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
Filed by the Registrant [X]
Filed by party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
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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.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1 Amount Previously Paid:
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2 Form, Schedule or Registration Statement No.:
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[LOGO]
6105 TRENTON LANE NORTH
MINNEAPOLIS, MINNESOTA 55442
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 15, 2002
TO THE SHAREHOLDERS OF SELECT COMFORT CORPORATION:
The Annual Meeting of Shareholders of Select Comfort Corporation, a
Minnesota corporation ("Select Comfort" or the "Company"), will be held on
Wednesday, May 15, 2002, at 3:00 p.m., local time, at the Radisson Plaza Hotel
Minneapolis, 35 South Seventh Street, Minneapolis, Minnesota 55402, for the
following purposes:
1. To elect two persons to serve as directors for three-year terms; and
2. 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 April 2, 2002 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 AS SOON AS POSSIBLE TO ACCOMMODATE OUR MEETING
SCHEDULED FOR MAY 15, 2002.
By Order of the Board of Directors,
/s/Mark A. Kimball
Mark A. Kimball
SENIOR VICE PRESIDENT,
GENERAL COUNSEL & SECRETARY
April 15, 2002
Minneapolis, Minnesota
TABLE OF CONTENTS
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Page
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INTRODUCTION..................................................................2
Shareholders Entitled to Vote.................................................2
Revocation of Proxies.........................................................2
Quorum Requirements...........................................................3
Vote Required.................................................................3
Proxy Solicitation Costs......................................................3
Electronic Delivery of Shareholder Communications.............................3
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................................4
Security Ownership of Certain Beneficial Owners...............................4
Security Ownership of Management..............................................6
ELECTION OF DIRECTORS.........................................................8
Nomination................................................................. ..8
Vote Required............................................................... .8
Board Recommendation..........................................................8
Information About Nominees and Other Directors................................9
Other Information About Nominees and Other Directors.........................10
Information About the Board and its Committees...............................11
Director Compensation........................................................12
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........................................................16
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
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CERTAIN TRANSACTIONS........................................................ 25
Director Relationships...................................................... 25
Registration Rights Agreement............................................... 25
Employment Agreements....................................................... 25
Private Placement........................................................... 25
GE Financing and Restructuring of GE Warrants............................... 28
OTHER MATTERS............................................................... 29
Independent Auditors........................................................ 29
Audit and Other Fees........................................................ 29
Section 16(a) Beneficial Ownership Reporting Compliance..................... 29
Shareholder Proposals for 2003 Annual Meeting............................... 30
Other Business.............................................................. 30
Copies of 2001 Annual Report................................................ 31
Householding Information.....................................................31
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[LOGO]
6105 TRENTON LANE NORTH
MINNEAPOLIS, MINNESOTA 55442
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PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
MAY 15, 2002
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INTRODUCTION
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This proxy statement is being mailed to our shareholders beginning on or about
April 16, 2002 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 15, 2002, at 3:00 p.m., local time, at the Radisson Plaza
Hotel Minneapolis, 35 South Seventh Street, Minneapolis, Minnesota 55402, 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 two 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 April 2, 2002 will be
entitled to vote at the meeting. As of that date, there were 18,451,096
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,
2
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.
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 (9,225,549 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.
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 "withholding authority" to vote for any
nominee for director will be treated as shares present and entitled to vote that
were voted against the nominee. Signed proxies that lack any specification will
be voted in favor of the election as directors of each of the two nominees for
director 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.
ELECTRONIC DELIVERY OF SELECT COMFORT SHAREHOLDER COMMUNICATIONS
Select Comfort is pleased to offer its shareholders the opportunity to receive
shareholder communications electronically. By signing up for electronic delivery
of documents such as the Annual Report and the Proxy Statement, you can receive
shareholder communications as soon as they are available without waiting for
them to arrive in the mail, and submit your shareholder votes online. You can
also reduce the number of paper documents in your personal files, eliminate
duplicate mailings, conserve natural resources, and help reduce our printing and
mailing costs. To sign up for electronic delivery, visit www.icsdelivery.com and
enter information for all of your Select Comfort shareholdings. Your enrollment
will be effective until canceled. If you have questions about electronic
delivery, please call Select Comfort Investor Relations at (763) 551-7498.
