SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
CNS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transactions 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] CNS
CNS, INC.
4400 WEST 78TH ST.
BLOOMINGTON, MINNESOTA 55435
(612) 820-6696
------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 21, 1999
------------------
To the Stockholders of CNS, Inc.:
Notice is hereby given that the Annual Meeting of Stockholders of CNS, Inc.
(the "Company") will be held on Wednesday, April 21, 1999 at 3:30 p.m., local
time, in the auditorium of the Lutheran Brotherhood Building, 625 Fourth Avenue
South, Minneapolis, Minnesota for the following purposes:
1. To elect six (6) directors to serve until the next Annual Meeting of
Stockholders;
2. To ratify and approve the appointment of KPMG Peat Marwick LLP as
independent auditors for the Company for the fiscal year ending
December 31, 1999; and
3. To act upon any other matters that may properly be presented at the
meeting or any adjournment or postponement thereof.
Accompanying this Notice of Annual Meeting is a Proxy Statement, form of
Proxy and the Company's Annual Report to Stockholders for the fiscal year ended
December 31, 1998.
The Board of Directors has fixed the close of business on March 3, 1999 as
the record date for the determination of Stockholders entitled to notice of, and
to vote at, the meeting and at any adjournment or postponement thereof.
By Order of the Board of Directors,
/s/ Daniel E. Cohen
Daniel E. Cohen
CHAIRMAN OF THE BOARD
Dated: March 15, 1999.
- --------------------------------------------------------------------------------
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. WHETHER OR NOT
YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN, DATE, AND RETURN YOUR PROXY IN THE
REPLY ENVELOPE PROVIDED AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE ANNUAL MEETING. THE PROXY IS SOLICITED BY MANAGEMENT AND
MAY BE REVOKED OR WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS EXERCISED.
- --------------------------------------------------------------------------------
<PAGE>
CNS, INC.
4400 WEST 78TH STREET
BLOOMINGTON, MINNESOTA 55435
(612) 820-6696
------------------
PROXY STATEMENT
------------------
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 21, 1999
GENERAL MATTERS
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of CNS, Inc. (the "Company") from holders of Common Stock
of proxies in the accompanying form to be voted at the Annual Meeting of
Stockholders on Wednesday, April 21, 1999 at 3:30 p.m., local time (the "Annual
Meeting"), and at any adjournment or postponement thereof.
The Company intends to mail this Proxy Statement and the accompanying proxy
card on or about March 15, 1999 to all holders of the Common Stock of the
Company as of the record date of March 3, 1999, who are entitled to vote at the
Annual Meeting.
Any stockholder giving a proxy will have the right to revoke it by written
notice to the Secretary of the Company or by filing with the Secretary another
proxy bearing a later date at any time before it is voted at the Annual Meeting.
A stockholder wishing to vote in person after giving his or her proxy must first
give written notice of revocation to the Secretary. All shares represented by
valid, unrevoked proxies will be voted at the Annual Meeting and any adjournment
or postponement thereof.
Under Delaware law, each item of business properly presented at a meeting
of stockholders generally must be approved by the affirmative vote of the
holders of a majority of the voting power of the shares present, in person or by
proxy, and entitled to vote on that item of business. However, if the shares
present and entitled to vote on that item of business would not constitute a
quorum for the transaction of business at the meeting, then the item must be
approved by a majority of the voting power of the minimum number of shares that
would constitute a quorum. Votes cast by proxy or in person at the Annual
Meeting of Stockholders will determine whether or not a quorum is present. If a
stockholder abstains from voting on any matter, the Company intends to count the
person abstaining as present for purposes of determining whether a quorum is
present at the Annual Meeting of Stockholders for the transaction of business
but as not having voted for any proposal, although there is no definitive
statutory or case law authority in Delaware as to the proper treatment of
abstentions. Additionally, the Company intends to count broker "non-votes" as
present for purposes of determining the presence or absence of a quorum for the
transactions of business. A "non-vote" occurs when a nominee holding shares for
a beneficial owner votes on one proposal, but does not vote on another proposal
because the nominee does not have discretionary voting power and has not
received instructions from the beneficial owner. Therefore, abstentions and
broker "non-votes" have the same effect as votes against the proposals.
