UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM 10-K/A
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended January 2, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________.
Commission File No. 0-25121
--------------------
SELECT COMFORT CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota 41-1597886
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6105 Trenton Lane North, Suite 100
Minneapolis, Minnesota 55442
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (612) 551-7000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
As of March 1, 1999, 18,568,471 shares of Common Stock of the Registrant
were outstanding, and the aggregate market value of the Common Stock of the
Registrant as of that date (based upon the last reported sale price of the
Common Stock at that date as reported by the Nasdaq National Market System),
excluding outstanding shares beneficially owned by directors and executive
officers, was $249,599,034.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of this Annual Report on Form 10-K incorporate by reference
information (to the extent specific pages are referred to herein) from the
Registrant's Annual Report to Shareholders for the year ended January 2, 1999
(the "1998 Annual Report").
<PAGE>
PART III
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Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors, Executive Officers, Promoters and Control Persons
The following table sets forth certain information, as of April 26, 1999,
which has been furnished to us by each executive officer, director and each
person who has been nominated by the Board of Directors to serve as a director
of Select Comfort.
Name Age Position(s)
- ------------------------- ----- --------------------------------------------
Daniel J. McAthie 49 President, Chief Executive Officer and
Director
Charles E. Dorsey 48 Senior Vice President of Direct Marketing
and President of Select Comfort Direct
Corporation
Ronald E. Mayle 40 Senior Vice President of Retail and
President of Select Comfort Retail
Corporation
Gregory T. Kliner 60 Senior Vice President of Operations
James C. Raabe 39 Chief Financial Officer
Patrick A. Hopf (1)(2) 50 Chairman of the Board
H. Robert Hawthorne 53 Vice Chairman of the Board
Christopher P. Kirchen (1)(3) 55 Director
Jean-Michel Valette (3) 38 Director
Ervin R. Shames (1)(2) 58 Director
Thomas J. Albani (3) 56 Director
David T. Kollat (3) 60 Director
Kenneth A. Macke (2) 59 Director
Lawrence P. Murphy 46 Nominee for Director
William J. Lansing 41 Nominee for Director
- -------------------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
<PAGE>
Other Information About Nominees and Other Directors
Daniel J. McAthie was elected as President and Chief Executive Officer and a
director of Select Comfort on April 19, 1999. From October 1995 to April 19,
1999, Mr. McAthie served as Executive Vice President, Chief Financial Officer
and Secretary of the Company. Mr. McAthie also served as Chief Administrative
Officer from October 1995 to October 1998, at which time he was named Chief
Operating Officer. From May 1990 to April 1995, Mr. McAthie held the positions
of Senior Vice President, Chief Financial Officer, Vice President and Treasurer
of Fingerhut Companies Inc., a mail order catalog company.
Charles E. Dorsey has served as Senior Vice President of Direct Marketing since
January 1992 and President of Select Comfort Direct Corporation since March
1996. From March 1988 to December 1991, Mr. Dorsey served as Chief Operating
Officer for DM Shelter, Inc., a custom packaged home company.
Ronald E. Mayle has served as Senior Vice President of Retail of the Company and
President of Select Comfort Retail Corporation since December 1997. From October
1996 to December 1997, Mr. Mayle served as Managing Member of Management &
Capital, a retail consulting firm. From May 1995 to October 1996, Mr. Mayle
served as an independent retail marketing consultant, primarily to a variety of
privately owned, start-up retail enterprises, advising on infrastructure and
sales and marketing strategies. From April 1992 to May 1995, Mr. Mayle was Vice
President of Operations of Petstuff, Inc., a subsidiary of PetsMart Inc.
Gregory T. Kliner has served as Senior Vice President of Operations since August
1995. From October 1986 to August 1995, Mr. Kliner served as Director of
Operations of the Irrigation Division for The Toro Company, a manufacturer of
lawn care and snow removal products and irrigation systems.
James C. Raabe was elected as Chief Financial Officer of Select Comfort on April
19, 1999. From September 1997 to April 19, 1999, Mr. Raabe served as Controller
of Select Comfort. From July 1995 to September 1997, Mr. Raabe served as Vice
President--Finance of ValueRx, Inc., a pharmacy benefit management provider.
From May 1992 to July 1995, Mr. Raabe served in various financial positions,
including Treasurer of Diagnostek, Inc., which was acquired by ValueRx, Inc. in
July 1995. Mr. Raabe held various positions with KPMG Peat Marwick LLP from
August 1982 to May 1992, including Senior Audit Manager.
Patrick A. Hopf was elected Chairman of the Board of Directors on April 19, 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 was elected to the Board in connection with the
purchase agreement under which the Series A preferred stock was purchased. Mr.
Hopf has been President of St. Paul Venture Capital, Inc., a venture capital
firm and Managing General Partner of St. Paul Venture Capital IV, LLC since its
formation in January 1997. 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 and St. Paul Venture Capital Affiliates Fund I, LLC, of which
St. Paul Venture Capital, Inc. is the manager for both, and St. Paul Fire and
Marine Insurance Company are investors in the Company. Mr. Hopf also serves as a
director of a number of privately held companies.
