UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from _________ to __________
COMMISSION FILE NUMBER: 0-16612
CNS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1580270
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
P.O. BOX 39802
MINNEAPOLIS, MN 55439
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (612) 820-6696
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Title of each class
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Common Stock, par value of $.01 per share
Preferred Stock purchase rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of March 3, 1999, assuming as market value the price of $3.094 per share, the
closing sale price of the Company's Common Stock on the Nasdaq National Market,
the aggregate market value of shares held by non-affiliates was approximately
$46,500,000.
As of March 3, 1999, the Company had outstanding 16,260,026 shares of Common
Stock of $.01 par value per share.
Documents Incorporated by Reference: Portions of the Company's (i) Annual Report
to Stockholders for the year ended December 31, 1998, and (ii) Proxy Statement
for its Annual Meeting of Stockholders to be held on April 21, 1999, are
incorporated by reference into Parts II and III of this Form 10-K.
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TABLE OF CONTENTS
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PAGE
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PART I
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Item 1. Business................................................................... 3
Item 2. Properties................................................................. 15
Item 3. Legal Proceedings.......................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders........................ 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 16
Item 6. Selected Financial Data.................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................. 16
Item 8. Financial Statements and Supplementary Data................................ 17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 17
PART III
Item 10. Directors and Executive Officers of the Registrant......................... 18
Item 11. Executive Compensation..................................................... 18
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 18
Item 13. Certain Relationships and Related Transactions............................. 18
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..................................................... 19
SIGNATURES ........................................................................... 20
EXHIBIT INDEX.......................................................................... 22
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FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K and
other written and oral statements made from time to time by the Company do not
relate strictly to historical or current facts but provide current expectations
or forecasts of future events. As such, they are considered "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995 and are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those presently anticipated or projected. Such
forward-looking statements can be identified by the use of terminology such as
"may," "will," "expect," "plan," "intend," "anticipate," "estimate," or
"continue" or similar words or expressions. It is not possible to foresee or
identify all factors affecting the Company's forward-looking statements and
investors therefore should not consider any list of factors to be an exhaustive
statement of all risks, uncertainties or potentially inaccurate assumptions.
Factors that could cause actual results to differ from the results discussed in
the forward-looking statements include, but are not limited to, the following
factors: (i) the Company's revenue and profitability is primarily reliant on
sales of a single product, Breathe Right(R) nasal strips; (ii) the Company's
success will depend significantly on its ability to effectively market Breathe
Right nasal strips; (iii) the Company's competitive position will, to some
extent, be dependent on the enforceability and comprehensiveness of its patents
on the Breathe Right nasal strip technology which have been, and in the future
may be, the subject of litigation (see Item 1, "Patents, Trademarks and
Proprietary Rights"); (iv) the Company operates in competitive markets where
recent and potential entrants in the nasal dilation segment pose greater
competitive challenges than those faced by the Company in the past (see Item 1,
"Competition"); (v) the Company has faced and will continue to face challenges
in successfully introducing new products; (vi) the Company is currently
dependent upon 3M for the international distribution of its products under a
contractual relationship which has produced less than anticipated results and
which the Company expects to modify or replace (see Item 1, "International
Distribution"); (vii) the Company is dependant upon contract manufacturers for
the production of substantially all of its products; and (viii) the risks
associated with the Year 2000 issue as described on pages 11 and 12 of the
Company's Annual Report to Stockholders for the year ended December 31, 1998.
PART I
ITEM 1. BUSINESS
GENERAL
CNS, Inc. (the "Company") develops and markets consumer health care
products, including the Breathe Right nasal strip. The Breathe Right nasal strip
improves breathing by reducing nasal airflow resistance. It can be effective in
providing temporary relief for nasal congestion, eliminating or reducing snoring
and reducing breathing difficulties due to a deviated nasal septum. The Company
has also entered into or is exploring a number of agreements to market or
license other new consumer products, including a chewable dietary fiber tablet.
These new products are in various stages of evaluation, testing and development.
MANAGEMENT
During 1998, the Company added several executive officers with a
diverse body of consumer packaged goods experience to its management team. See
"Executive Officers of the Company." The Company also reorganized its management
structure into three strategic business teams in order to expand the platform
for building the Breathe Right brand and launching additional products: Breathe
Right Brand Team; New Business Evaluation Team; and New Business
Commercialization Team. The Company believes that the addition of management
personnel experienced in the consumer products industry and its new team focus
will enable the Company to more effectively implement its business strategies
and position itself to become a larger, multi-product consumer products
company.
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BREATHE RIGHT BRAND TEAM. The Company's Breathe Right Brand Team (the
"BRB Team") is responsible for the management and development of the Breathe
Right nasal strip business and other non-nasal strip products that leverage the
Breathe Right brand name. The Breathe Right nasal strip products currently
represent the cornerstone of the Company's business. The Company intends to
exploit new markets and opportunities that it believes exist for its current
nasal strip products and plans to commercialize potential new Breathe Right
brand products. The BRB Team will lead this effort. In addition, there are two
new Breathe Right brand name products that have recently been introduced to the
market by the BRB Team-the Breathe Right saline nasal spray and the Breathe
Right allergen barrier pillow cover. See "Products - Breathe Right Brand
Products."
NEW BUSINESS EVALUATION TEAM. The Company's New Business Evaluation
Team (the "NBE Team") is committed to the expansion of its product base through
the acquisition and development of unique consumer health care products or
technologies that have good market potential. The NBE Team is responsible for
identifying and evaluating potential new companies, products, inventions and
other business opportunities that will enable the Company to achieve its
long-term growth and profit objectives. There are a number of new products,
inventions and business opportunities that are currently under various stages of
evaluation by the NBE Team.
NEW BUSINESS COMMERCIALIZATION TEAM. The Company's New Business
Commercialization Team (the "NBC Team") is responsible for evaluating the market
potential for new products and developing and implementing strategies for
successful product commercialization. The Company has acquired the rights to a
number of new products which are at various stages of development, testing and
market evaluation by the NBC Team, including a chewable dietary fiber tablet.
See "Products - Other Products."
PRODUCTS
BREATHE RIGHT NASAL STRIPS. The Breathe Right nasal strip is a
nonprescription, single-use disposable device that improves breathing by
reducing nasal airflow resistance. The Company received 510(k) clearances from
the United States Food and Drug Administration ("FDA") to market the Breathe
Right nasal strip for improvement of nasal breathing, temporary relief of nasal
congestion, elimination or reduction of snoring and temporary relief of
breathing difficulties due to a deviated nasal septum. See "Government
Regulation." The Breathe Right nasal strip comes both in tan and a nearly
transparent product, the Breathe Right clear nasal strip.
The Breathe Right nasal strip includes two embedded plastic strips.
When folded down onto the sides of the nose, the Breathe Right nasal strip lifts
the side walls of the nose outward to open the nasal passages. The product
improves nasal breathing upon application and does not include any medication,
thereby avoiding any medicinal side effects. The Breathe Right nasal strip is
offered in three sizes (junior/small, small/medium and medium/large) to
accommodate the range of nose sizes from a child's nose to an adult's nose. The
Breathe Right nasal strip is packaged for the consumer market in various
quantities ranging between 10 to 38 strips per box. The Company believes that
the Breathe Right nasal strip is priced comparably to medicinal decongestants on
a daily or nightly dosage basis at suggested retail prices ranging between $4.99
and $11.99 per box. The Company expanded the Breathe Right nasal strip line with
the introduction of the Breathe Right clear nasal strip in the second half of
1997. The Breathe Right clear nasal strip is a nearly transparent product that
the Company believes may reduce any vanity issues associated with the use of the
tan Breathe Right nasal strip product. The Company is currently evaluating
additional nasal strip products.
BREATHE RIGHT BRAND PRODUCTS. The Company began the national
introduction of two products that leverage the Breathe Right brand name during
the third quarter of 1998, a saline nasal spray and an allergen barrier pillow
cover. The Breathe Right saline nasal spray is a non-habit forming, drug-free
product that restores moisture to comfort and soothe dry, irritated nasal
passages due to colds, allergies, dry air (low humidity), air
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pollution and the overuse of nasal decongestants. The Breathe Right allergen
barrier pillow cover is a machine washable cover for pillows of various sizes
that protects against dust, dust mites and other allergens. The product is
placed under a regular pillow case and designed to act as a barrier to dust
mites, the number one in-home source of allergens. The Company is optimistic
about the potential of both products, but their contributions to 1998 sales were
not significant. The Company intends to introduce additional non-nasal strip
products that carry the Breathe Right brand name and to extend the product line.
There are a number of potential new Breathe Right brand name products that are
currently under various stages of evaluation, testing and development.
BANISH(TM) PERSONAL SMOKE DEODORIZER. Late in 1997, the Company began
the introduction of BANISH personal smoke deodorizer, a water-based nontoxic
odorless spray that removes same day odor from clothes and hair. This product
does not simply cover up or mask the odor of tobacco smoke; it neutralizes it.
In order to evaluate the market potential for this product, the advertising and
promotion of BANISH was limited to a regional test market. Overall business
results from the market test have been disappointing to date. Sales have been
limited and expenses associated with the introduction and test market were
approximately $2.8 million in 1998. Although the Company believes that consumer
interest in personal smoke deodorizing products is high, the Company is
currently evaluating options for BANISH before devoting any further significant
financial resources to the commercialization of this product.
OTHER PRODUCTS. The Company intends to introduce additional consumer
health care products and plans to increase its investment in new product
development. A number of potential new products are currently under various
stages of evaluation and testing. The Company has recently completed the
development of a chewable, dietary fiber supplement in tablet form and is in the
final phase of market research which will determine the feasibility and scope of
a product launch in 1999.
MARKETS
BREATHE RIGHT BRAND PRODUCT LINE. The Breathe Right brand of products
includes the Breathe Right nasal strip, Breathe Right saline nasal spray and
Breathe Right allergen barrier pillow cover. All of these products are sold
primarily in the consumer market. The Breathe Right nasal strip is, to a lesser
extent, also sold in the athletic market.
CONSUMER MARKET. Air impedance in the nose accounts for
approximately one-half of the total airway resistance involved in the
respiratory system (i.e., half of the energy required for breathing). If the
effort to breathe through the nose during sleep is excessive, the person will
resort to mouth breathing, promoting snoring, dry mouth, sore throat and
mini-awakenings which disrupt sleep. In addition, nasal breathing difficulties
during sleep are often caused by nasal congestion found in people who have a
common cold, allergies and sinusitis and by those who experience nasal
obstruction due to a deviated nasal septum. The Company believes that people
with deviated septa or other structural problems or chronic conditions such as
snoring or allergies may be more predisposed to use Breathe Right products on a
regular or daily basis while seasonal sufferers are likely to use Breathe Right
products as needed. People suffering from these conditions are currently the
primary users of the Company's products and are the main targets of its
advertising.
In 1998, the Company began to position the Breathe Right nasal strip as
a product that provides drug-free relief for those suffering from nasal
congestion and other symptoms due to the common cold, allergies and sinusitis.
The Company's new advertising emphasizes the ability of Breathe Right nasal
strips to provide immediate relief from nasal congestion due to colds and
allergies and the ability of the product to reduce snoring.
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The Company's marketing efforts capitalize on the benefits of Breathe
Right products to consumers in various, and often overlapping, consumer market
segments:
* Nasal congestion as a result of allergies affects
approximately 35 million Americans while virtually all
Americans suffer some nasal congestion annually as a result of
the common cold. The Company believes that the Breathe Right
nasal strip is often used as either an alternative or an
adjunct to decongestant drugs (including nasal sprays and oral
decongestants). In addition, the Breathe Right saline nasal
spray is designed to comfort and soothe dry, irritated nasal
passages due to, among other things, congestion resulting from
allergies, colds and an overuse of nasal decongestants.
* Breathe Right nasal strips were effective in eliminating
snoring or reducing snoring loudness in approximately 75% of
the participants in a clinical study. The Company believes
that approximately 78% of all households have at least one
snorer, approximately 37 million people snore regularly, while
another 50 million people snore occasionally.
* Sleep quality can be enhanced by improving nasal breathing at
night with a Breathe Right nasal strip. Nearly 88% of all
households in the United States report nightly sleep
disruptions, many of which are related to poor breathing.
* Approximately 12 million people in the United States suffer
from a deviated septum, a bend in the cartilage or bone that
divides the nostrils. Breathe Right nasal strips were cleared
by the Food and Drug Administration in 1996 to provide
temporary relief from breathing difficulties associated with a
deviated septum.
* Approximately 40-50 million people in the United States suffer
from allergies, many of whom are allergic to waste products
deposited by hundreds of thousands of microscopic dust mites
living inside a pillow. The Breathe Right allergen barrier
pillow cover is designed to protect allergy sufferers from
dust mites and other allergens contained in pillows.
ATHLETIC MARKET. The Company believes that the Breathe Right
nasal strip may make nasal breathing more comfortable and may improve endurance
during athletic activity, particularly when a mouth guard is used. An exercise
physiology study published in peer-reviewed medical literature in 1997 concluded
that the Breathe Right nasal strip provided physiologic advantages in
ventilation and heart rate during mid-level exercise. Other exercise physiology
studies have been conducted and add to the substantiation of the positive
effects of the Breathe Right nasal strip during exercise. Breathe Right nasal
strips have been used by professional and collegiate athletes in sports such as
football, soccer and hockey, by race car drivers and horse racing jockeys and by
other professional and recreational athletes, including runners and cyclists.
The Company uses athletes to endorse the Breathe Right nasal strip to increase
the visibility of the product, which thereby leads to awareness of the product
for not only its athletic applications, but also for nasal congestion, snoring
and other applications.
BANISH PERSONAL SMOKE DEODORIZER. The Company believes that there are
approximately 50 million adult smokers in the United States, 16 million of whom
are in positions that involve high interaction with others who could be offended
by the odor of smoke. There are also a significant number of additional
Americans that do not smoke, but are exposed to smoke in environments such as
bars, restaurants, offices or factories. The Company believes that BANISH has
potential use both for smokers and non-smokers who would like to eliminate the
odor of tobacco smoke.
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BUSINESS STRATEGY
The Company's business strategy includes increasing sales of its
Breathe Right nasal strip and other Breathe Right brand products, expanding its
Breathe Right product line and successfully introducing new products.
INCREASING NEW CONSUMER PRODUCT TRIAL AND INCREASING PRODUCT USAGE. The
Company uses a combination of advertising, promotions, public relations and
celebrity endorsements to increase consumer awareness and to encourage consumer
trial of the Breathe Right nasal strip. In 1998, the Company began to position
the Breathe Right nasal strip as a product that provides drug-free relief for
those suffering from nasal congestion and other symptoms due to the common cold,
allergies and sinusitis. The Company's new advertising emphasizes the ability of
Breathe right nasal strips to provide immediate relief from nasal congestion due
to colds and allergies and reduce snoring as well as capitalizes on the benefits
of the product to consumers in various, and often overlapping, consumer market
segments.
MARKETING NEW BREATHE RIGHT BRAND PRODUCTS. The Company believes that
the Breathe Right brand name is one of its most valuable assets. The Company is
in the process of evaluating new products that will carry the Breathe Right
name. In addition, the Company has recently commenced the introduction of a
Breathe Right saline nasal spray and a Breathe Right allergen barrier pillow
cover.