OUTSTANDING VOTING SECURITIES
Only stockholders of record as of the close of business on March 3, 1999
will be entitled to vote at the Annual Meeting. On that date, the Company had
outstanding 16,260,026 shares of common stock,
1
<PAGE>
$.01 par value ("Common Stock"), each of which is entitled to one vote per share
on each matter to be voted upon at the Annual Meeting. As provided in the
Certificate of Incorporation of the Company, there is no cumulative voting. The
Company has no class of voting securities outstanding other than the Common
Stock.
SECURITY OWNERSHIP OF PRINCIPAL
STOCKHOLDERS AND MANAGEMENT
The following table sets forth, as of March 3, 1999, the number and
percentage of outstanding shares of Common Stock of the Company beneficially
owned by each person who is known to the Company to beneficially own more than
five percent (5%) of the Common Stock of the Company, by each director and
nominee of the Company, by each executive officer named in the Summary
Compensation Table below, and by all directors and executive officers of the
Company as a group:
NUMBER OF SHARES PERCENT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1)(2) OF CLASS
- ------------------------ ------------------------ --------
Daniel E. Cohen(3) 830,664 5.1%
Richard W. Perkins(4)(5) 571,473 3.5%
Patrick Delaney(4) 105,066 *
Marti Morfitt 101,000 *
R. Hunt Greene(4)(6) 85,000 *
Andrew J. Greenshields(4)(7) 79,000 *
Kirk P. Hodgdon 99,000 *
David J. Byrd 36,700 *
John J. Keppeler 10,000 *
All directors, nominees and 2,045,701 12.0%
officers as a group (13 persons)(8)
- ------------------
* Indicates ownership of less than one percent.
(1) Except as otherwise noted, all shares beneficially owned by each owner were
owned of record, and each owner held sole voting power and sole investment
power for all shares held.
(2) Includes the following number of shares which could be purchased under
stock options exercisable within sixty (60) days of March 3, 1999: Mr.
Cohen, 200,000 shares; Mr. Perkins, 85,000 shares; Mr. Delaney, 85,000
shares; Ms. Morfitt, 60,000 shares; Mr. Greene, 60,000 shares; Mr.
Greenshields, 75,000 shares; Mr. Hodgdon, 99,000 shares; Mr. Byrd, 35,000
shares; Mr. Keppeler, 10,000 shares; and all directors, nominees and
officers as a group, 814,000 shares.
(3) Includes 327,332 shares of Common Stock owned of record by Mr. Cohen's
spouse for which he has no voting or dispositive power.
(4) Does not include 5,000 shares of Common Stock which could be purchased in
connection with a previously-granted option which will vest if the
individual is re-elected to the Board of Directors at the Annual Meeting.
(5) Includes 361,125 shares of Common Stock held for the accounts of clients of
Perkins Capital Management, Inc., a registered investment advisor of which
Mr. Perkins is the controlling shareholder, a director and President.
Perkins Capital Management has no voting power with respect to such shares
and has sole dispositive power with respect to 361,125 of such shares. Mr.
Perkins and Perkins Capital Management, Inc. disclaim beneficial ownership
of such shares. This total also includes 47,500 shares held in trusts for
which Mr. Perkins is the sole trustee, 4,000 shares held by a corporation
of which Mr. Perkins is sole shareholder and 73,848 shares held by a
partnership of which Mr. Perkins is a general partner.
(6) Includes 5,000 shares which could be purchased by stock options exercisable
within sixty (60) days of March 3, 1999 held by a general partnership of
which Mr. Greene is a general partner.
(7) Includes 4,000 shares of Common Stock held by Mr. Greenshields jointly with
his spouse for which he has shared voting and dispositive power.
