PROGRAM COMPONENTS
The three principal components of Select Comfort's executive compensation
programs are base salary, annual incentive bonuses, and long-term incentive
opportunities under our stock option plans. Each of these components is
discussed in greater detail below.
BASE SALARY. The Compensation Committee's recommendations regarding the base
salary of the executive officers of the Company, including the compensation of
the President and Chief Executive Officer, are based on a number of factors,
including each executive officer's experience and qualifications, the potential
impact of the individual on the Company's performance, the level of skill and
responsibility required fulfill the individual's responsibilities and the other
factors described above. Base salaries are reviewed annually, and the
Compensation Committee seeks to set executive officer base salaries at
moderately to aggressively competitive levels in relation to the companies with
which the Company competes for executives. Base salaries for the executive
officers were increased at the beginning of 2000 in order to retain key members
of the management team to pursue the Company's turnaround plans. For 2001, base
salaries for the executive officers have been maintained at the same levels as
in 2000.
ANNUAL INCENTIVE BONUS. The Company's annual incentive bonus program is designed
to provide a direct financial incentive to the Company's executive officers,
including the President and Chief Executive Officer, as well as other key
employees, for achievement of specific Company performance goals. Consistent
with the requirements of the Company's Executive and Key Employee Incentive
Plan, at the beginning of each fiscal year, the Compensation Committee
determines:
o The employees by grade level that are eligible to participate in the plan
for the year;
o The quarterly and/or annual performance goal or goals (from among sales
growth and volume, net operating profit, cash flow, earnings per share,
return on capital, and/or return on assets) for the year; and
o For each eligible employee, (A) the target bonus level as a percentage of
base compensation, (B) the portion of the target bonus level that is based
on achievement of objective company performance goals, and (C) the portion
of the target bonus level, if any, that is based on achievement of
objective individual performance goals.
In fiscal 2000, the Compensation Committee established incentive compensation
for executive officers based on Company-wide operating profit and cash flow
targets, and also established minimum bonus levels in order to retain key
management team members to enable the Company to pursue its turnaround plans.
Payment of incentive compensation to executive officers related to fiscal 2000
has been deferred pending the return of the Company to quarterly profitability.
For fiscal 2001, incentive compensation for the executive officers is based
exclusively on Company-wide annual operating profit and cash flow performance
targets.
LONG-TERM INCENTIVE COMPENSATION. The Compensation Committee makes long-term
incentive compensation available to the Company's executive officers, as well as
to many other employees of the Company, through the grant of stock options. The
purpose of stock option grants is to advance the interests of the Company and
its shareholders by enabling the Company to attract and retain persons of
ability to
20
perform services for the Company, including persons performing services for the
Company as executive officers. By granting stock options to executive officers
and other employees, the Compensation Committee seeks to align the long-term
interests of these individuals with those of the Company's shareholders by
creating a strong and direct nexus between compensation and shareholder return
and to enable executive officers and key managers to develop and maintain a
significant ownership position in the Company. The Compensation Committee
determines the number of options and the terms and conditions of such options
based on certain factors, including (for grants to executive officers) the past
performance of the executive officer, the executive officer's potential impact
on the achievement of the Company's objectives, past grants or awards of
stock-based compensation, and comparative compensation data regarding option
grants by companies of comparable size and complexity. Additionally, options may
be granted to an executive officer as an incentive at the time the executive
officer joins the Company.
All options have an exercise price equal to 100% of the fair market value of the
common stock on the date of grant. In past periods, options have typically
become exercisable in 36 equal monthly increments over a 36-month period from
the date of grant. For option grants made in 2001, the options typically become
exercisable in three equal increments on each of the first three anniversaries
of the date of grant. Options typically remain exercisable for a period of 10
years from the date of grant, provided the individual continues to be employed
by the Company during such period. Alternatively, some option grants have been
"performance-based" and become fully exercisable upon the trading price of the
Company's common stock reaching or exceeding certain levels for at least 30 days
or upon the end of a five-year period from the date of grant.
In 2000, the Compensation Committee approved the grant of options to all
executive officers and key managers of the Company. The primary purposes of the
2000 stock option grants was to provide an incentive to newly hired executive
officers and managers, to retain previously employed executive officers and
managers, and to align the interests of all such executive officers and key
managers with the interests of the shareholders of the Company.
CHIEF EXECUTIVE OFFICER COMPENSATION
During fiscal 2000, two different people served in the capacity of President and
CEO for different parts of the year.
Patrick A. Hopf served as interim President and CEO from mid-July 1999 until
mid-March 2000, pending the search for a permanent President and CEO. Mr. Hopf
did not serve as, and was not compensated as, an employee of the Company. In
consideration for Mr. Hopf's service as interim President and CEO, the
Compensation Committee granted to St. Paul Venture Capital V, LLC, which is an
affiliate of Mr. Hopf's employer, 10,000 options per month for the first six
months and 27,000 options per month for the final two months of Mr. Hopf's
tenure.
William R. McLaughlin was hired as President and CEO in March 2000. The
principal terms of Mr. McLaughlin's compensation package include: (A) an annual
base salary of $500,000; (B) a cash bonus of between 0% and 100% of base salary;
and (C) options to purchase an aggregate of up to 600,000 shares of common
stock, including (i) up to 300,000 shares vesting in equal monthly increments
over 36 months, (ii) 50,000 shares vesting at such time that the trading price
of Select Comfort common stock exceeds $12.00 per share for 30 consecutive
trading days, (iii) 100,000 shares vesting at such time that the trading price
of Select Comfort common
21
stock exceeds $24.00 per share for 30 consecutive trading days, and (iv) 150,000
shares vesting at such time that the trading price of Select Comfort common
stock exceeds $36.00 per share for 30 consecutive trading days. The payment to
Mr. McLaughlin of incentive compensation in the amount of $146,390 accrued in
2000 has been deferred pending the achievement of a quarterly operating profit
by the Company.
In addition to the foregoing, Mr. McLaughlin (i) is entitled to participate in
standard employee benefit plans offered by the Company, (ii) was entitled to and
received reimbursement of relocation and temporary living expenses aggregating
$121,322 in 2000, (iii) is entitled to severance compensation in certain
circumstances, and (iv) is eligible for additional stock options as may be
granted from time to time by the Compensation Committee. See "Executive
Compensation and Other Benefits - Employment and Consulting Agreements."
The terms of Mr. McLaughlin's compensation were determined in part on the basis
of a survey completed by an independent consultant of compensation and benefits
payable to CEOs for companies of comparable size and complexity to Select
Comfort.
SECTION 162(M)
Section 162(m) of the Internal Revenue Code limits the deductibility of certain
compensation paid to the chief executive officer and each of the four other most
highly compensated executives of a publicly held corporation to $1,000,000. In
2000, the Company did not pay "compensation" within the meaning of Section
162(m) to any such executive officers in excess of $1,000,000.
The $1,000,000 limit on deductibility does not apply to compensation that meets
certain requirements for qualified performance-based compensation as further
described in the Internal Revenue Code. The Company's 1997 Stock Incentive Plan,
as well as the Executive and Key Employee Incentive Plan submitted for approval
by shareholders at the Annual Meeting, are designed to permit stock options or
cash incentive awards granted under the respective plans to qualify as
deductible performance-based compensation under the Internal Revenue Code. In
reviewing and adopting other executive compensation programs, the Compensation
Committee plans to continue to consider the impact of Section 162(m) limitations
in light of the materiality of the deductibility of potential benefits and the
impact of such limitations on other compensation objectives. Because the
Compensation Committee seeks to maintain flexibility in accomplishing the
Company's compensation goals, however, it has not adopted a policy that all
compensation must be fully deductible.
COMPENSATION COMMITTEE
Thomas J. Albani
David T. Kollat
22
AUDIT COMMITTEE REPORT
----------------
The Audit Committee of the Board of Directors is responsible for providing
independent, objective oversight of the Company's accounting functions and
internal controls. The Audit Committee is composed of 3 directors, each of whom
is independent as defined by the National Association of Securities Dealers'
listing standards, and operates under a written charter approved by the Board of
Directors. A copy of the charter is attached to this Proxy Statement as Appendix
A.
Management is responsible for the Company's internal controls and financial
reporting process. KPMG LLP, the Company's independent accountants, are
responsible for performing an independent audit of the Company's consolidated
financial statements in accordance with auditing standards generally accepted in
the United States of America and to issue a report thereon. The Audit
Committee's responsibility is to monitor and oversee these processes.
In connection with these responsibilities, the Audit Committee met with
management and the independent accountants. Management represented to the Audit
Committee that the Company's consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United States of
America, and the Audit Committee has reviewed and discussed the consolidated
financial statements with management and the independent accountants. The Audit
Committee discussed with the independent accountants the matters required by
Statement on Auditing Standards No. 61 (Communication with Audit Committees).
The Company's independent accountants also provided the Audit Committee written
disclosures required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees), and the Audit Committee
discussed with the independent accountants that firm's independence.
Based upon the Audit Committee's discussions with management and the independent
accountants, and the Audit Committee's review of the representations of
management and the independent accountants, the Audit Committee recommended that
the Board of Directors include the audited consolidated financial statements in
the Company's Annual Report on Form 10-K for the year ended December 30, 2000,
to be filed with the Securities and Exchange Commission.
AUDIT COMMITTEE
Christopher P. Kirchen, Chairman
Ervin R. Shames
Jean-Michel Valette
23
COMPARATIVE STOCK PERFORMANCE
-----------------
The graph below compares, for the period from December 3, 1998 through
December 30, 2000, the total cumulative shareholder return on Select Comfort
common stock to the total cumulative return on The Nasdaq Stock Market (U.S.)
Index and the Standard & Poor's 400 Retail (Specialty) Index. The graph assumes
a $100 investment in Select Comfort common stock, The Nasdaq Stock Market (U.S.)
Index and the Standard & Poor's 400 Retail (Specialty) Index on January 2, 2000
and the reinvestment of all dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG SELECT COMFORT CORPORATION, THE STANDARD & POOR'S 400 RETAIL
(SPECIALTY) INDEX AND THE NASDAQ STOCK MARKET (U.S.) INDEX
JANUARY 2, 2000 TO DECEMBER 30, 2000
CUMULATIVE TOTAL RETURN
-------------------------------------------------
12/3/98 1/2/99 1/01/00 12/30/00
------- ------ ------- --------
SELECT COMFORT CORPORATION 100.00 155.51 23.90 8.46
NASDAQ STOCK MARKET (US) 100.00 112.65 209.34 125.96
PEER GROUP 100.00 126.37 103.23 92.31
[GRAPHIC OMITTED]
24
CERTAIN TRANSACTIONS
---------------
DIRECTOR RELATIONSHIPS
Patrick A. Hopf, Chairman of the Board of Directors of Select Comfort, is the
President of St. Paul Venture Capital, Inc. Mr. Hopf is the Managing General
Partner of St. Paul Venture Capital IV, LLC and St. Paul Venture Capital V, LLC.
St. Paul Venture Capital IV, LLC, St. Paul Venture Capital V, LLC, St. Paul
Venture Capital Affiliates Fund I, LLC (each of which funds is managed by St.
Paul Venture Capital, Inc.) and St. Paul Fire and Marine Insurance Co. are
significant shareholders of the Company.