MARKETING NEW PRODUCTS THAT UTILIZE EXISTING DISTRIBUTION CHANNELS. The
Company plans to take advantage of its marketing and distribution strengths by
acquiring or licensing the rights to products that it believes have merit and
bring them to market. Among the products currently being evaluated is a unique,
chewable dietary fiber tablet. There can be no assurance, however, that the
Company will ever successfully market the chewable dietary fiber tablet or any
of the Company's other new products.
EXPANDING COMPANY PRESENCE IN INTERNATIONAL MARKETS. The Company sells
its Breathe Right nasal strip products outside the United States and Canada
pursuant to an international distribution agreement under which 3M Company
agreed to act as an exclusive distributor. Under the terms of the agreement, 3M
is obligated to purchase nasal strips from the Company and satisfy certain
minimum purchase requirements. The contractual relationship with 3M has produced
less than anticipated results in international markets. The Company does,
however, believe that there is a significant market potential for the Company's
products outside the United States. Accordingly, the Company is currently in the
process of attempting to alter its contractual relationship with 3M in order to
allow the Company to take a more active role in the sale, marketing and
distribution of its products in international markets. The Company believes that
the negotiations with 3M will enable the Company to build its international
marketing and distribution capacity in preparation for other Company products.
See "International Distribution."
MARKETING STRATEGY
The Company has been engaged in the broad consumer marketing of the
Breathe Right nasal strip since September 1994 and began marketing the Breathe
Right saline nasal spray and the Breathe Right allergen barrier pillow cover in
the fourth quarter of 1998. According to data collected by a nationally
recognized consumer market research firm, the Breathe Right nasal strip became a
leading sales volume producer during 1995 in the cough, cold and allergy section
of drug, grocery and mass merchant stores nationwide. In September 1995, the
Company received two REX (retail excellence) awards from Drug Stores News
magazine. The first award named the Breathe Right nasal strip as the best new
product in the cough, cold and allergy section in United States drug stores. The
second award named the product the "market maker of the year," the single most
important product which disproportionately increased traffic and profits in
United States drug stores. The Company also received a REX award in 1998, for
its Breathe Right clear nasal strip in the cough, cold, allergies
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and sinus product category. In 1998, the Breathe Right brand was the number one
ranking brand in annual dollar sales in the nasal products category, with sales
exceeding those of familiar brand names such as Afrin(R), Vicks Sinex(R) and
Dristan(R).
The Company's marketing efforts for Breathe Right products are
primarily directed to the consumer market. The Company's advertising, with its
emphasis on improved breathing, focuses on the nasal congestion applications for
nasal strips and emphasizes the benefits of Breathe Right products for a variety
of large consumer markets. The Company has primarily used a mix of consumer and
trade promotions and television, radio and magazine advertising to market its
products. Marketing communications are generally designed to promote trial of
Breathe Right brand products by increasing consumer awareness of the benefits of
each product.
The Company's paid advertising programs for the Breathe Right brand
have been enhanced by media coverage of the use of Breathe Right nasal strips by
professional athletes. The Company has also entered into endorsement agreements
pursuant to which athletes are providing the Company with endorsement services.
The Company believes that the use of Breathe Right nasal strips by professional
athletes increases the visibility of the product, which thereby leads to greater
awareness of the product for not only its athletic applications but also for
nasal congestion, snoring and other applications, and also makes it more
acceptable for consumers to wear the highly visible product.
The Company also uses product promotion programs, such as coupons, and
public relations activities to encourage product trial and repeat purchases.
Typically, coupons for the Breathe Right nasal strip appear in free standing
inserts (FSIs) that are included in Sunday newspapers and are often tied to a
holiday or special event theme such as Super Bowl, Father's Day, or the
Christmas holidays. To increase consumer product awareness, the Company also
uses public relations programs associated with "special events," such as
sponsoring marathons, providing product to certain professional athletic teams
and sponsoring radio station contests in conjunction with certain holidays.
Because the Breathe Right nasal strip is sold as a consumer product,
sales of the product will depend in part upon the degree to which the consumer
is aware of the product and is satisfied with its use, which also influences
repeat usage and word of mouth referrals. The most recent research data
collected by a nationally recognized consumer market research firm indicated
that approximately 32% of those in the United States who had purchased Breathe
Right nasal strips have purchased additional product.
DOMESTIC DISTRIBUTION
The Breathe Right nasal strip is sold primarily as a consumer product
in drug stores, grocery stores, mass merchant chain stores, warehouse clubs and
military base stores in the United States. The Breathe Right saline nasal spray
and the Breathe Right allergen barrier pillow cover are sold in a number of the
same retail outlets. The Company sells its products to retailers through a
network of independent sales representatives referred to in the industry as
non-food general merchandise brokers. The Company uses broker groups who call on
the chain drug, grocery, mass merchant and warehouse club accounts and the
wholesalers who serve primarily the independent drug stores and many of the
grocery stores in the United States.
The Breathe Right nasal strip is typically positioned in the cough,
cold and allergy section of a particular store because the Breathe Right nasal
strip provides benefits similar to those obtained with other decongestant
products and there is typically no section in stores for snoring relief
products. The Breathe Right saline nasal spray and the Breathe Right allergen
barrier pillow cover are also usually positioned in the same section of the
store as the Breathe Right nasal strip since the products are typically used by
those suffering from congestion, allergies and colds.
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The Company's retail customers include national chains of drug stores,
grocery stores and mass merchants such as Eckerd Drug, Walgreens, RiteAid, CVS,
Albertson's, Safeway, Wal-Mart and Kmart and warehouse clubs such as Sam's Club
and Price Costco, as well as regional and independent stores in the same store
categories. In 1998, one retailer accounted for approximately 20% of sales. The
loss of this customer or any other large retailer would require the Company to
replace the lost sales through other retail outlets and could disrupt
distribution of the Breathe Right nasal strip.
INTERNATIONAL DISTRIBUTION
The Company executed an international distribution agreement with 3M in
August 1995 pursuant to which 3M has the exclusive right to distribute the
Breathe Right nasal strip outside of the United States and Canada. 3M has
operations in over 60 foreign countries. The product is marketed internationally
under the co-brand of "3M Breathe Right nasal strips" or "Nexcare Breathe Right
nasal strips" in order to benefit from both 3M's brand names and the publicity
that the Breathe Right brand name has received. Under the terms of the
agreement, 3M is obligated to buy product from the Company either in finished
form in 3M boxes or in bulk quantities to be packaged by 3M's international
subsidiaries. All sales to 3M are denominated in U.S. dollars. 3M is responsible
for obtaining all necessary regulatory approvals outside of the United States
and for all marketing and selling expenses. The agreement contains certain
minimum performance objectives and breakup provisions. The contractual
relationship with 3M has, however, produced less than anticipated results in
international markets. International sales for the Company dropped to
approximately $1.8 million for 1998, compared to approximately $6.4 million for
1997. The decrease in international sales can be attributed in substantial part
to the high inventory levels of nasal strips maintained by 3M and disappointing
marketing results in the international sector. The Company is optimistic about
the demand for nasal strips outside the United States and believes that
international markets require an increased level of advertising and promotion to
reach their potential. The Company is currently in the process of attempting to
alter its distribution agreement with 3M in order to enable the Company to take
a more active role in the sale, marketing and distribution of its products in
international markets.
In 1995, the Company executed a distribution agreement with LOCIN
Industries, a Canadian dental floss company, to establish distribution of the
Breathe Right nasal strip in the Canadian market. LOCIN purchases nasal strips
from the Company in bulk, does its own packaging and distributes the product in
Canada.
NEW PRODUCTS
The Company is committed to the expansion of its product base through
the acquisition and development of unique health care products and technologies
that have good market potential. As a result of the Company's established
distribution channels and highly visible success with the Breathe Right nasal
strip, the Company is approached by individuals and smaller companies to explore
the possibility of partnering with the Company to manufacture and market new
product ideas. In addition, the Company restructured its management organization
during 1998 and formed a New Business Evaluation Team. See "Management." The New
Business Evaluation Team is responsible for identifying and evaluating new
products, inventions and other business opportunities that will enable the
Company to achieve its long-term growth and profit objectives. The Company
routinely evaluates the merit of product concepts and, from time to time, may
acquire or license the rights to products which it believes could successfully
be sold through the Company's established distribution channels.
The Company has entered into contractual arrangements for several
products which are in various stages of evaluation, testing and development
prior to potential market launch. The Company is currently evaluating a unique,
chewable dietary fiber tablet and is in the final phase of market research which
will determine the feasibility and scope of a product launch. Most, if not all,
of these products are regulated to varying degrees by the FDA and some will
require extensive clinical studies and
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regulatory approvals prior to marketing and sale. There can be no assurance that
any required regulatory approvals will be obtained or that the Company will
market or sell any of these products.
MANUFACTURING AND OPERATIONS
The Company currently subcontracts with multiple manufacturers to
produce the Breathe Right nasal strip, the Breathe Right saline nasal spray and
the Breathe Right allergen barrier pillow cover. The Company does no in-house
product production itself. These contract manufacturers are capable of providing
full turnkey service and shipping product to the Company that is completely
packaged ready to be sold to retailers or providing semi-finished goods to the
Company that require final packaging. With respect to the Breathe Right nasal
strip, the Company has the ability to wrap individual strips in the paper sleeve
in-house and subcontracts the final packaging out to qualified packaging
subcontractors.
Each of the manufacturers builds the product to the Company's
specifications using materials specified by the Company and, for the major nasal
strip materials, places orders against a supply agreement negotiated by the
Company with the material manufacturer. The contract manufacturers have all
entered into confidentiality agreements with the Company to protect the
Company's intellectual property rights. Company quality control and operations
personnel periodically visit the contract manufacturers in order to observe
processes and procedures. Finished goods are inspected at the Company to ensure
that they meet quality requirements. The Company inspects its contract
manufacturers on a regular basis and is not aware of any material violation of
FDA Good Manufacturing Practice Standards. The Company works closely with its
material vendors and contract manufacturers to reduce scrap and waste, improve
efficiency, and improve yields to reduce the manufacturing costs of the product.
The Company has received certification that it has established and maintains a
quality system which meets the requirements of ISO 9002/EN 46002.
To ensure consistent quality and favorable pricing, the Company has
entered into a multi-year material supply agreement with 3M for the major
components of the Breathe Right nasal strip. Although similar materials are
currently available from other suppliers, the Company believes that 3M's
materials are of superior quality. Although the Company believes that this
relationship will not be disrupted or terminated, the inability to obtain
sufficient quantities of these components or the need to develop alternative
sources in a timely and cost effective manner could adversely affect the
Company's operations until new sources of these components become available, if
at all. In addition, while the Company does not expect 3M to do so, 3M has the
right to discontinue its production or sale of these products at any time upon
90 days' notice to the Company.
COMPETITION
The Company believes that the market for decongestant products is
highly competitive while there is currently somewhat less competition in the
market for products aimed at the reduction or elimination of snoring. The
Company's competition in the consumer market for decongestant products and other
cold, allergy and sinus relief products consists primarily of pharmaceutical
products, other nasal sprays and external nasal dilators while competition in
the snoring remedies market also consists primarily of internal nasal dilators,
throat sprays and herbs. Although the Company is currently the leading
manufacturer of external nasal dilation products, Schering Plough Corp. entered
the market in the fourth quarter of 1998 with an external nasal dilation device.
Many of the companies that compete with the Breathe Right nasal strip and other
Breathe Right products, including Schering Plough, have significantly greater
financial and operating resources than the Company. The Company has developed
and implemented marketing strategies aimed at minimizing the impact of
competitive products.
The patents licensed by the Company on the Breathe Right nasal strip
will limit the ability of others to introduce competitive external nasal dilator
products similar to the Breathe Right nasal strip in the United States.
10
<PAGE>
The Company intends to aggressively enforce the patents that it has licensed
covering the Breathe Right nasal strip and has engaged in significant litigation
to protect its patent rights. In particular, the Company was engaged in patent
litigation with Acutek Adhesive Specialties, Inc. ("Acutek") which was settled
by the parties in 1998. See "Patents, Trademarks and Proprietary Rights" below.
As a result of the settlement of that litigation, the Company retained all of
its patent rights on the Breathe Right nasal strip product. The settlement also
allows Acutek's licensee, Schering Plough Corp., to market a competitive
external nasal dilation device meeting certain design restrictions. The Company
has maintained a substantial majority of the market share in the category of
external nasal dilation products. It is, however, too early to determine whether
the introduction of a competitive nasal strip product will have a significant
impact on the Company.
There can be no assurance that potential competitors will not be able
to develop nasal dilation products which circumvent the Company's patents. In
addition, external nasal dilator products compete in the consumer markets with
decongestant and sinus relief products and snoring remedies in international
markets where the Company does not yet have patent protection on the Breathe
Right nasal strip.
GOVERNMENT REGULATION
As a manufacturer and marketer of medical devices, the Company is
subject to regulation by, among other governmental entities, the FDA and the
corresponding agencies of the states and foreign countries in which the Company
sells its products. The Company must comply with a variety of regulations,
including the FDA's Good Manufacturing Practice regulations, and is subject to
periodic inspections by the FDA and applicable state and foreign agencies. If
the FDA believes that its regulations have not been fulfilled, it may implement
extensive enforcement powers, including the ability to ban products from the
market, prohibit the operation of manufacturing facilities and effect recalls of
products from customer locations. The Company believes that it is currently in
compliance with applicable FDA regulations.
FDA regulations classify medical devices into three categories that
determine the degree of regulatory control to which the manufacturer of the
device is subject. In general, Class I devices involve compliance with labeling
and record keeping requirements and are subject to other general controls. Class
II devices are subject to performance standards in addition to general controls.
Class III devices are those devices, usually invasive, for which pre-market
approval (as distinct from pre-market notification) is required before
commercial marketing to assure the products' safety and effectiveness. The
Breathe Right nasal strip has been classified as a Class I device.
Before a new medical device can be introduced into the market, the
manufacturer generally must obtain FDA clearance through either a 510(k)
pre-market notification or a pre-market approval application ("PMA"). A 510(k)
clearance will be granted if the submitted data establish that the proposed
device is "substantially equivalent" to a legally marketed Class I or II medical
device, or to a Class III medical device for which the FDA has not called for
PMAs. The PMA process can be expensive, uncertain and lengthy, frequently
requiring from one to several years from the date the PMA is accepted. In
addition to requiring clearance for new products, FDA rules may require a filing
and waiting period prior to marketing modifications of existing products. The
Company has received 510(k) approvals to market the Breathe Right nasal strip as
a device that can (i) temporarily relieve the symptoms of nasal congestion and
stuffy nose, (ii) eliminate or reduce snoring, (iii) improve nasal breathing by
reducing nasal airflow resistance, and (iv) temporarily relieve breathing
difficulties due to a deviated nasal septum.
The Company's proposed dietary fiber product is considered to be a
dietary supplement and is regulated under the Federal Food, Drug, and Cosmetic
Act (the Act) as amended by the Dietary Supplement Health and Education Act
"DSHEA" of 1994, and under the Fair Packaging and Labeling Act. There is
generally no
11
<PAGE>
requirement that a firm obtain a license or approval from FDA before marketing
dietary supplements in the United States. The FDA is developing implementing
regulations for certain provisions of the DSHEA which will be published as final
rules in the Federal Register.