(8) Includes 327,332 shares of Common Stock owned by spouses and 4,000 shares
owned jointly with spouses.
2
<PAGE>
ELECTION OF DIRECTORS
(PROPOSAL #1)
Although the Company's Bylaws currently provide for a Board of Directors
consisting of seven members, only six directors are being nominated for election
at the Annual Meeting. Each of the nominees named below is a present director of
the Company and, if elected, will serve until the next Annual Meeting or until
his or her successor has been elected and qualified. Mr. Cohen has been a
director of the Company since its formation in 1982; Mr. Delaney has been a
director since 1983; Mr. Greene has been a director since 1985; Mr. Greenshields
has been a director since 1986; Mr. Perkins has been a director since 1993; and
Ms. Morfitt has been a director since 1998. If for any reason any of the
nominees becomes unavailable for election, the proxies solicited by the Board of
Directors will be voted for such new nominee as is selected by the Board of
Directors. The Board of Directors has no reason to believe that any of the
nominees is not available or will not serve if elected.
All of the nominees named below have been nominated by the Board of
Directors of the Company and are directors who served during 1998. It is
intended that proxies solicited by the Board of Directors will (unless otherwise
directed) be voted "FOR" the election of the nominees for director named below.
The nominees are listed below with their ages, their present positions
with the Company, their present principal occupations or employment and their
principal occupations or employment for at least the past five years. Mr. Cohen
and Ms. Morfitt devote their full working time to the business of the Company.
Messrs. Delaney, Greene, Greenshields and Perkins devote such time as is
necessary to fulfill their duties as directors.
DANIEL E. COHEN, 46, has served as the Company's Chairman of the Board
since 1993, its Chief Executive Officer since 1989 and the Treasurer from 1982
through March 3, 1999. Mr. Cohen, a founder of the Company, is a medical doctor
and board-certified neurologist.
PATRICK DELANEY, 56, has served as a director of the Company since 1983 and
as the Company's Secretary since 1995. Mr. Delaney is a partner in the
Minneapolis law firm of Lindquist & Vennum P.L.L.P., counsel to the Company. He
has been in the private practice of law since 1967. He is also a director of
Community First Bankshares, Inc., a multi-bank holding company and a director
and the secretary of Applied Biometrics, Inc., a manufacturer of medical
devices.
R. HUNT GREENE, 48, has been an investment banker for over fifteen years.
He is presently Managing Director of Greene Holcomb & Fisher LLC, a Minneapolis
investment bank that provided investment banking services to the Company over
the past three years and that will provide investment banking services to the
Company in 1999. Mr. Greene was a Managing Director of Piper Jaffray Inc., a
Minneapolis-based investment bank and general broker-dealer in investment
securities, from 1979 to 1995.
ANDREW J. GREENSHIELDS, 61, has been President of Pathfinder Ventures,
Inc., Minneapolis, Minnesota, since 1980. He is also a general partner of
Pathfinder Venture Capital Funds II and III and a general partner of Spell
Capital Partners, LP, all of which are Minneapolis-based venture capital limited
partnerships. Mr. Greenshields is also a director of Aetrium, Inc., a
manufacturer of semi-conductor handling equipment.
MARTI MORFITT, 41, has served as the Company's President and Chief
Operating Officer since March 1998. From September 1982 through February 1998,
Ms. Morfitt served in a series of positions of increasing responsibility with
the Pillsbury Company, a Minneapolis-based manufacturer and distributor of food
products, most recently serving from May 1997 to February 1998 as
Vice-President, Meals, and from February 1994 to May 1997 as Vice-President,
Green Giant Brands. She also serves as a director of Graco, Inc., a
Minneapolis-based manufacturer of fluid handling systems.