H. Robert Hawthorne was elected Vice Chairman of the Board of Directors of
Select Comfort on April 19, 1999 and has served as a director of Select Comfort
since April 1997. From April 1997 through April 19, 1999, Mr. Hawthorne served
as the President and Chief Executive Officer of the Company. From February 1992
to December 1997, he served as President of The Pillsbury Brands Group, a
subsidiary of The Pillsbury Company, which is a subsidiary of Diageo PLC.
3
<PAGE>
Christopher P. Kirchen has served as a director of Select Comfort since December
1991. Mr. Kirchen was elected to the Board in connection with the purchase
agreement under which the Series B preferred stock was purchased. 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 was elected to the Board in connection with the purchase agreement under
which the Series D preferred stock was purchased. Mr. Valette has served as
President and Chief Executive Officer of Franciscan Estates, Inc., a winery in
Northern California, since August 1998. Mr. Valette was a Managing Director of
Hambrecht & Quist LLC from October 1994 to August 1998 and a Senior Analyst of
Hambrecht & Quist LLC from November 1992 to October 1994. Mr. Valette is also a
member of the general partner of H&Q Select Comfort Investors, L.P., an investor
in the Company and a related party to Hambrecht & Quist LLC. Hambrecht & Quist
LLC 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.
Ervin R. Shames has served as a director of Select Comfort since April 1996.
From April 1996 to April 19, 1999, Mr. Shames served as Chairman of the Board of
Directors. Since January 1995, Mr. Shames has served as an independent
management consultant to large and small consumer goods and services companies,
advising on management and sales and marketing strategies. From December 1993 to
January 1995, Mr. Shames served as the Chief Executive Officer of Borden, Inc.
and was President and Chief Operating Officer of Borden, Inc. from July 1993
until December 1993. From June 1992 to July 1993, Mr. Shames served as Chairman
and Chief Executive Officer of The Stride Rite Corporation, a footwear
manufacturer, and was President and Chief Executive Officer of The Stride Rite
Corporation from June 1990 to June 1992.
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.
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,
including Executive Vice President of Marketing and President of Victoria's
Secret Catalogue. Mr. Kollat also serves as a director of numerous companies,
including The Limited, Inc., Wolverine World Wide, Inc., Consolidated Stores,
Inc. and Cooker Restaurant Corporation.
Kenneth A. Macke has served as a director as a of the Company since September
1994. Mr. Macke is General Partner of Macke Limited Partnership, a venture
capital firm and investor in the Company. He previously served as Chairman and
Chief Executive Officer of Dayton Hudson Corporation from 1984 to 1994, prior to
which he was employed by Dayton Hudson in a variety of positions beginning in
1961. Mr. Macke also serves as a director of Unisys Corporation, General Mills,
Inc. and Fingerhut Companies, Inc. Mr. Macke will not stand for re-election at
the next annual meeting of shareholders of Select Comfort in June 1999.
4
<PAGE>
Lawrence P. Murphy is a nominee for director of Select Comfort. Since May 1998,
Mr. Murphy has served as an independent strategic advisor to a number of
companies. From 1985 to May 1998, Mr. Murphy served as Executive Vice President
and Chief Strategic Officer of The Walt Disney Company and Chairman of Disney
Cruise Lines. From 1982 to 1985, he served as Vice President, Corporate Planning
and Business Development of Marriott Corporation.
William J. Lansing is a nominee for director of Select Comfort. Mr. Lansing is
the President of Fingerhut Companies Inc. He has served in such position since
May 1998. He served as Vice President, Business Development at General Electric
Corporation from October 1996 to May 1998. From January 1996 to October 1996, he
served as Chief Operating Officer of Prodigy, Inc., an Internet service
provider. From September 1986 to December 1995, Mr. Lansing was at McKinsey &
Co., where he was a partner leading the consulting firm's Internet practice. Mr.
Lansing also serves as a director of Digital River Inc.
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 year ended January 2, 1999 and written representations by such
persons, none of the directors, executive officers and beneficial owners of
greater than 10% of the Company's common stock failed to file on a timely basis
the forms required by Section 16 of the Securities Exchange Act of 1934.
Item 11. EXECUTIVE COMPENSATION
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 meeting of the
Executive Committee, Audit Committee or Compensation Committee attended.
Stock Options. Each non-employee director is granted, on an annual basis, an
option to purchase 5,000 shares of common stock exercisable at the fair market
value of the common stock on the date of grant for a period of up to 10 years,
subject to their continuous service on the Board. Accordingly, on February 24,
1999, each non-employee director was granted a ten-year option to purchase 2,000
shares of common stock at an exercise price of $24.50 per share. In addition, on
March 29, 1999, each non-employee director was granted a ten-year option to
purchase 3,000 shares of common stock at an exercise price of $23.79 per share.