Christopher P. Kirchen, a director of Select Comfort, is a general partner of
Consumer Venture Associates II, L.P., which is the general partner of Consumer
Venture Partners II, L.P., a significant shareholder of the Company.
Jean-Michel Valette, a director of Select Comfort, 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 was one of the underwriters of the Company's initial public offering
completed in December 1998.
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
Certain holders of our common stock and warrants to purchase shares of our
common stock, including certain directors and more than 5% shareholders, have
certain demand and incidental registration rights covering such shares pursuant
to a certain Amended and Restated Registration Rights Agreement dated December
28, 1995, as amended, among the Company and the other parties thereto.
EMPLOYMENT AGREEMENTS
For a discussion of the employment agreements entered into by the Company and
certain Named Executive Officers, see "Executive Compensation and Other
Benefits--Employment Agreements."
GE FINANCING AND RESTRUCTURING OF GE WARRANTS
In March 1997, we entered into a Purchase Agreement with General Electric
Capital Corporation ("GECC"), pursuant to which we issued to GECC a senior
subordinated promissory note in the principal amount of $15.0 million. We repaid
this note in full in December 1998 with a portion of the net proceeds of our
initial public offering. In addition to this note, we issued to GECC 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 warrant providing contingent rights to
purchase up to 1,000,000 shares of common stock at an exercise price of $.01
25
after May 1, 1999, subject to adjustment and cancellation upon the occurrence of
certain events.
Effective in March 1998, the Company and GECC restructured these warrants by
combining them into one 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 our Series E preferred stock, we issued an additional
warrant to GECC to purchase 5,513 shares of common stock at an exercise price of
$8.82 per share. In December 1998, in connection with our initial public
offering, GECC exercised a portion of this warrant and as of January 1, 2000,
held a combined warrant to purchase 1,076,098 shares of common stock. By
operation of certain anti-dilution provisions in GECC's warrant, as of December
31, 2000, GECC's warrant represented the rights to acquire 1,131,357 shares at
an exercise price of $8.39 per share. GECC has certain demand and incidental
registration rights covering the shares of common stock issuable upon exercise
of this warrant.
ACQUISITION OF ASSETS OF SLEEPTEC, INC.
In May 1999, the Company entered into a Series C Preferred Stock Purchase
Agreement pursuant to which the Company invested $2,000,000 in SleepTec, Inc., a
developer and manufacturer of sofa sleepers with air supported mattresses, in
exchange for 57% of the Series C Convertible Preferred Stock of SleepTec,
representing approximately 10.3% of the fully diluted equity of SleepTec at that
time. In December 1999, the Series C Convertible Preferred Stock of SleepTec was
split on a 1.45714 for 1 basis. As a result of this stock split, the Company's
investment in the Series C Convertible Preferred Stock of SleepTec represented
approximately 13.55% of the fully diluted equity of SleepTec at that time.
Affiliates of St. Paul Venture Capital, Inc. own a majority of the outstanding
capital stock of SleepTec. Patrick A. Hopf, the Chairman of the Board of
Directors of Select Comfort, is the President of St. Paul Venture Capital, Inc.
and a member of the Board of Directors of SleepTec, Inc.
In November 2000, the Company acquired substantially all of the business and
assets of SleepTec. The aggregate purchase price paid by the Company for the
assets of SleepTec consisted of (i) a non-interest-bearing subordinated
convertible debenture in the original principal amount $4,000,000 due November
10, 2005 and convertible at any time into shares of the Company's common stock
at the rate of $5.50 per share; (ii) $400,000 in cash; and (iii) $250,000 in a
combination of cash and equity (in the form of options) to employees of SleepTec
for transition services and severance compensation.
In fiscal 2000, the Company purchased product in the amount of $377,000 from
SleepTec.
All of the terms of the Company's relationship with and acquisition of SleepTec
were determined through arm's-length negotiations and management believes that
all such terms are no less favorable than terms available from any unrelated
party.
26
PROPOSAL TO GRANT VOTING RIGHTS WITH RESPECT TO SHARES OF THE COMPANY'S COMMON
STOCK PURSUANT TO THE CONTROL SHARE ACQUISITION ACT
(PROPOSAL 2)
----------------------------------
PROPOSAL
At the Annual Meeting, shareholders will be asked to consider and vote on the
following proposed resolution:
"RESOLVED, that pursuant to Section 302A.671, Subd. 4a of the Minnesota Business
Corporation Act, full voting rights are hereby granted to all shares of common
stock, par value $.01 per share, of Select Comfort Corporation (the "Company")
that are, or hereafter become, beneficially owned by The St. Paul Companies,
Inc. ("The St. Paul") or any person or entity affiliated with The St. Paul,
including without limitation St. Paul Fire and Marine Insurance Company, St.
Paul Venture Capital IV, LLC, St. Paul Venture Capital V, LLC, or St. Paul
Venture Capital VI, LLC (The St. Paul and such affiliated entities are
collectively referred to as "St. Paul"), regardless of whether such shares are
or were acquired in a control share acquisition as defined in Section 302A.011,
Subd. 38, or otherwise, provided that, so long as the provisions of Section
302A.671 of the Minnesota Business Corporation Act continue to apply to the
Company, in no event shall St. Paul be granted voting rights with respect to
shares beneficially owned which exceed 50% of the outstanding voting power of
the Company without a separate vote of shareholders."
BACKGROUND
Section 302A.671 of the Minnesota Business Corporation Act, and related
definitions (the "Control Share Acquisition Act"), can operate to restrict the
voting power of shares held by a shareholder if the shares are acquired in a
"control share acquisition" (as defined) that exceeds a certain percentage
voting threshold. There are three relevant thresholds, expressed as a percentage
of outstanding voting power, under the Control Share Acquisition Act: (i) at
least 20% but less than 33-1/3%; (ii) at least 33-1/3% but less than or equal to
50%; and (iii) over 50%.
For example, if an "acquiring person" (as defined) acquires shares in a control
share acquisition that results in the total beneficial ownership of the
acquiring person equaling or exceeding the 20% threshold, the acquiring person
may only exercise voting power with respect to the number of shares that
represent less than 20% of the outstanding voting power of that company. The
Control Share Acquisition Act removes the voting power from the number of shares
acquired in a "control share acquisition" (as defined) that are in excess of the
20% beneficial ownership threshold. The voting power is restored only if
approved by the required votes of that company's shareholders.
The acquiring person may request that a resolution be put before the
shareholders to authorize the restoration of voting rights for the shares
27
acquired in excess of the threshold. In addition, the acquiring person must file
an information statement with the company containing certain information for
inclusion in the company's proxy statement. If the shareholders approve the
restoration of voting power, the acquiring person will have full voting rights
with respect to the shares acquired in excess of the threshold and full voting
rights with respect to any additional shares that may be acquired by the
acquiring person up to the next threshold. For example, an acquiring person who
seeks and obtains approval of the shareholders to vote all shares in excess of
the 33.3% threshold, may only exercise voting rights with respect to shares
acquired up to the 50% threshold; if the acquiring person's beneficial ownership
through a control share acquisition exceeds 50% of the outstanding voting power,
the shares acquired in a control share acquisition in excess of the 50%
threshold will become non-voting unless voting power is restored by the
shareholders. A COPY OF THE CONTROL SHARE ACQUISITION ACT IS INCLUDED AS
APPENDIX A ATTACHED TO THIS PROXY STATEMENT.
In compliance with the Control Share Acquisition Act, The St. Paul Companies,
Inc. and certain of its affiliated entities named in the proposed resolution
(hereinafter collectively referred to as "St. Paul"), have submitted an
Information Statement and requested that the Company seek shareholder approval
of the above resolution at the Annual Meeting. A COPY OF THE INFORMATION
STATEMENT SUBMITTED BY ST. PAUL IS INCLUDED AS APPENDIX B ATTACHED TO THIS PROXY
STATEMENT. The following background information is derived in part from the
Information Statement:
Between September 8, 2000 and September 18, 2000, St. Paul Venture Capital V,
LLC ("SPVC V") purchased 305,000 shares of Select Comfort common stock in open
market brokerage transactions for aggregate purchase consideration of $876,418
(including brokers' commissions), representing an average price of $2.87 per
share. Corporate funds of SPVC V were used to purchase these shares.
Prior to the acquisition of the 305,000 shares in the transactions described
above, St. Paul beneficially owned 5,972,495 shares of Select Comfort common
stock, representing 33.1% of the outstanding voting power. Following the
acquisition of the 305,000 shares in the transactions described above, St. Paul
beneficially owned 6,277,495 shares, representing 34.8% of the outstanding
voting power. Of the 6,277,495 shares beneficially owned by St. Paul at the time
of the control share acquisition as described above, 271,056 shares have no
voting rights unless the resolution set forth above is approved by the requisite
votes of the shareholders at the Annual Meeting.
Subsequent to the transactions described above, St. Paul has also become the
beneficial owner of a Convertible Subordinated Debenture in the principal amount
of $4,000,000 that was issued by the Company as consideration for the
acquisition of the assets of SleepTec. As the debenture is convertible into
shares of Select Comfort common stock at a price of $5.50 per share, St. Paul
has the right to acquire 727,272 shares of Select Comfort common stock upon
conversion of the debenture. See " Certain Transactions - Acquisition of Assets
of SleepTec, Inc." Though the shares underlying the debenture do not carry any
voting rights until the shares are issued upon conversion of the debenture, St.
Paul's rights to vote these shares upon issuance would not be restricted by the
Control Share Acquisition Act because:
28
o Beneficial ownership of these shares was acquired in an independent
transaction after the 33.3% threshold was exceeded (as a result of the
September 2000 purchases by SPVC V) and the beneficial ownership of these
shares did not result in St. Paul reaching a "new range of voting power"
under the Control Share Acquisition Act; and
o The shares of common stock issued upon conversion of the debenture would be
shares acquired directly from the company and such acquisitions are not
included within the definition of a "control share acquisition" under the
Control Share Acquisition Act.
Patrick A. Hopf, the Chairman of the Board of Directors of the Company, is the
President of St. Paul Venture Capital, Inc., which is the manager of St. Paul
Venture Capital IV, LLC and St. Paul Venture Capital V, LLC. Each of these LLCs
is 99% owned by St. Paul Fire and Marine Insurance Company, which is a wholly
owned subsidiary of The St. Paul Companies, Inc.
VOTE REQUIRED
Under the Control Share Acquisition Act, the proposal being presented would
enable St. Paul to vote all shares of common stock that it currently holds, and
any subsequently acquired shares up to an aggregate of 50% of the outstanding
voting power of the Company. The proposal must receive the following affirmative
votes to be approved:
(1) The affirmative vote, whether in person or by proxy, of the holders of a
majority of all the outstanding common stock; and
(2) The affirmative vote, whether in person or by proxy, of the holders of a
majority of all the outstanding common stock, excluding "interested shares"
as that term is defined in the Minnesota statutes.
Under Minnesota Statutes, "interested shares" means shares owned by St. Paul, by
officers of the Company or by any employee of the Company who is also a director
of the Company. As of the record date:
(1) 18,055,633 shares of common stock were outstanding and entitled to vote at
the Annual Meeting; and
(2) 6,166,255 shares of common stock were considered "interested shares,"
including 6,082,939 shares beneficially owned by St. Paul and 83,316 shares
owned by officers of the Company.