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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 February 28, 2002, 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) 12,824,887 50.9%
Consumer Venture Partners II, L. P. (3) 1,962,801 10.6%
BayStar Capital, L.P. (4) 2,100,000 10.2%
Printware, Inc. (5) 2,100,000 10.2%
Liberty Diversified (6) 1,400,000 7.1%
Standard Fusee Corporation (7) 1,400,000 7.1%
- ------------------------
(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 indicated as beneficially owned. Shares of
common stock subject to options, warrants or other rights to purchase
shares that are currently exercisable or exercisable within 60 days are
deemed outstanding for computing the percentage of the person or group
holding such options, warrants or other rights 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, 955,900
shares held by St. Paul Venture Capital V, LLC and 275 shares held by St.
Paul Venture Capital Affiliates Fund I, LLC. Includes (i) 97,753 shares
issuable upon exercise of outstanding warrants held by St. Paul Fire and
Marine Insurance Co., (ii) 18,009 shares issuable upon exercise of
outstanding warrants and options held by St. Paul Venture Capital IV, LLC.,
(iii) 156,139 shares issuable upon exercise of outstanding options held by
St. Paul Venture Capital V, LLC., (iv) 727,272 shares issuable upon
conversion of a convertible debenture held by St. Paul Venture Capital V,
LLC., (v) 1,642,500 shares issuable upon exercise of outstanding warrants
and options held by St. Paul Venture Capital VI, LLC., and (vi) 4,100,000
shares issuable upon conversion of a convertible note held by St. Paul
Venture Capital VI, 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. St. Paul Fire and Marine Insurance Co. owns 99% of the
membership interests in St. Paul Venture Capital IV, LLC, St. Paul Venture
Capital V, LLC and St. Paul Venture Capital VI, LLC. Patrick A. Hopf,
Chairman of the Board of Directors of the Company, is a Managing Member of
St. Paul Venture Capital IV, LLC and St. Paul Venture Capital V, LLC, and a
Managing Director of SPVC Management VI, LLC, the Managing Member of St.
Paul Venture Capital VI, 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.
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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 1,500,000 shares issuable upon conversion of a convertible note
and 600,000 shares issuable upon exercise of outstanding warrants. The
address of BayStar Capital, L.P. is 1500 West Market Street, Suite 200,
Mequon, WI 53092.
(5) Includes 1,500,000 shares issuable upon conversion of a convertible note
and 600,000 shares issuable upon exercise of outstanding warrants. The
address of Printware, Inc. is 1270 Egan Industrial Road, St. Paul, MN
55121.
(6) Includes 1,000,000 shares issuable upon conversion of a convertible note
and 400,000 shares issuable upon exercise of outstanding warrants. The
address of Liberty Diversified is 5600 North Highway 169, Minneapolis, MN
55428.
(7) Includes 1,000,000 shares issuable upon conversion of a convertible note
and 400,000 shares issuable upon exercise of outstanding warrants. The
address of Standard Fusee Corporation is 28320 St. Michaels Road, Easton,
MD 21601.
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SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of Select Comfort common stock as of February 28, 2002 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) 1,762,723 8.7%
Mark A. Kimball (3) 194,805 1.0%
Gregory T. Kliner (4) 166,695 *
James C. Raabe (5) 115,878 *
Noel F. Schenker (6) 84,148 *
Patrick A. Hopf (7) 12,926,903 51.3%
Thomas J. Albani (8) 121,484 *
Christopher P. Kirchen (9) 2,143,393 11.6%
David T. Kollat (10) 81,484 *
Ervin R. Shames (11) 328,889 1.8%
Jean-Michel Valette (12) 109,989 *
All directors and executive officers
as a group (14 persons) (13) 18,223,758 64.9%
- ------------------------
* 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 indicated as beneficially owned. 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 (i) 330,555 shares issuable upon exercise of outstanding options
and (ii) an aggregate of (A) 400,000 shares issuable upon exercise of
outstanding warrants and (B) 1,000,000 shares issuable upon conversion of a
convertible note, all of which are beneficially owned by Standard Fusee
Corporation, for
6
which Mr. McLaughlin serves as a director and as to which Mr. McLaughlin
has an indirect ownership interest.
