UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
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 Section 240.14a-11(c) or Section
240.14a-12
------------------------------
SELECT COMFORT CORPORATION
(Name of Registrant as Specified In Its Charter)
SELECT COMFORT CORPORATION
(Name of Person(s) Filing Proxy Statement)
------------------------------
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] 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:
---------------------------------
2 Aggregate number of securities to which transaction applies:
---------------------------------
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):
---------------------------------
4 Proposed maximum aggregate value of transaction:
---------------------------------
5 Total fee paid:
---------------------------------
[ ] 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:
---------------------------------
2 Form, Schedule or Registration Statement No.:
---------------------------------
3 Filing Party:
---------------------------------
4 Date Filed:
---------------------------------
<PAGE>
[LOGO]
6105 TRENTON LANE NORTH
MINNEAPOLIS, MINNESOTA 55442
-----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 8, 1999
-----------------
TO THE SHAREHOLDERS OF SELECT COMFORT CORPORATION:
The Annual Meeting of Shareholders of Select Comfort Corporation, a
Minnesota corporation (the "Company"), will be held on Tuesday, June 8, 1999, at
2:00 p.m., local time, at the Radisson Plaza Hotel Minneapolis, 35 South Seventh
Street, Minneapolis, Minnesota 55402, for the following purposes:
1. To consider and act upon a proposal to amend the Company's Articles of
Incorporation to increase the maximum number of directors from nine to
twelve.
2. To elect three persons to serve as directors for three-year terms and
one person to serve as a director for a one-year term or until their
respective successors shall be elected and qualified.
3. To consider and act upon a proposal to amend the Select Comfort
Corporation 1997 Stock Incentive Plan to increase the number of shares
of common stock reserved for issuance by 1,000,000, from 1,500,000
shares to 2,500,000 shares.
4. To consider and act upon a proposal to ratify the appointment of KPMG
Peat Marwick LLP, certified public accountants, as independent
auditors for the Company for the fiscal year ending January 1, 2000.
5. 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 14, 1999 will
be entitled to notice of, and to vote at, the meeting and any adjournments
thereof. It is important that your shares be represented and voted at the
meeting. Please mark, sign, date and mail the enclosed proxy card in the
postage-paid envelope provided.
By Order of the Board of Directors,
/s/ Mark A. Kimball
Mark A. Kimball
SECRETARY
May 7, 1999
Minneapolis, Minnesota
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INTRODUCTION..................................................................2
Shareholders Entitled to Vote.................................................2
Revocation of Proxies.........................................................2
Quorum Requirements...........................................................3
Vote Required.................................................................3
Proxy Solicitation Costs......................................................3
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................4
Security Ownership of Certain Beneficial Owners...............................4
Security Ownership of Management..............................................6
AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION..........................8
Proposed Amendment............................................................8
Purpose and Effect of the Amendment...........................................8
Board Recommendation..........................................................8
ELECTION OF DIRECTORS.........................................................9
Nomination....................................................................9
Vote Required.................................................................9
Board Recommendation..........................................................9
Information About Nominees and Other Directors...............................10
Other Information About Nominees and Other Directors.........................11
Information About the Board and its Committees...............................12
Director Compensation........................................................13
Compensation Committee Interlocks and Insider Participation..................14
EXECUTIVE COMPENSATION AND OTHER BENEFITS....................................15
Summary of Cash and Certain Other Compensation...............................15
Option Grants and Exercises..................................................16
Employment and Consulting Agreements.........................................18
Change in Control Arrangements...............................................18
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION......................20
Compensation Philosophy and Objectives.......................................20
Executive Compensation Program Components....................................20
Chief Executive Officer Compensation.........................................22
Section 162(m)...............................................................22
COMPARATIVE STOCK PERFORMANCE................................................23
CERTAIN TRANSACTIONS.........................................................24
Director Relationships.......................................................24
Amended and Restated Registration Rights Agreement...........................24
Employment and Consulting Agreements.........................................24
GE Financing and Restructuring of GE Warrants................................24
i
<PAGE>
Monogram Bank Credit Card Program............................................25
Series E Preferred Stock Shareholder Voting Agreement and Irrevocable Proxy..25
AMENDMENT TO 1997 STOCK INCENTIVE PLAN.......................................26
Proposed Amendment...........................................................26
Purpose of the Amendment.....................................................26
Summary of the 1997 Plan.....................................................26
Federal Income Tax Consequences..............................................30
Incentive Awards Granted under the 1997 Plan.................................32
Board Recommendation.........................................................32
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS............................33
Appointment of Auditors......................................................33
Board Recommendation.........................................................33
OTHER MATTERS................................................................34
Section 16(a) Beneficial Ownership Reporting Compliance......................34
Shareholder Proposals For 2000 Annual Meeting................................34
Other Business...............................................................35
Copies of 1999 Annual Report.................................................35
</TABLE>
ii
<PAGE>
[LOGO]
6105 TRENTON LANE NORTH
MINNEAPOLIS, MINNESOTA 55442
-----------------
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
June 8, 1999
----------------
INTRODUCTION
----------------
This proxy statement is being mailed to our shareholders beginning on or about
May 7, 1999 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 Tuesday, June 8, 1999, at 2:00 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 four nominees for
directors listed in this proxy statement.
THE BOARD RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE 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 14, 1999 will be
entitled to vote at the meeting. As of that date, there were 18,579,713
outstanding shares of common stock. Each share is entitled to one vote on each
matter to be voted on at the Annual Meeting. Shareholders are not entitled to
cumulate voting rights.
REVOCATION OF PROXIES
Any shareholder giving a proxy may revoke it at any time prior to its use at the
Annual Meeting by:
o giving written notice of such revocation to the Secretary of the Company,
o filing a duly executed proxy bearing a later date with the Secretary of the
Company, or
o appearing at the Annual Meeting and filing written notice of revocation
with the Secretary of the Company prior to use of the proxy.
2
<PAGE>
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 (9,289,857 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 the nominees for director and the approval of the other
proposals described in this proxy statement, except for the proposal to amend
our Articles of Incorporation, require the approval of the holders of a majority
of the shares present and entitled to vote in person or by proxy. The proposal
to amend our Articles of Incorporation to increase the maximum number of
directors requires the affirmative vote of the holders of at least two-thirds of
the outstanding shares of common stock. Shares represented by a proxy card
including any broker non-votes on a matter will be treated as shares not
entitled to vote on that matter, and thus will not be counted in determining
whether that matter has been approved. Shares represented by a proxy card voted
as abstaining on any of the proposals will be treated as shares present and
entitled to vote that were not cast in favor of a particular matter, and thus
will be counted as votes against that matter. Signed proxies that lack any
specification will be voted in favor of the proposals set forth in the Notice of
Meeting and in favor of the election as directors of the four nominees for
directors listed in this proxy statement.
PROXY SOLICITATION COSTS
The cost of soliciting proxies, including the preparation, assembly and mailing
of proxies and soliciting material, as well as the cost of forwarding such
material to the beneficial owners of our common stock will be borne by us. Our
directors, officers and regular employees may, without compensation other than
their regular compensation, solicit proxies by telephone, telegraph or personal
conversation. We may reimburse brokerage firms and others for expenses in
forwarding proxy materials to the beneficial owners of our common stock.
3
<PAGE>
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>
St. Paul Venture Capital, Inc. (2)........................................ 5,155,023 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, 321,017 shares held by St. Paul Venture Capital IV, LLC and 275
shares held by St. Paul Venture Capital Affiliates Fund I, LLC. Includes
59,769 shares issuable upon exercise of outstanding warrants held by St.
Paul Fire and Marine Insurance Co. and 7,954 shares issuable upon exercise
of outstanding warrants held by St. Paul Venture Capital IV, LLC. St. Paul
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
Venture Capital, Inc. is 10400 Viking Drive, Suite 550, Eden Prairie,
Minnesota 55344.
(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
4
<PAGE>
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.
(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.
5
<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.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED (1)
------------------------------
NAME AMOUNT PERCENT OF CLASS
- - ---------------------------------------------- ----------- ----------------
<S> <C> <C>
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)......................... 250,000 1.3%
Jean-Michel Valette (13)..................... 207,091 1.1%
All directors and executive officers
as a group (12 persons) (14)................. 8,891,135 45.7%
- - ------------------
</TABLE>
* 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.
6
<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 840,267 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."
7
<PAGE>
AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION
TO INCREASE THE MAXIMUM NUMBER OF DIRECTORS
FROM NINE TO TWELVE
(PROPOSAL 1)
-----------------
PROPOSED AMENDMENT
On April 19, 1999, the Board of Directors of the Company approved, subject to
approval by the shareholders at the Annual Meeting, an amendment to our Articles
of Incorporation to increase the maximum number of directors from nine to
twelve. Article XIV of our Articles of Incorporation currently provides that the
number of directors must be at least one but not more than nine 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. The term of
each class is three years and the term of one class expires each year in
rotation.
PURPOSE AND EFFECT OF THE AMENDMENT
The Board has determined that the maximum number of directors should be
increased from nine to twelve to enable the Board to increase its size and
diversify its composition while at the same time ensuring continuity on the
Board. The Board has reviewed its current size of nine directors and its current
composition and has determined that a larger board with a better overall mix of
experience, expertise, independence and diversity of backgrounds among all the
directors will enable the Board to most effectively monitor Select Comfort's
performance and actively participate in developing and executing its long-term
strategic objectives.
BOARD RECOMMENDATION
The Board recommends that the shareholders vote FOR approval of the amendment to
Article XIV of our Articles of Incorporation to increase the maximum number of
directors from nine to twelve. The affirmative vote of the holders of two-thirds
of the outstanding shares of common stock is necessary for approval. Unless a
contrary choice is specified, proxies solicited by the Board will be voted FOR
approval of the amendment to Article XIV of our Articles of Incorporation.
If the amendment is approved by the shareholders, it will become effective as of
the date and time a certificate of amendment is filed with the Secretary of
State of the State of Minnesota. Such filing will be made as soon as practicable
after approval by the shareholders.
8
<PAGE>
ELECTION OF DIRECTORS
(PROPOSAL 2)
-----------------
NOMINATION
If the proposal to amend our Articles of Incorporation to increase the maximum
number of directors from nine to twelve is approved by the shareholders, our
Articles of Incorporation will provide 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. The term of each class is three
years and the term of one class expires each year in rotation. The Board has set
its size at ten for 1999.