See "Security Ownership of Certain Beneficial Owners and Management."
BOARD RECOMMENDATION
The Board of Directors recommends that the shareholders vote FOR approval of the
resolution to grant St. Paul full voting rights with respect to shares of the
Company's common stock held by St. Paul pursuant to the Control Share
Acquisition Act.
29
PROPOSAL TO AMEND THE
1999 EMPLOYEE STOCK PURCHASE PLAN
(PROPOSAL 3)
PROPOSED AMENDMENT
On June 10, 1999, the Board of Directors adopted the 1999 Employee Stock
Purchase Plan (the "Purchase Plan"), which was approved by our shareholders on
May 18, 2000. On February 13, 2001, the Board amended the Purchase Plan to
increase the number of shares reserved for issuance under the Purchase Plan by
500,000 shares, from 500,000 shares to a total of 1,000,000 shares. You are
being asked to approve this amendment at the Annual Meeting.
PURPOSE OF THE AMENDMENT
The Purchase Plan allows eligible employees of Select Comfort and its
subsidiaries to purchase shares of common stock on favorable terms through
payroll deductions. Under the Purchase Plan, Select Comfort conducts a series of
offerings of its common stock, each continuing for a period of three months (the
"Offering Period") and each beginning on January 1, April 1, July 1 and October
1 of each year, as the case may be (the "Offering Commencement Date"), and
ending on the following March 31, June 30, September 30 and December 31, as the
case may be (the "Offering Termination Date"). On each Offering Commencement
Date, each eligible participating employee (the "Participant") in the Purchase
Plan will be granted, by operation of the Purchase Plan, an option (a "Purchase
Plan Option") to purchase as many full shares of common stock as can be
purchased with payroll deductions authorized by the Participant and credited to
the Participant's account during that Offering Period.
The purpose of the Purchase Plan is to advance the interests of Select Comfort
and its shareholders by allowing employees of Select Comfort and its
subsidiaries the opportunity to acquire an ownership interest in Select Comfort
through these purchases.
At the time that the Purchase Plan was originally approved by the Board and the
shareholders, 500,000 shares were reserved for issuance under the plan. Through
the end of the 2000 fiscal year, the Company had issued an aggregate of
222,632 shares under the Purchase Plan. Based on current participation
levels in the plan and the current trading price of the Company's common stock,
the originally reserved shares would be depleted during the second quarter of
fiscal 2001. Without approval of the increase in the number of shares available
under the Purchase Plan, the Company may be forced to terminate the plan,
removing an important benefit to our employees that is designed to align the
interests of our employees with those of our shareholders.
The major features of the Purchase Plan are summarized below, which summary is
qualified in its entirety by reference to the actual text of the Purchase Plan,
a copy of which may be obtained from Select Comfort.
30
SUMMARY OF THE PURCHASE PLAN
GENERAL. Any employee (including any executive officer) of Select Comfort or any
participating subsidiary, other than an employee whose customary employment is
five months or less per calendar year, who has been continuously employed by
Select Comfort or a subsidiary prior to the Offering Commencement Date for an
Offering Period will be eligible to participate in that Offering Period.
Subject to approval by the shareholders of the proposed amendment of the
Purchase Plan, the maximum number of shares of common stock available for
issuance under the Purchase Plan is 1,000,000 shares. Any shares of common stock
that are subject to a Purchase Plan Option that terminates unexercised will
automatically become available again for issuance under the Purchase Plan. The
number and type of securities subject to outstanding Purchase Plan Options and
the exercise price of outstanding Purchase Plan Options will be appropriately
adjusted by the Company in the event of any common stock dividend, split-up,
recapitalization, merger, consolidation, combination or exchange or other change
in the corporate structure or shares of Select Comfort. If the total number of
shares that would otherwise be issuable on any Offering Termination Date exceeds
the number of shares then available under the Purchase Plan (after deduction of
all shares for which Purchase Plan Options have been exercised or are then
outstanding), Select Comfort will make a pro rata allocation of the shares
remaining available for Purchase Plan Option grants in as uniform and equitable
a manner as it deems appropriate.
The Compensation Committee (the "Committee") of the Board administers the
Purchase Plan. Members of the Committee are appointed from time to time by the
Board, serve at the pleasure of the Board, and may resign at any time upon
written notice to the Board. The Committee has the authority to make, administer
and interpret such rules and regulations as it deems necessary to administer the
Purchase Plan.
PARTICIPATION. An eligible employee may become a Participant in the Purchase
Plan by completing an enrollment form authorizing payroll deductions on the form
provided by Select Comfort and filing it with the Human Resources Department not
later than the 15th day of the month immediately preceding the Offering
Commencement Date of the first Offering Period in which the Participant wishes
to participate. Payroll deductions for a Participant will begin with the first
payroll following the applicable Offering Commencement Date and will continue
until the termination of the Purchase Plan, subject to withdrawal by the
Participant at any time as described below. An otherwise eligible employee will
not be granted a Purchase Plan Option under the Purchase Plan if, immediately
after the grant, the Participant would own shares of common stock and/or hold
outstanding options to purchase shares of common stock possessing 5% or more of
the total combined voting power or value of all classes of stock of Select
Comfort or of any subsidiary. As of March 1, 2001, approximately 1,700 persons
were eligible to participate in the Purchase Plan.
PAYROLL DEDUCTIONS. By completing and filing a participation form, a Participant
elects to have payroll deductions made from the Participant's total compensation
on each payday during the Offering Period at a rate equal to a whole percentage
from 1% to 15% of the total compensation that he or she would have received on
the payday (or such other minimum or maximum percentages as the Committee may
from time to time establish). No increases or decreases in the amount of payroll
31
deductions for a Participant may be made during an Offering Period. A
Participant may increase or decrease the rate of the Participant's payroll
deductions under the Purchase Plan for subsequent Offering Periods by completing
an amended enrollment form and filing it no later than the 15th day of the month
immediately preceding the Offering Commencement Date of the Offering Period for
which the increase or decrease is to become effective. A Participant may
discontinue participation in the Purchase Plan at any time as described below.
The funds accumulated through a Participant's payroll deductions under the
Purchase Plan are credited to an account established under the Purchase Plan for
the Participant. These funds are held by Select Comfort as part of its general
assets, usable for any corporate purpose, and Select Comfort is not obligated to
keep these funds separate from its other corporate funds. Participants will not
receive any interest from Select Comfort for the funds accumulated from their
payroll deductions under the Purchase Plan and may not make any separate cash
payment or contribution to such account.
PURCHASE OF SHARES. On each Offering Commencement Date, each Participant is
granted, by operation of the Purchase Plan, a Purchase Plan Option to purchase
as many full shares of common stock as he or she will be able to purchase with
the payroll deductions credited to the Participant's account during the Offering
Period plus the balance (if any) carried forward from the preceding Offering
Period. Unless a Participant withdraws from the Purchase Plan as described
below, the Participant's Purchase Plan Option will be exercised automatically on
the Offering Termination Date for the purchase of the number full of shares of
common stock that the accumulated payroll deductions in the Participant's
account on the Offering Termination Date will purchase at the applicable price,
determined in the manner described below. The number of shares of common stock
that may be purchased under the Purchase Plan, however, will be limited as
follows: (i) no Participant may purchase more than 2,000 shares of common stock
under the Purchase Plan in any given Offering Period; and (ii) no Participant
may be granted a Purchase Plan Option that permits such Participant's rights to
purchase common stock under the Purchase Plan and any other "employee stock
purchase plans" of Select Comfort and its subsidiaries to become exercisable at
a rate that exceeds $25,000 of fair market value of such shares of common stock
(determined at the time such Purchase Plan Option is granted) for each calendar
year in which such Purchase Plan Option is outstanding at any time.
The per share purchase price of the shares offered in a given Offering Period
will be 85% of the fair market value of one share of common stock on the
Offering Termination Date. For this purpose, the fair market value of the common
stock will be the average of the reported high and low sale prices of the common
stock as reported by the Nasdaq National Market on the applicable date or, if no
shares were traded on such day, as of the next preceding day on which there was
such a trade. On March 1, 2001 the average of the reported high and low sale
prices of the common stock on the Nasdaq National Market was $2.22 per share.
Shares purchased in an Offering Period will be issued as soon as practicable
after each Offering Termination Date. The Committee may determine, in its sole
32
discretion, the manner of delivery of shares of common stock purchased under the
Purchase Plan. No Participant will have any interest in any shares of common
stock subject to a Purchase Plan Option under the Purchase Plan until the
Purchase Plan Option has been exercised.
NON-TRANSFERABILITY OF PURCHASE PLAN OPTIONS. Neither payroll deductions
credited to a Participant's account nor any rights with regard to the exercise
of a Purchase Plan Option or to receive shares of common stock under the
Purchase Plan may be assigned, transferred, pledged or otherwise disposed of in
any way (other than by will, the laws of descent and distribution, or by
designation of a beneficiary as provided in the Purchase Plan). Any such attempt
at assignment, transfer, pledge or other disposition will have no effect, except
that Select Comfort may treat such act as an election to withdraw from the
Purchase Plan, in which case the provisions described below will apply.
WITHDRAWAL AND TERMINATION OF EMPLOYMENT. A Participant may terminate
participation in the Purchase Plan and withdraw all, but not less than all, of
the payroll deductions credited to the Participant's account under the Purchase
Plan prior to the Offering Termination Date of an Offering Period by giving
written notice to Select Comfort no later than the 15th day of the last month of
the Offering Period. The notice must state the Participant's desire to terminate
involvement in the Purchase Plan, specify a termination date and request the
withdrawal of all of the Participant's payroll deductions held under the
Purchase Plan. All of the Participant's payroll deductions credited to the
Participant's account will be paid to such Participant as soon as practicable
after the termination date specified in the notice (or, if no date is specified,
as soon as practicable after receipt of the notice of termination and
withdrawal), the Purchase Plan Option for the Offering Period will automatically
be canceled, and no further payroll deductions for the purchase of shares of
common stock will be made during the Offering Period or for any subsequent
Offering Period unless a new enrollment form is filed. A Participant's
withdrawal from an Offering Period will not have any effect upon the
Participant's eligibility to participate in a succeeding Offering Period or in
any similar plan that Select Comfort may adopt.
Upon termination of a Participant's employment for any reason, including
retirement, death or disability, the payroll deductions credited to such
Participant's account will be returned as soon as practicable after the
effective date of termination (or, in the case of the Participant's death, to
the person or persons entitled to such funds according to the provisions
described above under the section "Non-Transferability of Purchase Plan
Options") and the Participant's Purchase Plan Option will automatically be
canceled. A transfer of employment between Select Comfort and a subsidiary or
between subsidiaries and absences or leaves approved by Select Comfort are not
considered termination of employment under the Purchase Plan.
33
FEDERAL INCOME TAX CONSEQUENCES
The following general description of federal income tax consequences is based
upon current statutes, regulations and interpretations. This description is not
intended to address specific tax consequences applicable to an individual
participant who receives a Purchase Plan Option and does not address special
rules that may be applicable to directors, officers and greater-than-10%
stockholders of Select Comfort.