(3) Includes 167,251 shares issuable upon exercise of outstanding options.
(4) Includes 162,951 shares issuable upon exercise of outstanding options.
(5) Includes 95,764 shares issuable upon exercise of outstanding options.
(6) Includes 70,973 shares issuable upon exercise of outstanding options.
(7) Includes (i) 1,216 shares held by Mr. Hopf's wife and children and (ii) an
aggregate of (A) 6,083,214 outstanding shares, (B) 1,914,401 shares
issuable upon exercise of outstanding options and warrants, (C) 727,272
shares issuable upon conversion of a convertible debenture, and (D)
4,100,000 shares issuable upon conversion of a convertible note, 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 33,889 shares issuable upon exercise of outstanding options and
warrants and 50,000 shares issuable upon conversion of a convertible note.
(9) Includes 13,889 shares issuable upon exercise of outstanding options. Also
includes 1,962,801 shares beneficially owned by 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 51,389 shares issuable upon exercise of outstanding options.
(11) Includes 178,889 shares issuable upon exercise of outstanding options and
warrants 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 33,889 shares issuable upon exercise of outstanding options and
warrants and 50,000 shares issuable upon conversion of a convertible note.
(13) Includes an aggregate of (i) 3,674,286 shares issuable upon exercise of
outstanding options and warrants, (ii) 727,272 shares issuable upon
conversion of a convertible debenture, and (iii) 5,250,000 shares issuable
upon conversion of convertible notes held by officers, directors and their
affiliates. Also includes all shares beneficially owned by Standard Fusee
Corporation, St. Paul Fire and Marine Insurance Company, Inc. and Consumer
Venture Partners II, L. P. See "--Security Ownership of Certain Beneficial
Owners."
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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 2005 Annual Meeting of
Shareholders, or until their successors are elected and qualified:
o Christopher P. Kirchen
o Jean-Michel Valette
Each of the nominees is currently a member 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. Kirchen and Valette. In
the absence of other instructions, the proxies will be voted FOR the election of
each of Messrs. Kirchen and Valette.
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.
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INFORMATION ABOUT DIRECTORS
The following table sets forth certain information, as February 28, 2002,
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 2005:
Christopher P. Kirchen 59 Managing General Partner of BEV 1991
(1)(3) Capital and General Partner of
Consumer Venture Partners
Jean-Michel Valette (3) 41 Independent Adviser 1994
DIRECTORS NOT STANDING FOR ELECTION THIS YEAR WHOSE TERMS EXPIRE IN 2003:
Patrick A. Hopf (1) 53 Executive Vice President of St. Paul 1991
Venture Capital, Inc.
Ervin R. Shames (1)(3) 61 Independent Management Consultant 1996
DIRECTORS NOT STANDING FOR ELECTION THIS YEAR WHOSE TERMS EXPIRE IN 2004:
Thomas J. Albani (2) 59 Former President and Chief Executive 1994
Officer of Electrolux Corporation
David T. Kollat (2) 63 President and Chairman of 22 Inc. 1994
William R. McLaughlin 45 President and Chief Executive Officer 2000
of Select Comfort Corporation
- ------------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
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OTHER INFORMATION ABOUT DIRECTORS
CHRISTOPHER P. KIRCHEN has served as a director of Select Comfort since December
1991. Mr. Kirchen is currently Managing General Partner of BEV Capital, 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 adviser 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 Peet's Coffee and Tea, Inc. and of Golden State Vintners, Inc., as well as a
number of privately held companies.
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 an Executive Vice President of St. Paul Venture
Capital, Inc., a venture capital firm, a Managing Member of St. Paul Venture
Capital IV, LLC and St. Paul Venture Capital V, LLC, and a Managing Director of
SPVC Management VI, LLC, the Managing Member of St. Paul Venture Capital VI,
LLC. From August 1988 until February 2002, Mr. Hopf was President of St. Paul
Venture Capital, Inc. He was also Managing Director of St. Paul Venture Capital
IV, LLC and St. Paul Venture Capital V, LLC, and Senior Managing Director of
SPVC Management VI, LLC from the date of their formation until February 2002.