These options become exercisable in as nearly equal as possible monthly
installments over a 36-month period, so long as the director remains a director
of Select Comfort.
In addition, the Company intends to grant each newly elected director a one-time
option to purchase 15,000 shares of common stock at an exercise price equal to
the fair market value of the common stock on the date of grant. This option will
become exercisable in as nearly equal as possible monthly installments 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 will be
eligible for an annual grant, subject to action by the Board, of an option to
purchase 5,000 shares of common stock on the date of the annual meeting of
shareholders.
5
<PAGE>
Reimbursement of Expenses. All directors are reimbursed for travel expenses for
attending meetings of the Board and any Board committees.
Directors who are officers or employees of the Company do not receive additional
compensation for their services as directors.
Consulting Agreement with Ervin R. Shames. In April 1996, we entered into a
consulting agreement with Ervin R. Shames, a director and former Chairman of the
Board of Directors of the Company, pursuant to which Mr. Shames rendered certain
consulting services to the Company through the end of March 1999. Pursuant to
the consulting agreement, Mr. Shames received $120,000 in fiscal 1998.
Consulting Agreement with Lawrence P. Murphy. We are currently negotiating a
consulting agreement with Lawrence P. Murphy, a nominee for director, pursuant
to which Mr. Murphy will render certain consulting and strategic advisory
services to the Company.
Compensation Committee Interlocks and Insider Participation
Messrs. Hopf, Macke and Shames served as members of the Compensation Committee
of the Board of Directors during fiscal 1998. Mr. Shames rendered certain
consulting services to the Company through March 31, 1999. See "Item 11.
Executive Compensation -- Director Compensation."
Mr. Hopf is the President of St. Paul Venture Capital, Inc. and Managing General
Partner of St. Paul Venture Capital IV, LLC., which are investors in the
Company. Mr. Hopf was elected Chairman of the Board of Directors on April 19,
1999 and previously served as Chairman of the Board of Directors of the Company
from August 1993 to April 1996.
Mr. Macke is the General Partner of Macke Limited Partnership, which is an
investor in the Company.
For a description of certain transactions involving these entities, see "Item
13. Certain Relationships and Related Transactions - Director Relationships."
No other relationships existed during fiscal 1998 with respect to Messrs.
Shames, Hopf or Macke that would be required to be disclosed under the rules of
the Securities Act of 1933.
6
<PAGE>
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 Company's Chief Executive Officer
and the executive officers of the Company, all of whom received or earned cash
and non-cash salary and bonus of more than $100,000, for the fiscal year ended
January 2, 1999 (the "Named Executive Officers").
Summary Compensation Table
Annual Long-Term
Compensation Compensation
------------------ ------------
Securities All Other
Underlying Compensation
Name and Principal Position Year Salary($) Bonus($) Options(#) ($)(1)
- ---------------------------- ---- --------- -------- ------------ ------------
H. Robert Hawthorne (2) 1998 $341,914 $107,805 5,000 $5,000
President and Chief 1997 225,000 27,000 400,000 0
Executive Officer
Daniel J. McAthie (3) 1998 214,856 71,182 55,000 3,580
Executive Vice President, 1997 198,655 23,838 55,000 0
Chief Operating Officer,
Chief Financial Officer
and Secretary
Charles E. Dorsey 1998 167,231 54,233 25,000 3,709
Senior Vice President of 1997 155,540 81,381 35,000 0
Direct Marketing and
President of Select Comfort
Direct Corporation
Ronald E. Mayle (4) 1998 161,231 50,352 25,000 0
Senior Vice President of 1997 12,307 3,500 135,000 0
Retail and President of
Select Comfort Retail
Corporation
Gregory T. Kliner 1998 157,574 52,204 15,000 2,628
Senior Vice President of 1997 147,095 17,652 35,000 0
Operations
(1) 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. Hawthorne was President and Chief Executive Officer of the Company from
April 28, 1997 to April 19, 1999.
(3) Mr. McAthie was elected President and Chief Executive Officer of the Company
on April 19, 1999 at which time he resigned as Executive Vice President,
Chief Operating Officer, Chief Financial Officer and Secretary.
(4) Mr. Mayle became Senior Vice President of Retail and President of Select
Comfort Retail Corporation on December 1, 1997.
7
<PAGE>
Option Grants and Exercises
The following tables summarize option grants and exercises during the
fiscal year ended January 2, 1999 to or by the Named Executive Officers and the
potential realizable value of the options held by such persons at January 2,
1999.