The Board has nominated the following individuals to serve as directors of the
Company for terms of three years, expiring at the 2002 Annual Meeting of
Shareholders, or until their successors are elected and qualified:
o Christopher P. Kirchen
o Lawrence P. Murphy
o Jean-Michel Valette
In addition, the Board has nominated William J. Lansing to serve as a director
of the Company for a term of one year. In the event the proposal to amend our
Articles of Incorporation to increase the maximum number of directors from nine
to twelve is not approved by our shareholders, Mr. Lansing will not stand for
election at this time, and the number of directors will remain nine.
All of the nominees, except Messrs. Murphy and Lansing, are current members of
the Board. Kenneth A. Macke will not to stand for re-election this year. The
Board extends its thanks to Mr. Macke for his valuable and dedicated service to
Select Comfort.
VOTE REQUIRED
Proxies can only be voted for the number of persons named as nominees in this
proxy statement, which is four in the event the proposal to amend our Articles
of Incorporation to increase the maximum number of directors from nine to twelve
is approved by the shareholders, and three in the event the proposal is not
approved.
Assuming a quorum is represented at the Annual Meeting, either in person or by
proxy, the election of a 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, Murphy, Valette
and Lansing. In the absence of other instructions, the proxies will be voted FOR
the election of each of Messrs. Kirchen, Murphy, Valette and Lansing.
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.
9
<PAGE>
INFORMATION ABOUT NOMINEES AND OTHER DIRECTORS
The following table sets forth certain information, as of April 25, 1999,
which 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.
<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE
- - -------------------------------------- ------- ----------------------------------------------- ----------
<S> <C> <C> <C>
NOMINEES FOR THREE-YEAR TERMS EXPIRING IN 2002:
Christopher P. Kirchen (1)(3) 56 Managing General Partner of Brand Equity 1991
Ventures and General Partner of Consumer
Venture Partners
Lawrence P. Murphy 46 Independent Strategic Advisor --
Jean-Michel Valette 38 President and Chief Executive Officer of 1994
Franciscan Estates, Inc.
NOMINEE FOR ONE-YEAR TERM EXPIRING IN 2000:
William J. Lansing (2) 41 President of Fingerhut Companies Inc. --
DIRECTORS NOT STANDING FOR ELECTION THIS YEAR WHOSE TERMS EXPIRE IN 2000:
Patrick A. Hopf (1)(2) 50 President of St. Paul Venture Capital, Inc. 1991
Ervin R. Shames (1)(2) 58 Independent Management Consultant 1996
DIRECTORS NOT STANDING FOR ELECTION THIS YEAR WHOSE TERMS EXPIRE IN 2001:
Thomas J. Albani (3) 56 Former President and Chief Executive Officer 1994
of Electrolux Corporation
H. Robert Hawthorne 53 Vice Chairman of the Board of Directors of 1997
Select Comfort
David T. Kollat (3) 60 President and Chairman of 22 Inc. 1994
Daniel J. McAthie 48 President and Chief Executive Officer of 1999
Select Comfort
- - ------------------
</TABLE>
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
10
<PAGE>
OTHER INFORMATION ABOUT NOMINEES AND OTHER DIRECTORS
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. See "Certain
Transactions--Director Relationships." 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.
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.
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. See "Certain
Transactions--Director Relationships." 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.
WILLIAM J. LANSING is a nominee for director of Select Comfort. Mr. Lansing is
the President of Fingerhut Companies Inc., a mail order catalog company. 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., a provider of online software and digital products and e-commerce
services.
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. See
"Certain Transactions--Director Relationships." 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.
ERVIN R. SHAMES has served as a director of Select Comfort since April 1996.
From April
11
<PAGE>
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.
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. From
June 1990 to January 1992, he was President and Chief Executive Officer of Alpo
Petfoods, then a subsidiary of Grand Metropolitan PLC. Prior to joining Alpo
Petfoods, Mr. Hawthorne was President and Chief Executive Officer of Pillsbury
Canada, a subsidiary of Diageo PLC.
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.
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.
INFORMATION ABOUT THE BOARD AND ITS COMMITTEES
The Board of Directors met four times and took action by written consent on two
occasions during fiscal 1998. All of the directors attended 75% or more of the
meetings of the Board and all such committees on which they served during fiscal
1998.
The Board has an Executive Committee, an Audit Committee and a Compensation
Committee.
EXECUTIVE COMMITTEE. The Executive Committee has the authority to take all
actions that the Board as a whole is able to take, except as limited by
applicable law.
12
<PAGE>
The Executive Committee consists of Messrs. Hopf, Kirchen and Shames as of May
4, 1999. The Executive Committee did not meet during fiscal 1998.
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. Albani, Kirchen and Kollat as of May 4,
1999. The Audit Committee met once during fiscal 1998.
COMPENSATION COMMITTEE. The Compensation Committee:
o reviews general programs of compensation and benefits for all employees of
the Company;
o makes recommendations to the Board concerning such matters as compensation
to be paid to the Company's officers and directors; and
o administers the Company's stock option and incentive plans, pursuant to
which stock options and other incentive awards may be granted to eligible
employees, officers, directors and consultants of the Company.
The Compensation Committee consisted of Messrs. Hopf, Macke and Shames as of
April 1, 1999. Following the Annual Meeting, and upon the election of Mr.
Lansing to the Board, the Compenation Committee will consist of Messrs. Hopf,
Lansing and Shames. The Compensation Committee met once during fiscal 1998.
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 and
subject to action by the Board, 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.
REIMBURSEMENT OF EXPENSES. All directors are reimbursed for travel expenses for
attending meetings of the Board and any Board committees.
13
<PAGE>
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. In May 1999, we entered into 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. Pursuant to the consulting agreement, Mr Murphy will
receive a monthly retainer of $8,333 and options to purchase up to 60,000 shares
vesting in equal monthly increments over 24 months, in addition to the options
and cash compensation payable to non-employee directors as described above.
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 "Election of
Directors -- Director Compensation."
Mr. Hopf is the President of St. Paul Venture Capital, Inc. and Managing General
Partner of St. Paul Venture Capital IV, LLC., 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 "Certain
Transactions."
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.
14
<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 $100,000, for the fiscal year ended
January 2, 1999 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------- ------------ ALL OTHER
SECURITIES COMPENSATION
UNDERLYING ------------
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)(1)
--------------------------- ---- --------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
H. Robert Hawthorne (2) 1998 $341,914 $107,805 5,000 $5,000
PRESIDENT AND CHIEF EXECUTIVE 1997 225,000 27,000 400,000 0
OFFICER
Daniel J. McAthie (3) 1998 214,856 71,182 55,000 3,580
EXECUTIVE VICE PRESIDENT, CHIEF 1997 198,655 23,838 55,000 0
OPERATING OFFICER, CHIEF FINANCIAL
OFFICER AND SECRETARY
Charles E. Dorsey 1998 167,231 54,233 25,000 3,709
SENIOR VICE PRESIDENT OF DIRECT 1997 155,540 81,381 35,000 0
MARKETING AND PRESIDENT OF SELECT
COMFORT DIRECT CORPORATION
Ronald E. Mayle (4) 1998 161,231 50,352 25,000 0
SENIOR VICE PRESIDENT OF RETAIL AND 1997 12,307 3,500 135,000 0
PRESIDENT OF SELECT COMFORT RETAIL
CORPORATION
Gregory T. Kliner 1998 157,574 52,204 15,000 2,628
SENIOR VICE PRESIDENT OF OPERATIONS 1997 147,095 17,652 35,000 0
- - ---------------------------
</TABLE>
(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.
15
<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.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<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.
16
<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 $34.00 per share of common stock on a fully
diluted basis.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISE
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT JANUARY 2, 1999 AT JANUARY 2, 1999 (2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED ($)(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.
17
<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 discussing 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. In May 1999, we entered into 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. See
"Election of Directors--Directors Compensation."
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:
18
<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" will include any of the
following:
o a merger involving the Company where the pre-merger shareholders own less
than 50% of the surviving company's voting stock (whether or not approved
by the Board of Directors);
o a transfer of substantially all of the Company's assets or liquidation of
the Company;
o ownership by any person or group of more than 50% of the Company's voting
stock;
o the "continuity" directors (directors as of the effective date of the Plan
and their future nominees) ceasing to constitute a majority of the Board of
Directors; or
o any change of control that is required by the Securities and Exchange
Commission to be reported.
Notwithstanding anything in the foregoing to the contrary, 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.
19
<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
20
<PAGE>
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.
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 companies 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.
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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
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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) INDEX AND THE NASDAQ STOCK MARKET (U.S.) INDEX
<TABLE>
<CAPTION>
Standard & Poor's The Nasdaq Stock
Select Comfort 400 Retail Market (U.S.)
Corporation (Specialty) Index Index
<S> <C> <C> <C>
December 3, 1998 100 100 100
January 2, 1999 130 116 109
</TABLE>
[GRAPHIC OMITTED]
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CERTAIN TRANSACTIONS
-----------------
DIRECTOR RELATIONSHIPS
Patrick A. Hopf, Chairman of the Board of Directors of Select Comfort, is the
President of St. Paul Venture Capital, Inc. 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 "Election of Directors--Director Compensation."
In May 1999, we entered into 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. See "Election of
Directors--Directors Compensation."
For a discussion of the employment agreements entered into by the Company and
certain Named Executive Officers, see "Executive Compensation and Other
Benefits--Employment and Consulting Agreements."
GE FINANCING AND RESTRUCTURING OF GE WARRANTS
In March 1997, we entered into a Purchase Agreement with General Electric
Capital Corporation ("GECC"), pursuant to which we issued to GECC a senior
subordinated
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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.
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<PAGE>
AMENDMENT TO 1997 STOCK INCENTIVE PLAN
(PROPOSAL 3)
-----------------
PROPOSED AMENDMENT
On March 28, 1997, the Board of Directors of the Company adopted the Select
Comfort Corporation 1997 Stock Incentive Plan (the "1997 Plan"), which the
Company's shareholders approved on March 27, 1998. On February 24, 1999, the
Board amended the 1997 Plan, subject to shareholder approval, to increase the
number of shares of common stock reserved for issuance under the 1997 Plan by
1,000,000, from 1,500,000 shares to 2,500,000 shares. You are being asked to
approve this amendment at the Annual Meeting.