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, St. Paul Venture Capital VI, 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 Virginia's 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.
THOMAS J. ALBANI has served as a director of Select Comfort since February 1994.
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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.,
Big Lots, Inc., Cooker Restaurant Corporation and Cone Mills Corporation.
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.
INFORMATION ABOUT THE BOARD AND ITS COMMITTEES
The Board of Directors met five times and took action by written consent on five
occasions during fiscal 2001. 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 2001.
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 2001.
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 consists of Messrs.
Kirchen, Shames and Valette. The Audit Committee met four times during fiscal
2001.
COMPENSATION COMMITTEE. The Compensation Committee:
o reviews general programs of compensation and benefits for all employees of
the Company;
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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.
The Compensation Committee consists of Messrs. Albani and Kollat. The
Compensation Committee met or took action by written consent on eleven occasions
in fiscal 2001.
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.
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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Albani and Kollat served as members of the Compensation Committee of the
Board of Directors throughout fiscal 2001. Except for any transactions described
below under "Certain Transactions," no other relationships existed during fiscal
2001 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 the Chief Executive Officer and the
four most highly compensated executive officers other than the CEO serving as
executive officers at the end of 2001 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------- ------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)(1)
- --------------------------- ---- --------- -------- ---------- ------------
William R. McLaughlin 2001 $ 500,000 $ 281,250(2) 375,000 $ --
PRESIDENT AND CHIEF EXECUTIVE 2000 390,372 161,028 600,000 123,428 (3)
OFFICER 1999 -- -- -- --
Noel F. Schenker (4) 2001 250,000 84,375(2) 115,000 --
SENIOR VICE PRESIDENT, 2000 41,346 20,466 100,000 577
MARKETING AND NEW BUSINESS 1999 -- -- -- --
DEVELOPMENT
Mark A. Kimball (5) 2001 201,923 68,149(2) 115,000 --
SENIOR VICE PRESIDENT, HUMAN 2000 201,243 49,808 36,000 --
RESOURCES AND LEGAL, GENERAL 1999 117,788 -- 125,000 --
COUNSEL AND SECRETARY
Gregory T. Kliner 2001 192,400 64,935(2) 112,500 --
SENIOR VICE PRESIDENT OF 2000 186,992 46,281 28,000 2,400
OPERATIONS 1999 183,197 -- 15,000 2,139
James C. Raabe 2001 176,683 59,630(2) 115,000 --
SENIOR VICE PRESIDENT AND 2000 169,269 41,894 18,500 2,400
CHIEF FINANCIAL OFFICER 1999 141,520 -- 37,500 2,139
- -----------------------
(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) Represents bonuses accrued in 2001, the payment occurred in February 2002.
(3) Includes $2,106 in contributions to the account of Mr. McLaughlin in Select
Comfort's 401(k) defined contribution plan and $121,322 in payment for
reimbursement of relocation expenses.
(4) Ms. Schenker joined the Company on November 1, 2000.
(5) Mr. Kimball joined the Company on May 3, 1999.
13
OPTION GRANTS AND EXERCISES
The following tables summarize option grants and exercises during the
fiscal year ended December 29, 2001 to or by the Named Executive Officers and
the potential realizable value of the options held by such persons at December
29, 2001.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS (1)
---------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE
TOTAL AT ASSUMED ANNUAL RATES
NUMBER OF OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION
UNDERLYING EMPLOYEES OR BASE FOR OPTION TERM(2)
OPTIONS IN FISCAL PRICE EXPIRATION -------------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5% 10%
- -------------------- ----------- ---------- ------- ---------- ----------- ------------
William R. McLaughlin 300,000 (3) 17.5% $1.01 06/08/11 $ 188,112 $ 479,013
75,000 (4) 4.4% 1.00 04/17/11 29,453 91,324
Noel F. Schenker 100,000 (3) 5.8% 1.01 06/08/11 62,704 159,671
15,000 (4) 0.9% 1.00 04/17/11 5,891 18,265
Mark A. Kimball 100,000 (3) 5.8% 1.01 06/08/11 62,704 159,671
15,000 (4) 0.9% 1.00 04/17/11 5,891 18,265
Gregory T. Kliner 100,000 (3) 5.8% 1.01 06/08/11 62,704 159,671
12,500 (4) 0.7% 1.00 04/17/11 4,909 15,221
James C. Raabe 100,000 (3) 5.8% 1.01 06/08/11 62,704 159,671
15,000 (4) 0.9% 1.00 04/17/11 5,891 18,265
- --------------------
(1) All of the options granted to the Named Executive Officers were granted
under the Company's 1997 Stock Incentive Plan.