<TABLE>
Option Grants in Last Fiscal Year
<CAPTION>
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%
- -------------------- ----------- ---------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
H. Robert Hawthorne 5,000 (3) 1.2% $11.00 03/31/08 $34,589 $87,656
Daniel J. McAthie 5,000 (3) 1.2% 11.00 03/31/08 34,589 87,656
25,000 (3) 6.0% 17.00 12/03/08 267,280 677,341
25,000 (4) 6.0% 17.00 12/03/08 267,280 677,341
Charles E. Dorsey 5,000 (3) 1.2% 11.00 03/31/08 34,589 87,656
20,000 (4) 4.8% 17.00 12/03/08 213,824 541,872
Ronald E. Mayle 5,000 (3) 1.2% 11.00 03/31/08 34,589 87,656
20,000 (4) 4.8% 17.00 12/03/08 213,824 541,872
Gregory T. Kliner 5,000 (3) 1.2% 11.00 03/31/08 34,589 87,656
10,000 (4) 2.4% 17.00 12/03/08 106,912 270,936
- --------------------
</TABLE>
(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.
8
<PAGE>
(4) These options become exercisable in full upon the earlier of the following
to occur: (a) the date on which the average of the high and low sales
prices of the Company's common stock, as reported by the Nasdaq National
Market System, exceeds $34.00 per share for at least 30 consecutive trading
days; or (b) December 3, 2003, so long as the executive remains employed by
the Company or one of its subsidiaries at that date. To the extent not
already exercisable, these options become immediately exercisable in full
upon certain changes in control of the Company that result in consideration
received or to be received by the shareholders of the Company as a result
of such transaction exceeding $34.00 per share of common stock on a fully
diluted basis.
<TABLE>
Aggregated Option Exercises In
Last Fiscal Year and Fiscal Year-End Option Values
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Value Options at January 2, 1999 at January 2, 1999 (2)
on Realized -------------------------- --------------------------
Name Exercise (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ------------------- ------------ --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
H. Robert Hawthorne 100,000 $575,000 76,250 228,750 $1,608,359 $4,825,078
Daniel J. McAthie 58,194 359,115 61,930 99,876 1,318,705 1,507,060
Charles E. Dorsey 102,156 1,045,385 4,942 59,302 104,213 999,899
Ronald E. Mayle --- --- 74,375 85,625 1,221,289 1,263,711
Gregory T. Kliner 11,855 138,704 67,739 50,406 1,451,948 928,915
- -------------------
</TABLE>
(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 January 2, 1999 ($26.4375) 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.
9
<PAGE>
Employment and Consulting Agreements
H. Robert Hawthorne. On April 19, 1999, we entered into an employment and
consulting agreement with H. Robert Hawthorne, the Vice Chairman of the Board of
Directors and the former President and Chief Executive Officer of the Company.
Under the agreement, Mr. Hawthorne will remain an employee of the Company
through July 31, 1999 and will remain Vice Chairman of the Board of Directors
and a director of the Company for an indefinite period of time. From August 1,
1999 and through April 30, 2001, Mr. Hawthorne will serve as an independent
contractor to the Company and continue to perform consulting services for the
Company on a special project basis in areas of external corporate development
and corporate marketing.
In consideration of such services, we agreed to provide Mr. Hawthorne with
certain payments and benefits, including (i) payment of Mr. Hawthorne's current
base salary through April 30, 1999, (ii) payment of a base salary equal to
$10,000 per month for the period from May 1, 1999 through July 31, 1999, (iii)
payment of a consulting fee equal to $8,250 per month for the period from August
1, 1999 through April 30, 2001, and (iv) continuation of health, dental and life
insurance coverage until April 30, 2001. Under the agreement, Mr. Hawthorne
agreed not to disclose any confidential information of the Company until April
30, 2001, and until April 30, 2001, not to compete with the Company, interfere
with our relationships with any of our current or potential vendors, suppliers,
distributors or customers and not to solicit any of our employees so long as
they remain employees of the Company.
Daniel J. McAthie. We have entered into a letter agreement with Daniel J.
McAthie pursuant to which he serves as President and Chief Executive Officer of
the Company. Mr. McAthie receives a base salary and is entitled to receive an
incentive bonus if certain performance criteria are met. Mr. McAthie is also
entitled to a severance payment equal to two times his then current base salary
in the event of termination without cause. We are currently negotiating a new
employment agreement with Mr. McAthie.
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 and President of
Select Comfort Retail Corporation. Mr. Mayle receives a base salary and is
entitled to receive an incentive bonus if certain performance criteria are met.
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 receive an
incentive bonus if certain performance criteria are met.
Lawrence P. Murphy. We are currently negotiating a consulting agreement with
Lawrence P. Murphy, a nominee for director, pursuant to which Mr. Murphy will
render certain consulting and strategic advisory services to the Company.
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:
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<PAGE>
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.
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" has occurred in the event
of any of the following:
o a merger involving the Company where the pre-merger shareholders own at
least 50% but less than 80% of the surviving company's voting stock (unless
approved by the Board of Directors) or 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 (whether or not approved by the Board of Directors);
o the "continuity" directors (the current directors 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, 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 members of the Board of Directors on the effective date of the
Plan.