PURPOSE OF THE AMENDMENT
Providing stock option grants and other incentive awards under the 1997 Plan is
an important element in the overall success of Select Comfort. In general, the
Board believes that equity-based incentives align the interests of the Company's
management and employees with those of the Company's shareholders. In addition,
providing stock option grants and other incentive awards under the 1997 Plan is
an important strategy for attracting and retaining the type of high-quality
executives, employees and advisors the Board believes necessary for Select
Comfort to achieve its goals. Given the intense competition for such personnel,
the Board believes that its ability to offer competitive compensation packages,
including those with equity-based incentive components, is particularly
important in attracting and retaining qualified candidates.
As of April 1, 1999, the Company had granted options to purchase an aggregate of
1,450,175 shares of common stock under the 1997 Plan, 192,713 of which had been
exercised, 111,014 of which had been cancelled, and 1,146,448 of which remained
outstanding. As of April 1, 1999, 160,839 shares of common stock were available
for future grants under the 1997 Plan. If this proposal is approved by the
shareholders at the Annual Meeting, 1,160,839 shares of common stock will be
available for future grants (assuming no awards are made under the 1997 Plan
after April 1, 1999).
A general description of the basic features of the 1997 Plan is outlined below.
Unless otherwise indicated, the following summary of the principal provisions of
the 1997 Plan assumes the approval of the proposed amendment to the 1997 Plan.
This summary is qualified in its entirety by reference to the actual text of the
1997 Plan, a copy of which you may obtain from the Company at the address set
forth at the beginning of this proxy statement.
SUMMARY OF THE 1997 PLAN
INTRODUCTION. The 1997 Plan permits the Company to grant options, stock
appreciation rights, restricted stock awards, performance units and stock
bonuses.
PURPOSE OF THE 1997 PLAN. The 1997 Plan's purpose is to advance the Company's
interests and the interests of our shareholders by enabling us to attract and
retain talented persons by:
o providing an incentive to such individuals through equity participation in
the Company; and
o rewarding such individuals who contribute to the achievement of the
Company's economic objectives.
ELIGIBLE PARTICIPANTS. All employees (including officers and directors who are
also employees) of Select Comfort or any subsidiary and any
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<PAGE>
non-employee directors, consultants and independent contractors of Select
Comfort or any subsidiary who, in the judgment of the Compensation Committee,
have contributed, are contributing or are expected to contribute to the
achievement of the Company's economic objectives are eligible to participate in
the 1997 Plan. On April 1, 1999, there were approximately 1,550 employees of the
Company eligible to be granted incentive awards under the 1997 Plan.
Participants may be granted one or more incentive awards, alone or in
combination with other awards. The incentive awards will always be subject to
whatever terms and conditions the Compensation Committee determines, provided
such terms and conditions are consistent with the 1997 Plan. All incentive
awards are deemed granted as of the date specified in the Compensation
Committee's resolution, which will be the date of the participant's award
agreement.
ADMINISTRATION. The Compensation Committee of the Board of Directors administers
the 1997 Plan. The Compensation Committee has the authority to determine all
provisions of incentive awards as long as they are consistent with the terms of
the 1997 Plan. The Compensation Committee also has the authority to amend or
modify the terms of any outstanding incentive award in any manner. Any such
amendment or modification, however, must be permitted by the 1997 Plan and may
not adversely affect any participant's rights without his or her consent. Each
determination, interpretation or other action of the Committee will be
conclusive and binding for all purposes on all persons.
STOCK SUBJECT TO THE 1997 PLAN. Prior to the proposed amendment of the 1997 Plan
described in this proxy statement, there were 1,500,000 shares of common stock
authorized for issuance under the 1997 Plan. The amendment to the 1997 Plan
proposed hereby would increase the number of shares authorized under the 1997
Plan from 1,500,000 to 2,500,000 shares. As of April 1, 1999, 192,713 shares of
common stock had been issued upon the exercise of options granted under the 1997
Plan, and options to purchase 1,146,448 shares of common stock at a weighted
average exercise price of $11.36 were outstanding. Accordingly, 160,839 shares
remained available for future grant under the 1997 Plan as of April 1, 1999.
Assuming approval of an increase of 1,000,000 shares to the 1997 Plan, 1,160,839
shares would be available for future grant (assuming no awards are made under
the 1997 Plan after April 1, 1999).
The following points describe how the Compensation Committee determines the
number of shares of common stock available for issuance under the 1997 Plan at
any point in time.
o OUTSTANDING INCENTIVE AWARDS -- reduces the maximum number of shares
available for issuance.
o SHARES ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS -- reduces the maximum
number of shares available for issuance.
o INCENTIVE AWARD LAPSES OR EXPIRES UNEXERCISED OR UNVESTED-- shares become
available again for issuance.
o OPTION IS FORFEITED OR TERMINATED UNEXERCISED OR UNVESTED -- shares become
available again for issuance.
o RESTRICTED STOCK AWARD IS FORFEITED -- shares do not become available for
further issuance under the 1997 Plan.
o WE PAY FOR THE INCENTIVE AWARD, IN CASH, NOT COMMON STOCK -- shares become
available again for issuance.
OPTIONS. An option provides the optionee with the opportunity to purchase shares
of common stock in a specified amount, at a predetermined price for a specific
period of time. Incentive options must be granted with an exercise price equal
to at least the fair market value of the common stock on the date of grant. On
April 1, 1999, the closing price per share of the common stock as reported on
the Nasdaq National Market
27
<PAGE>
System was $25.8125. Options will become exercisable at such times and in such
installments as may be determined by the Compensation Committee, provided that
options may not become exercisable prior to six months from their date of grant
and may not be exercisable after 10 years from their date of grant.
The exercise price of options must be paid in cash, except that the Compensation
Committee may allow payment to be made (in whole or in part) by delivery of a
"broker exercise notice" (pursuant to which the broker or dealer is instructed
to sell enough shares or loan the optionee enough money to pay the exercise
price and to remit such sums to the Company), a promissory note or by transfer
of shares of common stock (either previously owned by the participant or to be
acquired upon option exercise). The aggregate fair market value of shares of
common stock with respect to which incentive stock options within the meaning of
Section 422 of the Internal Revenue Code become exercisable for the first time
by a participant in any calendar year may not exceed $100,000. Any incentive
options in excess of this amount will be treated as non-statutory options.
STOCK APPRECIATION RIGHTS. A stock appreciation right is a right to receive a
payment from the Company in the form of common stock, cash or a combination of
both, equal to the difference between the fair market value of one or more
shares of common stock and the exercise price of such shares. The exercise price
of a stock appreciation right will be determined by the Compensation Committee,
but may not be less than the fair market value of the common stock on the date
of grant. Stock appreciation rights become exercisable at such times and in such
installments as may be determined by the Compensation Committee, except that
stock appreciation rights may not become exercisable prior to six months from
their date of grant and may not be exercisable after 10 years from their date of
grant. A holder of a stock appreciation right has no rights as a shareholder
with respect to any shares subject to a stock appreciation right unless and
until he or she exercises the right and the Compensation Committee decides to
pay the holder in the form of common stock.
RESTRICTED STOCK AWARDS. A restricted stock award is an award of shares of
common stock that cannot be transferred to any person for some predetermined
period of time, and may have to be returned to the Company upon the occurrence
of certain conditions. The Compensation Committee may impose such restrictions
or conditions to the vesting of restricted stock awards as it deems appropriate,
including that the participant remain in the continuous employ or service of the
Company for a certain period or that the participant or the Company satisfy
certain performance goals or criteria. No restricted stock award may vest prior
to six months from its date of grant. Unless the Compensation Committee
determines otherwise, any dividends or distributions paid with respect to shares
of common stock subject to the unvested portion of a restricted stock award will
be subject to the same restrictions as the shares to which such dividends or
distributions relate.
PERFORMANCE UNITS. A performance unit is a right to receive cash, common stock,
or a combination of both, upon the achievement of established performance goals.
A performance unit will vest at such times and in such installments as may be
determined by the Compensation Committee. The Compensation Committee may impose
such restrictions or conditions to the vesting of performance units as it deems
appropriate, including that the participant remain in the continuous employ or
service of the Company for a certain period or that the participant or the
Company satisfy certain performance goals or criteria.
STOCK BONUSES. A stock bonus is an award of common stock upon the
achievement of established performance goals.
EFFECT OF BREACH OF CONFIDENTIALITY OR NON-COMPETE AGREEMENT. Without notice,
the Compensation Committee may immediately terminate all of a participant's
rights under the 1997 Plan and his or her incentive awards if
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such participant materially breaches the terms of any confidentiality or
non-compete agreement entered into with the Company or any subsidiary, whether
such breach occurs before or after the participant voluntarily terminates his or
her service with the Company.
EFFECT OF CHANGE IN CONTROL. See "Executive Compensation and Other Benefits --
Change in Control Arrangements" for discussion regarding the effects of a
"change in control" on incentive awards granted under the 1997 Plan.
EFFECT OF TERMINATION OF EMPLOYMENT ON SERVICE. In the event a participant's
employment or other service with the Company is terminated by reason of death,
disability or retirement,
o all outstanding option and stock appreciation rights will remain
exercisable to the extent then exercisable for a period of one year after
such termination (three months in the case of retirement), but in no event
after their original expiration date,
o all restricted stock awards then held by the participant will become fully
vested and nonforfeitable, and
o all performance units and stock bonuses then held by the participant will
vest or continue to vest according to their original terms.
In the event a participant's employment or other service with the Company is
terminated for any other reason, other than for cause, all outstanding option
and stock appreciation rights will remain exercisable to the extent then
exercisable for a period of three months after such termination.
In the event a participant's employment or other service with the Company is
terminated for cause,
o all outstanding option and stock appreciation rights will immediately
terminate without notice,
o all restricted stock awards that have not vested as of such termination
will be terminated and forfeited, and
o all performance units and stock bonuses then held by the participant will
vest or continue to vest according to their original terms;
The Company may, in its discretion, modify these post-termination provisions,
provided that no option or stock appreciation rights may remain exercisable
beyond its expiration date.