The Purchase Plan is intended to qualify as an "employee stock purchase plan"
under Section 423 of the Code. If the Purchase Plan so qualifies, the amount
withheld from a Participant's compensation under the Purchase Plan will
constitute ordinary income for federal income tax purposes in the year in which
such amounts would otherwise have been paid to the Participant. However, a
Participant will generally not recognize any income for federal income tax
purposes either on the grant of a Purchase Plan Option or upon the issuance of
any shares of common stock under the Purchase Plan.
The federal income tax consequences of disposing of shares of common stock
acquired under the Purchase Plan depend upon how long a Participant holds the
shares. If a Participant disposes of shares acquired under the Purchase Plan
(other than a transfer by reason of death) within a period of two years from the
Offering Commencement Date of the Offering Period in which the shares were
acquired, an amount equal to the difference between the purchase price and the
fair market value of the shares on the last day of the Offering Period will be
treated as ordinary income for federal income tax purposes in the taxable year
in which the disposition takes place. Such amount may be subject to wage
withholding. The difference between the amount realized upon such disposition of
the shares and their fair market value on the last day of the Offering Period
will constitute capital gain or loss. Whether the gain (or loss) constitutes
long-term or short-term capital gain (or loss) will depend upon the length of
time the Participant held the stock prior to its disposition. Participants
should consult their tax advisors to determine whether any specific gain (or
loss) constitutes long-term or short-term capital gain (or loss).
If a Participant disposes of any shares acquired under the Purchase Plan more
than two years after the Offering Commencement Date of the Offering Period in
which such shares were acquired (or if no disposition has occurred by the time
of Participant's death) an amount equal to the lesser of (a) the excess of the
fair market value of the shares at the time of disposition (or death) over the
purchase price, or (b) the excess of the fair market value of the shares on the
Offering Commencement Date of the Offering Period in which the shares were
acquired over the purchase price will be recognized as ordinary income and may
be subject to wage withholding. With respect to a disposition of such shares,
any remaining gain on such disposition will be taxed as long-term capital gain.
With respect to a transfer of such shares upon death, any remaining gain or loss
will not be recognized. However, a subsequent sale or exchange of such shares by
a Participant's estate or the person receiving such shares by reason of the
Participant's death may result in capital gain or loss.
No income tax deduction ordinarily is allowed to Select Comfort with respect to
the grant of any Purchase Plan Option, the issuance of any shares of common
stock under the Purchase Plan or the disposition of any shares acquired under
the Purchase Plan and held for two years. However, if a Participant disposes of
34
shares purchased under the Purchase Plan within two years after the Offering
Commencement Date of the Offering Period in which the shares were acquired,
Select Comfort will receive an income tax deduction in the year of such
disposition in an amount equal to the amount constituting ordinary income to the
Participant, provided that Select Comfort complies with the applicable wage
withholding requirements.
VOTE REQUIRED
Approval of the amendment of the 1999 Employee Stock Purchase Plan to increase
the number of shares reserved for issuance by 500,000 shares, from 500,000
shares to 1,000,000 shares requires the affirmative vote of the holders of a
majority of the shares of common stock present and entitled to vote in person or
by proxy on the matter at the Annual Meeting, and the affirmative vote of at
least a majority of the minimum number of votes necessary for a quorum.
BOARD OF DIRECTORS RECOMMENDATION
The Board of Directors recommends that the shareholders vote FOR approval of the
amendment of the 1999 Employee Stock Purchase Plan. Unless a contrary choice is
specified, proxies solicited by the Board of Directors will be voted FOR
approval of the amendment of the 1999 Employee Stock Purchase Plan.
35
APPROVAL OF THE MATERIAL TERMS OF THE
PERFORMANCE GOALS UNDER THE SELECT COMFORT CORPORATION EXECUTIVE
AND KEY EMPLOYEE INCENTIVE PLAN
(PROPOSAL 4)
PROPOSAL
At the Annual Meeting, shareholders will be requested to consider and act upon a
proposal to approve the material terms of the performance goals under the Select
Comfort Corporation Executive and Key Employee Incentive Plan (the "Incentive
Plan"). On February 13, 2001, the Board of Directors approved the Incentive
Plan, subject to approval by shareholders of the material terms of the objective
performance goals under the Incentive Plan (the "Performance Goals"). The
purposes of the Incentive Plan are to (i) enable the Company to attract and
retain high caliber executives and key employees; (ii) provide incentive
compensation for such executives and key employees that is linked to the growth
and profitability of the Company and increases in shareholder value; and (iii)
further the identity of interests of such executives and key employees with the
interests of our shareholders. Although no shareholder approval is required for
the Company to enact and maintain the Incentive Plan, shareholder approval of
the Performance Goals is required to obtain tax deductibility by the Company of
awards payable under the Incentive Plan.
The principal features of the Incentive Plan are summarized below, which summary
is qualified in its entirety by reference to the actual text of the Incentive
Plan, a copy of which may be obtained from Select Comfort.
DESCRIPTION OF THE INCENTIVE PLAN
Below is a summary of certain important features of the Incentive Plan and a
description of the Performance Goals under the Incentive Plan that shareholders
are being asked to approve.
Administration. The Compensation Committee will administer the Incentive Plan.
Under the terms of the Incentive Plan, at the beginning of each fiscal year, the
Compensation Committee determines:
o The employees of the Company by grade level that will be eligible to
participate in the Incentive Plan for the fiscal year;
o The quarterly and/or annual specific measures and goals for the fiscal year
from among the objective Company-wide Performance Goals described below;
and
o For each level of employee: (i) the target incentive compensation award as
a percentage of base compensation, (ii) the portion of the target award to
be based on the objective Company-wide Performance Goals, and (iii) the
portion of the target award, if any, to be based on objective individual
performance goals.
Notwithstanding the foregoing, for the senior executive officers of the Company,
at least 75% of any award under the Incentive Plan must be based on objective
36
Company-wide Performance Goals and not more than 25% of any award may be based
on objective individual performance goals.
The Compensation Committee has full authority to make all decisions necessary to
administer the Incentive Plan, to interpret and enforce the terms and conditions
of the Incentive Plan and to determine the amounts payable to participants under
the Incentive Plan. The Compensation Committee has full authority to reduce or
eliminate the amount payable to any participant with respect to any award under
the Incentive Plan as may be necessary or appropriate in the discretion of the
Compensation Committee. All decisions of the Compensation Committee with respect
to any aspect of the Incentive Plan will be final, conclusive and binding for
all purposes.
Performance Goals. At the beginning of each fiscal year, the Compensation
Committee will determine the quarterly and/or annual specific measures and goals
that incentive compensation will be based upon from among the following possible
Performance Goals (all of which are determined on a consolidated Company-wide
basis):
o Sales growth or volume;
o Net operating profit before tax;
o Cash flow;
o Earnings per share;
o Return on capital; and
o Return on assets.
The foregoing Performance Goals are submitted for approval by the shareholders
at the Annual Meeting.
LIMITATION ON AWARDS. The maximum award payable to any participant under the
Incentive Plan shall not exceed either 200% of the participant's base salary or
$1,000,000.
PAYMENT OF AWARDS. Unless otherwise specified by the Compensation Committee,
awards under the Incentive Plan are payable in cash. No participant shall have a
right to an award under the Incentive Plan until the Compensation Committee
shall have taken final action granting the award. Awards shall be paid as soon
as practical following the period for which the award is payable, and in any
event within 45 days after the end of the quarter for quarterly awards and
within 90 days after the end of the year for annual awards.
The Compensation Committee has selected net operating profit before tax and cash
flow as the Performance Goals for the 2001 fiscal year. Approximately 100
employees in various management positions within the Company are potentially
eligible to participate in the Incentive Plan. The actual awards to be paid
under the Incentive Plan to executive officers or key employees cannot be
determined at this time since the awards are dependent on the level of
achievement against the Performance Goals.
REASON FOR SHAREHOLDER APPROVAL
The Incentive Plan has been designed to address certain limits on the ability of
a public corporation to claim tax deductions for compensation paid to certain
highly compensated executive officers. Section162(m) of the Internal Revenue
Code generally denies a corporate tax deduction for annual compensation
37
exceeding $1 million paid to the chief executive officer or to any of the four
other most highly compensated officers of a public corporation. See
"Compensation Committee Report on Executive Compensation - Section 162(m)."
However, "Qualified Incentive Plan compensation" is exempt from this limitation.
Qualified Incentive Plan compensation is compensation paid solely on the basis
of achievement of objective Performance Goals, the material terms of which are
approved by the shareholders of the public corporation. The shareholders of the
Company are thus being asked to approve the material terms of the objective
Performance Goals under the Incentive Plan, as described above.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the shares of common stock
present and entitled to vote in person or by proxy on this matter at the Annual
Meeting, and at least a majority of the minimum number of votes necessary for a
quorum, is necessary for approval.
BOARD RECOMMENDATION
The Board of Directors recommends that the shareholders vote FOR approval of the
Performance Goals under the Select Comfort Corporation Executive and Key
Employee Incentive Plan. Unless a contrary choice is specified, proxies
solicited by the Board will be voted FOR approval of the Performance Goals.
38
RATIFICATION OF SELECTION OF
INDEPENDENT AUDITORS
(PROPOSAL 5)
APPOINTMENT OF AUDITORS
The Board of Directors has appointed KPMG LLP, independent certified public
accountants, as our auditors for the year ending December 29, 2001. KPMG LLP has
acted as our independent auditors since 1993.
Although it is not required to do so, the Board wishes to submit the selection
of KPMG LLP to the shareholders for ratification. If you do not ratify the
appointment of KPMG LLP, the Board will consider another firm of independent
auditors.
Representatives of KPMG LLP will be present at the Annual Meeting, will have an
opportunity to make a statement if they so desire and will be available to
respond to appropriate questions.
AUDIT FEES
The aggregate fees billed to the Company by KPMG LLP for professional services
rendered for the audit of the Company's annual financial statements for fiscal
2000 and for review of the financial statements included in the Company's
quarterly reports on Form 10-Q for fiscal 2000 were $104,000.
ALL OTHER FEES
Other than audit fees described above, the aggregate fees billed to the Company
by KPMG LLP for all services, none of which were financial information systems
design or implementation fees, for fiscal 2000 were $14,000. The Audit Committee
has considered as a general matter the independence of KPMG, and has concluded
that the provision of the services described above is not incompatible with
maintaining KPMG LLP's independence.
VOTE REQUIRED
The affirmative vote of the holders of a majority of shares of common stock of
the Company present in person or by proxy at the Annual Meeting, assuming a
quorum is present, is necessary for approval.
BOARD RECOMMENDATION
The Board recommends a vote FOR ratification of the appointment of KPMG LLP as
our auditors for the year ending December 29, 2001. Unless a contrary choice is
specified, proxies solicited by the Board will be voted FOR the ratification of
KPMG LLP.
39
OTHER MATTERS
---------------
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers and all persons who beneficially own more than 10% of the
outstanding shares of our common stock to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
our common stock.
Executive officers, directors and greater than 10% beneficial owners are also
required to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based upon a review of the copies of such reports furnished to
us during the fiscal year ended December 30, 2000 and written representations by
such persons, one report on Form 4 relating to the purchase by William R.
McLaughlin of 2,000 shares in October, 2000 was inadvertently not timely filed
during 2000. All other transactions were reported on a timely basis.
SHAREHOLDER PROPOSALS FOR 2002 ANNUAL MEETING
Any shareholder proposal to be included in the proxy materials for the 2002
Annual Meeting of Shareholders must be received by the Company on or before
December 4, 2001.