11
<PAGE>
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 Kenneth A. Macke during fiscal
1998. The Compensation Committee makes recommendations to the Board of Directors
concerning the compensation and benefits of the Company's directors, executive
officers and key managers, and acts on such other matters relating to their
compensation as it deems appropriate. In addition, the Compensation Committee
administers our stock option and incentive 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.
Compensation Philosophy and Objectives
The philosophy underlying the decisions and recommendations of the Compensation
Committee is to recognize and reward results and achievement at the Company and
individual level by linking compensation to such achievement. Consistent with
this philosophy, the Compensation Committee has set the following objectives for
the Company's executive compensation program:
o Motivate officers to achieve desired Company performance goals by rewarding
such achievements.
o Provide a program of 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 by linking compensation to the Company's performance
and by providing the Company's executives with long-term opportunities for
stock ownership.
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 growth companies of
comparable size, development and complexity; the individual performance of each
executive officer; historical compensation levels at the Company; the overall
competitive environment for executives and the level of compensation necessary
to attract and retain the level of key executive talent desired by the Company.
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
may from time to time review competitive compensation data gathered in
comparative surveys or collected by independent consultants.
Executive Compensation Program Components
The three components of Select Comfort's executive compensation program are base
salary, annual cash incentive bonuses, and long-term incentive opportunities
under our stock option and incentive plans. Each element of the compensation
program is discussed in greater detail below.
Base Salary. The Compensation Committee's recommendations regarding the base
salary of each executive officer of the Company, including the compensation of
the President and Chief Executive Officer, are based on a number of factors,
including the executive officer's experience and qualifications, the potential
impact of the individual on the Company's performance, the level of skill and
responsibility required by the individual's position 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.
12
<PAGE>
Annual Management Incentive Bonus. The Company's annual management incentive
bonus program is designed to provide a direct financial incentive to the
Company's executive officers, including the President and Chief Executive
Officer, for the achievement of specific Company performance goals. Generally,
at the beginning of each year, the Compensation Committee establishes a maximum
annual bonus, as a percentage of base salary, that the President and Chief
Executive Officer and the other executive officers of the Company are eligible
to receive and the goals against which performance will be measured in
determining annual bonuses after the conclusion of the year. In past years,
these goals have consisted of financial and non-financial goals, established to
motivate the executive officers to achieve milestones that would impact the
Company's long-term value. The bonuses paid to the officers of the Company
ranged from 31% to 33% of their base salaries for 1998.
Long-Term Incentive Compensation. The Compensation Committee makes long-term
incentive compensation available to the Company's executive officers, as well as
substantially all 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 to 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 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 on comparative compensation data regarding option
grants by Company's within the specialty retail industry as well as within a
broader group of 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 granted by the Compensation Committee have an exercise price equal
to 100% of the fair market value of the Common stock on the date of grant. In
general, options become exercisable in as nearly equal as possible monthly
installments over a 36-month period and remain exercisable for a period of 10
years from the date of grant, provided the individual continues to be employed
by the Company. Alternatively, some options are "performance-based" and become
exercisable upon the achievement of certain performance goals, including the
price of the Company's common stock.
In 1998, the Compensation Committee granted options to all executive officers of
the Company and key managers and sales personnel of the Company. In addition, in
connection with the Company's initial public offering, the Compensation
Committee granted options to substantially all employees of the Company. The
primary purpose of the 1998 stock option grants was to recognize the outstanding
individual contributions being made by these individuals during a year in which
the Company experienced substantial growth and achieved significant milestones,
including its initial public offering in December 1998.
13
<PAGE>
Chief Executive Officer Compensation
Mr. Hawthorne's base salary during fiscal 1998 was $350,000. Mr. Hawthorne's
1998 annual bonus was determined in the manner described above, and amounted to
32% of base salary. Mr. Hawthorne was granted a stock option to purchase 5,000
shares of common stock in March 1998. Mr. Hawthorne's salary, annual bonus and
long-term compensation are determined by the Compensation Committee in
accordance with the practices described above. These determinations are based
primarily on the Compensation Committee's subjective evaluation of Mr.
Hawthorne's performance, Select Comfort's performance and its stock price
performance. No specific weighting is assigned to the factors considered by the
Compensation Committee.
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
1998, the Company did not pay "compensation" within the meaning of Section
162(m) to such executive officers in excess of $1,000,000, and does not believe
it will do so in the near future. Therefore, the Company does not have a policy
at this time regarding qualifying compensation paid to its executive officers
for deductibility under Section 162(m), but will formulate such a policy if
compensation levels ever approach $1,000,000.
Compensation Committee
Ervin R. Shames
Patrick A. Hopf
Kenneth A. Macke
14
<PAGE>
COMPARATIVE STOCK PERFORMANCE
The graph below compares, for the period from December 3, 1998, the date
of our initial public offering, to January 2, 1999, 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 One Month Cumulative Total Return
Among Select Comfort Corporation, the Standard & Poor's 400 Retail
(Specialty) Indexand The Nasdaq Stock Market (U.S.) Index
Standard &
Poor's
400 Retail The Nasdaq
Select Comfort (Specialty) Stock Market
Corporation Index (U.S.) Index
December 3, 1998 100 100 100
January 2, 1999 130 116 109
15
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth information, as of December 31, 1998, with
respect to each person who was known by us to be the beneficial owner of more
than 5% of Select Comfort common stock.