AMENDMENT OF 1997 PLAN. The Board of Directors has the following powers with
respect to the 1997 Plan:
o The Board may suspend or terminate all or a portion of the 1997 Plan at any
time.
o The Board may amend the 1997 Plan to conform to any change in applicable
laws or regulations.
o The Board may amend the 1997 Plan in whatever manner it deems to be in the
Company's best interests.
The Board may not, however, make an amendment to the 1997 Plan without
shareholder approval if shareholder approval is required under Rule 16(b)(3)
under the Securities Exchange Act of 1934, Section 422 of the Internal Revenue
Code or the rules of the Nasdaq Stock Market. Furthermore, the Board cannot make
any modification to the 1997 Plan that would adversely affect outstanding
incentive awards without the consent of the affected participants.
TERMINATION. The 1997 Plan will terminate on March 28, 2007, unless terminated
earlier by the Board. No incentive award may be granted after such termination.
Incentive awards outstanding upon termination of the 1997 Plan may continue to
be exercised, or become free of restrictions, in accordance with their terms.
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FEDERAL INCOME TAX CONSEQUENCES
The following description of federal income tax consequences is based on current
statutes, regulations and interpretations. The description does not include
foreign, state or local income tax consequences. In addition, the description is
not intended to address specific tax consequences applicable to directors,
executive officers or greater than 10% shareholders of the Company or to any
individual participant who receives an incentive award under the 1997 Plan.
INCENTIVE STOCK OPTIONS. There will not be any federal income tax consequences
to either the participant or the Company as a result of the grant to an employee
of an incentive stock option under the 1997 Plan. The exercise by a participant
of an incentive stock option also will not result in any federal income tax
consequences to the Company or the participant, except that (i) an amount equal
to the excess of the fair market value of the shares acquired upon exercise of
the incentive stock option, determined at the time of exercise, over the amount
paid for the shares by the participant will be includable in the participant's
alternative minimum taxable income for purposes of the alternative minimum tax,
and (ii) the participant may be subject to an additional excise tax if any
amounts are treated as excess parachute payments (see explanation below).
Special rules will apply if previously acquired shares of common stock are
permitted to be tendered in payment of an option exercise price.
If the participant disposes of the incentive stock option shares acquired upon
exercise of the incentive stock option, the federal income tax consequences will
depend upon how long the participant has held the shares. If the participant
does not dispose of the shares within two years after the incentive stock option
was granted, nor within one year after the participant exercised the incentive
stock option, then the participant will recognize a long-term capital gain or
loss. The amount of the long-term capital gain or loss will be equal to the
difference between (i) the amount the participant realized on disposition of the
shares, and (ii) the option price at which the participant acquired the shares.
The Company is not entitled to any compensation expense deduction under these
circumstances.
If the participant does not satisfy both of the above holding period
requirements, then the participant will be required to report as ordinary
income, in the year the participant disposes of the shares, the amount by which
the lesser of (i) the fair market value of the shares at the time of exercise of
the incentive stock option, or (ii) the amount realized on the disposition of
the shares, exceeds the option price for the shares. The Company will be
entitled to a compensation expense deduction in an amount equal to the ordinary
income includable in the taxable income of the participant. This compensation
income may be subject to withholding. The remainder of the gain recognized on
the disposition, if any, or any loss recognized on the disposition, will be
treated as long-term or short-term capital gain or loss, depending on the
holding period.
NON-STATUTORY STOCK OPTIONS. Neither the participant nor the Company incurs any
federal income tax consequences as a result of the grant of a non-statutory
stock option. Upon exercise of a non-statutory stock option, a participant will
recognize ordinary income, subject to withholding, on the date of exercise in an
amount equal to the difference between (i) the fair market value of the shares
purchased, determined on the date of exercise, and (ii) the consideration paid
for the shares. The participant may be subject to an additional excise tax if
any amounts are treated as excess parachute payments (see explanation below).
Special rules will apply if previously acquired shares of common stock are
permitted to be tendered in payment of an option exercise price.
At the time of a subsequent sale or disposition of any shares of common stock
obtained upon exercise of a non-statutory stock option, any gain or loss will be
treated as long-term or
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<PAGE>
short-term capital gain or loss, depending on the holding period from the date
of exercise.
In general, the Company will be entitled to a compensation expense deduction in
connection with the exercise of a non-statutory stock option for any amounts
includable in the taxable income of the participant as ordinary income, provided
the Company complies with any applicable withholding requirements.
STOCK APPRECIATION RIGHTS. A participant who receives a stock appreciation right
will not recognize any taxable income at the time of the grant. Upon the
exercise of a stock appreciation right, the participant will realize ordinary
income in an amount equal to the cash and the fair market value of any shares of
common stock received by the participant. Provided that proper withholding is
made, the Company will be entitled to a compensation expense deduction for any
amounts includable by the participant as ordinary income.
RESTRICTED STOCK AWARDS. With respect to shares issued pursuant to a restricted
stock award that are not subject to a substantial risk of forfeiture, a
participant will include as ordinary income in the year of receipt an amount
equal to the fair market value of the shares received on the date of receipt.
With respect to shares that are subject to a substantial risk of forfeiture, a
participant may file an election under Section 83(b) of the Internal Revenue
Code within 30 days after the shares are received to include as ordinary income
in the year of receipt an amount equal to the fair market value of the shares
received on the date of receipt (determined as if the shares were not subject to
any risk of forfeiture). The Company will receive a corresponding tax deduction,
provided that proper withholding is made. If a Section 83(b) election is made,
the participant will not recognize any additional income when the restrictions
on the shares issued in connection with the stock award lapse. At the time any
such shares are sold or disposed of, any gain or loss will be treated as
long-term or short-term capital gain or loss, depending on the holding period
from the date of receipt of the restricted stock award.
A participant who does not make a Section 83(b) election within 30 days of the
receipt of a restricted stock award that is subject to a substantial risk of
forfeiture will recognize ordinary income at the time of the lapse of the
restrictions in an amount equal to the then fair market value of the shares. The
Company will receive a corresponding tax deduction, provided that proper
withholding is made. At the time of a subsequent sale or disposition of any
shares of common stock issued in connection with a restricted stock award as to
which the restrictions have lapsed, any gain or loss will be treated as
long-term or short-term capital gain or loss, depending on the holding period
from the date the restrictions lapse.
PERFORMANCE UNITS. A participant who receives a performance unit will not
recognize any taxable income at the time of the grant. Upon settlement of the
performance unit, the participant will realize ordinary income in an amount
equal to the cash and the fair market value of any shares of common stock
received by the participant. Provided that proper withholding is made, the
Company would be entitled to a compensation expense deduction for any amounts
includable by the participant as ordinary income.
STOCK BONUSES. With respect to shares issued pursuant to a stock bonus, a
participant will include as ordinary income in the year of receipt an amount
equal to the fair market value of the shares received as of the date of receipt.
The Company will receive a corresponding tax deduction, provided that proper
withholding is made. At the time of a subsequent sale or disposition of any
shares of common stock issued in connection with a stock bonus, any gain or loss
will be treated as long-term or short-term capital gain or loss, depending on
the holding period from the date the shares were received.
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EXCISE TAX ON PARACHUTE PAYMENTS. The Internal Revenue Code also imposes a 20%
excise tax on the recipient of "excess parachute payments," as defined in the
Internal Revenue Code and denies tax deductibility to the Company on excess
parachute payments. Generally, parachute payments are payments in the nature of
compensation to employees of a company who are officers, shareholders or highly
compensated individuals, which payments are contingent upon a change in
ownership or effective control of the company, or in the ownership of a
substantial portion of the assets of the company. For example, acceleration of
the exercisability of options, or the vesting of restricted stock awards, upon a
change in control of the Company may constitute parachute payments, and in
certain cases, "excess parachute payments."
SECTION 162(M). Under Section 162(m) of the Internal Revenue Code, 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 is limited to $1,000,000. Compensation for this purpose generally
includes any items of compensation expense described above in connection with
incentive awards under the 1997 Plan. However, certain types of compensation are
excepted from this limit, including compensation that qualifies as
"performance-based compensation." Under Section 162(m), any compensation expense
resulting from the exercise of options under the 1997 Plan with exercise prices
equal to (or greater than) the fair market value of the common stock on the date
of grant should qualify as "performance-based compensation" excepted from the
limit of Section 162(m). However, compensation expense in connection with any
other incentive awards under the 1997 Plan will be subject to this limit.
INCENTIVE AWARDS GRANTED UNDER THE 1997 PLAN
Information about options granted in fiscal 1998 under the 1997 Plan to the
Chief Executive Officer of Select Comfort and the four other most highly
compensated executive officers of Select Comfort during fiscal 1998 can be found
in the table under the heading "Option Grants in Last Fiscal Year" on page 16 of
this proxy statement. In fiscal 1998, options to purchase an aggregate of
125,000 shares were granted to all current executive officers as a group,
options to purchase 25,000 shares were granted to current directors who are not
executive officers as a group, and options to purchase an aggregate of 293,075
shares were granted to all employees (excluding current executive officers) as a
group under the 1997 Plan.
No information can be provided with respect to options or awards that may be
granted in the future under the 1997 Plan. Such awards are within the discretion
of the Compensation Committee. The Compensation Committee has not determined
future awards or who might receive them.
BOARD RECOMMENDATION
The Board of Directors recommends that the shareholders vote FOR approval of the
amendment to the 1997 Plan to increase the number of shares of common stock
reserved for issuance by 1,000,000, from 1,500,000 shares to 2,500,000 shares.
The affirmative vote of the holders of a majority of the shares of common stock
present and entitled to vote in person or by proxy on this matter at the Annual
Meeting, and at least a majority of the minimum number of votes necessary for a
quorum, is necessary for approval. Unless a contrary choice is specified,
proxies solicited by the Board will be voted FOR approval of the amendment to
the 1997 Plan.