RICHARD W. PERKINS, 68, has been President, Chief Executive Officer and a
director of Perkins Capital Management, Inc., a Minneapolis-based investment
management company, since 1985. He is also a general partner of Spell Capital
Partners, LP, a Minneapolis-based venture capital limited partnership. He is
also a director of the following publicly-held companies: Bio-Vascular, Inc., a
manufacturer of prosthetics and surgical appliances; Children's Broadcasting
Corporation, a holding company; Eagle
3
<PAGE>
Pacific Industries, Inc., a manufacturer of plastic pipes; Lifecore Biomedical,
Inc., a medical device company; Nortech Systems, Inc., a contract manufacturer
for the electronics industry; Quantech, Ltd., a development stage medical
products company; Vital Images, Inc., a medical diagnostic software company; and
Harmony Holdings, Inc., a producer of television commercials, music videos and
related media.
---------------------------------------------------------------
MANAGEMENT RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED.
---------------------------------------------------------------
OTHER INFORMATION REGARDING THE BOARD
BOARD MEETINGS
The Board of Directors met five times and took action in writing in lieu of
a meeting once during 1998. Each director attended at least 75% of the aggregate
of the total number of Board meetings and Committee meetings on which he or she
served during the fiscal year 1998.
COMMITTEES
The Audit Committee of the Board of Directors, which is comprised of
Messrs. Greene (Chairman) and Greenshields, met three times during 1998. The
Audit Committee reviews and evaluates significant matters relating to the audit
and internal controls of the Company, reviews the scope and results of audits by
and the recommendations of the Company's independent auditors, and approves
services provided by the auditors.
The Compensation Committee of the Board of Directors, which is comprised of
Messrs. Greenshields (Chairman) and Perkins, met three times during 1998. Among
other duties, the Compensation Committee makes recommendations to the Board of
Directors regarding the employment practices and the policies of the Company and
the compensation paid to executive officers of the Company. The Compensation
Committee therefore also has the authority to make awards under and adopt and
alter administrative rules and practices governing the Company's Stock Option
Plans and Stock Purchase Plan ("Plans") and interpret the terms and provisions
of the Plans and any award issued under those Plans.
The Nominating Committee, which is comprised of Messrs. Greenshields
(Chairman) and Delaney and Ms. Morfitt met three times during 1998. The
responsibilities of the Nominating Committee include Board membership
recommendations and executive officer succession planning.
4
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for the fiscal years ending December 31, 1998,
1997 and 1996, the cash compensation paid by the Company, as well as certain
other compensation paid or accrued for those years, to Daniel E. Cohen, the
Company's Chief Executive Officer, and each of the other four most highly
compensated executive officers of the Company as of December 31, 1998 (together
with Mr. Cohen, the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------ ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(1)
- --------------------------- ---- --------- -------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Daniel E. Cohen 1998 $235,000 $ 74,025 -0- $261
Chief Executive Officer 1997 219,750 -0- -0- 300
and Chairman of the Board 1996 150,000 150,000 -0- 300
Marti Morfitt 1998 185,647(2) 73,479 150,000 127
President and 1997 -0- -0- -0- -0-
Chief Operating Officer 1996 -0- -0- -0- -0-
Kirk P. Hodgdon 1998 144,213 27,256 15,000 99
Vice President of 1997 142,000 -0- -0- 300
Breathe Right Brand 1996 127,000 76,200 -0- 300
David J. Byrd 1998 143,175 27,060 15,000 261
Vice President of Finance, 1997 136,000 -0- 60,000(3) 275
Chief Financial Officer 1996 118,750(4) 71,250 -0- 275
and Treasurer
John J. Keppeler 1998 74,240(5) 73,700 15,000 49
Vice President of Sales 1997 -0- -0- -0- -0-
1996 -0- -0- -0- -0-
</TABLE>
- ------------------
(1) Represents the payment by the Company of life insurance premiums on behalf
of the Named Executive.
(2) Ms. Morfitt became Chief Operating Officer in March 1998 and received a
salary for the remainder of the year.
(3) Represents a repricing of an option previously granted on May 5, 1996.