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially Owned (1)
---------------------------
Name Amount Percent of Class
- ------------------------------------------------------------------- --------- ----------------
<S> <C> <C>
The St. Paul Companies, Inc. (2)................................... 5,154,748 28.4%
Consumer Venture Partners (3)...................................... 2,237,113 12.3%
Putnam Investments, Inc. (4)....................................... 1,111,602 6.1%
General Electric Capital Corporation (5)........................... 1,076,098 5.5%
Dresdner RCM Global Investors (6).................................. 940,150 5.1%
Apex Investment Fund, L.P. and The Productivity Fund II, L.P. (7).. 939,534 5.2%
Norwest Venture Capital (8)........................................ 926,330 5.1%
- --------------------
</TABLE>
(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 4,766,008 shares held by St. Paul Fire and Marine Insurance
Company and 321,017 shares held by St. Paul Venture Capital IV, LLC.
Includes 59,769 shares issuable upon exercise of outstanding warrants held
by St. Paul Fire and Marine Insurance Co. and 7,954 shares issuable upon
exercise of outstanding warrants held by St. Paul Venture Capital IV, LLC.
St. Paul 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. Patrick A. Hopf, Chairman of the Board of
Directors of the Company, is the Managing General Partner of St. Paul
Venture Capital IV, 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 Companies, Inc. is 385 Washington Street, St. Paul,
Minnesota 55102.
(3) Includes 274,312 shares held by Consumer Venture Partners I, L.P. and
1,962,801 shares held by Consumer Venture Partners II, L.P. Christopher P.
Kirchen, a director of the Company, is the general partner of Consumer
Venture Associates L.P., which is the general partner of Consumer Venture
Partners I, L.P. Mr. Kirchen is also the general partner of Consumer
Venture Associates II, L.P., which is the general partner of Consumer
Venture Partners II, L.P. Does not include any shares held of record by
Mr. Kirchen. See "--Security Ownership of Management." The address of
Consumer Venture Partners is Three Pickwick Plaza, Greenwich, Connecticut
06830.
16
<PAGE>
(4) Putnam Investments, Inc. ("PI") beneficially owns 1,111,602 shares, all of
which shares PI has shared dispositive power and 98,750 of which shares PI
holds shared voting power. PI's wholly owned investment advisers Putnam
Investment Management, Inc. ("PIM") has shared dispositive power with
respect to 992,842 shares, and The Putnam Advisory Company, Inc. ("PAC")
has shared dispositive power with respect to 118,760 shares and holds
shared voting power with respect to 98,750 shares. The address of PI, PIM
and PAC is One Post Office Square, Boston, Massachusetts 02109. PI is a
wholly owned subsidiary of Marsh & McLennan Companies, Inc., whose address
is 1166 Avenue of the Americas, New York, New York 10036.
(5) Includes 1,076,098 shares issuable upon exercise of an outstanding
warrant. The address of General Electric Capital Corporation is 260 Long
Ridge Road, Stamford, Connecticut 06927.
(6) Each of Dresdner RCM Global Investors LLC, Dresdner RCM Global Investors
US Holdings LLC and Dresdner Bank AG may be deemed to have sole voting
power with respect to 606,750 shares and sole dispositive power with
respect to 940,150 shares. The address of Dresdner RCM Global Investors
LLC and Dresdner RCM Global Investors US Holdings LLC is Four Embarcadero
Center, San Francisco, California 94111. The address of Dresdner Bank AG
is Jurgen-Ponto-Platz 1, 60301 Frankfurt, Germany.
(7) Includes 645,878 shares held by Apex Investment Fund, L.P. ("Apex") and
277,619 shares held by The Productivity Fund II, L.P. ("TPF"). Also
includes 11,102 and 4,935 shares issuable upon exercise of outstanding
warrants held by Apex and TPF, respectively. First Analysis Corporation is
a general partner of each of the general partners of Apex and TPF and may
be deemed to be the beneficial owner of shares held by Apex and TPF. First
Analysis Corporation disclaims beneficial ownership of such shares, except
to the extent of its pecuniary interest therein. James A. Johnson, George
M. Middlemas and Paul J. Renze, by virtue of their affiliation with Apex,
may be deemed to be the beneficial owner of shares held by Apex; however,
they disclaim beneficial ownership of such shares, except to the extent of
their individual pecuniary interest therein. Bret R. Maxwell, by virtue of
his affiliation with TPF, may be deemed to be the beneficial owner of
shares held by TPF; however, he disclaims beneficial ownership of such
shares, except to the extent of his pecuniary interest therein. The
address of Apex and TPF is 233 South Wacker Drive, Suite 9500, Chicago,
Illinois 60606.