Our Bylaws require advance written notice to the Company of shareholder-proposed
business or of a shareholder's intention to make a nomination for director at an
annual meeting of shareholders. They also limit the business, which may be
conducted at any special meeting of shareholders to business brought by the
Board.
Specifically, the Bylaws provide that business may be brought before an annual
meeting by a shareholder only if the shareholder provides written notice to the
Secretary of the Company not less than 120 days prior to the first anniversary
of the date that the Company first released or mailed its proxy statement to
shareholders in connection with the preceding year's annual meeting. In the
event, however, that the date of the annual meeting is advanced by more than 30
days or delayed by more than 60 days from the anniversary of the preceding
year's annual meeting date, notice by the shareholder to be timely must be so
delivered not later than the close of business on the later of the 120th day
prior to such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made.
A shareholder's notice must set forth:
o a description of the proposed business and the reasons for it,
o the name and address of the shareholder making the proposal,
o the class and number of shares of common stock owned by the shareholder,
and
o a description of any material interest of the shareholder in the proposed
business.
40
Our Bylaws also provide that a shareholder may nominate a director at an annual
meeting only after providing advance written notice to the Secretary of the
Company within the time limits described above. The shareholder's notice must
set forth all information about each nominee that would be required under SEC
rules in a proxy statement soliciting proxies for the election of such nominee,
as well as the nominee's business and residence address. The notice must also
set forth the name and record address of the shareholder making the nomination
and the class and number of shares of common stock owned by that shareholder.
OTHER BUSINESS
The management of the Company does not intend to present other items of business
and knows of no items of business that are likely to be brought before the
Annual Meeting except those described in this proxy statement.
However, if any other matters should properly come before the Annual Meeting,
the persons named in the enclosed proxy will have discretionary authority to
vote such proxy in accordance with the best judgment on such matters.
COPIES OF 2000 ANNUAL REPORT
We will furnish without charge a copy of our Annual Report on Form 10-K (without
exhibits) for the fiscal year ended December 30, 2000 upon receipt from any such
person of a written request for such an Annual Report.
Such request should be sent to:
Select Comfort Corporation
6105 Trenton Lane North
Minneapolis, Minnesota 55442
Attn: Shareholder Information
- --------------------------------------------------------------------------------
Your vote is important. Whether or not you plan to attend the Annual Meeting,
please vote your shares of common stock by marking, signing, dating and promptly
returning the enclosed proxy card in the envelope provided. No postage is
required for mailing in the United States.
By Order Of the Board of Directors
PRESIDENT AND CHIEF EXECUTIVE OFFICER
April 4, 2001
Minneapolis, Minnesota
41
APPENDIX A
SELECT COMFORT CORPORATION
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS CHARTER
(Effective March 2, 2000)
I. PURPOSE
The primary function of the Audit Committee is to assist the Board of
Directors in fulfilling its oversight responsibilities by reviewing: the
financial reports and other financial information provided by Select Comfort
Corporation (the "Company") to any governmental body or the public; the
Company's systems of internal controls regarding finance, accounting, legal
compliance and ethics that management and the Board have established; and the
Company's auditing, accounting and financial reporting processes generally.
Consistent with this function, the Audit Committee should encourage continuous
improvement of, and should foster adherence to, the Company's policies,
procedures and practices at all levels. The Audit Committee's primary duties and
responsibilities are to:
- - Serve as an independent and objective party to monitor the Company's
financial reporting process and internal control system.
- - Review and appraise the audit efforts of the Company's independent
auditors, KPMG LLP.
- - Provide an open avenue of communication among the independent auditors,
financial and senior management, and the Board of Directors.
The Audit Committee will primarily fulfill these responsibilities by
carrying out the activities enumerated in Section IV of this Charter.
II. COMPOSITION
The Audit Committee shall be comprised of three directors as determined
by the Board, each of whom shall be independent directors, and free from any
relationship that, in the opinion of the Board, would interfere with the
exercise of his or her independent judgment as a member of the Committee. A
director is not independent if the director:
- - is an employee of the company or an affiliate, or former employee within
three years, or an immediate family member of a current or former (within
three years) executive officer;
- - has received non-director compensation exceeding $60,000 during the prior
year (excluding benefits under a tax-qualified retirement plan);
- - is an affiliate of an entity that received payments in any of the past
three years exceeding the greater of $200,000 or five percent of either the
paying or receiving company's annual gross revenues; or
- - is an executive of another entity and any of the company's executives serve
on that entity's compensation committee.
All members of the Committee shall have a working familiarity with basic
finance and accounting practices, and at least one member of the Committee shall
have accounting or related financial management expertise (including prior
experience as CEO of an unrelated entity).
The members of the Committee shall be elected by the Board at the annual
organizational meeting of the Board or until their successors shall be duly
elected and qualified. Unless a Chair is elected by the full Board, the members
of the Committee may designate a Chair by majority vote of the full Committee
membership.
2
III. MEETINGS
The Committee shall meet at least two times annually, or more frequently
as circumstances dictate. As part of its job to foster open communication, the
Committee should meet at least annually with management and the independent
auditors in separate executive sessions to discuss any matters that the
Committee or each of these groups believe should be discussed privately. In
addition, the Committee or at least its Chair should meet with the independent
auditors and management quarterly to review the Company's financials consistent
with IV.4. below.
IV. RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties the Audit Committee shall:
DOCUMENTS/REPORTS REVIEW
1. Review and update this Charter periodically, at least annually, as
conditions dictate.
2. Review the Company's annual financial statements and any reports or other
financial information submitted to any governmental body, or the public,
including any certification, report, opinion, or review rendered by the
independent auditors.
3. Review the annual management recommendations to management prepared by the
independent auditors and management's response.
4. Review with financial management and the independent auditors the 10-Q
prior to its filing or prior to the release of earnings. The Chair of the
Committee may represent the entire Committee for purposes of this review.
3
INDEPENDENT AUDITORS
5. Recommend to the Board of Directors the selection of the independent
auditors, considering independence and effectiveness and approve the fees
and other compensation to be paid to the independent auditors. On an annual
basis, the Committee should review and discuss with the auditors all
significant relationships the auditors have with the Company to determine
the auditors' independence.
6. Review the performance of the independent auditors and approve any proposed
discharge of the independent auditors when circumstances warrant.
7. Periodically consult with the independent auditors out of the presence of
management about internal controls and the fullness and accuracy of the
Company's financial statements.
FINANCIAL REPORTING PROCESSES
8. In consultation with the independent auditors, review the integrity of the
Company's financial reporting processes, both internal and external.
9. Consider the independent auditors' judgments about the quality and
appropriateness of the Company's accounting principles as applied in its
financial reporting.
10. Consider and approve, if appropriate, major changes to the Company's
accounting principles and practices as suggested by the independent
auditors and management.
PROCESS IMPROVEMENT
11. Establish regular and separate systems of reporting to the Audit Committee
by each of management and the independent auditors regarding any
significant judgments made in management's preparation of the financial
statements and the view of each as to appropriateness of such judgments.
4
12. Following completion of the annual audit, review separately with each of
management and the independent auditors any significant difficulties
encountered during the course of the audit, including any restrictions on
the scope of work or access to required information.
13. Review any significant disagreement among management and the independent
auditors in connection with the preparation of the financial statements.
14. Review with the independent auditors and management the extent to which
changes or improvements in financial or accounting practices, as approved
by the Audit Committee, have been implemented. (This review should be
conducted at an appropriate time subsequent to implementation of changes or
improvements, as decided by the Committee.)
ETHICAL AND LEGAL COMPLIANCE
15. Establish, review and update periodically a Code of Ethical Conduct and
ensure that management has established a system to enforce this Code.
16. Review management's monitoring of the Company's compliance with the
Company's Ethical Code, and ensure that management has the proper review
system in place to ensure that Company's financial statements, reports and
other financial information disseminated to governmental organizations, and
the public satisfy legal requirements.
17. Review, with the Company's counsel, legal compliance matters including
corporate securities trading policies.
18. Review, with the Company's counsel, any legal matter that could have a
significant impact on the Company's financial statements.
19. Review Travel and Entertainment expenditures of President and CEO of the
Company.
5
20. Perform any other activities consistent with this charter, the Company's
By-laws and governing law, as the Committee or the Board deems necessary or
appropriate.
WHILE THE AUDIT COMMITTEE HAS THE RESPONSIBILITIES AND POWERS SET FORTH IN THIS
CHARTER, IT IS NOT THE DUTY OF THE AUDIT COMMITTEE TO DETERMINE THAT THE
COMPANY'S FINANCIAL STATEMENTS ARE COMPLETE AND ACCURATE AND ARE IN ACCORDANCE
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. THIS IS THE RESPONSIBILITY OF
MANAGEMENT. THE INDEPENDENT AUDITOR IS RESPONSIBLE TO PLAN AND CONDUCT THIS
AUDIT IN ACCORDANCE WITH GAAS. NOR IS IT THE DUTY OF THE AUDIT COMMITTEE TO
CONDUCT INVESTIGATIONS, TO RESOLVE DISAGREEMENTS, IF ANY, BETWEEN MANAGEMENT AND
THE INDEPENDENT AUDITOR OR TO ASSURE COMPLIANCE WITH LAWS AND REGULATIONS AND
THE COMPANY'S CODE OF CONDUCT.
6
APPENDIX B
MINNESOTA CONTROL SHARE ACQUISITION ACT
SECTION 302A.671. CONTROL SHARE ACQUISITIONS.
SUBDIVISION 1. APPLICATION. (a) Unless otherwise expressly provided in the
articles or in bylaws approved by the shareholders of an issuing public
corporation, this section applies to a control share acquisition. A
shareholder's proposal to amend the corporation's articles or bylaws to cause
this section to be inapplicable to the corporation requires the vote set forth
in subdivision 4a, paragraph (b), in order for it to be effective, unless it is
approved by a committee of the board comprised solely of directors who:
(1) are neither officers nor employees of, nor were during the five years
preceding the formation of the committee officers or employees of, the
corporation or a related organization;
(2) are neither acquiring persons nor affiliates or associates of an acquiring
person;
(3) were not nominated for election as directors by an acquiring person or an
affiliate or associate of an acquiring person; and
(4) were directors at the time an acquiring person became an acquiring person
or were nominated, elected, or recommended for election as directors by a
majority of those directors.
(b) The shares of an issuing public corporation acquired by an acquiring person
in a control share acquisition that exceed the threshold of voting power of any
of the ranges specified in subdivision 2, paragraph (d), shall have only the
voting rights as shall be accorded to them pursuant to subdivision 4a.