(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 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.
(4) These options become exercisable in as nearly equal as possible yearly
installments over a three-year period, so long as the executive remains
employed by the Company or one of its subsidiaries at that date.
14
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES VALUE OPTIONS AT DECEMBER 29, 2001 AT DECEMBER 29, 2001 (2)
ACQUIRED ON REALIZED -------------------------- --------------------------
NAME EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ---------- -------------
William R. McLaughlin --- --- 225,000 750,000 $ 51,000 $ 332,250
Noel F. Schenker --- --- 43,750 171,250 17,000 100,450
Mark A. Kimball --- --- 132,695 143,305 17,000 100,450
Gregory T. Kliner --- --- 142,340 131,305 17,000 97,875
James C. Raabe --- --- 72,042 120,458 17,000 100,450
- --------------------
(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.
(2) Value based on the difference between the fair market value of one share of
common stock at December 29, 2001 ($2.03) and the exercise price of the
options ranging from $1.00 to $17.00 per share. Options are in-the-money if
the market price of the shares exceeds the option exercise price.
15
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.
KEITH C. SPURGEON. We have entered into a letter agreement with Keith C.
Spurgeon pursuant to which he serves as Senior Vice President of Sales of the
Company. Mr. Spurgeon's receives a base salary and is entitled to participate in
the Company's incentive compensation plans. Upon the involuntary termination of
Mr. Spurgeon's employment following a change in control, a termination without
cause or a constructive dismissal, Mr. Spurgeon is entitled to one year's salary
as severance and the unvested portion of his initial grant of 100,000 options
would become fully vested.
NOEL F. SCHENKER. We have entered into a letter agreement with Noel F. Schenker
pursuant to which she serves as Senior Vice President, Marketing and New
Business Development of the Company. Ms. Schenker receives a base salary and is
entitled to participate in the Company's incentive compensation plans. Upon the
involuntary termination of Ms. Schenker's employment following a change in
control, a termination without cause or a constructive dismissal, Ms. Schenker
is entitled to one year's salary as severance and the unvested portion of her
initial grant of 100,000 options would become fully vested.
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.
JAMES C. RAABE. We have entered into a letter agreement with James C. Raabe
pursuant to which he serves as Senior Vice President and Chief Financial Officer
of the Company. Mr. Raabe receives a base salary and is entitled to participate
in the Company's compensation plans.
MARK A. KIMBALL. We have entered into a letter agreement with Mark A. Kimball
pursuant to which he serves as Senior Vice President, Human Resources and Legal,
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.
MICHAEL J. THYKEN. We have entered into a letter agreement with Michael J.
Thyken pursuant to which he serves as Senior Vice President and Chief
Information Officer of the Company. Mr. Thyken receives a base salary and is
entitled to participate in the Company's incentive compensation plans.
16
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.
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;
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.
There are presently no outstanding stock appreciation rights, restricted stock
awards, 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 the sale, lease, exchange or other transfer of all or substantially all of
the assets of the Company to a corporation not controlled by the Company;
o the approval by our shareholders of a plan or proposal for the liquidation
or dissolution of the Company;
17
o any change of control that is required by the Securities and Exchange
Commission to be reported;
o any person who was not a shareholder of the Company on the effective date
of the Plan becomes the beneficial owner of 50% or more of the voting power
of the Company's outstanding common stock; or
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.