Sales of the Company's products outside the United States are subject
to regulatory requirements governing human clinical trials and marketing
approval for drugs, and such requirements vary widely from country to country.
Under its current agreement with the Company, which is as noted above under
"International Distribution" is currently in the process of being renegotiated,
3M is responsible for obtaining all necessary regulatory approvals outside the
United States for Breathe Right nasal strips. The Company believes that it has
provided 3M with the necessary documentation to enable 3M to obtain the "CE"
mark, an international symbol of quality and compliance with applicable European
medical device directives, and 3M is affixing the CE mark on the Company's
products in Europe.
No assurance can be given that the FDA or state or foreign regulatory
agencies will give on a timely basis, if at all, the requisite approvals or
clearances for additional applications for the Breathe Right nasal strip or for
any of the Company's products which are under development. Moreover, after
clearance is given, the Company is required to advise the FDA and these other
regulatory agencies of modifications to its products. These agencies have the
power to withdraw the clearance or require the Company to change the device or
its manufacturing process or labeling, to supply additional proof of its safety
and effectiveness or to recall, repair, replace or refund the cost of the
medical device if it is shown to be hazardous or defective. The process of
obtaining clearance to market products is costly and time-consuming and can
delay the marketing and sale of the Company's products. Furthermore, federal,
state and foreign regulations regarding the manufacture and sale of medical
devices are subject to future change. The Company cannot predict what impact, if
any, such changes might have on its business.
The Company is also subject to substantial federal, state and local
regulation regarding occupational health and safety, environmental protection,
hazardous substance control and waste management and disposal, among others.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company entered into a license agreement in 1992 (the "License
Agreement") pursuant to which the Company acquired from the licensor (the
"Licensor") the exclusive rights to manufacture and sell the Breathe Right nasal
strip. Specifically, the Company has the exclusive right pursuant to the License
Agreement to manufacture, sell and otherwise practice any invention, including
the Breathe Right nasal strip, claimed in the Licensor's patent applications
related thereto and all patents issued in any country which correspond to those
applications. The Company is obligated to pay royalties to the Licensor based on
sales of the Breathe Right nasal strip including certain minimum royalty amounts
in order to maintain its exclusivity. The Company is also responsible for all
costs and expenses incurred in obtaining and maintaining patents related to the
Breathe Right nasal strip.
The Licensor has filed patent applications with the U.S. Patent and
Trademark Office seeking patent protection for different aspects of the Breathe
Right nasal strip technology. Six of these patent applications have resulted in
issued patents, including one with claims that cover the single-body
construction of the Breathe Right nasal strip. The Licensor also has one patent
application which is currently pending. In addition, the Licensor has obtained
patent protection on the Breathe Right nasal strip in three foreign countries
and has various applications pending which seek further patent protection in
these and a number of additional countries.
There can be no assurance that the patents on the Breathe Right nasal
strip, or any additional patents issued, if any, will effectively foreclose the
development of competitive products or that the Company
12
<PAGE>
will have sufficient resources to pursue enforcement of any patents issued. The
Company does, however, intend to aggressively enforce the patents covering the
Breathe Right nasal strip. In order to enforce any patents issued covering the
Breathe Right nasal strip, the Company may have to engage in litigation, which
may result in substantial cost to the Company and counterclaims against the
Company. Any adverse outcome of such litigation could have a negative impact on
the Company's business.
The Company believes that its licensed patents on the Breathe Right
nasal strip will limit the ability of others to introduce competitive external
nasal dilator products in the United States. The Company has engaged in
significant litigation to enforce its patent rights and in response to claims
that it has infringed the patents of others. In particular, the Company was
engaged in patent litigation during 1998 with Acutek Adhesive Specialities,
Inc., which notified the Company that it, or one of its affiliates, will make or
sell a nasal dilation device in the United States and certain other markets. On
July 13, 1998, the Company announced that it had settled all claims in that
litigation which resulted in the dismissal of the legal proceedings. As a result
of the settlement of that litigation, the Company retained all of its rights
under the patents covering the Breathe Right nasal strip product. Although the
Company believes that its licensed patents provide significant proprietary
protection, Acutek's licensee, Schering Plough, has developed and, after the
settlement, is able to market a competitive nasal dilation device meeting
certain design restrictions. See "Competition."
The Company has registered its Breathe Right trademark in the United
States and in several foreign countries and is seeking further registration of
that trademark and other trademarks. The Company believes its trademarks are
important as protection for the Company's image in the marketplace and
advertising, and intends to take such steps as are necessary to protect these
trademarks.
There can be no assurance that the Company's technology will not be
challenged on the grounds that its products infringe on patents, copyrights or
other proprietary information owned or claimed by others, or that others will
not successfully utilize part or all of the Company's technology without
compensation to the Company. Nor can there be any assurance that others will not
attempt to challenge the validity or enforceability of the Company's licensed
patents on the basis of prior art or introduce a nasal dilation product
different from that of the Company. In addition to seeking patent protection for
its products, the Company also intends to protect its proprietary technologies
and proprietary information as trade secrets.
EMPLOYEES
At March 3, 1999, the Company had 62 full-time and 4 part-time
employees, of whom 18 were engaged in operations, 22 in general administration,
24 in marketing and sales and 2 in product development. There are no unions
representing Company employees. Relations with its employees are believed to be
positive and there are no pending or threatened labor employment disputes or
work interruptions.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names and ages of the Company's
Executive Officers together with all positions and offices held with the Company
by such Executive Officers. Officers are appointed to serve until the meeting of
the Board of Directors following the next Annual Meeting of Stockholders and
until their successors have been elected and have qualified.
13
<PAGE>
Name and Age Office
------------ ------
Daniel E. Cohen (46) Chairman of the Board, Chief Executive Officer and
Director
Marti Morfitt (41) President, Chief Operating Officer and Director
M. W. Anderson, Ph.D (48) Vice President of Product Development and Regulatory
Affairs
Douglas G. Austin (44) Vice President of Operations
David J. Byrd (45) Vice President of Finance, Chief Financial Officer
and Treasurer
Kirk P. Hodgdon (39) Vice President of Breathe Right Brand
John J. Keppeler (37) Vice President of Sales
Teri P. Osgood (35) Vice President of New Business Commercialization
Carol J. Watzke (51) Vice President of Consumer Strategy
DANIEL E. COHEN has served as the Company's Chairman of the Board since
1993, its Chief Executive Officer since 1989 and a director since 1982. He also
served as the Company's Treasurer from 1982 to March 1999. Mr. Cohen, a founder
of the Company, is a medical doctor and board-certified neurologist.
MARTI MORFITT has served as the Company's President and Chief Operating
Officer and a director 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.
M. W. ANDERSON, PH.D has served as the Company's Vice President of
Product Development and Regulatory Affairs since 1998,Vice President of Clinical
and Regulatory Affairs from 1994 to 1998, and Vice President of Research and
Development from 1990 to 1994. He has served in various other capacities since
joining the Company in 1984, including Director of Applications Research and
Director of Research and Development. Prior to joining the Company in 1984, Dr.
Anderson was an Assistant Professor at the University of Minnesota's College of
Pharmacy.
DOUGLAS G. AUSTIN has served as the Company's Vice President of
Operations since December 1998. Prior to joining the Company, Mr. Austin served
as: Executive Vice President and Vice President of Operations for Ergotron,
Inc., a manufacturer of computer mounting solutions, from February 1996 to
December 1998; Director of Logistics and Purchasing for Wilsons - The Leather
Experts, a specialty retailer of leather garments and accessories, from March
1993 to February 1996; and Director of System Stores and General Purchasing of
Northwest Airlines, Inc. from June 1976 to October 1992.
DAVID J. BYRD has served as the Company's Vice President of Finance and
Chief Financial Officer since February 1996 and its Treasurer since March 1999.
Prior to joining the Company, Mr. Byrd was Chief Financial
14
<PAGE>
Officer and Treasurer of Medisys, Inc., a health care services company, since
1991. From 1975 to 1991, Mr. Byrd was employed by Coopers & Lybrand, where he
was a partner from 1986 to 1991. Mr. Byrd is a certified public accountant.
KIRK P. HODGDON has served as the Company's Vice President of the
Breathe Right Brand since 1998 and as the Company's Vice President of Marketing
from 1994 to 1998. Prior to joining the Company, Mr. Hodgdon served as: Vice
President-Management Supervisor at Gage Marketing Communications, a marketing
services company, from 1993 to 1994; Vice President - Account Supervisor at U.S.
Communications, a marketing agency, from 1989 to 1993; and Marketing Manager at
Land O'Lakes, Inc., a consumer foods cooperative, from 1988 to 1989.
JOHN J. KEPPELER has served as the Company's Vice President of Sales
since July 1998. From November 1986 to June 1998, Mr. Keppeler served in a
series of sales and marketing positions of increasing responsibility with The
Pillsbury Company, a Minneapolis-based manufacturer and distributor of food
products, most recently serving as Director of Category & Customer Development
for the Green Giant and Progresso Business.
TERI P. OSGOOD has served as the Company's Vice President of New
Business Commercialization since August 1998. From August 1990 to July 1998, Ms.
Osgood 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 July 1998 as Business Team
Leader for Old El Paso, and from October 1995 to May 1997 as Business Team
Leader for Pizza Snacks. Prior to joining Pillsbury, Ms. Osgood was employed in
marketing by the Kimberly Clark Corp., from 1988 to 1990.
CAROL J. WATZKE has served as the Company's Vice President of Consumer
Strategy since July 1998. Prior to joining the Company, Ms. Watzke served in a
series of positions of increasing responsibility since 1974 with The Pillsbury
Company, a Minneapolis-based manufacturer and distributor of food products, most
recently serving as Consumer Insights Director from May 1997 to July 1998 and as
Market Research Director, Green Giant Brands, from 1994 to 1997.
ITEM 2. PROPERTIES
The Company leases approximately 80,000 square feet of office,
manufacturing and warehouse space in Bloomington, Minnesota. The lease expires
in December 2000. The Company also leases approximately 19,000 square feet of
warehouse space on a month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information as to the principal market on which the Company's Common
Stock is traded and market price information for the Common Stock of the Company
is incorporated herein by reference from page 20 of the 1998 Annual Report to
Stockholders (the "1998 Annual Report"). On March 3, 1999, the last sale price
of the Common Stock as reported on the Nasdaq National Market was $3.094 per
share. As of March 3, 1999, there were approximately 800 owners of record of
Common Stock.
The Company has never paid any dividends on its Common Stock. The
Company currently intends to retain any earnings for use in its operations and
does not anticipate paying any cash dividends in the foreseeable future. The
payment of dividends, if any, in the future will be at the discretion of the
Board of Directors and will depend upon, among other things, future earnings,
capital requirements, restrictions in future financing agreements, the general
financial condition of the Company and general business considerations.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial information is presented on page 1 of the Company's
1998 Annual Report and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations appears on pages 8 through 12 of the Company's 1998 Annual Report
and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposure is primarily interest rate risk
related to its cash and cash equivalents and investments in marketable
securities. The Company has investment guidelines which limit the types of
securities in which it may invest as well as the length of maturities. No
investment may exceed 36 months in maturity and the weighted average life of the
portfolio may not exceed 18 months.
The table below provides information about the Company's cash and cash
equivalents and marketable securities as of December 31, 1998:
(In thousands)
Cost Fair Value
---- ----------
Due within one year $22,277 $22,387
Due after one year
through two years 22,599 22,763
Due after two years
through three years 15,099 15,232
------- --------
$59,975 $60,382
======= =======
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Balance Sheets of the Company as of December 31, 1997 and 1998, and
the related Statements of Income, Stockholders' Equity and Comprehensive Income,
and Cash Flows for each of the years in the three-year period ended December 31,
1998, the Notes to the Financial Statements and the Report of KPMG Peat Marwick
LLP, independent auditors, are contained in the Company's 1998 Annual Report on
pages 13 through 20 and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information required under this Item with respect to directors
is contained in the Section "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held on April 21, 1999 (the "1999 Proxy
Statement"), a definitive copy of which will be filed with the Commission within
120 days of the close of the last fiscal year, and is incorporated herein by
reference.
Information concerning executive officers is set forth in the Section
entitled "Executive Officers of the Company" in Part I of this Form 10-K
pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item is contained in the section
entitled "Executive Compensation" in the Company's 1999 Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is contained in the section
entitled "Security Ownership of Principal Stockholders and Management" in the
Company's 1999 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. Documents filed as part of this Report:
1. Financial Statements. See Item 8, Financial Statements.
2. Financial Statement Schedules. Not Applicable.
3. Exhibits. See "Exhibit Index" on the page following the
Signature Page.
b. Reports on Form 8-K. The Company did not file a report on Form 8-K
during the fourth quarter ended December 31, 1998.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CNS, INC.
("Registrant")
Dated: March 22, 1999 By /s/ Daniel E. Cohen
--------------------------------------
Daniel E. Cohen
Chairman of the Board, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on March 22, 1999 on behalf
of the Registrant in the capacities indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints
DANIEL E. COHEN and PATRICK DELANEY as his or her true and lawful
attorneys-in-fact and agents, each acting alone, with the full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any or all amendments to this
Annual Report on Form 10-K and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, each acting alone,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
/s/ Daniel E. Cohen
- --------------------------------
Daniel E. Cohen
Chairman of the Board, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Marti Morfitt
- --------------------------------
Marti Morfitt
President, Chief Operating Officer and Director
/s/ David J. Byrd
- --------------------------------
David J. Byrd
Vice President of Finance, Chief
Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
20
<PAGE>
/s/ Patrick Delaney
- --------------------------------
Patrick Delaney
Director
/s/ R. Hunt Greene
- --------------------------------
R. Hunt Greene
Director
/s/ Andrew J. Greenshields
- --------------------------------
Andrew J. Greenshields
Director
/s/ Richard W. Perkins
- --------------------------------
Richard W. Perkins
Director
21
<PAGE>
CNS, INC.
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Company's Certificate of Incorporation as amended to date
(incorporated by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1995 (the "1995 Form 10-K")).
3.2 Company's Amended and Restated By-Laws.
10.1* CNS, Inc. 1987 Employee Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-18, Commission File No.
33-14052C).
10.2* CNS, Inc. 1989 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.9 to the Company's Registration
Statement on Form S-8, Commission File No. 33-29454).
10.3* CNS, Inc. 1990 Stock Plan (incorporated by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1990).
10.4 License Agreement dated January 30, 1992 between the Company
and Creative Integration and Design, Inc. (incorporated by
reference to Exhibit 10.11 to the 1992 Form S-2).
10.5* CNS, Inc. 1994 Amended Stock Plan (incorporated by reference
to Exhibit 10.5 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 (the "1997 Form 10-K")).
10.6 Distribution Agreement dated August 2, 1995 between the
Company and Minnesota Mining and Manufacturing Company ("3M")
(incorporated by reference to Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1995 (the "1995 Form 10-K"))
10.7 Supply Agreement dated May 17, 1995 between the Company and
Minnesota Mining and Manufacturing Company ("3M")
(incorporated by reference to Exhibit 10.12 to the 1995 Form
10-K).
10.8 License Agreement dated May 9, 1997 between the Company and
Cigone, Enterprises, SmokeBusters of Texas, Inc. and Odor
Pros, Inc. (incorporated by reference to Exhibit 10.9 to the
1997 Form 10-K)
10.9* Employment Agreement between the Company and Daniel E. Cohen
dated February 12, 1999.