(8) Includes 597,053 shares held by Norwest Equity Partners IV and 329,277
shares held by Norwest Equity Partners V. Itasca Partners is the general
partner of Norwest Equity Partners IV and may be deemed to be the
beneficial owner of shares held by Norwest Equity Partners IV. Itasca
Partners V is the general partner of Norwest Equity Partners V and may be
deemed to be the beneficial owner of shares held by Norwest Equity
Partners V. John E. Lindahl and George J. Still, Jr. are each managing
general partners of, and John P. Whaley is the managing administrative
partner of, Itasca Partners and Itasca Partners V, respectively. By virtue
of their affiliation with Norwest Equity Partners IV and Norwest Equity
Partners V resulting from their positions with Itasca Partners and Itasca
Partners V, each may be deemed to be the beneficial owner of shares held
by Norwest Equity Partners IV and Norwest Equity Partners V; however, they
disclaim beneficial ownership of such shares, except to the extent of
their pecuniary interest therein. The address of Norwest Venture Capital
and the other named individuals is 2800 Piper Tower, 222 South Ninth
Street, Minneapolis, Minnesota 55402.
17
<PAGE>
Security Ownership of Management
The following table sets forth information regarding the beneficial
ownership of Select Comfort common stock as of April 1, 1999 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
- --------------------------------------------------- --------- ----------------
H. Robert Hawthorne (2)............................ 330,610 1.8%
Daniel J. McAthie (3).............................. 186,635 *
Charles E. Dorsey (4).............................. 145,344 *
Ronald E. Mayle (5)................................ 97,569 *
Gregory T. Kliner (6).............................. 105,089 *
Patrick A. Hopf (7)................................ 5,164,761 27.7%
Thomas J. Albani (8)............................... 37,927 *
Christopher P. Kirchen (9)......................... 2,237,445 12.0%
David T. Kollat (10)............................... 37,927 *
William J. Lansing................................. 2,000 *
Kenneth A. Macke (11).............................. 90,737 *
Lawrence P. Murphy................................. 0 *
Ervin R. Shames (12)............................... 225,000 1.2%
Jean-Michel Valette (13)........................... 207,091 1.1%
All directors and executive officers
as a group (12 persons) (14)....................... 8,866,135 45.7%
- --------------------
* 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.
18
<PAGE>
(2) Includes 150,700 shares issuable upon exercise of outstanding options.
Also includes 12,000 shares held by Mr. Hawthorne's children.
(3) Includes 110,832 shares issuable upon exercise of outstanding options and
4,000 shares issuable upon exercise of outstanding warrants. Also includes
29,097 shares held by Mr. McAthie's spouse, as to which Mr. McAthie shares
voting and dispositive power.
(4) Includes 18,449 shares issuable upon exercise of outstanding options. Also
includes 99,156 shares jointly held by Mr. Dorsey and his spouse, as to
which Mr. Dorsey shares voting and dispositive power, and an aggregate of
3,000 shares held by Mr. Dorsey's children, as to which Mr. Dorsey has
sole voting and dispositive power. Also includes 1,000 shares held by Mr.
Dorsey's daughter and 1,000 shares held by Mr. Dorsey's son, as to which
shares Mr. Dorsey disclaims beneficial ownership.
(5) Includes 97,569 shares issuable upon exercise of outstanding options.
(6) Includes 105,089 shares issuable upon exercise of outstanding options.
(7) Includes 190 shares issuable upon exercise of outstanding warrants.
Also includes an aggregate of 1,216 shares held by Mr. Hopf's spouse
and children. Also includes shares beneficially owned by St. Paul Fire
and Marine Insurance Company, St. Paul Venture Capital Affiliates Fund
I, LLC and St. Paul Venture Capital IV, LLC. St. Paul Venture Capital,
Inc. is the manager of St. Paul Venture Capital Affiliates Fund I,
LLC. Mr. Hopf is the President of St. Paul Venture Capital, Inc. and
the Managing General Partner of St. Paul Venture Capital IV, LLC.
Mr. Hopf's address is 10400 Viking Drive, Suite 550, Eden Prairie,
Minnesota 55344. See "--Security Ownership of Certain Beneficial
Owners."
(8) Includes 332 shares issuable upon exercise of outstanding options.
(9) Includes 332 shares issuable upon exercise of outstanding options. Also
includes shares beneficially owned by Consumer Venture Partners I, L.P.
and Consumer Venture Partners II, L.P., as to which Mr. Kirchen shares
voting and dispositive power. Mr. Kirchen has the same business address as
Consumer Venture Partners. See "--Security Ownership of Certain Beneficial
Owners."
(10) Includes 37,832 shares issuable upon exercise of outstanding options.