SUBD. 2. INFORMATION STATEMENT. An acquiring person shall deliver to the issuing
public corporation at its principal executive office an information statement
containing all of the following:
(a) the identity and background of the acquiring person, including the identity
and background of each member of any partnership, limited partnership,
syndicate, or other group constituting the acquiring person, and the identity
and background of each affiliate and associate of the acquiring person,
including the identity and background of each affiliate and associate of each
member of such partnership, syndicate, or other group; provided, however, that
with respect to a limited partnership, the information need only be given with
respect to a partner who is denominated or functions as a general partner and
each affiliate and associate of the general partner;
(b) a reference that the information statement is made under this section;
(c) the number and class or series of shares of the issuing public corporation
beneficially owned, directly or indirectly, before the control share acquisition
by each of the persons identified pursuant to paragraph (a);
(d) the number and class or series of shares of the issuing public corporation
acquired or proposed to be acquired pursuant to the control share acquisition by
each of the persons identified pursuant to paragraph (a) and specification of
which of the following ranges of voting power in the election of directors that,
except for this section, resulted or would result from consummation of the
control share acquisition:
(1) at least 20 percent but less than 33-1/3 percent;
(2) at least 33-1/3 percent but less than or equal to 50 percent;
(3) over 50 percent; and
(e) the terms of the control share acquisition or proposed control share
acquisition, including, but not limited to, the source of funds or other
consideration and the material terms of the financial arrangements for the
control share acquisition; plans or proposals of the acquiring person (including
plans or proposals under consideration) to (1) liquidate or dissolve the issuing
public corporation, (2) sell all or a substantial part of its assets, or merge
it or exchange its shares with any other person, (3) change the location of its
principal place of business or its principal executive office or a material
portion of its business activities, (4) change materially its management or
policies of employment, (5) change materially its charitable or community
contributions or its policies, programs, or practices relating thereto, (6)
change materially its relationship with suppliers or customers or the
communities in which it operates, or (7) make any other material change in its
business, corporate structure, management or personnel; and other objective
facts as would be substantially likely to affect the decision of a shareholder
with respect to voting on the control share acquisition.
If any material change occurs in the facts set forth in the information
statement, including but not limited to any material increase or decrease in the
number of shares of the issuing public corporation acquired or proposed to be
acquired by the persons identified pursuant to paragraph (a), the acquiring
person shall promptly deliver to the issuing public corporation at its principal
executive office an amendment to the information statement containing
information relating to the material change. An increase or decrease or proposed
increase or decrease equal, in the aggregate for all persons identified pursuant
to paragraph (a), to one percent or more of the total number of outstanding
shares of any class or series of the issuing public corporation shall be deemed
"material" for purposes of this paragraph; an increase or decrease or proposed
increase or decrease of less than this amount may be material, depending upon
the facts and circumstances.
SUBD. 3. MEETING OF SHAREHOLDERS. If the acquiring person so requests in writing
at the time of delivery of an information statement pursuant to subdivision 2,
and has made, or has made a bona fide written offer to make, a control share
acquisition and gives a written undertaking to pay or reimburse the issuing
public corporation's expenses of a special meeting, except the expenses of the
issuing public corporation in opposing according voting rights with respect to
shares acquired or to be acquired in the control share acquisition, within ten
days after receipt by the issuing public corporation of the information
statement, a special meeting of the shareholders
2
of the issuing public corporation shall be called pursuant to section 302A.433,
subdivision 1, for the sole purpose of considering the voting rights to be
accorded to shares referred to in subdivision 1, paragraph (b), acquired or to
be acquired pursuant to the control share acquisition. The special meeting shall
be held no later than 55 days after receipt of the information statement and
written undertaking to pay or reimburse the issuing public corporation's
expenses of the special meeting, unless the acquiring person agrees to a later
date. If the acquiring person so requests in writing at the time of delivery of
the information statement, (1) the special meeting shall not be held sooner than
30 days after receipt by the issuing public corporation of the information
statement and (2) the record date for the meeting must be at least 30 days prior
to the date of the meeting. If no request for a special meeting is made,
consideration of the voting rights to be accorded to shares referred to in
subdivision 1, paragraph (b), acquired or to be acquired pursuant to the control
share acquisition shall be presented at the next special or annual meeting of
the shareholders of which notice has not been given, unless prior thereto the
matter of the voting rights becomes moot. The issuing public corporation is not
required to have the voting rights to be accorded to shares acquired or to be
acquired according to a control share acquisition considered at the next special
or annual meeting of the shareholders unless it has received the information
statement and documents required by subdivision 4 at least 55 days before the
meeting. The notice of the meeting shall at a minimum be accompanied by a copy
of the information statement (and a copy of any amendment to the information
statement previously delivered to the issuing public corporation) and a
statement disclosing that the board of the issuing public corporation recommends
approval of, expresses no opinion and is remaining neutral toward, recommends
rejection of, or is unable to take a position with respect to according voting
rights to shares referred to in subdivision 1, paragraph (b), acquired or to be
acquired in the control share acquisition. The notice of meeting shall be given
at least ten days prior to the meeting. Any amendments to the information
statement received after mailing of the notice of the meeting must be mailed
promptly to the shareholders by the issuing public corporation.
SUBD. 4. FINANCING. Notwithstanding anything to the contrary contained in this
chapter, no call of a special meeting of the shareholders of the issuing public
corporation shall be made pursuant to subdivision 3 and no consideration of the
voting rights to be accorded to shares referred to in subdivision 1, paragraph
(b), acquired or to be acquired pursuant to a control share acquisition shall be
presented at any special or annual meeting of the shareholders of the issuing
public corporation unless at the time of delivery of the information statement
pursuant to subdivision 2, the acquiring person shall have entered into, and
shall deliver to the issuing public corporation a copy or copies of, a
definitive financing agreement or definitive financing agreements, with one or
more responsible financial institutions or other entities having the necessary
financial capacity, for any financing of the control share acquisition not to be
provided by funds of the acquiring person. A financing agreement is not deemed
not definitive for purposes of this subdivision solely because it contains
conditions or contingencies customarily contained in term loan agreements with
financial institutions.
SUBD. 4A. VOTING RIGHTS. (a) Shares referred to in subdivision 1, paragraph (b),
acquired in a control share acquisition shall have the same voting rights as
other shares of the same class or series only if approved by resolution of
shareholders of the issuing public corporation at a special or annual meeting of
shareholders pursuant to subdivision 3.
3
(b) The resolution of shareholders must be approved by (1) the affirmative vote
of the holders of a majority of the voting power of all shares entitled to vote
including all shares held by the acquiring person, and (2) the affirmative vote
of the holders of a majority of the voting power of all shares entitled to vote
excluding all interested shares. A class or series of shares of the issuing
public corporation is entitled to vote separately as a class or series if any
provision of the control share acquisition would, if contained in a proposed
amendment to the articles, entitle the class or series to vote separately as a
class or series.
(c) To have the voting rights accorded by approval of a resolution of
shareholders, any proposed control share acquisition not consummated prior to
the time of the shareholder approval must be consummated within 180 days after
the shareholder approval.
(d) Any shares referred to in subdivision 1, paragraph (b), acquired in a
control share acquisition that do not have voting rights accorded to them by
approval of a resolution of shareholders shall regain their voting rights upon
transfer to a person other than the acquiring person or any affiliate or
associate of the acquiring person unless the acquisition of the shares by the
other person constitutes a control share acquisition, in which case the voting
rights of the shares are subject to the provisions of this section.
SUBD. 5. RIGHTS OF ACTION. An acquiring person, an issuing public corporation,
and shareholders of an issuing public corporation may sue at law or in equity to
enforce the provisions of this section and section 302A.449, subdivision 7.
SUBD. 6. REDEMPTION. Unless otherwise expressly provided in the articles or in
bylaws approved by the shareholders of an issuing public corporation, the
issuing public corporation shall have the option to call for redemption all but
not less than all shares referred to in subdivision 1, paragraph (b), acquired
in a control share acquisition, at a redemption price equal to the market value
of the shares at the time the call for redemption is given, in the event (1) an
information statement has not been delivered to the issuing public corporation
by the acquiring person by the tenth day after the control share acquisition, or
(2) an information statement has been delivered but the shareholders have voted
not to accord voting rights to such shares pursuant to subdivision 4a, paragraph
(b). The call for redemption shall be given by the issuing public corporation
within 30 days after the event giving the issuing public corporation the option
to call the shares for redemption and the shares shall be redeemed within 60
days after the call is given.
SECTION 302A.011. DEFINITIONS.
SUBD. 37. ACQUIRING PERSON. "Acquiring person" means a person that makes or
proposes to make a control share acquisition. When two or more persons act as a
partnership, limited partnership, syndicate, or other group pursuant to any
written or oral agreement, arrangement, relationship, understanding, or
otherwise for the purposes of acquiring, owning, or voting shares of an issuing
public corporation, all members of the partnership, syndicate, or other group
constitute a "person."
4
"Acquiring person" does not include (a) a licensed broker/dealer or licensed
underwriter who (1) purchases shares of an issuing public corporation solely for
purposes of resale to the public and (2) is not acting in concert with an
acquiring person, or (b) a person who becomes entitled to exercise or direct the
exercise of a new range of voting power within any of the ranges specified in
section 302A.671, subdivision 2, paragraph (d), solely as a result of a
repurchase of shares by, or recapitalization of, the issuing public corporation
or similar action unless (1) the repurchase, recapitalization, or similar action
was proposed by or on behalf of, or pursuant to any written or oral agreement,
arrangement, relationship, understanding, or otherwise with, the person or any
affiliate or associate of the person or (2) the person thereafter acquires
beneficial ownership, directly or indirectly, of outstanding shares entitled to
vote of the issuing public corporation and, immediately after the acquisition,
is entitled to exercise or direct the exercise of the same or a higher range of
voting power under section 302A.671, subdivision 2, paragraph (d), as the person
became entitled to exercise as a result of the repurchase, recapitalization, or
similar action.
SUBD. 38. CONTROL SHARE ACQUISITION. "Control share acquisition" means an
acquisition, directly or indirectly, by an acquiring person of beneficial
ownership of shares of an issuing public corporation that, except for section
302A.671, would, when added to all other shares of the issuing public
corporation beneficially owned by the acquiring person, entitle the acquiring
person, immediately after the acquisition, to exercise or direct the exercise of
a new range of voting power within any of the ranges specified in section
302A.671, subdivision 2, paragraph (d), but does not include any of the
following:
(a) an acquisition before, or pursuant to an agreement entered into before,
August 1, 1984;
(b) an acquisition by a donee pursuant to an inter vivos gift not made to avoid
section 302A.671 or by a distributee as defined in section 524.1-201, clause
(10);
(c) an acquisition pursuant to a security agreement not created to avoid section
302A.671;
(d) an acquisition under sections 302A.601 to 302A.661, if the issuing public
corporation is a party to the transaction;
(e) an acquisition from the issuing public corporation;
(f) an acquisition for the benefit of others by a person acting in good faith
and not made to avoid section 302A.671, to the extent that the person may not
exercise or direct the exercise of the voting power or disposition of the shares
except upon the instruction of others;
(g) an acquisition pursuant to a savings, employee stock ownership, or other
employee benefit plan of the issuing public corporation or any of its
subsidiaries, or by a fiduciary of the plan acting in a fiduciary capacity
pursuant to the plan; or
(h) an acquisition subsequent to January 1, 1991, pursuant to an offer to
purchase for cash pursuant to a tender offer all shares of the voting stock of
the issuing public corporation:
5
(i) which has been approved by a majority vote of the members of a committee
comprised of the disinterested members of the board of the issuing public
corporation formed pursuant to section 302A.673, subdivision 1, paragraph (d),
before the commencement of, or the public announcement of the intent to
commence, the tender offer; and
(ii) pursuant to which the acquiring person will become the owner of over 50
percent of the voting stock of the issuing public corporation outstanding at the
time of the transaction.