10.10* Employment Agreement between the Company and Marti Morfitt
dated February 12, 1999.
10.11* Employment Agreement between the Company and Kirk P. Hodgdon
dated February 12, 1999.
10.12* Employment Agreement between the Company and David J. Byrd
dated February 12, 1999.
22
<PAGE>
10.13* Employment Agreement between the Company and John J. Keppeler
dated February 12, 1999.
10.14* Employment Agreement between the Company and Teri P. Osgood
dated February 12, 1999.
10.15* Employment Agreement between the Company and Carol J. Watzke
dated February 12, 1999.
10.16* Employment Agreement between the Company and Douglas G. Austin
dated February 12, 1999.
10.17* Employment Agreement between the Company and M. W. Anderson
dated February 12, 1999.
13.1 Selected information from Company's 1998 Annual Report to
Stockholders.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
24.1 Powers of Attorney (included on the signature page hereof).
27.1 Financial Data Schedule.
- ----------------------------------
*Indicates Compensatory Agreement
23
EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
OF
CNS, INC.
DATED MARCH 3, 1999
<PAGE>
CONTENTS OF AMENDED AND RESTATED BY-LAWS
OF
CNS, INC.
ARTICLE 1 - OFFICES............................................................1
1.1) Registered Offices....................................................1
1.2) Offices .............................................................1
ARTICLE 2 - CORPORATE SEAL.....................................................1
ARTICLE 3 - SHAREHOLDERS.......................................................1
3.1) Regular Meeting.......................................................1
3.2) Special Meetings......................................................1
3.3) Quorum .............................................................2
3.4) Voting .............................................................2
3.5) Notice of Meeting.....................................................2
3.6) Proxies .............................................................2
3.7) Closing Transfer Books................................................3
3.8) Record Date...........................................................3
3.9) Presiding Officer.....................................................3
3.10) Conduct of Meetings of Shareholders...................................3
3.11) Order of Business.....................................................4
3.12) Inspectors of Election................................................4
3.13) Informal Action by Shareholders.......................................4
ARTICLE 4 - DIRECTORS..........................................................5
4.1) General Powers........................................................5
4.2) Number .............................................................5
4.3) Qualifications and Term of Office.....................................5
4.4) Quorum .............................................................5
4.5) Regular Meetings......................................................5
4.6) Telephonic Meetings...................................................5
4.7) Special Meetings......................................................5
4.8) Compensation..........................................................6
4.9) Salaries .............................................................6
4.10) Committees............................................................6
4.11) Committee of Disinterested Persons....................................6
4.12) Vacancies.............................................................6
4.13) Order of Business.....................................................7
4.14) Written Consent or Opposition in Advance of Meeting...................7
4.15) Informal Action by Directors..........................................7
4.16) Removal of Directors..................................................7
ARTICLE 5 - OFFICERS...........................................................7
5.1) Number .............................................................7
5.2) Election, Term of Office and Qualifications...........................8
<PAGE>
5.3) Chairman of the Board.................................................8
5.4) President and Chief Executive Officer.................................8
5.5) Chief Operating Officer...............................................8
5.6) Vice President........................................................8
5.7) Secretary.............................................................8
5.8) Treasurer and Chief Financial Officer.................................8
5.9) Assistant Officers....................................................9
5.10) Officers Shall Not Lend Corporate Credit..............................9
ARTICLE 6 - INDEMNIFICATION....................................................9
ARTICLE 7 - SHARES AND THEIR TRANSFER..........................................9
7.1) Certificates of Stock.................................................9
7.2) Facsimile Signature..................................................10
7.3) Issuance of Shares...................................................10
7.4) Transfer of Shares...................................................10
7.5) Lost Certificates....................................................10
7.6) Treasury Stock.......................................................10
7.7) Indebtedness of Shareholders.........................................10
7.8) Transfer Agent and Registrar.........................................10
ARTICLE 8 - BOOKS AND RECORDS.................................................11
8.1) Share Register; Dates of Issuance....................................11
8.2) Other Documents Required.............................................11
8.3) Financial Records....................................................11
8.4) Right to Inspect.....................................................11
8.5) Cost of Copies.......................................................12
8.6) Computerized Records.................................................12
8.7) Financial Statements.................................................12
ARTICLE 9 - DISTRIBUTIONS.....................................................12
9.1) Distributions........................................................12
9.2) Record Date..........................................................12
9.3) Restrictions.........................................................13
ARTICLE 10 - FINANCIAL AND PROPERTY MANAGEMENT................................13
10.1) Fiscal Year..........................................................13
10.2) Audit of Books and Accounts..........................................13
10.3) Contracts............................................................13
10.4) Checks ............................................................13
10.5) Deposits ............................................................13
10.6) Voting Securities Held by Corporation................................13
ARTICLE 11 - WAIVER OF NOTICE.................................................14
ARTICLE 12 - AMENDMENTS.......................................................14
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AMENDED AND RESTATED BY-LAWS
OF
CNS, INC.
ARTICLE 1
OFFICES
1.1) Registered Offices - The address of the registered office of the
corporation shall be established and maintained at the office of the Corporation
Trust Center, 1209 Orange Street, in the City of Wilmington, County of New
Castle, State of Delaware and the Corporation Trust Company shall be the
registered agent of the corporation. The Board of Directors shall have authority
to change the registered office of the corporation from time to time, and any
such change shall be registered by the secretary with the Secretary of State of
Delaware.
1.2) Offices - The corporation may have such other offices, including
its principal business office, either within or without the State of Delaware,
as the Board of Directors may designate or as the business of the corporation
may require from time to time.
ARTICLE 2
CORPORATE SEAL
The corporate seal shall have thereon the name of the corporation, and
the words "Corporate Seal" and when so directed by the Board of Directors a
duplicate of the seal may be kept and used by the secretary or treasurer or by
an assistant secretary or assistant treasurer.
ARTICLE 3
SHAREHOLDERS
3.1) Regular Meeting - The regular meeting of the shareholders of the
corporation shall be an annual meeting held at the principal business office of
the corporation, or at such place as is designated by the Board of Directors or
by written consent of all the shareholders entitled to vote thereat, within one
hundred twenty (120) days of the close of the fiscal year of the corporation, at
which time the shareholders, voting as provided in the Articles of
Incorporation, shall elect a Board of Directors for the ensuing year, and shall
transact such other business as shall properly come before them. In the event
the regular meeting is not held for a period of thirteen (13) months or more, a
shareholder or director may apply to the Court of Chancery to summarily order a
meeting to be held.
3.2) Special Meetings - Special meetings of the shareholders shall be
called by the Secretary at any time upon request of the President, a
Vice-President acting in the capacity of the President, the Treasurer or two (2)
or more members of the Board of Directors, or upon a written request of
shareholders holding ten percent (10%) or more of the capital stock entitled to
vote. Notice shall be given in accordance with the provisions of Article 3.5
hereof.
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3.3) Quorum - The holders of fifty (50%) percent of the outstanding
shares entitled to vote, represented either in person or by proxy, shall
constitute a quorum for the transaction of business. The shareholders present at
a duly called or held meeting, at which a quorum of the shareholders is present,
may continue to transact business until adjournment notwithstanding the
withdrawal of enough shareholders to leave less than a quorum. In case a quorum
is not present at any meeting, those present shall have the power to adjourn the
meeting from time to time, without notice or other announcement at the meeting,
until the requisite number of voting shares shall be represented. Any business
may be transacted at such reconvened meeting which might have been transacted at
the meeting which was adjourned.
3.4) Voting - At each meeting of the shareholders, every shareholder
having the right to vote shall be entitled to vote in person or by proxy duly
appointed by an instrument in writing subscribed by such shareholder. Each
shareholder shall have one (1) vote for each share having voting power standing
in his name on the books of the corporation. Shares owned by two (2) or more
shareholders may be voted by any one of them unless the corporation receives
written notice from any one of them denying the authority of that person to vote
those shares. A holder of voting shares may vote any portion of the shares in
any way the shareholder chooses. If a shareholder votes without designating the
proportion or number of shares voted in a particular way, the shareholder is
deemed to have voted all the shares in that way. Upon the demand of any
shareholder, the vote for director, or the vote upon any question before the
meeting shall be by ballot. All elections shall be had and all questions decided
by a majority vote of the number of shares entitled to vote and represented at
any meeting at which there is a quorum, except in such cases as shall otherwise
be required or permitted by statute, the Certificate of Incorporation, these
By-Laws or by agreement approved by a majority vote of the number of shares
entitled to vote.
3.5) Notice of Meeting - There shall be mailed to each shareholder
shown by the books of the corporation to be a holder of record of voting shares,
at his address as shown by the books of the corporation, a notice setting out
the time and place of the regular meeting or any special meeting, which notice
shall be mailed at least ten (10) days and not more than sixty (60) days prior
thereto. Every notice of any special meeting shall state the purpose or purposes
of the proposed meeting, and the business transacted at all special meetings
shall be confined to purposes stated in the call. A shareholder may waive notice
of a meeting of shareholders. A waiver of notice by a shareholder entitled to
notice is effective whether given before, at, or after the meeting, or whether
given in writing, orally, or by attendance. Attendance by a shareholder at a
meeting is a waiver of notice of that meeting, except where the shareholder
objects at the beginning of the meeting to the transaction of business because
the meeting is not lawfully called or convened, or objects before a vote on an
item of business because the item may not lawfully be considered at that meeting
and does not participate in the consideration of the item at that meeting.
3.6) Proxies - At all meetings of shareholders, a shareholder may vote
by proxy executed in writing by the shareholder or by his duly authorized
attorney-in-fact. Such proxies shall be filed with the Secretary of the
corporation before or at the time of the meeting. No proxy shall be valid after
eleven (11) months from the date of its execution, unless otherwise provided in
the proxy. No appointment of a proxy is irrevocable unless the appointment is
coupled with an interest in the shares of the corporation.
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3.7) Closing Transfer Books - The Board of Directors may close the
stock transfer books for a period of time not exceeding forty (40) days
preceding the date of any meeting of shareholders, payment of dividend,
allotment of rights, change, conversion or exchange of capital stock or the date
of obtaining consent of shareholders for any purpose.
3.8) Record Date - In lieu of closing the stock record books the Board
of Directors may fix in advance a date, not exceeding forty (40) days preceding
the date of any of the aforesaid events, as a record date for the determination
of shareholders entitled to notice of and to vote at any such meeting and any
adjournment thereof, or to receive any such dividend or allotment or rights, or
to exercise the rights in respect to any change, conversion or exchange of
capital stock or to give such consent, and in such case only such shareholders
on the record date so fixed shall be entitled to notice of and to vote at such
meeting and any adjournment thereof, or to receive such dividend or allotment of
rights, or to exercise such rights, or to give such consent, as the case may be,
notwithstanding any transfer of any stock on the books of the corporation after
any such record date so fixed. If the stock transfer books are not closed and no
record date is fixed for such determination of the shareholders of record, the
date on which notice of the meeting is mailed, or the date of adoption of a
resolution of the Board of Directors declaring a dividend, allotment of rights,
change, conversion or exchange of capital stock or to give such consent, as the
case may be, shall be the record date for such determination of shareholders. A
determination of shareholders entitled to vote shall apply to any adjournment of
such meeting except when the date of determination or the closing of the stock
transfer book exceeds forty (40) days preceding such adjourned meeting, in which
event a new meeting must be called.
3.9) Presiding Officer - The appropriate officers of the corporation
shall preside over all meetings of the shareholders; provided, however, that in
the absence of an appropriate corporate officer at any meeting of the
shareholders, the meeting shall choose any person present to act as presiding
officer of the meeting.
3.10) Conduct of Meetings of Shareholders - Subject to the following,
meetings of shareholders generally shall follow accepted rules of parliamentary
procedure:
1. The chairman of the meeting shall have absolute authority over
matters of procedure and there shall be no appeal from the
ruling of the chairman. If the chairman, in his absolute
discretion, deems it advisable to dispense with the rules of
parliamentary procedure as to any one meeting of shareholders
or part thereof the chairman shall so state and shall clearly
state the rules under which the meeting or appropriate part
thereof shall be conducted.
2. If disorder should arise which prevents continuation of the
legitimate business of the meeting, the chairman may quit the
chair and announce the adjournment of the meeting; and upon
his so doing, the meeting is immediately adjourned.
3. The chairman may ask or require that anyone not a bona fide
shareholder or proxy leave the meeting.
4. A resolution or motion shall be considered for vote only if
proposed by a shareholder or duly authorized proxy, and
seconded by an individual who is a shareholder or a duly
authorized proxy, other than the individual who proposed the
resolution or motion.
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3.11) Order of Business - The suggested order of business at the
regular meeting of shareholders, and so far as possible at all other meetings of
the shareholders, shall be:
1. Calling of roll.
2. Proof of due notice of meeting, or unanimous waiver.
3. Reading and disposal of any unapproved minutes.
4. Annual reports of all officers and committees.
5. Election of directors.
6. Unfinished business.
7. New business.
8. Adjournment.
3.12) Inspectors of Election - The Board of Directors in advance of any
meeting of shareholders may appoint inspectors to act at such meeting or any
adjournment thereof. If inspectors of election are not so appointed, the officer
or person acting as chairman of any such meeting may, and on the request of any
shareholder or his proxy, shall make such appointment. In case any person
appointed as inspector shall fail to appear or act, the vacancy may be filled by
appointment made by the Board of Directors in advance of the meeting, or at the
meeting by the officer or person acting as chairman. The inspectors of election
shall determine the number of shares outstanding, the voting power of each, the
shares represented at the meeting, the existence of a quorum, the authenticity,
validity and effect of proxies, receive votes, ballots, assents or consents,
hear and determine all challenges and questions in any way arising and announce
the result, and do such acts as may be proper to conduct the election or vote
with fairness to all shareholders.
No inspector whether appointed by the Board of Directors or by the
officer or person acting as chairman need be a shareholder.
3.13) Informal Action by Shareholders - Any action required to be taken
at a meeting of the shareholders, or any other action which may be taken at a
meeting of the shareholders, may be taken without a meeting and notice thereof
if a consent in writing, setting forth the action so taken, shall be signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted. The written
action is effective when it has been signed by all of those shareholders, unless
a different effective time is provided in the written action.
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ARTICLE 4
DIRECTORS
4.1) General Powers - The property, affairs, and business of the
corporation shall be managed by the Board of Directors.
4.2) Number - The Board of Directors shall consist of such number of
directors, not less than five (5) nor more than eight (8), the exact number to
be fixed from time to time solely by resolution of the Board of Directors,
acting by not less than a majority of the directors then in office.
4.3) Qualifications and Term of Office - Directors need not be
shareholders or residents of the State of Delaware. Directors shall be elected
by the shareholders at the regular meeting for a term of one (1) year or until
their successors are elected and qualified. Each of the directors of the
corporation shall hold office until the regular meeting next following or
closely coinciding with the expiration of his term of office and until his
successor shall have been elected and shall qualify or until he shall resign, or
shall have been removed as provided by statute.
4.4) Quorum - A majority of the whole Board of Directors shall
constitute a quorum for the transaction of business; provided, however, that if
any vacancies exist by reason of death, resignation or otherwise, a majority of
the remaining directors shall constitute a quorum for the conduct of business.