(11) Includes 12,832 shares issuable upon exercise of outstanding options. Also
includes 75,182 shares held by Macke Limited Partnership and 2,723 shares
issuable upon exercise of outstanding warrants held by Macke Limited
Partnership, of which Mr. Macke is the general partner.
(12) Includes 106,000 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.
(13) Includes 332 shares issuable upon exercise of outstanding options. Also
includes 206,106 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.
(14) Includes an aggregate of 815,267 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
Companies, Inc. and Consumer Venture Partners. See "--Security
Ownership of Certain Beneficial Owners."
19
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Director Relationships
Patrick A. Hopf, Chairman of the Board of Directors of Select Comfort, is the
President of St. Paul Venture Capital, Inc. and the Managing General Partner of
St. Paul Venture Capital IV, LLC. St. Paul Venture Capital IV, LLC and St. Paul
Venture Capital Affiliates Fund I, of which St. Paul Venture Capital, Inc. is
the manager for both, and St. Paul Fire and Marine Insurance Co. are
shareholders of the Company. Mr. Hopf was elected to the Board in connection
with the purchase agreement under which the Series A preferred stock was
purchased.
Christopher P. Kirchen, a director of Select Comfort, is a general partner of
Consumer Venture Associates, L.P., which is the general partner of Consumer
Venture Partners I, L.P., a shareholder of the Company. Mr. Kirchen is also the
general partner of Consumer Venture Associates II, L.P., which is the general
partner of Consumer Venture Partners II, L.P., a shareholder of the Company. Mr.
Kirchen was elected to the Board in connection with the purchase agreement under
which the Series B preferred stock was purchased.
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. Mr. Valette was
elected to the Board in connection with the purchase agreement under which the
Series D preferred stock was purchased. Hambrecht & Quist LLC was one of the
underwriters of the Company's initial public offering.
Amended and Restated Registration Rights Agreement
Certain holders of our common stock and warrants to purchase shares of our
common stock, including executive officers, 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 and Consulting Agreements
In April 1996, we entered into a consulting agreement with Ervin R. Shames, a
director and former Chairman of the Board of Directors of the Company, pursuant
to which Mr. Shames rendered certain consulting services to the Company through
the end of March 1999. See "Item 11. Executive Compensation--Director
Compensation."
We are currently negotiating a consulting agreement with Lawrence P. Murphy, a
nominee for director, pursuant to which Mr. Murphy will render certain
consulting and strategic advisory services to the Company.
For a discussion of the employment agreements entered into by the Company and
certain Named Executive Officers, see "Item 11. Executive Compensation--Director
Compensation" and "Item 11. Executive Compensation--Executive Compensation and
Other Benefits--Employment and Consulting Agreements."
20
<PAGE>
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 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 their warrant and as of January 2, 1999,
held a combined warrant to purchase 1,076,098 shares of common stock. GECC has
certain demand and incidental registration rights covering the shares of common
stock issuable upon exercise of this warrant.
Monogram Bank Credit Card Program
GECC, which controls Monogram Credit Card Bank of Georgia (the "Bank"), has an
indirect interest in our consumer credit arrangements with the Bank. Under these
arrangements, the Bank offers to our qualified customers an unsecured revolving
credit arrangement to finance purchases from us. For all purchases financed
under these arrangements, the Bank pays us an amount equal to the total amount
of purchases net of promotional related discounts and less amounts retained for
limited recourse on bad debts.
Upon commencement of our consumer credit arrangements with the Bank, the Bank
paid us a $500,000 incentive bonus, and we paid the Bank $500,000 as amounts to
be retained by the Bank for returned products.
In March 1999, we notified the Bank of our intent to terminate this consumer
credit arrangement. In addition, we have signed a letter of intent with a third
party provider to replace the existing arrangement. We anticipate that a new
arrangement will be under terms that are no less favorable than under the
existing arrangement and that the transition to the new provider will occur
during the third quarter of 1999.
Series E Preferred Stock Shareholder Voting Agreement and Irrevocable Proxy
In November 1998, the Company and the holders of more than 60% of the
outstanding shares of Series E preferred stock entered into a Shareholder Voting
Agreement and Irrevocable Proxy pursuant to which such shareholders agreed to
vote all of the shares of Select Comfort capital stock held by them in favor of
an amendment of our Articles of Incorporation to decrease the public offering
price at which the Series E preferred stock would automatically convert into
common stock from $19.95 to $15.00 per share and reduce the conversion price of
the Series E preferred stock into common stock from $8.82 to $8.20 per share.
The amendment was approved by our shareholders on November 30, 1998, and all
outstanding shares of Series E preferred stock converted into shares of common
stock in connection with our initial public offering.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SELECT COMFORT CORPORATION
Dated: April 29, 1999 By: /s/ Daniel J. McAthie
Daniel J. McAthie
President and Chief Executive Officer
(principal executive officer)
By: /s/ James C. Raabe
James C. Raabe
Chief Financial Officer
(principal financial and accounting
officer)
22
<PAGE>