(4) Mr. Byrd became Vice President of Finance and Chief Financial Officer in
February 1996 and received a salary for the remainder of the year.
(5) Mr. Keppeler became Vice President of Sales in July 1998 and received a
salary for the remainder of the year.
5
<PAGE>
STOCK OPTIONS
The following table contains information concerning grants of stock options
to the Named Executives during the fiscal year ending December 31, 1998:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------
POTENTIAL
REALIZABLE VALUE AT
PERCENT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK
OF SECURITIES OPTIONS EXERCISE OR PRICE APPRECIATION
UNDERLYING GRANTED TO BASE FOR OPTION TERM(1)
OPTIONS EMPLOYEES PRICE EXPIRATION ------------------------
NAME GRANTED (#) IN 1998 ($/Sh) DATE 5% 10%
- ---- ------------- ---------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Daniel E. Cohen .......... -0- -- -- -- -- --
Marti Morfitt ............ 150,000(2) 23.6% $5.438 03/30/08 $512,942 $1,299,896
Kirk P. Hodgdon .......... 15,000(3) 2.4 5.00 04/22/08 47,167 119,531
David J. Byrd ............ 15,000(3) 2.4 5.00 04/22/08 47,167 119,531
John J. Keppeler ......... 50,000(4) 7.9 4.438 07/13/08 139,535 353,612
</TABLE>
- ------------------
(1) Potential realizable values shown above represent potential gains based
upon annual compound price appreciation of 5% and 10% from the date of
grant through the full option term. The actual value realized, if any, on
stock option exercises will be dependent on overall market conditions and
the future performance of the Company and its Common Stock. There is no
assurance that the actual value realized will approximate the amounts
reflected in this table.
(2) The option vests as follows: 30,000 shares on each of March 30, 1998, 1999,
2000, 2001 and 2002.
(3) The option vests as follows: 5,000 shares on each of April 22, 1999, 2000
and 2001.
(4) The option vests as follows: 10,000 shares on each of July 13, 1998, 1999,
2000, 2001 and 2002.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the Named
Executives concerning the exercise of options during the fiscal year ending
December 31, 1998 and unexercised options held as of December 31, 1998:
AGGREGATED OPTION EXERCISES IN 1998 AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS AT FY-END(#) OPTIONS AT FY-END ($)(1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel E. Cohen .......... -0- -0- 200,000 -0- (2) (2)
Marti Morfitt ............ -0- -0- 30,000 120,000 (2) (2)
Kirk P. Hodgdon .......... -0- -0- 82,000 27,000 (2) (2)
David J. Byrd ............ -0- -0- 30,000 45,000 (2) (2)
John J. Keppeler ......... -0- -0- 10,000 40,000 (2) (2)
</TABLE>
- ------------------
(1) Based on the closing sale price of $3.4375 per share for the Common Stock
on December 31, 1998.
(2) The exercise price for these options was greater than the closing sale
price on December 31, 1998.
6
<PAGE>
REPORT ON EXECUTIVE COMPENSATION
This is a report of the Compensation Committee of the Board of Directors of
the Company, which is composed of the undersigned Board members. This report
shall not be deemed incorporated by reference into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934 and shall not
otherwise be deemed to be filed under either such Act.
COMPENSATION PHILOSOPHY. The compensation philosophy of the Company is to
provide competitive levels of compensation that are consistent with the
Company's annual and long-term performance goals, recognize individual
initiative and achievements and assist the Company in attracting and retaining
qualified executives. It is intended that, in judging appropriate levels of
compensation, the Compensation Committee will take into account internally set
performance goals and comparisons with the performance of other publicly-held
consumer products companies which had rapidly growing revenues under $500
million.
BASE SALARY. Executive base salary is reviewed annually and adjustments, if
any, are based on levels of responsibility, experience, internal equity,
external pay practices and the rate of inflation. In 1998, the Compensation
Committee recommended to the Board of Directors and the Board adopted a plan
under which the base salaries of the executive officers were set effective April
1, 1998.