If less than a quorum is present at any meeting, a majority of the directors
present may adjourn the meeting from time to time without further notice. If a
quorum is present when a duly called or held meeting is convened, the directors
present may continue to transact business until adjournment, even though the
withdrawal of a number of directors originally present leaves less than a
majority.
4.5) Regular Meetings - As soon as practical after each regular meeting
of shareholders, the Board of Directors shall meet for the purposes of
organization, choosing the officers of the corporation and for the transaction
of other business at the place where the shareholders' meeting is held or at the
place where regular meetings of the Board of Directors are held. No notice of
such meeting need be given. Such first meeting may be held at any other time and
place which shall be specified in a notice given as hereinafter provided for
special meetings or in a consent and waiver of notice signed by all the
directors.
4.6) Telephonic Meetings - Any member or members of the Board of
Directors, or any committee designated by such Board, may participate in a
meeting of the Board of Directors or such committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
pursuant to this paragraph shall constitute presence in person at such meeting.
4.7) Special Meetings - Special meetings of the Board of Directors may
be held at such time and place as may from time to time be designated in the
notice or waiver of notice of the meeting. Special meetings of the Board of
Directors may be called by the president, or by any director. Unless notice
shall be waived by all directors entitled to notice, notice of the special
meeting shall be given by the secretary, who shall give at least twenty-four
(24) hours notice thereof to each director by mail, telegraph, telephone, or in
person; provided, however, that meetings may be held without waiver of notice
from or giving notice to any director while he is in the Armed Forces of the
United States. Each
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director, by his attendance and his participation in the action taken at any
directors' meeting, shall be deemed to have waived notice of such meeting.
4.8) Compensation - Directors and any members of any committee of the
corporation contemplated by these By-Laws or otherwise provided for by
resolution of the Board of Directors, shall receive such compensation therefore
as may be determined from time to time by resolution of the Board of Directors.
Nothing herein contained shall be construed to preclude any director from
serving the corporation in any other capacity and receiving proper compensation
therefor.
4.9) Salaries - Salaries and other compensation of all officers and
employees of the corporation shall be fixed by the Board of Directors. Nothing
herein contained shall be construed to preclude any officer from serving the
corporation as a director, consultant or in any other capacity and receiving
proper compensation therefor. In the event that any authority, such as the
Internal Revenue Service, determines, and such determination is ultimately
accepted, that any compensation paid to a director, officer or employee of the
corporation is excessive and disallows the corporate deduction therefor, the
recipient of the amounts so determined to be excessive shall repay the
corporation said amount.
4.10) Committees - A resolution approved by the affirmative vote of a
majority of the Board of Directors may establish committees having the authority
of the Board in the management of the business of the corporation to the extent
provided in the resolution. Committees are subject at all times to the direction
and control of the Board of Directors except as provided in Article 4.11. A
committee shall consist of one or more natural persons, who are directors,
appointed by affirmative vote of a majority of the directors present. A majority
of the members of the committee present at a meeting is a quorum for the
transaction of business unless a larger or smaller proportion is provided in a
resolution approved by the affirmative vote of a majority of the directors
present.
4.11) Committee of Disinterested Persons - The Board of Directors may
establish a committee composed of two or more disinterested directors or other
disinterested persons to determine whether it is in the best interests of the
corporation to pursue a particular legal right or remedy of the corporation and
whether to cause the dismissal or discontinuance of a particular proceeding that
seeks to assert a right or remedy on behalf of the corporation. A director or
other person is "disinterested" if he is not an owner of more than one percent
of the outstanding shares of, or a present or former officer, employee or agent
of the corporation or of a related corporation and has not been made or
threatened to be made a party to the proceeding in question. The committee, once
established, is not subject to the direction or control of, or termination by,
the Board of Directors. A vacancy on the committee may be filled by a majority
vote of the remaining members. The good faith determinations of the committee
are binding upon the corporation and its directors, officers and shareholders.
The committee terminates when it issues a written report of its determinations.
4.12) Vacancies - Any vacancy in the Board of Directors shall be filled
by an affirmative vote of a majority of the remaining directors of the Board,
though less than a quorum, and each person so elected shall be a director until
his successor is elected by the shareholders, who may make such election at
their next annual meeting or any meeting duly called for that purpose.
4.13) Order of Business - The meetings shall be conducted in accordance
with Roberts Rules of Order, Revised, and the suggested order of business at any
meeting of the directors shall be:
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1. Roll call.
2. Proof of due notice of meeting, or unanimous consent, or
unanimous presence and declaration by president.
3. Reading and disposal of any unapproved minutes.
4. Reports of officers and committees.
5. Election of officers.
6. Unfinished business.
7. New business.
8. Adjournment.
4.14) Written Consent or Opposition in Advance of Meeting - Any member
of the Board of Directors or a committee thereof, may give advance written
consent or opposition to a proposal or resolution stating an action to be taken
by the Board or committee. Such consent or opposition shall be a vote in favor
of or against the proposal or resolution if the proposal or resolution acted
upon at the meeting is substantially the same or has substantially the same
effect as the proposal or resolution to which the member of the Board or
committee has consented or objected.
4.15) Informal Action by Directors - Any action required or permitted
to be taken at a meeting of the directors may be taken without a meeting and
notice thereof if a consent in writing, setting forth the action so taken, shall
be signed by all of the directors entitled to vote with respect to the subject
matter set forth.
4.16) Removal of Directors - The holders of a majority of the shares
entitled to vote at an election of directors may remove at any time, for cause
or without cause, any director of the corporation.
ARTICLE 5
OFFICERS
5.1) Number - The officers of the corporation shall include a president
or chief executive officer, a treasurer or chief financial officer and a
secretary and may include such other officers as may from time to time be chosen
by the Board of Directors. Any two offices except those of president and
vice-president may be held by one person.
5.2) Election, Term of Office and Qualifications - At any regular
meeting of the Board of Directors, the Board shall elect from their number a
president or chief executive officer and shall, from within or without their
number, elect a treasurer or chief financial officer and a secretary, and may,
in addition, from within or without their number, elect one or more
vice-presidents and such other officers and assistant officers as may be deemed
advisable. Such officers shall hold office until the next regular
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meeting or until their successors are elected and qualified; provided, however,
that any officer may be removed with or without cause by the affirmative vote of
a majority of the whole Board of Directors.
5.3) Chairman of the Board - The chairman of the board of directors
shall preside at all meetings of shareholders and directors, and he shall have
such other powers and perform such other duties as the Board of Directors may
from time to time prescribe.
5.4) President and Chief Executive Officer - The president shall have
general and active management of the business under the supervision and
direction of the Board of Directors, and he shall be responsible for carrying
into effect all orders and resolutions of the Board of Directors. He shall be
the chief executive officer of the corporation and shall perform all duties
usually incident to the office of president and chief executive officer and such
other duties as may be from time to time prescribed by the Board of Directors;
except that if the Board of Directors elects a separate chief executive officer,
then the president shall perform such duties usually incident to the office of
president and the chief executive officer shall perform such duties usually
incident to the office of the chief executive officer and each of them shall
perform such duties as may be from time to time prescribed to each of them by
the Board of Directors.
5.5) Chief Operating Officer - The chief operating officer of the
corporation shall be responsible for directing and supervising the corporation's
overall business activities. He shall be the officer primarily responsible for
planning and carrying out the business policies of the corporation and shall
report to the Board of Directors thereon at each meeting of the Board of
Directors. He shall have such other responsibilities and shall exercise such
additional authority as may from time to time be assigned to him by the Board.
5.6) Vice President - Each vice-president shall have such powers and
shall perform such duties as may be specified in these By-Laws or prescribed by
the Board of Directors. In the event of absence or disability of the president,
a vice-president shall succeed to his powers and duties in the order in which
they are elected or as otherwise prescribed by the Board of Directors. A
vice-president who is not a director shall not succeed to the office of
president.
5.7) Secretary - The secretary shall be secretary of and shall attend
all meetings of the shareholders and Board of Directors. He shall act as clerk
thereof and shall record all the proceedings of such meetings in the minute book
of the corporation. He shall give proper notice of meetings of shareholders and
directors. He shall keep the seal of the corporation and shall affix the same to
any instrument requiring it and shall attest the seal by his signature. He
shall, with the president or any vice-president, acknowledge all certificates
for shares of the corporation and shall perform such other duties as may be
prescribed from time to time by the Board of Directors.
5.8) Treasurer and Chief Financial Officer - The treasurer shall keep
accurate accounts of all moneys of the corporation received or disbursed. He
shall deposit all moneys, drafts, and checks in the name and to the credit of
the corporation in such banks and depositories as the Board of Directors shall
designate from time to time. He shall endorse for deposit all notes, checks and
drafts received by the corporation as ordered by the Board of Directors, making
proper vouchers therefor. He shall disburse the funds of the corporation as
authorized by the Board of Directors. He shall render to the president and the
Board of Directors, whenever required, an account of all of his transactions as
treasurer and of
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the financial condition of the corporation and shall perform such other duties
as may be prescribed by the Board of Directors from time to time.
5.9) Assistant Officers - In the event of absence or disability of any
vice-president, secretary, or treasurer, such assistants to such officers shall
succeed to the powers and duties of the absent officer in the order in which
they are elected or as otherwise prescribed by the Board of Directors until such
principal officer shall resume his duties or a replacement is elected by the
Board of Directors. Such assistant officers shall exercise such other powers and
duties as may be delegated to them from time to time by the Board of Directors,
but they shall be subordinate to the principal officer they are designated to
assist.
5.10) Officers Shall Not Lend Corporate Credit - Except for the proper
use of the corporation, no officer of this corporation shall sign or endorse in
the name or on behalf of this corporation, or in his official capacity, any
obligations for the accommodation of any other party or parties, nor shall any
check, note, bond, stock certificate or other security or thing of value
belonging to this company be used by any officer or director as collateral for
any obligation other than valid obligations of this corporation.
ARTICLE 6
INDEMNIFICATION
Any person who at any time shall serve or shall have served as a
director, officer, employee or agent of the Corporation, and the heirs,
executors and administrators of such person shall be indemnified by the
Corporation in accordance with, and the fullest extent permitted by, the
provisions of the Delaware General Corporation Law, as it may be amended from
time to time.
ARTICLE 7
SHARES AND THEIR TRANSFER
7.1) Certificates of Stock - Every owner of stock of the corporation
shall be entitled to a certificate, to be in such form as the Board of Directors
prescribe, certifying the number of shares of stock of the corporation owned by
him. The certificates for such stock shall be numbered in the order in which
they shall be issued and shall be signed in the name of the corporation by the
president, and by the secretary, or by any other two (2) proper officers of the
corporation authorized by the Board of Directors. A record shall be kept of the
name of the person, firm or corporation owning the stock represented by each
such certificate, and the respective issue date thereof, and in the case of
cancellation, the respective dates of cancellation. Every certificate
surrendered to the corporation for exchange or transfer shall be canceled and no
other certificate or certificates shall be issued in exchange for any existing
certificates until such existing certificate shall have been so canceled except
in cases provided for in Article 7.5.
7.2) Facsimile Signature - Where any certificate is manually signed by
a transfer agent, a transfer clerk or by a registrar appointed by the Board of
Directors to perform such duties, a facsimile or engraved signature of the
president and secretary or other proper officer of the corporation authorized by
the Board of Directors may be inscribed on the certificate in lieu of the actual
signature of such
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officer. The fact that a certificate bears the facsimile signature of an officer
who has ceased to hold office shall not affect the validity of such certificate
if otherwise validly issued.
7.3) Issuance of Shares - Subject to the provisions and limitations of
Article 4 of the Certificate of Incorporation, the Board of Directors is
authorized to cause to be issued shares of the corporation, to the full amount
of such authorized shares, and at such times as may be determined by the Board
of Directors and as may be permitted by law.
7.4) Transfer of Shares - Transfer of shares on the books of the
corporation may be authorized only by the shareholder named in the certificate,
or by the shareholder's legal representative, or duly authorized
attorney-in-fact, and upon surrender for cancellation of the certificate or
certificates for such shares. The shareholder in whose name shares of stock
stand on the books of the corporation shall be deemed the owner thereof for all
purposes as regards the corporation; provided, that when any transfer of shares
shall be made as collateral security, and not absolutely, such facts, if known
to the secretary of the corporation, or to the transfer agent, shall be so
expressed in the entry of transfer.
7.5) Lost Certificates - Any shareholder claiming a certificate of
stock to be lost or destroyed shall make an affidavit or affirmation of that
fact in such form as the Board of Directors may require, and shall, if the
directors so require, give the corporation a bond of indemnity in form and with
one or more sureties satisfactory to the Board, in an amount determined by the
Board of Directors not exceeding double the value of the stock represented by
such certificate to indemnify the corporation, against any claim that may be
made against it on account of the alleged loss or destruction of such
certificate; whereupon a new certificate may be issued in the same tenor and for
the same number of shares as the one alleged to have been destroyed or lost.
7.6) Treasury Stock - Treasury stock shall be held by the corporation
subject to disposal by the Board of Directors, in accordance with the
Certificate of Incorporation and these By-Laws, and shall not have voting rights
nor participate in dividends.
7.7) Indebtedness of Shareholders - The corporation shall have a first
lien on all the shares of its capital stock and upon all dividends declared upon
the same for any indebtedness of the respective holders thereof to the
corporation.
7.8) Transfer Agent and Registrar - The Board of Directors may appoint
one or more transfer agents or transfer clerks, and may require all certificates
for shares to bear the signature or signatures of any of them.
ARTICLE 8
BOOKS AND RECORDS
8.1) Share Register; Dates of Issuance - The corporation shall keep at
its principal business office, or at another place or places within the United
States determined by the Board of Directors, a share register not more than one
year old, containing the names and addresses of the shareholders and the number
and classes of shares held by each shareholder. The corporation shall also keep,
with the share register, a record of the dates on which certificates or
transaction statements representing shares were issued.
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8.2) Other Documents Required - A corporation shall keep at its
principal business office, or, if its principal business office is outside of
this state, shall make available at its registered office within ten days after
receipt by an officer of the corporation of a written demand for them made by a
person described in Article 8.4, originals or copies of:
1. Records of all proceedings of shareholders for the last three
years;
2. Records of all proceedings of the board for the last three
years;
3. Its articles and all amendments currently in effect;
4. Its by-laws and all amendments currently in effect;
5. Financial statements required by Article 8.7 and the financial
statement for the most recent interim period prepared in the
course of the operation of the corporation for distribution to
the shareholders or to a governmental agency as a matter of
public record;
6. Reports made to shareholders generally within the last three
years;
7. A statement of the names and usual business addresses of its
directors and principal officers;
8. Voting trust agreements; and
9. Shareholder control agreements.
8.3) Financial Records - A corporation shall keep appropriate and
complete financial records.
8.4) Right to Inspect - A shareholder, beneficial owner, or a holder of
a voting trust certificate has an absolute right, upon written demand, to
examine and copy, in person or by a legal representative, during the usual hours
for business, the share register and all documents referred to in Article 8.2. A
shareholder, beneficial owner, or a holder of a voting trust certificate has a
right, upon written demand, to examine and copy in person or by legal
representative, other corporate records during the usual hours for business,
only if the shareholder, beneficial owner, or holder of a voting trust
certificate demonstrates a proper purpose for the examination. A "proper
purpose" is one reasonably related to the person's interest as a shareholder,
beneficial owner, or holder of a voting trust certificate of the corporation.