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RATIFICATION OF SELECTION OF
INDEPENDENT AUDITORS
(PROPOSAL 4)
-----------------
APPOINTMENT OF AUDITORS
The Board of Directors has appointed KPMG Peat Marwick LLP, independent
certified public accountants, as our auditors for the year ending January 1,
2000. KPMG Peat Marwick LLP has acted as our independent auditors since 1993.
Although it is not required to do so, the Board wishes to submit the selection
of KPMG Peat Marwick LLP to the shareholders for ratification. If you do not
ratify the appointment of KPMG Peat Marwick LLP, another firm of independent
auditors will be considered by the Board.
Representatives of KPMG Peat Marwick 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.
BOARD RECOMMENDATION
The Board recommends a vote FOR ratification of the appointment of KPMG Peat
Marwick LLP as our auditors for the year ending January 1, 2000.
The affirmative vote of the holders of a majority of shares of common stock of
the Company present in person or by proxy at the Annual Meeting, assuming a
quorum is present, is necessary for approval. Unless a contrary choice is
specified, proxies solicited by the Board will be voted FOR the ratification of
KPMG Peat Marwick LLP.
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OTHER MATTERS
-----------------
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers and all persons who beneficially own more than 10% of the
outstanding shares of our common stock to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
our common stock.
Executive officers, directors and greater than 10% beneficial owners are also
required to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based upon a review of the copies of such reports furnished to
us during the fiscal year ended January 2, 1999 and written representations by
such persons, none of the directors, executive officers and beneficial owners of
greater than 10% of our common stock failed to file on a timely basis the forms
required by Section 16 of the Securities Exchange Act of 1934.
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
Any shareholder proposal to be included in the proxy materials for the 2000
Annual Meeting of Shareholders must be received by the Company on or before
January 10, 2000.
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.
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OTHER BUSINESS
The management of the Company does not intend to present other items of business
and knows of no items of business that are likely to be brought before the
Annual Meeting except those described in this proxy statement. However, if any
other matters should properly come before the Annual Meeting, the persons named
in the enclosed proxy will have discretionary authority to vote such proxy in
accordance with the best judgment on such matters.
COPIES OF 1999 ANNUAL REPORT
We will furnish without charge a copy of our Annual Report on Form 10-K (without
exhibits) for the fiscal year ended January 2, 1999 upon receipt from any such
person of a written request for such an Annual Report.
Such request should be sent to:
Select Comfort Corporation
6105 Trenton Lane North
Minneapolis, Minnesota 55442
Attn: Shareholder Information
- - --------------------------------------------------------------------------------
Your vote is important. Whether or not you plan to attend the Annual Meeting,
please vote your shares of common stock by marking, signing, dating and promptly
returning the enclosed proxy card in the envelope provided. No postage is
required for mailing in the United States.
By Order Of The Board Of Directors
/s/ Daniel J. McAthie
Daniel J. McAthie
PRESIDENT AND CHIEF EXECUTIVE OFFICER
May 7, 1999
Minneapolis, Minnesota
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APPENDIX A
SELECT COMFORT CORPORATION
1997 STOCK INCENTIVE PLAN
(As Amended on June 8, 1999)
1. PURPOSE OF PLAN.
The purpose of the Select Comfort Corporation 1997 Stock Incentive Plan
(the "Plan") is to advance the interests of Select Comfort Corporation (the
"Company") and its shareholders by enabling the Company and its Subsidiaries to
attract and retain persons of ability to perform services for the Company and
its Subsidiaries by providing an incentive to such individuals through equity
participation in the Company and by rewarding such individuals who contribute to
the achievement by the Company of its economic objectives.
2. DEFINITIONS.
The following terms will have the meanings set forth below, unless the
context clearly otherwise requires:
2.1 "BOARD" means the Board of Directors of the Company.
2.2 "BROKER EXERCISE NOTICE" means a written notice pursuant to which a
Participant, upon exercise of an Option, irrevocably instructs a broker or
dealer to sell a sufficient number of shares or loan a sufficient amount of
money to pay all or a portion of the exercise price of the Option and/or any
related withholding tax obligations and remit such sums to the Company and
directs the Company to deliver stock certificates to be issued upon such
exercise directly to such broker or dealer.
2.3 "CHANGE IN CONTROL" means an event described in Section 13.1 of the
Plan.
2.4 "CODE" means the Internal Revenue Code of 1986, as amended.
2.5 "COMMITTEE" means the group of individuals administering the Plan, as
provided in Section 3 of the Plan.
2.6 "COMMON STOCK" means the common stock of the Company, $0.01 par value,
or the number and kind of shares of stock or other securities into which such
common stock may be changed in accordance with Section 4.3 of the Plan.
2.7 "DISABILITY" means the disability of the Participant such as would
entitle the Participant to receive disability income benefits pursuant to the
long-term disability plan of the Company or Subsidiary then covering the
Participant or, if no such plan exists or is applicable to the Participant, the
permanent and total disability of the Participant within the meaning of Section
22(e)(3) of the Code.
2.8 "ELIGIBLE RECIPIENTS" means all employees of the Company or any
Subsidiary and any non-employee directors, consultants and independent
contractors of the Company or any Subsidiary.
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2.9 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
2.10 "FAIR MARKET VALUE" means, with respect to the Common Stock, as of any
date (or, if no shares were traded or quoted on such date, as of the next
preceding date on which there was such a trade or quote) (a) the mean between
the reported high and low sale prices of the Common Stock if the Common Stock is
listed, admitted to unlisted trading privileges or reported on any foreign or
national securities exchange or on the Nasdaq National Market or an equivalent
foreign market on which sale prices are reported; (b) if the Common Stock is not
so listed, admitted to unlisted trading privileges or reported, the closing bid
price as reported by the Nasdaq SmallCap Market, OTC Bulletin Board or the
National Quotation Bureau, Inc. or other comparable service; or (c) if the
Common Stock is not so listed or reported, such price as the Committee
determines in good faith in the exercise of its reasonable discretion. If
determined by the Committee, such determination will be final, conclusive and
binding for all purposes and on all persons, including, without limitation, the
Company, the shareholders of the Company, the Participants and their respective
successors-in-interest. No member of the Committee will be liable for any
determination regarding the fair market value of the Common Stock that is made
in good faith.
2.11 "INCENTIVE AWARD" means an Option, Stock Appreciation Right,
Restricted Stock Award, Performance Unit or Stock Bonus granted to an Eligible
Recipient pursuant to the Plan.
2.12 "INCENTIVE STOCK OPTION" means a right to purchase Common Stock
granted to an Eligible Recipient pursuant to Section 6 of the Plan that
qualifies as an "incentive stock option" within the meaning of Section 422 of
the Code.
2.13 "NON-STATUTORY STOCK OPTION" means a right to purchase Common Stock
granted to an Eligible Recipient pursuant to Section 6 of the Plan that does not
qualify as an Incentive Stock Option.
2.14 "OPTION" means an Incentive Stock Option or a Non-Statutory Stock
Option.
2.15 "PARTICIPANT" means an Eligible Recipient who receives one or more
Incentive Awards under the Plan.
2.16 "PERFORMANCE UNIT" means a right granted to an Eligible Recipient
pursuant to Section 9 of the Plan to receive a payment from the Company, in the
form of stock, cash or a combination of both, upon the achievement of
established employment, service, performance or other goals.
2.17 "PREVIOUSLY ACQUIRED SHARES" means shares of Common Stock or Preferred
Stock that are already owned by the Participant or, with respect to any
Incentive Award, that are to be issued upon the grant, exercise or vesting of
such Incentive Award.
2.18 "RESTRICTED STOCK AWARD" means an award of Common Stock granted to an
Eligible Recipient pursuant to Section 8 of the Plan that is subject to the
restrictions on transferability and the risk of forfeiture imposed by the
provisions of such Section 8.
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2.19 "RETIREMENT" means termination of employment or service pursuant to
and in accordance with the regular (or, if approved by the Board for purposes of
the Plan, early) retirement/pension plan or practice of the Company or
Subsidiary then covering the Participant, provided that if the Participant is
not covered by any such plan or practice, the Participant will be deemed to be
covered by the Company's plan or practice for purposes of this determination.
2.20 "SECURITIES ACT" means the Securities Act of 1933, as amended.
2.21 "STOCK APPRECIATION RIGHT" means a right granted to an Eligible
Recipient pursuant to Section 7 of the Plan to receive a payment from the
Company, in the form of stock, cash or a combination of both, equal to the
difference between the Fair Market Value of one or more shares of Common Stock
and the exercise price of such shares under the terms of such Stock Appreciation
Right.
2.22 "STOCK BONUS" means an award of Common Stock granted to an Eligible
Recipient pursuant to Section 10 of the Plan.
2.23 "SUBSIDIARY" means any entity that is directly or indirectly
controlled by the Company or any entity in which the Company has a significant
equity interest, as determined by the Committee.
2.24 "TAX DATE" means the date any withholding tax obligation arises under
the Code or other applicable tax statute for a Participant with respect to an
Incentive Award.
3. PLAN ADMINISTRATION.
3.1 THE COMMITTEE. The Plan will be administered by the Board or by a
committee of the Board. So long as the Company has a class of its equity
securities registered under Section 12 of the Exchange Act, any committee
administering the Plan will consist solely of two or more members of the Board
who are "non-employee directors" within the meaning of Rule 16b-3 under the
Exchange Act and, if the Board so determines in its sole discretion, who are
"outside directors" within the meaning of Section 162(m) of the Code. Such a
committee, if established, will act by majority approval of the members (but may
also take action with the written consent of a majority of the members of such
committee), and a majority of the members of such a committee will constitute a
quorum. As used in the Plan, "Committee" will refer to the Board or to such a
committee, if established. To the extent consistent with corporate law, the
Committee may delegate to any officers of the Company the duties, power and
authority of the Committee under the Plan pursuant to such conditions or
limitations as the Committee may establish; provided, however, that only the
Committee may exercise such duties, power and authority with respect to Eligible
Recipients who are subject to Section 16 of the Exchange Act. The Committee may
exercise its duties, power and authority under the Plan in its sole and absolute
discretion without the consent of any Participant or other party, unless the
Plan specifically provides otherwise. Each determination, interpretation or
other action made or taken by the Committee pursuant to the provisions of the
Plan will be conclusive and binding for all purposes and on all persons, and no
member of the Committee will be liable for any action or determination made in
good faith with respect to the Plan or any Incentive Award granted under the
Plan.