CASH BONUS. Bonuses are awarded to executive officers in consideration of
contributions to the Company and the Company's overall performance. In 1998, the
Board of Directors adopted a plan under which the Chairman and Chief Executive
Officer of the Company and the President and Chief Operating Officer of the
Company would be eligible for cash bonuses equal to amounts of between 17.5% and
100% of their base salaries depending on the Company's financial performance for
the fiscal year. The specified financial targets required for various bonus
levels were set by the Board of Directors. Under the same plan, Vice Presidents
of the Company were eligible for cash bonuses of between 10.5% and 60% of their
base salaries.
STOCK OPTIONS. The Company's Stock Option Plans include executive officers.
Stock options are generally granted to executive officers at the time they are
elected. The Compensation Committee has adopted the position that stock
ownership by management and stock-based performance compensation arrangements
are beneficial in aligning management's and shareholder's interests in enhancing
shareholder value.
CHIEF EXECUTIVE OFFICER COMPENSATION. Mr. Cohen's compensation for
1996-1998 is shown in the Summary Compensation Table above. Mr. Cohen has
managed the Company well in an increasingly competitive industry, has
successfully guided the development and marketing of its Breathe Right(R)
external nasal dilator, and has made arrangements for the Company to test and
enter into production and sale of new product lines. The Compensation Committee
has determined Mr. Cohen's compensation on these bases and commends him for his
performance.
BOARD ACTION. All recommendations of the Compensation Committee have been
and are subject to Board of Director review and approval. Stock option grants by
the Compensation Committee are not, however, subject to Board of Director review
and approval.
SUBMITTED BY THE COMPENSATION COMMITTEE
OF THE COMPANY'S BOARD OF DIRECTORS:
Andrew J. Greenshields, Chairman
Richard W. Perkins
7
<PAGE>
STOCK PERFORMANCE
The graph below sets forth a comparison of the cumulative shareholder
return of the Company's Common Stock over the last five fiscal years with the
cumulative total return over the same periods for the Nasdaq Market Index and
the Surgical, Medical and Dental Instruments and Supplies Index (the "Medical
Instruments Index") (SIC Code 384, which includes 242 companies). The graph
below compares with the two indicated indexes the cumulative total return of the
Company's Common Stock over the last five fiscal years assuming a $100
investment on December 31, 1993 and assuming reinvestment of all dividends paid.
The Company did not pay any dividends during this period. This graph shall not
be deemed incorporated by reference into any filing under the Securities Act of
1933 or the Securities Exchange Act of 1934.
[PLOT POINTS CHART]
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CNS, Inc. $100 $107.58 $366.67 $348.48 $162.12 $ 83.33
Industry Index 100 110.79 185.06 197.06 236.33 307.44
Nasdaq Market Index 100 104.99 136.18 169.23 207.00 291.96
</TABLE>
The Company's Common Stock closed at $3.4375 per share on December 31,
1998.
EMPLOYMENT AGREEMENTS
Messrs. Cohen, Hodgdon, Byrd, and Keppeler and Ms. Morfitt each have
employment agreements with the Company. The employment agreements with Messrs.
Cohen, Hodgdon, Byrd and Keppeler and Ms. Morfitt provide that they are
entitled to base salaries, respectively, of $235,000, $145,950, $144,900,
$158,000 and $245,000 annually. In addition, they may earn cash bonuses as
established by the Board from time to time. Either the Company or Messrs.
Cohen, Hodgdon, Byrd, Keppeler or Ms. Morfitt may terminate their respective
agreements at any time on 30 days' advance, written notice. Each of the
employment agreements with Messrs. Cohen, Hodgdon, Byrd and Keppeler and Ms.
Morfitt contains a noncompete obligation which remains in effect for a period
of one year after termination of employment for any reason.