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 Thomas J. Albani and David T. Kollat throughout 2001. 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 to 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 were maintained at the same levels as in
2000. For 2002, base salaries of most of the executive officers were again
maintained at 2000 levels, consistent with the Compensation Committee's
philosophy and goal of increasing the percentage of executive officers'
compensation that is based on annual company performance and long-term stock
performance. Two members of the executive management team received modest
increases in base salary for 2002 to bring such salaries more in line with
internal and external comparable positions.
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 2001, the Compensation Committee established incentive compensation
for executive officers based exclusively on Company-wide operating profit and
cash flow targets.
20
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 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. Options typically become exercisable in 36
equal monthly increments over a 36-month period from 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 2001, the Compensation Committee approved the grant of options to all
executive officers and key managers of the Company. The primary purposes of the
2001 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
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 at a target level of 75% of base
salary (which bonus may range from 0% to 250% of such target amount, depending
on Company performance); and (C) long-term incentive stock options. When hired
in March 2000, Mr. McLaughlin received options to purchase an aggregate of
600,000 shares of common stock, including (i) 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
21
Comfort common 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.
Mr. McLaughlin is also eligible for additional annual stock option grants. In
2001, the Compensation Committee granted to Mr. McLaughlin additional stock
options to purchase up to 375,000 shares of common stock, vesting over three
years from the date of grant.
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
2001, 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
and Executive and Key Employee Incentive Plan 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 three 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.
Management is responsible for the Company's internal controls and financial
reporting process. KPMG LLP, the Company's independent certified public
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 on four
occasions with management, the internal auditor and the independent accountants
during 2001. 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, the internal
auditor 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 29, 2001, 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 29, 2001, 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 December 3, 1998
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
DECEMBER 3, 1998 TO DECEMBER 29, 2001
Cumulative Total Return
-----------------------------------------------
12/3/98 1/2/99 1/1/00 12/30/00 12/29/01
---------- ------- ------- -------- --------
SELECT COMFORT CORPORATION 100.00 155.51 23.90 8.46 11.94
NASDAQ STOCK MARKET (U.S.) 100.00 112.65 209.33 125.91 101.86
S & P MIDCAP 400 RETAIL SPECIALTY 100.00 126.37 103.23 91.31 115.98
[GRAPHIC OMITTED]
24
CERTAIN TRANSACTIONS
------------
DIRECTOR RELATIONSHIPS
Patrick A. Hopf, Chairman of the Board of Directors of Select Comfort, is an
Executive Vice President of St. Paul Venture Capital, Inc. Mr. Hopf is a
Managing Member of St. Paul Venture Capital IV, LLC and St. Paul Venture Capital
V, LLC, and a Managing Director of SPVC Management VI, LLC, the Managing Member
of St. Paul Venture Capital VI, LLC. St. Paul Venture Capital IV, LLC, St. Paul
Venture Capital V, LLC, St. Paul Venture Capital VI, 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. (whose
holdings are managed by St. Paul Venture Capital, Inc.) 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.
REGISTRATION RIGHTS AGREEMENT
Certain holders of our common stock and warrants to purchase shares of our
common stock, including certain directors and holders of more than 5% of our
shares, have certain demand and incidental registration rights covering such
shares pursuant to a certain Registration Rights Agreement dated June 6, 2001
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."
PRIVATE PLACEMENT OF SENIOR SECURED CONVERTIBLE NOTES AND WARRANTS
In June 2001, the Company completed a private placement of its Senior Secured
Convertible Notes (the "Notes") in the aggregate principal amount of $11
million, convertible into an aggregate of 11 million shares of common stock,
together with warrants (the "Warrants") to purchase an aggregate of 4.4 million
shares of common stock at an exercise price of $1.00 per share (the "Private
Placement"). St. Paul Venture Capital VI, LLC purchased $4.1 million of the
Notes. Standard Fusee Corporation, a company in which William R. McLaughlin has
an ownership interest, purchased $1 million of the Notes. Three of our
independent directors, including Thomas J. Albani, Ervin R. Shames and
Jean-Michel Valette, each purchased $50,000 of the Notes.