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3.2 AUTHORITY OF THE COMMITTEE.
(a) In accordance with and subject to the provisions of the Plan, the
Committee will have the authority to determine all provisions of Incentive
Awards as the Committee may deem necessary or desirable and as consistent
with the terms of the Plan, including, without limitation, the following:
(i) the Eligible Recipients to be selected as Participants; (ii) the nature
and extent of the Incentive Awards to be made to each Participant
(including the number of shares of Common Stock to be subject to each
Incentive Award, any exercise price, the manner in which Incentive Awards
will vest or become exercisable and whether Incentive Awards will be
granted in tandem with other Incentive Awards) and the form of written
agreement, if any, evidencing such Incentive Award; (iii) the time or times
when Incentive Awards will be granted; (iv) the duration of each Incentive
Award; and (v) the restrictions and other conditions to which the payment
or vesting of Incentive Awards may be subject. In addition, the Committee
will have the authority under the Plan in its sole discretion to pay the
economic value of any Incentive Award in the form of cash, Common Stock or
any combination of both.
(b) The Committee will have the authority under the Plan to amend or
modify the terms of any outstanding Incentive Award in any manner,
including, without limitation, the authority to modify the number of shares
or other terms and conditions of an Incentive Award, extend the term of an
Incentive Award, accelerate the exercisability or vesting or otherwise
terminate any restrictions relating to an Incentive Award, accept the
surrender of any outstanding Incentive Award or, to the extent not
previously exercised or vested, authorize the grant of new Incentive Awards
in substitution for surrendered Incentive Awards; provided, however that
the amended or modified terms are permitted by the Plan as then in effect
and that any Participant adversely affected by such amended or modified
terms has consented to such amendment or modification. No amendment or
modification to an Incentive Award, however, whether pursuant to this
Section 3.2 or any other provisions of the Plan, will be deemed to be a
re-grant of such Incentive Award for purposes of this Plan.
(c) In the event of (i) any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock
split, combination of shares, rights offering, extraordinary dividend or
divestiture (including a spin-off) or any other change in corporate
structure or shares, (ii) any purchase, acquisition, sale or disposition of
a significant amount of assets or a significant business, (iii) any change
in accounting principles or practices, or (iv) any other similar change, in
each case with respect to the Company or any other entity whose performance
is relevant to the grant or vesting of an Incentive Award, the Committee
(or, if the Company is not the surviving corporation in any such
transaction, the board of directors of the surviving corporation) may,
without the consent of any affected Participant, amend or modify the
vesting criteria of any outstanding Incentive Award that is based in whole
or in part on the financial performance of the Company (or any Subsidiary
or division thereof) or such other entity so as equitably to reflect such
event, with the desired result that the criteria for evaluating such
financial performance of the Company or such other entity will be
substantially the same (in the sole discretion of the Committee or the
board of directors of the surviving
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corporation) following such event as prior to such event; provided,
however, that the amended or modified terms are permitted by the Plan as
then in effect.
4. SHARES AVAILABLE FOR ISSUANCE.
4.1 MAXIMUM NUMBER OF SHARES AVAILABLE. Subject to adjustment as provided
in Section 4.3 of the Plan, the maximum number of shares of Common Stock that
will be available for issuance under the Plan will be 2,500,000 shares of Common
Stock.
4.2 ACCOUNTING FOR INCENTIVE AWARDS. Shares of Common Stock that are issued
under the Plan or that are subject to outstanding Incentive Awards will be
applied to reduce the maximum number of shares of Common Stock remaining
available for issuance under the Plan. Any shares of Common Stock that are
subject to an Incentive Award that lapses, expires, is forfeited or for any
reason is terminated unexercised or unvested and any shares of Common Stock that
are subject to an Incentive Award that is settled or paid in cash or any form
other than shares of Common Stock will automatically again become available for
issuance under the Plan. Any shares of Common Stock that constitute the
forfeited portion of a Restricted Stock Award, however, will not become
available for further issuance under the Plan.
4.3 ADJUSTMENTS TO SHARES AND INCENTIVE AWARDS. In the event of any
reorganization, merger, consolidation, recapitalization, liquidation,
reclassification, stock dividend, stock split, combination of shares, rights
offering, divestiture or extraordinary dividend (including a spin-off) or any
other change in the corporate structure or shares of the Company, the Committee
(or, if the Company is not the surviving corporation in any such transaction,
the board of directors of the surviving corporation) will make appropriate
adjustment (which determination will be conclusive) as to the number and kind of
securities or other property (including cash) available for issuance or payment
under the Plan and, in order to prevent dilution or enlargement of the rights of
Participants, (a) the number and kind of securities or other property (including
cash) subject to outstanding Options, and (b) the exercise price of outstanding
Options.
5. PARTICIPATION.
Participants in the Plan will be those Eligible Recipients who, in the
judgment of the Committee, have contributed, are contributing or are expected to
contribute to the achievement of economic objectives of the Company or its
Subsidiaries. Eligible Recipients may be granted from time to time one or more
Incentive Awards, singly or in combination or in tandem with other Incentive
Awards, as may be determined by the Committee in its sole discretion. Incentive
Awards will be deemed to be granted as of the date specified in the grant
resolution of the Committee, which date will be the date of any related
agreement with the Participant.
6. OPTIONS.
6.1 GRANT. An Eligible Recipient may be granted one or more Options under
the Plan, and such Options will be subject to such terms and conditions,
consistent with the other provisions of the Plan, as may be determined by the
Committee in its sole discretion. The Committee may designate whether an Option
is to be considered an Incentive Stock Option or a Non-Statutory Stock Option.
To the extent that any Incentive Stock Option granted under the
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Plan ceases for any reason to qualify as an "incentive stock option" for
purposes of Section 422 of the Code, such Incentive Stock Option will continue
to be outstanding for purposes of the Plan but will thereafter be deemed to be a
Non-Statutory Stock Option.
6.2 EXERCISE PRICE. The per share price to be paid by a Participant upon
exercise of an Option will be determined by the Committee in its discretion at
the time of the Option grant; provided, however, that (a) such price will not be
less than 100% of the Fair Market Value of one share of Common Stock on the date
of grant with respect to an Incentive Stock Option (110% of the Fair Market
Value if, at the time the Incentive Stock Option is granted, the Participant
owns, directly or indirectly, more than 10% of the total combined voting power
of all classes of stock of the Company or any parent or subsidiary corporation
of the Company), and (b) such price will not be less than 85% of the Fair Market
Value of one share of Common Stock on the date of grant with respect to a
Non-Statutory Stock Option.
6.3 EXERCISABILITY AND DURATION. An Option will become exercisable at such
times and in such installments as may be determined by the Committee in its sole
discretion at the time of grant; provided, however, that no Option may be
exercisable after 10 years from its date of grant.
6.4 PAYMENT OF EXERCISE PRICE. The total purchase price of the shares to be
purchased upon exercise of an Option will be paid entirely in cash (including
check, bank draft or money order); provided, however, that the Committee, in its
sole discretion and upon terms and conditions established by the Committee, may
allow such payments to be made, in whole or in part, by tender of a Broker
Exercise Notice, Previously Acquired Shares, a promissory note (on terms
acceptable to the Committee in its sole discretion) or by a combination of such
methods.
6.5 MANNER OF EXERCISE. An Option may be exercised by a Participant in
whole or in part from time to time, subject to the conditions contained in the
Plan and in the agreement evidencing such Option, by delivery in person, by
facsimile or electronic transmission or through the mail of written notice of
exercise to the Company (Attention: Chief Financial Officer) at its principal
executive office in Minneapolis, Minnesota and by paying in full the total
exercise price for the shares of Common Stock to be purchased in accordance with
Section 6.4 of the Plan.
6.6 AGGREGATE LIMITATION OF STOCK SUBJECT TO INCENTIVE STOCK OPTIONS. To
the extent that the aggregate Fair Market Value (determined as of the date an
Incentive Stock Option is granted) of the shares of Common Stock with respect to
which incentive stock options (within the meaning of Section 422 of the Code)
are exercisable for the first time by a Participant during any calendar year
(under the Plan and any other incentive stock option plans of the Company or any
subsidiary or parent corporation of the Company (within the meaning of the
Code)) exceeds $100,000 (or such other amount as may be prescribed by the Code
from time to time), such excess Options will be treated as Non-Statutory Stock
Options. The determination will be made by taking incentive stock options into
account in the order in which they were granted. If such excess only applies to
a portion of an Incentive Stock Option, the Committee, in its discretion, will
designate which shares will be treated as shares to be acquired upon exercise of
an Incentive Stock Option.
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7. STOCK APPRECIATION RIGHTS.
7.1 GRANT. An Eligible Recipient may be granted one or more Stock
Appreciation Rights under the Plan, and such Stock Appreciation Rights will be
subject to such terms and conditions, consistent with the other provisions of
the Plan, as may be determined by the Committee in its sole discretion.
7.2 EXERCISE PRICE. The exercise price of a Stock Appreciation Right will
be determined by the Committee, in its discretion, at the date of grant but may
not be less than 100% of the Fair Market Value of one share of Common Stock on
the date of grant.
7.3 EXERCISABILITY AND DURATION. A Stock Appreciation Right will become
exercisable at such time and in such installments as may be determined by the
Committee in its sole discretion at the time of grant; provided, however, that
no Stock Appreciation Right may be exercisable after 10 years from its date of
grant. A Stock Appreciation Right will be exercised by giving notice in the same
manner as for Options, as set forth in Section 6.5 of the Plan.
8. RESTRICTED STOCK AWARDS.
8.1 GRANT. An Eligible Recipient may be granted one or more Restricted
Stock Awards under the Plan, and such Restricted Stock Awards will be subject to
such terms and conditions, consistent with the other provisions of the Plan, as
may be determined by the Committee in its sole discretion. The Committee may
impose such restrictions or conditions, not inconsistent with the provisions of
the Plan, to the vesting of such Restricted Stock Awards as it deems
appropriate, including, without limitation, that the Participant remain in the
continuous employ or service of the Company or a Subsidiary for a certain period
or that the Participant or the Company (or any Subsidiary or division thereof)
satisfy certain performance goals or criteria.