Each of the employment agreements with Messrs. Cohen, Hodgdon, Byrd and
Keppeler and Ms. Morfitt provides that upon the termination of their employment
with the Company during a period of twenty-four months following a Change in
Control of the Company (i) by the Company other than for Cause, death or
Disability, or (ii) by the employee for Good Reason (as such terms are defined
in their employment agreements), then they shall be entitled to a lump sum
payment equal to twenty-four times the average monthly cash compensation paid to
them in the twenty-four months prior to termination
8
<PAGE>
and all of their outstanding options to purchase Common Stock of the Company
shall immediately become fully vested and exercisable. If such a termination
had occurred in 1998, the amounts payable pursuant to these employment
agreements would have been as follows: Mr. Cohen, $528,775; Mr. Hodgdon,
$313,469, Mr. Byrd, $306,235; Mr. Keppeler, $427,000; Ms. Morfitt, $691,000.
DIRECTOR COMPENSATION
Directors who served during 1998 and were not otherwise directly or
indirectly compensated by the Company as employees were each paid directors'
fees in the form of an annual retainer and meeting fee during 1998. The annual
retainers for Messrs. Delaney, Greene, Greenshields and Perkins, who served the
entire fiscal year, was $5,000. In addition, non-employee directors received
$1,000 for each board meeting they attended and were compensated for attending
committee meetings not held on the same day as a regular board meeting at a rate
of $750 per meeting. Fees were also paid to Mr. Delaney's law firm, Lindquist &
Vennum P.L.L.P., for legal services rendered to the Company during 1998. All
cash fees paid to Mr. Delaney were assigned to Lindquist & Vennum and deducted
from legal fees payable by the Company.
Each of the non-employee directors who was elected or re-elected at last
year's Annual Meeting of Stockholders (Messrs. Delaney, Greene, Greenshields and
Perkins) was granted a ten-year, nonqualified option under the 1994 Amended
Stock Option Plan to purchase 15,000 shares of Common Stock at $5.00 per share,
the fair market value of the Common Stock on the date of grant. The options vest
as follows: 5,000 shares on the date of grant and 5,000 shares on the date of
each annual stockholders' meeting held during the succeeding two years at which
the director is re-elected to the Board of Directors.
------------------
9
<PAGE>
APPOINTMENT OF INDEPENDENT AUDITORS
(PROPOSAL #2)
The Board of Directors has selected KPMG Peat Marwick LLP, certified public
accountants, as independent auditors to make an examination of the accounts of
the Company for the fiscal year ending December 31, 1999, and to perform other
appropriate accounting services. Unless otherwise specified, proxies solicited
by the Board of Directors will be voted "FOR" such appointment of KPMG Peat
Marwick LLP. In the event the appointment of KPMG Peat Marwick LLP should not be
ratified and approved by the stockholders, the Board of Directors will make
another appointment to be effective at the earliest feasible time.
A representative of KPMG Peat Marwick LLP is expected to attend the Annual
Meeting. He or she will have an opportunity to make a statement if he or she
desires to do so and will be available to respond to appropriate questions.
---------------------------------------------------------------
MANAGEMENT RECOMMENDS A VOTE "FOR" THE PROPOSAL TO RATIFY AND
APPROVE THE APPOINTMENT OF KPMG PEAT MARWICK LLP.
---------------------------------------------------------------
ANNUAL REPORT
An Annual Report of the Company describing the Company's key activities and
containing financial statements for the fiscal year ended December 31, 1998
accompanies this Notice of Annual Meeting and proxy solicitation material.
STOCKHOLDER PROPOSALS
If a stockholder desires to present a proposal to be voted upon at the next
meeting of stockholders of CNS, Inc., such proposal, in order to be included in
the proxy statement, must be received at the Company's office at P.O. Box 39802,
Minneapolis, Minnesota, 55439 by November 19, 1999. In addition, if the Company
receives notice of a stockholder proposal after January 15, 2000, such proposal
will be considered untimely pursuant to Rules 14a-4 and 14a-5(e) and the persons
named in the proxies solicited by the Board of Directors of the Company may
exercise discretionary voting power with respect to such proposal.