For purposes of this subdivision, shares beneficially owned by a plan described
in clause (g), or by a fiduciary of a plan described in clause (g) pursuant to
the plan, are not deemed to be beneficially owned by a person who is a fiduciary
of the plan.
SUBD. 39. ISSUING PUBLIC CORPORATION. "Issuing public corporation" means either:
(1) a publicly held corporation that has at least 50 shareholders; or (2) any
other corporation that has at least 100 shareholders, provided that if, before
January 1, 1998, a corporation that has at least 50 shareholders elects to be an
issuing public corporation by express amendment contained in the articles or
bylaws, including bylaws approved by the board, that corporation is an issuing
public corporation if it has at least 50 shareholders.
SUBD. 40. PUBLICLY HELD CORPORATION. "Publicly held corporation" means a
corporation that has a class of equity securities registered pursuant to section
12, or is subject to section 15(d), of the Securities Exchange Act of 1934.
SUBD. 41. BENEFICIAL OWNER; BENEFICIAL OWNERSHIP. (a) "Beneficial owner," when
used with respect to shares or other securities, includes, but is not limited
to, any person who, directly or indirectly through any written or oral
agreement, arrangement, relationship, understanding, or otherwise, has or shares
the power to vote, or direct the voting of, the shares or securities or has or
shares the power to dispose of, or direct the disposition of, the shares or
securities, except that:
(1) a person shall not be deemed the beneficial owner of shares or securities
tendered pursuant to a tender or exchange offer made by the person or any of the
person's affiliates or associates until the tendered shares or securities are
accepted for purchase or exchange; and
(2) a person shall not be deemed the beneficial owner of shares or securities
with respect to which the person has the power to vote or direct the voting
arising solely from a revocable proxy given in response to a proxy solicitation
required to be made and made in accordance with the applicable rules and
regulations under the Securities Exchange Act of 1934 and is not then reportable
under that act on a Schedule 13D or comparable report, or, if the corporation is
not subject to the rules and regulations under the Securities Exchange Act of
1934, would have been required to be made and would not have been reportable if
the corporation had been subject to the rules and regulations.
(b) "Beneficial ownership" includes, but is not limited to, the right to acquire
shares or securities through the exercise of options, warrants, or rights, or
the conversion of convertible securities, or otherwise. The shares or securities
subject to the options, warrants, rights, or conversion privileges held by a
person shall be deemed to be outstanding for the purpose of computing the
percentage of outstanding shares or securities of the class or series owned by
the person, but shall not be deemed to be outstanding for the purpose of
computing the
6
percentage of the class or series owned by any other person. A person shall be
deemed the beneficial owner of shares and securities beneficially owned by any
relative or spouse of the person or any relative of the spouse, residing in the
home of the person, any trust or estate in which the person owns ten percent or
more of the total beneficial interest or serves as trustee or executor or in a
similar fiduciary capacity, any corporation or entity in which the person owns
ten percent or more of the equity, and any affiliate of the person.
(c) When two or more persons act or agree to act as a partnership, limited
partnership, syndicate, or other group for the purposes of acquiring, owning, or
voting shares or other securities of a corporation, all members of the
partnership, syndicate, or other group are deemed to constitute a "person" and
to have acquired beneficial ownership, as of the date they first so act or agree
to act together, of all shares or securities of the corporation beneficially
owned by the person.
SUBD. 42. INTERESTED SHARES. "Interested shares" means the shares of an issuing
public corporation beneficially owned by any of the following persons: (1) the
acquiring person; (2) any officer of the issuing public corporation; or (3) any
employee of the issuing public corporation who is also a director of the issuing
public corporation.
SUBD. 43. AFFILIATE. "Affiliate" means a person that directly or indirectly
controls, is controlled by, or is under common control with, a specified person.
7
APPENDIX C
AMENDED AND RESTATED INFORMATION STATEMENT
March 13, 2001
Board of Directors
Select Comfort Corporation
10400 Viking Drive, Suite 400
Eden Prairie, Minnesota
Ladies and Gentlemen:
This letter amends and restates the information contained in the
Information Statement dated September 18, 2000 and the Supplement to Information
Statement dated November 16, 2000 that was provided to Select Comfort
Corporation, a Minnesota corporation ("Select Comfort"), by The St. Paul
Companies, Inc. ("The St. Paul"), St. Paul Fire and Marine Insurance Company
("F&M"), St. Paul Venture Capital V, LLC ("SPVC V") and St. Paul Venture Capital
IV, LLC ("SPVC IV") (collectively, the "Parties"), in connection with the
acquisition by SPVC V of 305,000 additional shares of Select Comfort common
stock (the "Control Share Acquisition").
A. IDENTITY AND BACKGROUND.
The St. Paul is the parent company of F&M. F&M is the 99% owner of SPVC V
and SPVC IV. The principal executive offices of each of The St. Paul and F&M is
located at 385 Washington Street, St. Paul, Minnesota 55102. Each of The St.
Paul and F&M is a Minnesota corporation and is principally engaged in the
insurance business.
Information concerning the directors and executive officers of each of
The St. Paul and F&M is set forth in Exhibit A attached to this Information
Statement and incorporated herein by reference.
B. REFERENCE TO STATUTORY SECTION.
This Information Statement is made pursuant to the requirements of the
Minnesota Control Share Acquisition Act contained in Section 302A.671 of the
Minnesota Business Corporation Act.
C. NUMBER AND CLASS OR SERIES OF SHARES OF SELECT COMFORT BENEFICIALLY OWNED,
DIRECTLY OR INDIRECTLY, BEFORE THE CONTROL SHARE ACQUISITION.
Prior to the consummation of the Control Share Acquisition, the amount of
shares of common stock of Select Comfort beneficially owned, directly or
indirectly, by each Party was as
follows: The St. Paul: 5,972,495 shares; F&M: 5,972,495 shares; SPVC V: 775,039
shares; and SPVC IV: 331,665 shares. Based on 17,824,764 shares of common stock
reported as outstanding on July 1, 2000 in Select Comfort's Form 10-Q for the
quarter ended July 1, 2000, such ownership by The St. Paul and F&M represents
33.1% of the total issued and outstanding shares of Select Comfort.
Information concerning the amount of shares of common stock of Select
Comfort beneficially owned by directors and executive officers of each of The
St. Paul and F&M before the Control Share Acquisition is set forth in Exhibit A
attached to this Information Statement and incorporated herein by reference.
D. NUMBER AND CLASS OR SERIES OF SHARES OF SELECT COMFORT ACQUIRED PURSUANT TO
THE CONTROL SHARE ACQUISITION AND SPECIFICATION OF THE RANGE OF VOTING
POWER IN THE ELECTION OF DIRECTORS THAT, EXCEPT FOR SECTION 302A.671,
RESULTS FROM THE CONSUMMATION OF THE CONTROL SHARE ACQUISITION.
Immediately following the acquisition by SPVC V of the 305,000 shares in
the Control Share Acquisition, the amount of shares of common stock of Select
Comfort beneficially owned, directly or indirectly, by each of the Parties is
follows: The St. Paul: 6,277,495 shares; F&M: 6,277,495 shares; SPVC V:
1,080,039 shares; and SPVC IV: 331,665 shares. Based on 17,824,764 shares of
common stock reported as outstanding on July 1, 2000 in Select Comfort's Form
10-Q for the quarter ended July 1, 2000, such ownership by The St. Paul and F&M
represents 34.8% of the total issued and outstanding shares of Select Comfort.
As a result of the Control Share Acquisition, each of The St. Paul and F&M have
voting power in the election of directors that, except for the application of
the Minnesota Control Share Act, would be in the 33 1/3% to 50% range, within
the meaning of Section 302A.671, subd. 2(d) of the Minnesota Business
Corporation Act.
Information concerning the amount of shares of common stock of Select
Comfort beneficially owned by directors and executive officers of each of The
St. Paul and F&M after the Control Share Acquisition is set forth in Exhibit A
attached to this Information Statement and incorporated herein by reference.
E. TERMS OF THE CONTROL SHARE ACQUISITION.
In a series of transactions between September 8, 2000 and September 18,
2000, SPVC V purchased 305,000 shares of Select Comfort common stock in open
market brokerage transactions at an average purchase price of $2.87 per share
(including brokers' commissions), for an aggregate purchase price of
$876,417.50. Corporate funds of SPVC V were used to purchase these shares. Each
individual purchase by SPVC V during the period between September 8, 2000 and
September 18, 2000 is detailed below.
NUMBER OF PRICE PER SHARE AGGREGATE PURCHASE
DATE SHARES (INCLUDING BROKERS' COMMISSIONS) PRICE
- ----------------------- --------------- ----------------------------------- ---------------------
September 8, 2000 225,000 $2.91 $653,917.50
September 13, 2000 50,000 $2.69 $134,375.00
September 18, 2000 30,000 $2.94 $88,125.00
- ----------------------- --------------- ----------------------------------- ---------------------
At the present time, the Parties do not have any definitive plans or
proposals to:
1. liquidate or dissolve Select Comfort,
2. sell all or a substantial part of its assets or merge it or
exchange its shares with any other person,
3. change the location of its principal place of business or its
principal executive office or of a material portion of its
business activities,
4. change materially its management or policies of employment,
5. change materially its charitable or community contributions or
its policies, programs, or practices relating thereto,
6. change materially its relationship with suppliers or customers or
the communities in which it operates, or
7. make any other material change in its business, corporate
structure, management or personnel.
F. TRANSACTIONS AFTER THE CONTROL SHARE ACQUISITION.
On November 15, 2000, SleepTec, Inc., a Delaware corporation
("SleepTec"), SPVC IV, SPVC V, St. Paul Venture Capital VI, LLC ("SPVC VI") and
Select Comfort entered into an Asset Purchase Agreement, dated effective as of
November 10, 2000, pursuant to which SleepTec agreed to sell certain assets to
Select Comfort. As part of the purchase price, Select Comfort issued SleepTec a
five-year convertible debenture in the principal amount of $4,000,000. This
debenture is convertible at the election of the holder at any time into shares
of common stock of Select Comfort based on an initial conversion price of $5.50
per share.
The St. Paul, F&M, SPVC V and SPVC IV are majority stockholders of
SleepTec. SPVC V loaned $4,540,000 to SleepTec in the form of convertible
promissory notes. SleepTec transferred the debenture to SPVC V as repayment of
these notes. As a result of this transaction, The St. Paul, F&M and SPVC V may
be deemed to beneficially own 727,273 shares of common stock of Select Comfort
with respect to the debenture.
We would be pleased to answer any questions you may have concerning the
matters discussed above.
Sincerely,
THE ST PAUL COMPANIES, INC. ST. PAUL FIRE AND MARINE INSURANCE COMPANY
By: /s/ Bruc A. Backberg By: /s/ Bruce A. Backberg
---------------------------- -------------------------------
Bruce A. Backberg Bruce A. Backberg
Its: Senior Vice President Its: Senior Vice President
ST. PAUL VENTURE CAPITAL V, LLC ST. PAUL VENTURE CAPITAL IV, LLC
By: By:
--------------------------- -------------------------------
Its: Its:
---------------------------- -------------------------------
EXHIBIT A
DIRECTORS AND EXECUTIVE OFFICERS OF
THE ST. PAUL COMPANIES, INC. AND
ST. PAUL FIRE AND MARINE INSURANCE COMPANY
The names and present principal occupations of the directors and executive
officers of The St. Paul Companies, Inc. and St. Paul Fire and Marine Insurance
Company are set forth below. All of the individuals listed below are citizens of
the United States except Douglas West Leatherdale, who is a citizen of Canada,
and David John, who is a citizen of the United Kingdom.