8.2 RIGHTS AS A STOCKHOLDER; TRANSFERABILITY. Except as provided in
Sections 8.1, 8.3 and 14.3 of the Plan, a Participant will have all voting,
dividend, liquidation and other rights with respect to shares of Common Stock
issued to the Participant as a Restricted Stock Award under this Section 8 upon
the Participant becoming the holder of record of such shares as if such
Participant were a holder of record of shares of unrestricted Common Stock.
8.3 DIVIDENDS AND DISTRIBUTIONS. Unless the Committee determines otherwise
in its sole discretion (either in the agreement evidencing the Restricted Stock
Award at the time of grant or at any time after the grant of the Restricted
Stock Award), any dividends or distributions (including regular quarterly cash
dividends) paid with respect to shares of Common Stock subject to the unvested
portion of a Restricted Stock Award will be subject to the same restrictions as
the shares to which such dividends or distributions relate. In the event the
Committee determines not to pay such dividends or distributions currently, the
Committee will determine in its sole discretion whether any interest will be
paid on such dividends or distributions. In addition, the Committee in its sole
discretion may require such dividends and distributions to be reinvested (and in
such case the Participants consent to such reinvestment) in shares of Common
Stock that will be subject to the same restrictions as the shares to which such
dividends or distributions relate.
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8.4 ENFORCEMENT OF RESTRICTIONS. To enforce the restrictions referred to in
this Section 8, the Committee may place a legend on the stock certificates
referring to such restrictions and may require the Participant, until the
restrictions have lapsed, to keep the stock certificates, together with duly
endorsed stock powers, in the custody of the Company or its transfer agent or to
maintain evidence of stock ownership, together with duly endorsed stock powers,
in a certificateless book-entry stock account with the Company's transfer agent.
9. PERFORMANCE UNITS.
An Eligible Recipient may be granted one or more Performance Units under
the Plan, and such Performance Units will be subject to such terms and
conditions, consistent with the other provisions of the Plan, as may be
determined by the Committee in its sole discretion. The Committee may impose
such restrictions or conditions, not inconsistent with the provisions of the
Plan, to the vesting of such Performance Units as it deems appropriate,
including, without limitation, that the Participant remain in the continuous
employ or service of the Company or any Subsidiary for a certain period or that
the Participant or the Company (or any Subsidiary or division thereof) satisfy
certain performance goals or criteria. The Committee will have the sole
discretion to determine the form in which payment of the economic value of
vested Performance Units will be made to the Participant (i.e., cash, Common
Stock or any combination thereof) or to consent to or disapprove the election by
the Participant of the form of such payment.
10. STOCK BONUSES.
An Eligible Recipient may be granted one or more Stock Bonuses under the
Plan, and such Stock Bonuses will be subject to such terms and conditions,
consistent with the other provisions of the Plan, as may be determined by the
Committee. The Participant will have all voting, dividend, liquidation and other
rights with respect to the shares of Common Stock issued to a Participant as a
Stock Bonus under this Section 10 upon the Participant becoming the holder of
record of such shares; provided, however, that the Committee may impose such
restrictions on the assignment or transfer of a Stock Bonus as it deems
appropriate.
11. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE.
11.1 TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT. Unless otherwise
provided by the Committee in its sole discretion in the agreement evidencing an
Incentive Award, in the event a Participant's employment or other service with
the Company and all Subsidiaries is terminated by reason of death, Disability or
Retirement:
(a) All outstanding Options and Stock Appreciation Rights then held by
the Participant that are currently exercisable by the Participant as of the
time of such termination will remain exercisable for a period of one year
after such termination (but in no event after the expiration date of any
such Option or Stock Appreciation Right); and
(b) All Restricted Stock Awards, Performance Units and Stock Bonuses
then held by the Participant will vest and/or continue to vest in the
manner determined by the Committee and set forth in the agreement
evidencing such Restricted Stock Awards, Performance Units or Stock
Bonuses.
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11.2 TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR RETIREMENT.
(a) Unless otherwise provided by the Committee in its sole discretion
in the agreement evidencing an Incentive Award, in the event a
Participant's employment or other service is terminated with the Company
and all Subsidiaries for any reason other than death, Disability or
Retirement, or a Participant is in the employ or service of a Subsidiary
and the Subsidiary ceases to be a Subsidiary of the Company (unless the
Participant continues in the employ or service of the Company or another
Subsidiary), all rights of the Participant under the Plan and any
agreements evidencing an Incentive Award will immediately terminate without
notice of any kind, and no Options or Stock Appreciation Rights then held
by the Participant will thereafter be exercisable, all Restricted Stock
Awards then held by the Participant that have not vested will be terminated
and forfeited, and all Performance Units and Stock Bonuses then held by the
Participant will vest and/or continue to vest in the manner determined by
the Committee and set forth in the agreement evidencing such Performance
Units or Stock Bonuses; provided, however, that if such termination is due
to any reason other than termination by the Company or any Subsidiary for
"cause," all outstanding Options or Stock Appreciation Rights then held by
such Participant that are currently exercisable by the Participant as of
the time of such termination will remain exercisable for a period of three
months after such termination (but in no event after the expiration date of
any such Option or Stock Appreciation Right).
(b) For purposes of this Section 11.2, "cause" (as determined by the
Committee) will be as defined in any employment or other agreement or
policy applicable to the Participant or, if no such agreement or policy
exists, will mean (i) dishonesty, fraud, misrepresentation, embezzlement or
deliberate injury or attempted injury, in each case related to the Company
or any Subsidiary, (ii) any unlawful or criminal activity of a serious
nature, (iii) any intentional and deliberate breach of a duty or duties
that, individually or in the aggregate, are material in relation to the
Participant's overall duties, or (iv) any material breach of any
employment, service, confidentiality or non-compete agreement entered into
with the Company or any Subsidiary.
11.3 MODIFICATION OF RIGHTS UPON TERMINATION. Notwithstanding the other
provisions of this Section 11, upon a Participant's termination of employment or
other service with the Company and all Subsidiaries, the Committee may, in its
sole discretion (which may be exercised at any time on or after the date of
grant, including following such termination), cause Options and Stock
Appreciation Rights (or any part thereof) then held by such Participant to
become or continue to become exercisable and/or remain exercisable following
such termination of employment or service and Restricted Stock Awards,
Performance Units and Stock Bonuses then held by such Participant to vest and/or
continue to vest or become free of transfer restrictions, as the case may be,
following such termination of employment or service, in each case in the manner
determined by the Committee; provided, however, that no Option or Stock
Appreciation Right may remain exercisable beyond its expiration date.
11.4 BREACH OF CONFIDENTIALITY OR NONCOMPETE AGREEMENTS. Notwithstanding
anything in the Plan to the contrary, in the event that a Participant materially
breaches the terms of any confidentiality or non-compete agreement entered into
with the Company or any
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Subsidiary, whether such breach occurs before or after termination of such
Participant's employment or other service with the Company or any Subsidiary,
the Committee in its sole discretion may immediately terminate all rights of the
Participant under the Plan and any agreements evidencing an Incentive Award then
held by the Participant without notice of any kind.
11.5 DATE OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE. Unless the
Committee otherwise determines in its sole discretion, a Participant's
employment or other service will, for purposes of the Plan, be deemed to have
terminated on the date recorded on the personnel or other records of the Company
or the Subsidiary for which the Participant provides employment or other
service, as determined by the Committee in its sole discretion based upon such
records.
12. PAYMENT OF WITHHOLDING TAXES.
12.1 GENERAL RULES. The Company is entitled to (a) withhold and deduct from
future wages of the Participant (or from other amounts that may be due and owing
to the Participant from the Company or a Subsidiary), or make other arrangements
for the collection of, all legally required amounts necessary to satisfy any and
all foreign, federal, state and local withholding and employment-related tax
requirements attributable to an Incentive Award, including, without limitation,
the grant, exercise or vesting of, or payment of dividends with respect to, an
Incentive Award or a disqualifying disposition of stock received upon exercise
of an Incentive Stock Option, or (b) require the Participant promptly to remit
the amount of such withholding to the Company before taking any action,
including issuing any shares of Common Stock, with respect to an Incentive
Award.
12.2 SPECIAL RULES. The Committee may, in its sole discretion and upon
terms and conditions established by the Committee, permit or require a
Participant to satisfy, in whole or in part, any withholding or
employment-related tax obligation described in Section 12.1 of the Plan by
electing to tender Previously Acquired Shares, a Broker Exercise Notice or a
promissory note (on terms acceptable to the Committee in its sole discretion),
or by a combination of such methods.
13. CHANGE IN CONTROL.
13.1 CHANGE IN CONTROL. For purposes of this Section 13, a "Change in
Control" of the Company shall mean (a) the sale, lease, exchange or other
transfer of all or substantially all of the assets of the Company (in one
transaction or in a series of related transactions) to a corporation that is not
controlled by the Company, (b) the approval by the shareholders of the Company
of any plan or proposal for the liquidation or dissolution of the Company, or
(c) a change in control of a nature that would be required to be reported
(assuming such event has not been "previously reported") in response to Item
1(a) of the Current Report on Form 8-K, as in effect on the effective date of
the Plan, pursuant to Section 13 or 15(d) of the Exchange Act, whether or not
the Company is then subject to such reporting requirement; provided that,
without limitation, such a Change in Control shall be deemed to have occurred at
such time as (x) any Person, other than any Person who owns any shares of Common
Stock on the effective date of the Plan, becomes after the effective date of the
Plan the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act)
directly or indirectly, of 50% or more of the combined voting
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power of the Company's outstanding securities ordinarily having the right to
vote at elections of directors or (y) individuals who constitute the Board of
Directors on the effective date of the Plan cease for any reason to constitute
at least a majority thereof, provided that any person becoming a director
subsequent to the effective date of the Plan whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least a
majority of the directors comprising the Board of Directors on the effective
date of the Plan (either by a specific vote or by approval of the proxy
statement of the Company in which such person is named as a nominee for
director, without objection to such nomination) shall be, for purposes of this
clause (y) and the following sentence, considered as though such person were a
member of the Board of Directors on the effective date of the Plan.
Notwithstanding anything in the foregoing to the contrary, no Change in Control
shall be deemed to have occurred for purposes of this Section 13 by virtue of
any transaction which shall have been 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.