8.5) Cost of Copies - Copies of all documents referred to in Article
8.2 shall be furnished at the expense of the corporation. A copy of the most
recently generated share register shall be furnished at the expense of the
corporation if the requesting party shows a proper purpose. In all other cases,
the corporation may charge the requesting party a reasonable fee to cover the
expenses of providing the copy.
8.6) Computerized Records - The records maintained by the corporation,
including its share register, financial records, and minute books, may utilize
any information storage technique, including, for example, punched holes,
printed or magnetized spots, or microimages, even though that makes them
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illegible visually, if the records can be converted, by machine and within a
reasonable time, into a form that is legible visually and whose contents are
assembled by related subject matter to permit convenient use by people in the
normal course of business. The corporation shall convert any of the records
referred to in Articles 8.1 and 8.2 upon the request of a person entitled to
inspect them, and the expense of the conversion shall be borne by the person who
bears the expense of copying pursuant to Article 8.5. A copy of the conversion
is admissible in evidence, and shall be accepted for all other purposes, to the
same extent as the existing or original records would be if they were legible
visually.
8.7) Financial Statements - The corporation shall upon written request
by a shareholder stating a proper purpose therefor, furnish annual financial
statements, including at least a balance sheet as of the end of each fiscal year
and a statement of income for the fiscal year, which shall be prepared on the
basis of accounting methods reasonable in the circumstances and may be
consolidated statements of the corporation and one or more of its subsidiaries.
In the case of statements audited by a public accountant, each copy shall be
accompanied by a report setting forth the opinion of the accountant on the
statements; in other cases, each copy shall be accompanied by a statement of the
president or other person in charge of the corporation's financial records
stating the reasonable belief of the person that the financial statements were
prepared in accordance with accounting methods reasonable in the circumstances,
describing the basis of presentation, and describing any respects in which the
financial statements were not prepared on a basis consistent with those prepared
for the previous year.
ARTICLE 9
DISTRIBUTIONS
9.1) Distributions - The Board of Directors may authorize distributions
by the corporation from funds legally available therefor at such times and in
such amounts as the Board shall deem reasonable.
9.2) Record Date - Subject to any provisions of the Certificate of
Incorporation, the Board of Directors may fix a date preceding the date fixed
for the payment of any distribution or allotment of other rights as the record
date for the determination of the shareholders entitled to receive payment of
such distribution or allotment notwithstanding any transfer of shares on the
books of the Corporation after such record date.
9.3) Restrictions - A distribution may be made to the holders of a
class or series of shares only if:
1. All amounts payable to the holders of shares having a
preference for the payment of that kind of distribution are
paid; and
2. The payment of the distribution does not reduce the remaining
net assets of the corporation below the aggregate preferential
amount payable in the event of liquidation to the holders of
shares having preferential rights, unless the distribution is
made to those shareholders in the order and to the extent of
their respective priorities.
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3. The money or property available for distribution is
insufficient to satisfy all preferences, the distributions
shall be made pro rate according to the order of priority of
preferences by classes and by series within those classes.
ARTICLE 10
FINANCIAL AND PROPERTY MANAGEMENT
10.1) Fiscal Year - The fiscal year of the corporation shall be set by
the Board of Directors.
10.2) Audit of Books and Accounts - The books and accounts of the
corporation shall be audited at such times as may be ordered by the Board of
Directors.
10.3) Contracts - The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the corporation, and such authority
may be general or confined to specific instances.
10.4) Checks - All checks, drafts, or other orders for the payment of
money, notes, or other evidences of indebtedness issued in the name of the
corporation shall be signed by the treasurer or such other officer or officers,
agent or agents of the corporation and in such manner as shall from time to time
be determined by resolution of the Board of Directors.
10.5) Deposits - All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks, trust companies, or other depositories as the Board of Directors may
select.
10.6) Voting Securities Held by Corporation - The president or other
agent designated by the Board of Directors, shall have full power and authority
on behalf of the corporation to attend, act and vote at any meeting of security
holders of other corporations in which this corporation may hold securities. At
such meeting the president, or such other agent, shall possess and exercise any
and all rights and powers incident to the ownership of such securities which the
corporation might possess and exercise.
ARTICLE 11
WAIVER OF NOTICE
Whenever any notice whatsoever is required to be given by these By-Laws
or the Certificate of Incorporation of the corporation or any of the corporate
laws of the State of Delaware, a waiver thereof in writing, signed by the person
or persons entitled to said notice, either before, at, or after the time stated
therein, shall be deemed equivalent thereto.
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ARTICLE 12
AMENDMENTS
Subject to the limitations set forth in the Delaware General
Corporation Law, these By-Laws may be amended by a vote of the majority of the
whole Board of Directors at any meeting, provided that notice of such proposed
amendment shall have been included in the notice of such meeting given to the
directors.
The undersigned Secretary hereby certifies that the foregoing Amended
and Restated By-Laws were adopted as the complete By-Laws of the corporation by
the Board of Directors on this 3rd day of March, 1999.
/s/ Patrick Delaney
-----------------------------
Patrick Delaney, Secretary
14
EXHIBIT 10.9
EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is made as of February 12, 1999 (the "Effective Date") between
CNS, INC. a Delaware corporation ("CNS") and Dan Cohen ("Employee").
WHEREAS, CNS considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of CNS
and its shareholders; and
WHEREAS, Employee has made and is expected to continue to make, due to his
experience and knowledge, a significant contribution to the profitability,
growth and financial strength of CNS; and
WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of
a change in control may exist and that such possibility and the uncertainty and
questions which it may raise among management may result in the departure or
distraction of the performance of Employee's duties to the detriment of CNS and
its shareholders; and
WHEREAS, Employee is willing to continue his employment with CNS upon the
understanding that CNS will provide income security if Employee's employment is
terminated under certain terms and conditions;
WHEREAS, it is in the best interests of CNS and its stockholders to employ
Employee and to reinforce and encourage his continued attention and dedication
to his assigned duties without distraction and to ensure his continued
availability to CNS in the event of a Change in Control; and
WHEREAS, it is further in CNS's best interests to receive certain assurances
from Employee regarding CNS's confidentiality, competition and other proprietary
business concerns;
THEREFORE, in consideration of the foregoing and of this agreement, certain
change in control protection, continued employment and other benefits hereunder,
as well as other mutual covenants and obligations hereinafter set forth, CNS and
Employee agree as follows:
1. Employment. CNS agrees to continue to employ Employee as its Chairman &
CEO under the terms, conditions and benefits set forth herein and
Employee accepts continued employment with CNS on said terms,
conditions and benefits.
2. Term. The term of Employee's employment shall continue until terminated
pursuant to paragraph 6, 7, or 8 herein.
3. Duties. In his position as Chairman & CEO, Employee will continue to
faithfully and diligently perform such executive management
responsibilities as may be assigned to him from time to time by the
Chief Executive Officer, President or Chairman of the
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Executive Employment Agreement
Page 2
Board of Directors of CNS (the "Board"); devote his full time, energy
and skill to CNS's business, as is reasonably necessary to execute
fully his duties hereunder, except for vacations, absences made
necessary because of illness, and service on other corporate, civic, or
charitable boards or committees not significantly interfering with his
duties hereunder; and promote CNS's best interests. The principal place
of employment and the location of Employee's principal office and
normal place of work shall be in the Minneapolis, Minnesota
metropolitan area. Employee will be expected to travel to other
locations, as necessary, in the performance of his duties during the
term of this Agreement. Employee shall notify the President of any
other paid position which he is considering accepting, including but
not limited to a board of directors position, a position as an employee
or an independent consultant, or any position, whether or not for pay,
which could constitute a conflict of interest with CNS. The Employee
agrees not to accept any such position without the President of CNS's
prior approval.
4. Compensation. For all services rendered by Employee, CNS shall pay
Employee the compensation described in Exhibit A, payable at such times
as salaried employees of CNS are customarily paid. The President of CNS
shall, from time to time during Employee's employment, review his
annual salary in connection with possible increases, giving
consideration to inflation factors, performance of Employee and CNS,
salaries paid for positions of similar responsibility for other
companies, and other relevant factors, and shall provide for such
increases when deemed appropriate. Employee shall in addition be
eligible to participate in the annual management incentive bonus
program, as approved by the Board of Directors. In the event of
termination of this Agreement by CNS without Good Cause, as defined in
paragraph 7 herein, the Board may, in good faith and in its sole
discretion, determine and cause to be paid a partial bonus based on
Employee's performance through the date of termination, and such
determination shall be final and binding.
5. Benefits. Employee shall be entitled to Paid Time Off consistent with
CNS policy and such insurance, 401(k) program and other benefits
available to all salaried employees of CNS, subject to any limitations
on such benefits to officers, directors or highly paid employees in
order that such benefit programs qualify under federal or state law for
favored tax or other treatment. Such benefit programs may be changed
from time to time by the Board. Employee shall also be entitled to
reimbursement of his reasonable and necessary expenses incurred in
connection with the performance of his duties hereunder.
6. Termination by Employee. Employee may resign his employment with CNS
effective upon 30 days' advance written notice to the President. If
Employee resigns under this paragraph, the President retains the right
to terminate his employment, effective upon written notice to Employee,
at any time during the 30-day notice period, provided, however, that
base salary and the employer portion of his health insurance premiums
will continue to be paid by CNS for the duration of the 30-day notice
period. In connection
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Executive Employment Agreement
Page 3
with his termination, Employee will receive any accrued unused Paid
Time Off to which he is entitled.
7. Termination by CNS. CNS shall have the right to terminate Employee's
employment in any of the following ways:
a. CNS may, by written notice to Employee, terminate his
employment without Good Cause, in which event Employee will be
paid his base salary up to the date of termination. Employee
is also entitled to receive Salary Continuation for one year
from his termination date. "Salary Continuation" shall mean
payment by CNS of the Employee's base salary as of his
termination date, payable to Employee on the same schedule and
in the same amount as the payment of base salary prior to
termination of his employment, until such time as the full
Salary Continuation obligation shall be discharged, as
provided in this paragraph 7. During the period when Salary
Continuation is payable to Employee, CNS will also continue to
provide to Employee all group medical, dental and life plan
benefits provided to its other senior executives. Employee
shall also receive any accrued unused Paid Time Off to which
he is entitled. Receipt of Salary Continuation is subject to
Employee's compliance with his obligations under paragraphs 9,
10, 11 and 12 of this Agreement and his execution of a
standard release agreement which includes, in addition to
release of claims against CNS and related releasees, an
obligation not to speak negatively about or harm CNS,
confidentiality with respect to the termination process, and
cooperation with the transition of responsibilities. Payment
of the employer portion of Employee's group medical, dental
and life plan premiums under this paragraph and under
paragraphs 6 and 8 herein shall cease as of the date on which
Employee is covered under other such group plans if such
coverage occurs prior to termination of any salary
continuation periods set forth in said paragraphs.
b. CNS, by written notice to Employee, may terminate his
employment for Good Cause, as defined below. In the event of
termination under this subparagraph 7.b., Employee shall be
paid his base salary up to the date of termination. "Good
Cause" for the purpose of this Agreement shall mean one or
more of the following: (i) willful and premeditated failure or
refusal of Employee to render services to CNS in accordance
with his obligations under paragraph 3; (ii) the commission by
Employee of an act of fraud or embezzlement against CNS; (iii)
the commission by Employee of any other willful or reckless
act which injures CNS in a substantial or material way (it
being understood that mere negligence in performance of duties
is not Good Cause under this Agreement); (iv) the breach by
Employee of any provision of this Agreement; or (v) the
commission of a substantial act of moral turpitude by Employee
which is deemed by CNS's Board to have a material adverse
effect on CNS; or (vi) unsatisfactory performance after
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Executive Employment Agreement
Page 4
specific notice of performance deficiencies, description of
expectations and opportunity to cure.
c. CNS, by written notice to Employee, may terminate Employee's
employment under this Agreement if he becomes physically or
mentally disabled during the term so that he has not been able
to substantially perform, for a period of 120 consecutive
days, with reasonable accommodation, the usual duties assigned
to him hereunder ("Disability"). Upon such determination, CNS
shall pay to Employee his base salary up to the date of such
termination to the extent not covered by any disability plan.
d. This Agreement shall terminate upon the Employee's death
during its term, except that CNS shall pay to the legal
representative of Employee's estate all base salary due him up
to the date of his death.
8. Termination Following a Change in Control.
DEFINITION.
a. For purposes of this Agreement, "Change in Control" shall mean
the occurrence of one of the following events:
i. ACQUISITION OF 25% OF STOCK IN CNS
any "person" [as such term is used in Section 13(d)
and 4(d) of the Securities Exchange Act of 1934, as
amended ("Exchange Act")], other than a trustee or
other fiduciary holding securities under an employee
benefit plan of CNS is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly of securities
representing 25% or more of the combined voting power
of CNS's then outstanding securities;
ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT
APPROVED BY BOARD
during any period of two consecutive years (not
including any period ending prior to the effective
date of this Agreement), individuals who at the
beginning of such period constitute the Board of
Directors of CNS, and any new director [other than a
director designated by a person who has entered into
agreement with CNS to effect a transaction permitted
by Section 6(a)(I), (iii) or (iv)] whose election by
the Board of Directors of CNS or nomination for
election by CNS's stockholders was approved by vote
of at least two-thirds of the directors then still in
office who either were directors at the beginning of
the period or whose election or nomination for
election was previously so approved ("Continuing
Directors"), cease for any reason to constitute at
least a majority of the
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Executive Employment Agreement
Page 5
Board of Directors of CNS;
iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN
LESS THAN 50% OF SURVIVING COMPANY'S STOCK
the stockholders of CNS approve a merger or
consolidation of CNS with any other corporation,
other than (A) a merger or consolidation which would
result in the voting securities of CNS outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being
converted into voting securities of the merged or
consolidated entity) 50% or more of the combined
voting power of the voting securities of CNS or such
merged or consolidated entity outstanding immediately
after such merger or consolidation, or (B) a merger
or consolidation effected to implement a
recapitalization of CNS or similar transaction in
which no "person" acquires more than 25% of the
combined voting power of CNS's then outstanding
securities;
iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF
CNS STOCK MARKET VALUE
the stockholders of CNS approve a plan of complete
liquidation or a sale or disposition by CNS of all or
substantially all of CNS's assets. "The sale or
disposition by CNS of all or substantially all of
CNS's assets" shall mean a sale or other disposition
transaction or series of related transactions
involving assets of CNS or of any direct or indirect
subsidiary of CNS (including the stock of any direct
or indirect subsidiary of CNS) in which the value of
the assets or stock being sold or otherwise disposed
of (as measured by the purchase price being paid
therefor or by such other method as the Board of
Directors of CNS determines is appropriate in a case
where there is no readily ascertainable purchase
price) constitutes more than 50% of the fair market
value of CNS. For purposes of the preceding sentence,
the "fair market value of CNS" shall be the aggregate
market value of CNS's outstanding common stock (on a
fully diluted basis) plus the aggregate market value
of CNS's other outstanding equity securities. The
aggregate market value of CNS's common stock shall be
determined by multiplying the number of shares of CNS
common stock (on a fully diluted basis) outstanding
on the date of the execution and delivery of a
definitive agreement ("Transaction Date") with
respect to the sale or disposition by CNS of all or
substantially all of CNS's assets by the average
closing price for CNS's common stock for the ten
trading days immediately preceding the Transaction
Date. The aggregate market value of any other equity
securities of CNS shall be determined in a manner
similar to that prescribed in the immediately
preceding sentence for determining the aggregate
market value of CNS's common stock or by such other
method as the Board of Directors of CNS shall
determine is
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Executive Employment Agreement
Page 6
appropriate; and Employee agrees that, subject to the
terms and conditions of this Agreement, in the event
of a Change in Control of CNS occurring after the
date hereof, Employee will remain in the employ of
CNS for a period of 30 days from the occurrence of
such Change in Control.
b. Applicability. In the event of a Change in Control, the terms
of this subparagraph 8.b shall be effective for a period of 24
months following the Change in Control. At the expiration of
such 24 month period this Agreement in its entirety shall be
terminated and be of no further effect. Employee shall be
entitled to receive the benefits set forth in subparagraph 8.f
if, within 24 months of such Change in Control, his employment
is terminated by CNS or its successor without Good Cause (as
defined in paragraph 7.a above), or by Employee for Good
Reason (as defined in subparagraph 8.b.i, below). Employee
shall, in return for the benefits provided under subparagraph
8.f., sign a standard release agreement with CNS, in which he
agrees to release any and all claims and causes of action
which he might have against CNS and in which he affirms and
acknowledges his obligations under paragraphs 9, 10, 11 and 12
of this Agreement.
i. Termination for Good Reason shall be effective
immediately upon written notice from the Employee to
the President. Good Reason shall exist if CNS has
materially breached any of the terms of this
Agreement; Employee is assigned duties which are
materially inconsistent with his position, duties,
responsibilities and status as Chairman & CEO; his
compensation, including any incentive compensation or
bonus plan, is reduced; or relocation of CNS would
require him to relocate his principal residence
outside reasonable commuting distance of the Twin
Cities Metropolitan area.
ii. Termination without Good Cause shall be effective
upon 30 days' advance notice by CNS to the Employee.