SOLICITATION
The cost of soliciting proxies, including the cost of preparing,
assembling, and mailing the proxies and soliciting material, as well as the cost
of forwarding the material to the beneficial owners of stock, will be borne by
the Company. Directors, officers and regular employees of the Company may,
without compensation other than their regular remuneration, solicit proxies by
telephone, facsimile or in person. The Company may also request banks and
brokers to solicit their customers who have a beneficial interest in shares
registered in the names of nominees and will reimburse such banks and brokers
for their reasonable out-of-pocket expenses.
GENERAL
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission and
the NASD. Executive officers and directors are required by SEC regulations
10
<PAGE>
to furnish the Company with copies of all Section 16(a) forms they file. To the
Company's knowledge, all insiders of the Company filed in a timely manner all
such reports.
OTHER BUSINESS
The management of the Company does not know of any other business to be
presented at the Annual Meeting of Stockholders. If any matter properly comes
before the meeting, however, it is intended that the persons named in the
enclosed form of proxy will vote said proxy in accordance with their best
judgment.
ALL PROXIES PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED BY
STOCKHOLDERS. IF NO DIRECTION IS GIVEN, PROXIES WILL BE VOTED FOR THE ELECTION
OF MANAGEMENT'S NOMINEES FOR DIRECTORS, AND FOR THE APPOINTMENT OF KPMG PEAT
MARWICK LLP AS THE COMPANY'S INDEPENDENT AUDITORS.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Daniel E. Cohen
Daniel E. Cohen
CHAIRMAN OF THE BOARD
Minneapolis, Minnesota
March 15, 1999
PLEASE SIGN, DATE AND MAIL YOUR PROXY NOW
11
<PAGE>
CNS, INC.
4400 WEST 78TH STREET
BLOOMINGTON, MINNESOTA 55435
THIS PROXY IS SOLICITED ON BEHALF OF THE COMPANY'S BOARD OF DIRECTORS
The undersigned hereby appoints Daniel E. Cohen and Patrick Delaney, each of
them as Proxies and each with the power to appoint his substitute, and hereby
authorizes them to represent and to vote, as designated below, all the shares of
Common Stock of CNS, Inc. held of record by the undersigned on March 3, 1999, at
the Annual Meeting of Stockholders to be held on April 21, 1999, or at any
adjournment or postponement thereof.
1. ELECTION OF DIRECTORS [ ] FOR all nominees listed below
(except as marked to the contrary below)
DANIEL E. COHEN, PATRICK DELANEY, R. HUNT GREENE,
ANDREW J. GREENSHIELDS, MARTI MORFITT, RICHARD W. PERKINS
(INSTRUCTION: To withhold authority to vote for any nominee, print that
nominee's name on the space provided below.)
---------------------------------------------------------------------------
[ ] WITHHOLD AUTHORITY to vote for all nominees listed above.
2. PROPOSAL TO RATIFY AND APPROVE THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS
THE INDEPENDENT AUDITORS OF THE COMPANY.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
(CONTINUED, AND TO BE COMPLETED AND SIGNED ON REVERSE SIDE)
<PAGE>
(CONTINUED FROM OTHER SIDE)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH PROPOSAL.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THE PROXY WILL
BE VOTED IN FAVOR OF THE PROPOSALS. Please sign exactly as name appears below.
When shares are held by joint tenants, both should sign. When signing as
attorney, executor, administrator, trustee, or guardian, please give full title
as such. If a corporation, please sign in full corporate name by President or
other authorized officer. If a partnership, please sign in partnership name by
authorized person.
Dated: ____________________________, 1999
_________________________________________
Name of Shareholder(s) (Please print)
_________________________________________
Signature (and Title if applicable)
_________________________________________
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE
ENCLOSED ENVELOPE.