13.2 ACCELERATION OF VESTING. Without limiting the authority of the
Committee under Sections 3.2 and 4.3 of the Plan, if a Change in Control of the
Company occurs, then, unless otherwise provided by the Committee in its sole
discretion either in the agreement evidencing an Incentive Award at the time of
grant or at any time after the grant of an Incentive Award, (a) all outstanding
Options and 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 Options or Stock Appreciation Rights have
been granted remains in the employ or service of the Company or any Subsidiary;
(b) all outstanding Restricted Stock Awards will become immediately fully vested
and non-forfeitable; and (c) all outstanding Performance Units and Stock Bonuses
then held by the Participant will vest and/or continue to vest in the manner
determined by the Committee and set forth in the agreement evidencing such
Performance Units or Stock Bonuses.
13.3 CASH PAYMENT FOR OPTIONS. If a Change in Control of the Company
occurs, then the Committee, if approved by the Committee in its sole discretion
either in an agreement evidencing an Incentive Award at the time of grant or at
any time after the grant of an Incentive Award, and without the consent of any
Participant effected thereby, may determine that some or all Participants
holding outstanding Options will receive, with respect to some or all of the
shares of Common Stock subject to such Options, as of the effective date of any
such Change in Control of the Company, cash in an amount equal to the excess of
the Fair Market Value of such shares immediately prior to the effective date of
such Change in Control of the Company over the exercise price per share of such
Options.
13.4 LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding anything in
Section 13.2 or 13.3 of the Plan to the contrary, if, with respect to a
Participant, the acceleration of the vesting of an Incentive Award as provided
in Section 13.2 or the payment of cash in exchange for all or part of an
Incentive Award as provided in Section 13.3 (which acceleration or payment could
be deemed a "payment" within the meaning of Section 280G(b)(2) of the Code),
together with any other "payments" that such Participant has the right to
receive from the Company or any corporation that is a member of an "affiliated
group" (as defined in Section 1504(a) of the Code without regard to Section
1504(b) of the Code) of which the Company is a member, would constitute a
"parachute payment" (as defined in Section 280G(b)(2) of the Code), then the
"payments" to such Participant pursuant to Section
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13.2 or 13.3 of the Plan will be reduced to the largest amount as will result in
no portion of such "payments" being subject to the excise tax imposed by Section
4999 of the Code; provided, however, that if a Participant is subject to a
separate agreement with the Company or a Subsidiary that expressly addresses the
potential application of Sections 280G or 4999 of the Code (including, without
limitation, that "payments" under such agreement or otherwise will be reduced,
that such "payments" will not be reduced or that the Participant will have the
discretion to determine which "payments" will be reduced), then this Section
13.4 will not apply, and any "payments" to a Participant pursuant to Section
13.2 or 13.3 of the Plan will be treated as "payments" arising under such
separate agreement.
14. RIGHTS OF ELIGIBLE RECIPIENTS AND PARTICIPANTS; TRANSFERABILITY.
14.1 EMPLOYMENT OR SERVICE. Nothing in the Plan will interfere with or
limit in any way the right of the Company or any Subsidiary to terminate the
employment or service of any Eligible Recipient or Participant at any time, nor
confer upon any Eligible Recipient or Participant any right to continue in the
employ or service of the Company or any Subsidiary.
14.2 RIGHTS AS A SHAREHOLDER. As a holder of Incentive Awards (other than
Restricted Stock Awards and Stock Bonuses), a Participant will have no rights as
a stockholder unless and until such Incentive Awards are exercised for, or paid
in the form of, shares of Common Stock and the Participant becomes the holder of
record of such shares. Except as otherwise provided in the Plan, no adjustment
will be made for dividends or distributions with respect to such Incentive
Awards as to which there is a record date preceding the date the Participant
becomes the holder of record of such shares, except as the Committee may
determine in its discretion.
14.3 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary will or the
laws of descent and distribution or as otherwise expressly permitted by the
Plan, unless approved by the Committee in its sole discretion, no right or
interest of any Participant in an Incentive Award prior to the exercise or
vesting of such Incentive Award will be assignable or transferable, or subjected
to any lien, during the lifetime of the Participant, either voluntarily or
involuntarily, directly or indirectly, by operation of law or otherwise. A
Participant will, however, be entitled to designate a beneficiary to receive an
Incentive Award upon such Participant's death, and in the event of a
Participant's death, payment of any amounts due under the Plan will be made to,
and exercise of any Options (to the extent permitted pursuant to Section 11 of
the Plan) may be made by, the Participant's legal representatives, heirs and
legatees.
14.4 NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is intended
to modify or rescind any previously approved compensation plans or programs of
the Company or create any limitations on the power or authority of the Board to
adopt such additional or other compensation arrangements as the Board may deem
necessary or desirable.
15. SECURITIES LAW AND OTHER RESTRICTIONS.
Notwithstanding any other provision of the Plan or any agreements entered
into pursuant to the Plan, the Company will not be required to issue any shares
of Common Stock under this Plan, and a Participant may not sell, assign,
transfer or otherwise dispose of shares of Common Stock issued pursuant to
Incentive Awards granted under the Plan, unless (a) there is in effect
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<PAGE>
with respect to such shares a registration statement under the Securities Act
and any applicable state or foreign securities laws or an exemption from such
registration under the Securities Act and applicable state or foreign securities
laws, and (b) there has been obtained any other consent, approval or permit from
any other regulatory body which the Committee, in its sole discretion, deems
necessary or advisable. The Company may condition such issuance, sale or
transfer upon the receipt of any representations or agreements from the parties
involved, and the placement of any legends on certificates representing shares
of Common Stock, as may be deemed necessary or advisable by the Company in order
to comply with such securities law or other restrictions.
16. PLAN AMENDMENT, MODIFICATION AND TERMINATION.
The Board may suspend or terminate the Plan or any portion thereof at any
time, and may amend the Plan from time to time in such respects as the Board may
deem advisable in order that Incentive Awards under the Plan will conform to any
change in applicable laws or regulations or in any other respect the Board may
deem to be in the best interests of the Company; provided, however, that no
amendments to the Plan will be effective without approval of the shareholders of
the Company if stockholder approval of the amendment is then required pursuant
to Section 422 of the Code or the rules of any stock exchange or Nasdaq or
similar regulatory body. No termination, suspension or amendment of the Plan may
adversely affect any outstanding Incentive Award without the consent of the
affected Participant; provided, however, that this sentence will not impair the
right of the Committee to take whatever action it deems appropriate under
Sections 3.2, 4.3 and 13 of the Plan.
17. EFFECTIVE DATE AND DURATION OF THE PLAN.
The Plan is effective as of March 28, 1997. The Plan will terminate at
midnight on March 28, 2007, and may be terminated prior to such time to by Board
action, and no Incentive Award will be granted after such termination. Incentive
Awards outstanding upon termination of the Plan may continue to be exercised, or
become free of restrictions, in accordance with their terms.
18. MISCELLANEOUS.
18.1 GOVERNING LAW. The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations and actions
relating to the Plan will be governed by and construed exclusively in accordance
with the laws of the State of Minnesota, notwithstanding the conflicts of laws
principles of any jurisdictions.
18.2 SUCCESSORS AND ASSIGNS. The Plan will be binding upon and inure to the
benefit of the successors and permitted assigns of the Company and the
Participants.
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ANNUAL MEETING OF SHAREHOLDERS
[LOGO] TUESDAY, JUNE 8, 1999
2:00 P.M.
RADISSON PLAZA HOTEL MINNEAPOLIS
35 SOUTH SEVENTH STREET
MINNEAPOLIS, MINNESOTA 55402
[LOGO]
6105 TRENTON LANE NORTH
MINNEAPOLIS, MINNESOTA 55442 PROXY
- - --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF SELECT COMFORT CORPORATION FOR THE ANNUAL MEETING OF
SHAREHOLDERS ON JUNE 8, 1999.
The undersigned appoints Daniel J. McAthie and James C. Raabe, and either of
them, the proxies of the undersigned, with full power of substitution in each,
to vote at the Annual Meeting of Shareholders to be held on June 8, 1999 and at
any adjournment or postponement thereof all of the undersigned's shares of
Select Comfort Corporation common stock held of record on April 14, 1999 in the
manner indicated on the reverse side hereof, and with the discretionary
authority to vote as to any other matters that may properly come before such
meeting.
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES ON
THE REVERSE SIDE.
This proxy, when properly signed, will be voted in the manner directed. IF NO
DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR ITEMS 1, 2, 3 AND 4.
SEE REVERSE FOR VOTING INSTRUCTIONS
<PAGE>
PLEASE DETACH HERE
- - --------------------------------------------------------------------------------
SHARE AMOUNTS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2, 3 AND 4.
<TABLE>
<S><C>
1. Proposal to approve amendment to Select Comfort's Articles of Incorporation
to increase the maximum number of directors from nine to twelve. / / For / / Against / / Abstain
2. Election of directors: 01 Christopher P. Kirchen 02 Lawrence P. Murphy / / Vote FOR all / / Vote WITHHELD
(for three-year term) (for three-year term) nominees from all nominees
03 Jean-Michel Valette 04 William J. Lansing
(for three-year term) (for one-year term)
(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.)
------------------------------------------------
3. Proposal to amend the Select Comfort Corporation 1997 Stock Incentive Plan to
increase the number of shares of common stock reserved for issuance by
1,000,000, from 1,500,000 shares to 2,500,000 shares. / / For / / Against / / Abstain
4. Proposal to ratify the appointment of KPMG Peat Marwick LLP, certified public
accountants, as independent auditors for Select Comfort for the fiscal year
ending January 1, 2000. / / For / / Against / / Abstain
THIS PROXY WHEN PROPERTY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL.
Address Change? Mark Box / / Date
Indicate changes below: ----------------------------------------
- - ------------------------------------------------------------------------------- ------------------------------------------------
ADDRESS AREA
------------------------------------------------
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 or
corporation and title of authorized officer
- - ------------------------------------------------------------------------------- signing the proxy.
- - ---------------------------------------------- ------------------------------------------- -----------------------------------------
PROXY # ACCOUNT # ISSUE OR ISSUER #
- - ---------------------------------------------- ------------------------------------------- -----------------------------------------
</TABLE>