For purposes of this paragraph 8, Good Cause shall be
defined as in subparagraph 7.b.
c. Notice of Termination. Any purported termination of employment
under this paragraph 8 and also under paragraphs 6 and 7 shall
be communicated by written Notice of Termination to the other
party hereto in accordance with paragraph 20 hereunder. For
purposes of this Agreement, a "Notice of Termination" shall
mean a notice which indicates the specific termination
provision in this Agreement relied upon and which sets forth
the facts and circumstances claimed to provide a basis for
termination of Employee's employment.
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Executive Employment Agreement
Page 7
d. Date of Termination. For purposes of this paragraph 8 and also
paragraphs 6 and 7 of this Agreement, "Date of Termination"
shall mean:
i. if Employee's employment is terminated for
Disability, as defined in paragraph 7.c. hereunder,
30 days after Notice of Termination is given
(provided that Employee shall not have returned to
the full-time performance of Employee's duties during
such 30 day period); and
ii. if Employee's employment is terminated pursuant to a
provision contained in paragraph 6, 7 or 8 herein or
for any other reason (other than Disability), the
date specified in the Notice of Termination,
consistent with the provisions in said paragraphs.
e. Dispute of Termination. If, within ten days after any Notice
of Termination is given under this paragraph 8, the party
receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties,
or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or the time
for appeal therefrom having expired and no appeal having been
perfected); provided, that the Date of Termination shall be
extended by a notice of dispute only if such notice is given
in good faith and the party giving such notice pursues the
resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, CNS shall
continue to pay Employee full compensation in effect when the
notice giving rise to the dispute was given (including, but
not limited to, base salary) and continue Employee as a
participant in all compensation, benefit and insurance plans
in which Employee was participating when the notice giving
rise to the dispute was given, to the extent permissible under
the terms of the applicable group plans and state and federal
law, until the dispute is finally resolved in accordance with
this subparagraph. Amounts paid under this subsection are in
addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts under
this Agreement.
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Executive Employment Agreement
Page 8
f. Compensation Upon Termination. Following a Change in Control,
as defined in subparagraph 8.a. above, to the extent provided
in subparagraph 8.b. above, Employee shall be entitled to the
following benefits in lieu of any benefits which would
otherwise be available to him upon termination under
paragraphs 6 or 7 hereunder:
i. CNS shall pay Employee through the Date of
Termination Employee's base salary at the rate in
effect at the time the Notice of Termination is given
and any other form or type of other compensation
otherwise payable for such period, including any
applicable incentive bonus, commensurate with his
performance and the performance of CNS.
ii. In lieu of any further salary payments for periods
subsequent to the Date of Termination, CNS shall pay
a severance payment (the "Severance Payment") equal
to 24 months of Employee's Compensation as defined
below based on the average monthly Compensation paid
to Employee during the 24 month period ending
immediately prior to the Date of Termination (without
giving effect to any reduction in such Compensation
which would constitute a breach of this Agreement).
If the Employee has not been employed by CNS for 24
months as of the Date of Termination, average monthly
Compensation shall be the Employee's average monthly
Compensation for the number of months during which
the Employee has been employed at CNS. For purposes
of this subparagraph, Compensation shall mean and
include every type and form of compensation paid to
Employee by CNS (or any corporation ("Affiliate")
affiliated with CNS within the meaning of Section
1504 of the Internal Revenue Code of 1986, as may be
amended from time to time (the "Code")) and included
in Employee's gross income for federal income tax
purposes, but excluding compensation income arising
from (1) hiring bonuses and (2) compensation income
recognized as a result of the exercise of stock
options or sale of the stock so acquired. All of
Employee's contributions to any qualified plan
pursuant to Section 401(k) of the Code or any
flexible benefit plan pursuant to Section 125 of the
Code shall be deemed to be included in gross income
for federal tax purposes for purposes of this
subparagraph. The Severance Payment shall be made in
a single lump sum within 60 days after the Date of
Termination.
iii. For 18 months following the Employee's Date of
Termination, CNS shall arrange to provide, at its
sole expense, Employee with group medical, dental and
life plan benefits substantially similar to those
which Employee was receiving or entitled to receive
immediately prior to the Notice of Termination. The
cost of providing such benefits shall be in addition
to (and shall not reduce) the Severance Payment.
Benefits otherwise
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Executive Employment Agreement
Page 9
receivable by Employee pursuant to this paragraph
(iii) shall be reduced to the extent comparable
benefits are actually received by Employee during
such period from any third party, and any such
benefits actually received by Employee shall be
reported to CNS.
iv. CNS shall also pay to Employee all legal fees and
expenses incurred by Employee as a result of such
termination (including all such fees and expenses, if
any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any
right or benefit provided by this paragraph).
v. The Severance Payment shall be reduced and offset by
the amount of any other payment received or to be
received by Employee in connection with his
termination of employment pursuant to any policies of
CNS.
vi. If a determination is made by legislation,
regulations, rulings directed to CNS or Employee, or
court decision that the aggregate amount of any
payment made to Employee hereunder, or pursuant to
any plan, program or policy of CNS in connection
with, on account of, or as a result of, a Change of
Control constitutes an "excess parachute payment" as
defined in Section 280G of the Code subject to the
excise tax provisions of Section 4999 of the Code, or
any successor sections thereof, Employee shall be
entitled to receive from CNS, in addition to any
other amounts payable hereunder, an amount which
shall be equal to such excise tax, plus, on a net
after-tax basis, an amount equal to the aggregate
amount of any interest, penalties, fines or additions
to any tax, including income tax, which are imposed
in connection with the imposition of such excise tax.
Such amount shall be payable to Employee as soon as
may be practicable after such final determination is
made. Employee and CNS shall mutually and reasonably
determine whether or not such determination has
occurred or whether any appeal to such determination
should be made.
vii. Employee shall be entitled to receive all benefits
payable to Employee under the CNS, Inc. Profit
Sharing Plan and Trust or any successor of such Plan
and Trust and any other plan or agreement relating to
retirement benefits, and, in addition, if Employee is
not fully vested in his account balance under such
Plan, a single lump sum payment in cash from CNS
representing the nonvested portion of his account,
which shall be in addition to, and not reduced by,
any other amounts payable to Employee under this
paragraph 8.
viii. Employee shall not be required to mitigate the amount
of any payment provided for in this paragraph 8 by
seeking other employment or
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Executive Employment Agreement
Page 10
otherwise, nor shall the amount of any payment or
benefit provided for in this paragraph 8 be reduced
by any compensation earned by Employee as the result
of employment by another employer or by retirement
benefits after the Date of Termination, or otherwise
except as specifically provided in this paragraph 8.
ix. In order to assure the performance of CNS or its
successor of its obligations under this paragraph,
CNS may deposit in trust an amount equal to the
maximum payment that will be due Employee under the
terms hereof. Under a written trust instrument, the
Trustee shall be instructed to pay to Employee (or
Employee's legal representative, as the case may be)
the amount to which Employee shall be entitled under
the terms hereof, and the balance, if any, of the
trust not so paid or reserved for payment shall be
repaid to CNS. If CNS deposits funds in trust,
payment shall be made no later than the occurrence of
a Change in Control. If and to the extent there are
not amounts in trust sufficient to pay Employee under
this Agreement, CNS shall remain liable for any and
all payments due to Employee. In accordance with the
terms of such trust, at all times during the term of
this Agreement, Employee shall have no rights, other
than as an unsecured general creditor of CNS, to any
amounts held in trust and all trust assets shall be
general assets of CNS and subject to the claims of
creditors of CNS. Failure of CNS to establish or
fully fund such trust shall not be deemed a
revocation or termination of this Agreement by CNS.
x. As a condition of receiving the Severance Payment and
other benefits provided in this subparagraph 8.f and
in subparagraph 8.g, Employee shall be required to
sign a standard release agreement with CNS in which
he agrees to release any and all claims and causes of
action which he might have against CNS and in which
he affirms and acknowledges his obligations under
paragraphs 9, 10, 11 and 12 of this Agreement.
g. Stock Options. Employee shall, immediately upon a Change in
Control, vest in all stock options which have been granted to
him and he shall be entitled to exercise all rights and to
receive all benefits accruing to him under any and all CNS
stock purchase and stock option plans or programs, including
the CNS, Inc. 1994 Amended Stock Plan, or any successor to any
such plan or program, which shall be in addition to and not
reduced by any other amounts payable to Employee under this
paragraph 8.
9. Confidential Information. All knowledge and information not already
available to the public which Employee may acquire or has acquired with
respect to product development, improvements, modifications,
discoveries, designs, methods, systems, computer software, programs,
codes and documentation, research, designs, formulas, instructions,
methods,
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Executive Employment Agreement
Page 11
inventions, trade secrets, services or other private or confidential
matters of CNS (such as those concerning sales, costs, profits,
organizations, customer lists, pricing methods, etc.), or of any third
party which CNS is obligated to keep confidential, shall be regarded by
Employee as strictly confidential and shall not be used by Employee
directly or indirectly or disclosed to any persons, corporations or
firms. All of the foregoing knowledge and information are collectively
termed "Confidential Information" herein. Employee's obligations under
this paragraph will not apply to any information which (a) is or
becomes known to the general public under circumstances involving no
breach by Employee of the terms of this paragraph, (b) is generally
disclosed to third parties by CNS as a continuing practice without
restriction on such third parties, (c) is approved for release by
written authorization of CNS's Board, or (d) Employee is obligated by
law to disclose.
10. Disclosure and Transfer of Product Developments, etc.
a. Employee will make full and prompt disclosure to CNS or all
product developments, improvements, modifications,
discoveries, computer software, programs, codes and
documentation, research, designs, formulas, configurations,
instructions, methods and inventions (all of which are
collectively termed "Developments" herein), whether patentable
or not, made, discovered, conceived or first reduced to
practice by Employee or under his direction during his
employment, alone or with others, whether or not made or
conceived during normal working hours or on the premises of
CNS which relate in any material way to the business or to
research or development work of CNS. Employee confirms by his
acceptance of this Agreement that CNS owns and shall own all
of the Developments.
b. Employee also agrees on behalf of himself and his heirs and
legal representatives that he will promptly communicate,
disclose and transfer to CNS, free of encumbrances and
restrictions, all of his right, title and interest in the
Developments covered by subparagraph 10.a. and any patents or
patent applications covering such Developments and to execute
and deliver such assignments, patents and applications, and
any other documents as CNS may direct, and to cooperate fully
with CNS to enable it to secure any patents or otherwise
protect such Developments in any and all countries. Employee
shall assign to CNS any and all copyrights and reproduction
rights to all material prepared by Employee in connection with
his employment.
c. Notwithstanding subparagraphs 10.a. and b., however, this
paragraph 10 shall not apply to Developments for which no
equipment, supplies, facility or trade secret information of
CNS was used and which was developed entirely on the
Employee's own time, and (1) which do not relate (a) directly
to the business of CNS or (b) to CNS's actual or demonstrably
anticipated research or development, or (2) which does not
result from any work performed by Employee for CNS.
<PAGE>
Executive Employment Agreement
Page 12
This will confirm that Employee's obligations to CNS under paragraphs
9, 10 and 11 will continue after the termination of Employee's
employment.
11. Non-Competition. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly engage in, enter into or participate in the business of CNS
or in any business or commercial activity which does or is reasonably
likely to compete with or adversely affect the Business or products of
CNS, either as an individual for Employee's own account, as a partner
or a joint venturer, or as an officer, director, consultant or holder
of more than five percent (5%) of the entity interest in, any other
person, firm, partnership or corporation, or an employee, agent or
salesman for any person. In addition, during such period Employee shall
not: avail himself of any advantages or acquaintances he has made with
any person who has, within the twelve (12) month period ended on the
date of termination of his employment, been a customer of CNS or its
affiliates, and which would, directly or indirectly, materially divert
business from or materially and adversely affect the Business of CNS;
interfere with the contractual relations between CNS and any of its
employees; or employ or cause to be employed in any capacity or retain
or cause to be retained as a consultant any person who was employed in
any capacity by CNS during the twelve (12) month period ended on the
date of termination of Employee's employment.
For purposes of this Agreement, the "Business of CNS" or "Business"
means and includes the business of the manufacture, production, sale,
marketing and distribution of the Breathe Right strip and any other
products currently offered or currently under development by CNS or
offered or currently under development by CNS during one (1) year prior
to the date of termination of Employee's employment.
Inasmuch as the activities of CNS are conducted on an international
basis, the restrictions of this paragraph 11 shall apply throughout the
United States, Canada, Japan and Europe.
12. Non-Solicitation. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly solicit any current or prospective CNS customer, broker,
vendor or distributor for the purpose of providing products or services
for or on behalf of said customer, broker, vendor or distributor which
are competitive with the products or services being provided by CNS,
which are in the development stages of being competitive with the
products or services being provided by CNS, or which would in any way
cause said customer, broker, vendor or distributor to discontinue or
reduce its business relationship with CNS. Current CNS customers,
brokers, vendors or distributors include those customer, brokers,
vendors or distributors with whom CNS has had a business relationship
at any time within one year immediately preceding Employee's
termination date. Prospective CNS customers, brokers, vendors and
distributors include those with whom (a) a CNS representative has been
in direct personal contact and (b) CNS has a reasonable opportunity of
entering into a business
<PAGE>
Executive Employment Agreement
Page 13
relationship within six months following Employee's termination date.