The summary set forth below reflects the principal terms of the Private
Placement and is qualified in its entirety by reference to the actual text of
the definitive transaction documents related to the Private Placement. We will
furnish to our shareholders without charge a copy of the definitive transaction
documents upon receipt from any such
25
person of a written request therefor. Such request should be sent to:
Select Comfort Corporation
6105 Trenton Lane North
Minneapolis, Minnesota 55442
Attn: Shareholder Information
TERMS OF THE SENIOR SECURED CONVERTIBLE NOTES. The Notes bear interest at the
rate of 8% per year, payable in cash on each anniversary of the issuance of the
Notes. The Notes are due and payable in full after five years, and may only be
prepaid with the consent of the holders of 67% of the principal amount of the
outstanding Notes. The Notes are secured by a first priority lien on
substantially all of the Company's and its subsidiaries' assets.
The principal amount of the Notes is convertible into shares of the common stock
of the Company at any time at the option of the holders, initially at the rate
of $1.00 per share of common stock. The principal amount of the Notes is subject
to automatic conversion into shares of the Company's common stock, initially at
the rate of $1.00 per share of common stock (i) any time after the first
anniversary of the issuance of the Notes, provided that the market price of the
common stock has equaled or exceeded $4.00 per share (as adjusted for stock
splits, stock dividends, recapitalizations and the like) for a period of at
least 10 out of 20 consecutive trading days after such first anniversary date or
(ii) in the event that the holders of at least 67% of the outstanding principal
amount of the Notes consent to such conversion.
The conversion price of the Notes is subject to proportional adjustment for
stock splits, stock dividends, recapitalizations and the like.
The conversion price of the Notes is also subject to adjustment downward to the
price per share at which the Company issues any shares, or rights to acquire
shares, of its common stock at a price per share that is less than the
then-current conversion price (the "Price Anti-Dilution Provisions"). However,
the grant and exercise of options to and by employees, directors and consultants
of the Company, and the exercise or conversion of warrants or convertible
securities existing as of the date of issuance of the Notes, would not trigger
the Price Anti-Dilution Provisions.
TERMS OF THE WARRANTS. Investors in the Private Placement received Warrants to
purchase a number of shares of the Company's common stock equal to 40% of the
dollar amount invested in the Private Placement divided by $1.00. The Warrants
represent rights to purchase shares of the Company's common stock initially at
an exercise price of $1.00 per share. The exercise price of the Warrants is
subject to adjustment such that the exercise price will always equal the
then-current conversion price of the Notes. In the event of the downward
adjustment of the exercise price of the Warrants pursuant to the terms set forth
above, the number of shares purchasable upon exercise of the Warrants would be
increased to an amount equal to (i) the original exercise price of the Warrants
multiplied by the original number of Warrants, divided by (ii) the new exercise
price of the Warrants. The Warrants are fully exercisable upon issuance and will
expire after five years. The exercise price is payable in cash or, at the option
of the holder, the Warrants or any part thereof may be exchanged for shares of
common stock equal to the economic value of the portion of the Warrants being
exercised.
26
NOTE PURCHASE AGREEMENT. The Notes and the Warrants were issued pursuant to a
Note Purchase Agreement containing customary representations, warranties,
covenants and conditions. Without limiting the foregoing, the Note Purchase
Agreement provides that, subject to certain exceptions, as long as the Notes
remain outstanding, consent of the holders of 67% of the securities issued or
issuable in the Private Placement, including shares issuable upon conversion of
the Notes or upon exercise of the Warrants, would be required for:
o Any amendment to the articles or bylaws of the Company that would have an
adverse impact on the Notes;
o Any redemption of any shares of capital stock of the Company;
o Any payment of a dividend on any shares of capital stock of the Company;
o Any merger, other corporate reorganization or sale of control of the
Company, or any transaction in which all or any substantial part of the
assets of the Company are sold or licensed on an exclusive basis;
o Any liquidation, dissolution or winding up of the Company;
o The incurrence by the Company of debt (other than up to $5 million of
senior debt financing);
o The granting by the Company of liens on its assets (except for certain
permitted liens); and
o The making by the Company of any loans, investments or guaranties.
The Note Purchase Agreement contains customary events of default, upon which (i)
the interest rate on the Notes would be increased by 3% per year and (ii) the
holders of the Notes would have the right to accelerate payment of the Notes.