THE ST. PAUL COMPANIES, INC.
PRESENT SHARES OF DESCRIPTION OF ANY CONTRACT,
PRINCIPAL SELECT COMFORT ARRANGEMENT, UNDERSTANDING OR
POSITION WITH OCCUPATION BENEFICIALLY RELATIONSHIP WITH RESPECT TO
NAME THE ST. PAUL OR EMPLOYMENT BUSINESS ADDRESS OWNED ANY SECURITIES OF SELECT COMFORT
- ------------------ ------------ -------------- ------------------ ----------- --------------------------------
H. Furlong Baldwin Director Chairman, Mercantile 0 None
Mercantile Bankshares
Bankshares Corporation
Corporation 2 Hopkins Plaza
Baltimore, MD 21201
John H. Dasburg Director President Northwest 0 None
and Chief Airlines, Inc.
Executive Northwest Drive
Officer, St. Paul, MN 55111-3034
Northwest
Airlines,
Inc.
W. John Driscoll Director Former Rock Island 0 None
Chairman and Company
Chief 332 Minnesota St.
Execute Suite 2090
Officer, St. Paul, MN 55101-1308
Rock Island
Company
Kenneth Marc Director Chairman and The Duberstein Group 0 None
Duberstein Chief 2100 Pennsylvania Ave. NW
Executive Suite 500
Officer, The Washington, DC 20037
Duberstein
Group
Pierson Director Retired 4900 IDS Center 0 None
MacDonald Grieve Chairman and 80 South 8th Street
Chief Minneapolis, MN 55402
Executive
Officer,
Ecolab, Inc.
Thomas R. Hodgson Director Former 225 E. Deerpath 0 None
President Suite 222
and Chief Lake Forest, IL 60045
Operating
Officer,
Abbott
Laboratories
Sir David G. Director Chairman, The BOC Group 0 None
John, KCMG The BOC Chertsey Road
Group PLC Windlesham
Surrey GU20 6HG
England
PRESENT SHARES OF DESCRIPTION OF ANY CONTRACT,
PRINCIPAL SELECT COMFORT ARRANGEMENT, UNDERSTANDING OR
POSITION WITH OCCUPATION BENEFICIALLY RELATIONSHIP WITH RESPECT TO
NAME THE ST. PAUL OR EMPLOYMENT BUSINESS ADDRESS OWNED ANY SECURITIES OF SELECT COMFORT
- ------------------ ------------ -------------- ------------------ ----------- --------------------------------
William Hugh Director President, Minnesota Public Radio 1000 None
Kling Minnesota 45 E. 7th Street
Public St. Paul, MN 55105
Radio,
President,
Minnesota
Communications
Group and
President,
Greenspring
Company
Douglas West Chairman, Chairman, 385 Washington Street 0 None
Leatherdale President, President, St. Paul, MN 55102
CEO and CEO and
Director Director of
The St. Paul
Bruce King Director President 5109 Yuma Place, NW 0 None
MacLaury Emeritus, Washington, DC 20016
The
Brookings
Institution
Glen D. Nelson Director Vice Medtronic, Inc. 0 None
Chairman, 710 Medtronic Pkwy. NE
Medtronic, Minneapolis, MN 55432
Inc.
Anita Marie Director President, The Bush Foundation 0 None
Pampusch The Bush E-900 First National
Foundation Bank Building
332 Minnesota Street
St. Paul, MN 55101
Gordon M. Director President Allina Health 0 None
Sprenger and Chief Systems, Inc.
Executive P.O. Box 9310
Officer, Minneapolis, MN 55440-9310
Allina
Health
Systems, Inc.
Bruce Allen Sr. Vice Sr. Vice 385 Washington Street 0 None
Backberg President President & St. Paul, MN 55102
& Corporate
Corporate Secretary of
Secretary The St. Paul
Karen L. Himle Sr. Vice Sr. Vice 385 Washington Street 0 None
President- President- St. Paul, MN 55102
Corporate Corporate
Affairs Affairs of
The St. Paul
Thomas Andrew Sr. Vice Sr. Vice 385 Washington Street 0 None
Bradley President- President- St. Paul, MN 55102
Corporate Corporate
Controller Controller
of The St.
Paul
Laura L. Gagnon Vice Vice 385 Washington Street 0 None
President- President- St. Paul, MN 55102
Finanace Finanace
& & Investor
Investor Relations of
Relations The St. Paul
Paul James Liska Executive Executive 385 Washington Street 0 None
Vice Vice St. Paul, MN 55102
President President
and Chief and Chief
Financial Financial
Officer Officer of
The St. Paul
John A. MacColl Executive Executive 385 Washington Street 0 None
Vice Vice St. Paul, MN 55102
President President
and and General
General Counsel of
Counsel The St. Paul
David Nachbar Sr. Vice Sr. Vice 385 Washington Street 0 None
President- President St. Paul, MN 55102
Human Human
Resources Resources of
The St. Paul
Mark Lindell Sr. Vice Sr. Vice St. Paul Syndicate 0 None
Pabst President President of Management
The St. Paul 60 Gracechurch Street
London EC3V 0HR
England
ST. PAUL FIRE AND MARINE INSURANCE COMPANY
PRESENT SHARES OF DESCRIPTION OF ANY CONTRACT,
PRINCIPAL SELECT COMFORT ARRANGEMENT, UNDERSTANDING OR
POSITION WITH OCCUPATION BENEFICIALLY RELATIONSHIP WITH RESPECT TO
NAME THE ST. PAUL OR EMPLOYMENT BUSINESS ADDRESS OWNED ANY SECURITIES OF SELECT COMFORT
- ------------------ ------------ -------------- ------------------ ----------- --------------------------------
Bruce Allen Sr. Vice Sr. Vice 385 Washington Street 0 None
Backberg President President & St. Paul, MN 55102
& Corporate
Corporate Secretary of
Secretary F&M
Thomas Andrew Sr. Vice Sr. Vice 385 Washington Street 0 None
Bradley President- President- St. Paul, MN 55102
Finance & Finance &
Corporate Corporate
Planning Planning &
& Development
Development of F&M
Michael James Executive Executive 385 Washington 0 None
Conroy Vice Vice St. Paul, MN 55102
President, President,
Chief Chief
Administrative Administrative
Officer and Officer and
Director Director of
F&M
James Francis Sr. Vice Sr. Vice St. Paul Re, Inc. 0 None
Duffy President President of 195 Broadway
F&M New York, NY 10007
Karen L. Himle Sr. Vice Sr. Vice 385 Washington Street 0 None
President- President- St. Paul, MN 55102
Corporate Corporate
Affairs Affairs of
F&M
Robert Jule Sr. Vice Sr. Vice 385 Washington Street 0 None
Lamendola President President of St. Paul, MN 55102
F&M
Douglas West Chairman, Chairman, 385 Washington Street 0 None
Leatherdale President, President, St. Paul, MN 55102
CEO and CEO and
Director Director of
The St. Paul
Stephen Wright Executive Executive 385 Washington Street 600 None
Lilienthal Vice Vice St. Paul, MN 55102
President President
and and Director
Director of F&M
Paul James Liska Executive Executive 385 Washington Street 0 None
Vice Vice St. Paul, MN 55102
President, President,
Chief Chief
Financial Financial
Officer Officer and
and Director of
Director F&M
John A. MacColl Executive Executive 385 Washington Street 0 None
Vice Vice St. Paul, MN 55102
President President
and and General
General Counsel of
Counsel F&M
T. Michael Miller Sr. Vice Sr. Vice 385 Washington Street 0 None
President- President St. Paul, MN 55102
Global Global
Products, Products,
and and Director
Director of F&M
Janet Rajala Sr. Vice Sr. Vice 385 Washington Street 0 None
Nelson President President & St. Paul, MN 55102
& Chief Chief Risk
Risk Officer of
Officer F&M
Mark Lindell Sr. Vice Sr. Vice St. Paul Syndicate 0 None
Pabst President President of Management
The St. Paul 60 Gracechurch Street
London EC3V 0HR
England
Kent D. Urness Sr. Vice Sr. Vice 385 Washington Street 0 None
President- President- St. Paul, MN 55102
Global Global
Products Products and
and Director of
Director F&M
SELECT COMFORT CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
WEDNESDAY, MAY 16, 2001
3:00 P.M. CENTRAL DAYLIGHT TIME
HILTON HOTEL MINNEAPOLIS NORTH
2200 FREEWAY BLVD.
BROOKLYN CENTER, MINNESOTA 55430
{logo} SELECT COMFORT CORPORATION
6105 TRENTON LANE NORTH
MINNEAPOLIS, MINNESOTA 55442 PROXY
- --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF SELECT COMFORT CORPORATION
FOR USE AT THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 16, 2001.
The undersigned hereby appoints William R. McLaughlin and Mark A. Kimball
(collectively, the "Proxies"), and each of them, with full power of
substitution, as proxies to vote the shares which the undersigned is entitled to
vote at the Annual Meeting of Shareholders of Select Comfort Corporation to be
held on May 16, 2001 and at any adjournment or postponement thereof. Such shares
will be voted as directed with respect to the proposals listed on the reverse
side hereof and in the Proxies' discretion as to any other matter that may
properly come before the meeting or at any adjournment or postponement thereof.
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES ON
THE REVERSE SIDE. WHEN PROPERLY SIGNED, THIS PROXY WILL BE VOTED IN THE MANNER
DIRECTED. IF NO DIRECTION IS GIVEN, THIS PROXY WILL VOTED FOR ITEMS 1, 2, 3, 4
AND 5.
SEE REVERSE FOR VOTING INSTRUCTIONS.
PLEASE DETACH HERE
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2, 3, 4 AND 5.
1. Election of directors: 01 Thomas J. Albani 03 William R. McLaughlin / / Vote FOR / / Vote WITHHELD
02 David T. Kollat all nominees from all nominees
(except as marked)
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE, -------------------------------------------
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.) -------------------------------------------
2. Proposal to grant voting rights to The St. Paul Companies, Inc. and its
affiliates under the Minnesota Control Share Acquisition Act. / / For / / Against / / Abstain
3. Proposal to amend the 1999 Employee Stock Purchase Plan. / / For / / Against / / Abstain
4. Proposal to approve the performance goals under the Select Comfort
Corporation Executive and Key Employee Incentive Plan. / / For / / Against / / Abstain
5. Proposal to ratify the appointment of KPMG LLP, certified public
accountants, as independent auditors for the fiscal year ending
December 29, 2001. / / For / / Against / / Abstain
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL.
Address Change? Mark Box [ ]
Indicate changes below: Date
-------------------------------
-------------------------------
-------------------------------
- --------------------------------------------------------------------------------
Signature(s) in Box Please sign exactly as your name(s)
appear on Proxy. If held in joint tenancy, all persons must
sign. Trustees, administrators, etc., should include title
and authority. Corporations should provide full name of
corporation and title of authorized officer signing the
proxy.