Events of default include, without limitation, payment defaults, covenant
defaults, material misrepresentations, cross-defaults, bankruptcy and
insolvency, and change in control of the Company.
RIGHTS OF FIRST REFUSAL. Except in the event of a public offering of Common
Stock, or the grant or exercise of options to or by employees, directors or
consultants of the Company, or the exercise or conversion of warrants or
convertible securities existing as of the date of issuance of the Notes and
certain other exceptions, the holders of the Notes, for a period of five years,
have a 15-day right of first refusal on the sale of any additional shares of
capital stock or rights to purchase capital stock of the Company to maintain
their pro rata ownership.
REGISTRATION RIGHTS. The holders of the Notes and Warrants are entitled to
certain demand and incidental registration rights. These registration rights
give the holders certain customary rights to have the shares of common stock
issuable upon conversion of the Notes or exercise of the Warrants registered by
the Company for resale under applicable federal and state securities laws.
27
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
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, 1999,
held a combined warrant to purchase an aggregate of 1,076,098 shares of common
stock at an exercise price of $8.82 per share.
By operation of certain anti-dilution provisions in GECC's warrant, as of April
28, 2001, GECC's warrant represented rights to acquire 1,107,914 shares at an
exercise price of $8.57 per share. In connection with the Private Placement
completed in June 2001, GECC agreed to cancel this warrant and accept in
exchange for the cancelled warrant a new warrant to purchase 135,000 shares at
an exercise price of $1.00 per share. GECC utilized the "net exercise" feature
of this warrant to receive 91,633 shares in full settlement of Select Comfort's
obligations under this warrant in February 2002.
28
OTHER MATTERS
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INDEPENDENT AUDITORS
The Board of Directors appointed KPMG LLP, independent certified public
accountants, as our auditors for the year ended December 29, 2001. KPMG has
acted as our independent auditors since 1993. The Board of Directors has not yet
approved the engagement of independent certified public accountants to audit our
financial statements for the fiscal year ending December 28, 2002. The Board of
Directors will address this matter after the management team of Select Comfort
makes a recommendation to the Audit Committee.
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 AND OTHER FEES
The following table sets forth the amounts KPMG LLP billed us for audit fees and
all other fees during the fiscal year ended December 29, 2001.
AGGREGATE
TYPE OF FEE FEES BILLED
Annual audit and quarterly
reviews for fiscal 2001 . . $116,550
Financial information
systems design and
implementation fees . . . . $ -0-
All other fees
Accounting research and
SEC filings . . . . . . . $ 34,000
Management advisory
services . . . . . . . . $ -0-
Total all other fees $ 34,000
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 29, 2001 and written representations by
such persons, all transactions were reported on a timely basis in 2001.
29
SHAREHOLDER PROPOSALS FOR 2003 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 17, 2002.
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.
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
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.
30
COPIES OF 2001 ANNUAL REPORT
We will furnish to our shareholders without charge a copy of our Annual Report
on Form 10-K (without exhibits) for the fiscal year ended December 29, 2001 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
HOUSEHOLDING INFORMATION
Some banks, brokers and other record holders may be participating in the
practice of "householding" proxy statements and annual reports. This means that
you and other holders of the Company's common stock in your household may not
receive separate copies of our Proxy Statement or Annual Report. We will
promptly deliver an additional copy of either document to you if you call or
write us at the following address or phone number:
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
/s/Mark A. Kimball
SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
April 15, 2002
Minneapolis, Minnesota
31
[LOGO] SELECT COMFORT CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
WEDNESDAY, MAY 15, 2002
3:00 P.M. LOCAL TIME
RADISSON PLAZA HOTEL
35 SOUTH SEVENTH STREET
MINNEAPOLIS, MINNESOTA 55402
[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 15, 2002.
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 15, 2002 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 be voted FOR Item 1.
SEE REVERSE FOR VOTING INSTRUCTIONS
Please detach here
The Board of Directors Recommends a Vote FOR Item 1.
1. Election of directors: 01 Christopher P. Kirchen 02 Jean-Michel Valette [ ] Vote FOR [ ] Vote WITHHELD
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.) --------------------------------------------
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
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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.