Employee also agrees that during his employment in the one year period
following his employment, he will not directly or indirectly solicit
any CNS employees to terminate his or her employment with CNS. This
Employee non-solicitation obligation applies to Employees of CNS during
Employee's employment and as of his termination date.
13. Remedies. Employee acknowledges that the restrictions set forth in
paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect
legitimate business interests of CNS. It is understood that if Employee
violates his obligations under any of these paragraphs, CNS would
suffer irreparable harm for which a recovery of money damages would be
an incomplete and inadequate remedy. It is therefore agreed that CNS,
in addition to any remedies at law, shall be entitled, as a matter of
right, in any court of competent jurisdiction, to a mandatory
injunction restraining Employee pending litigation, as well as upon
final determination thereof, from violating this Agreement. In
addition, CNS will discontinue payment to Employee of any Severance or
Salary Continuation Payments, benefits or bonus which he may be
entitled to receive or is receiving under paragraphs 6, 7 or 8
hereunder or otherwise, in the event of his violation of any of his
obligations under this Agreement. In the event of cessation of payments
and benefits, Employee's release of his claims against CNS shall remain
valid and fully enforceable in consideration of the benefits which
Employee received prior to set breach.
14. Severability. The parties intend that the covenants and agreements
contained herein shall be deemed to be a series of separate covenants
and agreements, one for each and every state of the United States and
political subdivision outside the United States where the business
described is conducted. If, in any judicial proceeding, a court shall
refuse to enforce any of the separate covenants deemed included in such
action, then such unenforceable covenants shall be deemed eliminated
from the provisions of this Agreement for the purpose of such
proceeding to the extent necessary to permit the remaining covenants to
be enforced in such proceeding. Further, in the event that any
provision is held to be overbroad as written, such provision shall be
deemed amended to narrow its application to the extent necessary to
make the provision enforceable according to applicable law and enforced
as amended.
15. Binding Effect.
<PAGE>
Executive Employment Agreement
Page 14
a. CNS will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets as defined in
subparagraph 8.a of CNS to expressly assume and agree to
perform this Agreement in the same manner and to the same
extent that CNS would be required to perform it if no such
succession had taken place, in which case, the term "CNS" as
used in this Agreement shall instead refer to CNS' successor.
Failure of CNS to obtain such assumption and agreement prior
to the effectiveness of any such succession shall be a breach
of this Agreement and shall entitle Employee to compensation
from CNS in the same amount and on the same terms as he would
be entitled hereunder if he terminated his employment for Good
Reason following a Change in Control, except that for purposes
of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of
Termination.
b. This Agreement shall inure to the benefit of and be
enforceable by Employee's personal or legal representatives,
successors, heirs, and designated beneficiaries. If Employee
should die while any amount would still be payable to Employee
hereunder if Employee had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to Employee's designated
beneficiaries, or, if there is no such designated beneficiary,
to Employee's estate.
16. Entire Agreement. From and after the date of this Agreement the terms
and provisions of this Agreement constitute the entire agreement
between the parties and this Agreement supersedes any previous oral or
written communications, representations, or agreements with respect to
any subject, including the subject matter of compensation, bonus,
participation and profit sharing and termination compensation.
17. Waiver and Interpretation. The waiver by either party of a breach of
any provision of this Agreement by the other party shall not operate or
be construed as a waiver of any subsequent breach by the breaching
party. No waiver shall be valid unless in writing and signed by the
party providing such waiver. If any provision of this Agreement is held
by any court to be unenforceable, then such provision shall be deemed
to be eliminated from the Agreement to permit enforceability of the
remaining provisions. If any provision is held to be overbroad, such
provision shall be amended to narrow its application to the extent
necessary for enforceability. For purposes of the release agreement
which Employee shall be required to execute as a condition of receiving
any payments and benefits hereunder, "CNS", as referred to in this
Agreement, shall include CNS and all its affiliates, shareholders,
officers, directors, employees, agents, attorneys, insurers and
indemnitors.
<PAGE>
Executive Employment Agreement
Page 15
18. Applicable Law. All questions pertaining to the validity, construction,
execution and performance of this Agreement shall be construed and
governed in accordance with the laws of the State of Minnesota. The
parties consent to the personal jurisdiction of the State of Minnesota,
waive any argument that such a forum is not convenient, and agree that
any litigation relating to this Agreement shall be venued in
Minneapolis, Minnesota.
19. Tax Withholding. CNS may withhold from any payment of benefits under
this Agreement (and forward to the appropriate taxing authority) any
taxes required to be withheld under applicable law.
20. Notice. Any notice required or desired to be given under this Agreement
shall be deemed given if in writing sent by certified mail to his
residence in the case of Employee, or to its principal office in the
case of CNS.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first set forth above.
CNS, INC.
By /s/ Marti Morfitt
-----------------------------------------
Its President & COO
-------------------------------------
EMPLOYEE
/s/ Dan Cohen
--------------------------------------------
Dan Cohen
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
EXHIBIT A
NAME: Dan Cohen
DATE: February 12, 1999
POSITION: Chairman & CEO
DEPARTMENT: Corporate Administration
BASE SALARY: $235,000
CAR ALLOWANCE: (INCLUDE ONLY IF APPLICABLE) $500.00/month
MANAGEMENT INCENTIVE PLAN LEVEL: 25 at Threshold
50 at Plan
100 at Maximum
EXHIBIT 10.10
EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is made as of February 12, 1999 (the "Effective Date") between
CNS, INC. a Delaware corporation ("CNS") and Marti Morfitt ("Employee").
WHEREAS, CNS considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of CNS
and its shareholders; and
WHEREAS, Employee has made and is expected to continue to make, due to his
experience and knowledge, a significant contribution to the profitability,
growth and financial strength of CNS; and
WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of
a change in control may exist and that such possibility and the uncertainty and
questions which it may raise among management may result in the departure or
distraction of the performance of Employee's duties to the detriment of CNS and
its shareholders; and
WHEREAS, Employee is willing to continue his employment with CNS upon the
understanding that CNS will provide income security if Employee's employment is
terminated under certain terms and conditions;
WHEREAS, it is in the best interests of CNS and its stockholders to employ
Employee and to reinforce and encourage his continued attention and dedication
to his assigned duties without distraction and to ensure his continued
availability to CNS in the event of a Change in Control; and
WHEREAS, it is further in CNS's best interests to receive certain assurances
from Employee regarding CNS's confidentiality, competition and other proprietary
business concerns;
THEREFORE, in consideration of the foregoing and of this agreement, certain
change in control protection, continued employment and other benefits hereunder,
as well as other mutual covenants and obligations hereinafter set forth, CNS and
Employee agree as follows:
1. Employment. CNS agrees to continue to employ Employee as its President
& COO under the terms, conditions and benefits set forth herein and
Employee accepts continued employment with CNS on said terms,
conditions and benefits.
2. Term. The term of Employee's employment shall continue until terminated
pursuant to paragraph 6, 7, or 8 herein.
3. Duties. In his position as President & COO, Employee will continue to
faithfully and diligently perform such executive management
responsibilities as may be assigned to him from time to time by the
Chief Executive Officer, President or Chairman of the
<PAGE>
Executive Employment Agreement
Page 2
Board of Directors of CNS (the "Board"); devote his full time, energy
and skill to CNS's business, as is reasonably necessary to execute
fully his duties hereunder, except for vacations, absences made
necessary because of illness, and service on other corporate, civic, or
charitable boards or committees not significantly interfering with his
duties hereunder; and promote CNS's best interests. The principal place
of employment and the location of Employee's principal office and
normal place of work shall be in the Minneapolis, Minnesota
metropolitan area. Employee will be expected to travel to other
locations, as necessary, in the performance of his duties during the
term of this Agreement. Employee shall notify the President of any
other paid position which he is considering accepting, including but
not limited to a board of directors position, a position as an employee
or an independent consultant, or any position, whether or not for pay,
which could constitute a conflict of interest with CNS. The Employee
agrees not to accept any such position without the President of CNS's
prior approval.
4. Compensation. For all services rendered by Employee, CNS shall pay
Employee the compensation described in Exhibit A, payable at such times
as salaried employees of CNS are customarily paid. The President of CNS
shall, from time to time during Employee's employment, review his
annual salary in connection with possible increases, giving
consideration to inflation factors, performance of Employee and CNS,
salaries paid for positions of similar responsibility for other
companies, and other relevant factors, and shall provide for such
increases when deemed appropriate. Employee shall in addition be
eligible to participate in the annual management incentive bonus
program, as approved by the Board of Directors. In the event of
termination of this Agreement by CNS without Good Cause, as defined in
paragraph 7 herein, the Board may, in good faith and in its sole
discretion, determine and cause to be paid a partial bonus based on
Employee's performance through the date of termination, and such
determination shall be final and binding.
5. Benefits. Employee shall be entitled to Paid Time Off consistent with
CNS policy and such insurance, 401(k) program and other benefits
available to all salaried employees of CNS, subject to any limitations
on such benefits to officers, directors or highly paid employees in
order that such benefit programs qualify under federal or state law for
favored tax or other treatment. Such benefit programs may be changed
from time to time by the Board. Employee shall also be entitled to
reimbursement of his reasonable and necessary expenses incurred in
connection with the performance of his duties hereunder.
6. Termination by Employee. Employee may resign his employment with CNS
effective upon 30 days' advance written notice to the President. If
Employee resigns under this paragraph, the President retains the right
to terminate his employment, effective upon written notice to Employee,
at any time during the 30-day notice period, provided, however, that
base salary and the employer portion of his health insurance premiums
will continue to be paid by CNS for the duration of the 30-day notice
period. In connection
<PAGE>
Executive Employment Agreement
Page 3
with his termination, Employee will receive any accrued unused Paid
Time Off to which he is entitled.
7. Termination by CNS. CNS shall have the right to terminate Employee's
employment in any of the following ways:
a. CNS may, by written notice to Employee, terminate his
employment without Good Cause, in which event Employee will be
paid his base salary up to the date of termination. Employee
is also entitled to receive Salary Continuation for one year
from his termination date. "Salary Continuation" shall mean
payment by CNS of the Employee's base salary as of his
termination date, payable to Employee on the same schedule and
in the same amount as the payment of base salary prior to
termination of his employment, until such time as the full
Salary Continuation obligation shall be discharged, as
provided in this paragraph 7. During the period when Salary
Continuation is payable to Employee, CNS will also continue to
provide to Employee all group medical, dental and life plan
benefits provided to its other senior executives. Employee
shall also receive any accrued unused Paid Time Off to which
he is entitled. Receipt of Salary Continuation is subject to
Employee's compliance with his obligations under paragraphs 9,
10, 11 and 12 of this Agreement and his execution of a
standard release agreement which includes, in addition to
release of claims against CNS and related releasees, an
obligation not to speak negatively about or harm CNS,
confidentiality with respect to the termination process, and
cooperation with the transition of responsibilities. Payment
of the employer portion of Employee's group medical, dental
and life plan premiums under this paragraph and under
paragraphs 6 and 8 herein shall cease as of the date on which
Employee is covered under other such group plans if such
coverage occurs prior to termination of any salary
continuation periods set forth in said paragraphs.
b. CNS, by written notice to Employee, may terminate his
employment for Good Cause, as defined below. In the event of
termination under this subparagraph 7.b., Employee shall be
paid his base salary up to the date of termination. "Good
Cause" for the purpose of this Agreement shall mean one or
more of the following: (i) willful and premeditated failure or
refusal of Employee to render services to CNS in accordance
with his obligations under paragraph 3; (ii) the commission by
Employee of an act of fraud or embezzlement against CNS; (iii)
the commission by Employee of any other willful or reckless
act which injures CNS in a substantial or material way (it
being understood that mere negligence in performance of duties
is not Good Cause under this Agreement); (iv) the breach by
Employee of any provision of this Agreement; or (v) the
commission of a substantial act of moral turpitude by Employee
which is deemed by CNS's Board to have a material adverse
effect on CNS; or (vi) unsatisfactory performance after
<PAGE>
Executive Employment Agreement
Page 4
specific notice of performance deficiencies, description of
expectations and opportunity to cure.
c. CNS, by written notice to Employee, may terminate Employee's
employment under this Agreement if he becomes physically or
mentally disabled during the term so that he has not been able
to substantially perform, for a period of 120 consecutive
days, with reasonable accommodation, the usual duties assigned
to him hereunder ("Disability"). Upon such determination, CNS
shall pay to Employee his base salary up to the date of such
termination to the extent not covered by any disability plan.
d. This Agreement shall terminate upon the Employee's death
during its term, except that CNS shall pay to the legal
representative of Employee's estate all base salary due him up
to the date of his death.
8. Termination Following a Change in Control.
DEFINITION.
a. For purposes of this Agreement, "Change in Control" shall mean
the occurrence of one of the following events:
i. ACQUISITION OF 25% OF STOCK IN CNS
any "person" [as such term is used in Section 13(d)
and 4(d) of the Securities Exchange Act of 1934, as
amended ("Exchange Act")], other than a trustee or
other fiduciary holding securities under an employee
benefit plan of CNS is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly of securities
representing 25% or more of the combined voting power
of CNS's then outstanding securities;
ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT
APPROVED BY BOARD
during any period of two consecutive years (not
including any period ending prior to the effective
date of this Agreement), individuals who at the
beginning of such period constitute the Board of
Directors of CNS, and any new director [other than a
director designated by a person who has entered into
agreement with CNS to effect a transaction permitted
by Section 6(a)(I), (iii) or (iv)] whose election by
the Board of Directors of CNS or nomination for
election by CNS's stockholders was approved by vote
of at least two-thirds of the directors then still in
office who either were directors at the beginning of
the period or whose election or nomination for
election was previously so approved ("Continuing
Directors"), cease for any reason to constitute at
least a majority of the
<PAGE>
Executive Employment Agreement
Page 5
Board of Directors of CNS;
iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN
LESS THAN 50% OF SURVIVING COMPANY'S STOCK
the stockholders of CNS approve a merger or
consolidation of CNS with any other corporation,
other than (A) a merger or consolidation which would
result in the voting securities of CNS outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being
converted into voting securities of the merged or
consolidated entity) 50% or more of the combined
voting power of the voting securities of CNS or such
merged or consolidated entity outstanding immediately
after such merger or consolidation, or (B) a merger
or consolidation effected to implement a
recapitalization of CNS or similar transaction in
which no "person" acquires more than 25% of the
combined voting power of CNS's then outstanding
securities;
iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF
CNS STOCK MARKET VALUE
the stockholders of CNS approve a plan of complete
liquidation or a sale or disposition by CNS of all or
substantially all of CNS's assets. "The sale or
disposition by CNS of all or substantially all of
CNS's assets" shall mean a sale or other disposition
transaction or series of related transactions
involving assets of CNS or of any direct or indirect
subsidiary of CNS (including the stock of any direct
or indirect subsidiary of CNS) in which the value of
the assets or stock being sold or otherwise disposed
of (as measured by the purchase price being paid
therefor or by such other method as the Board of
Directors of CNS determines is appropriate in a case
where there is no readily ascertainable purchase
price) constitutes more than 50% of the fair market
value of CNS. For purposes of the preceding sentence,
the "fair market value of CNS" shall be the aggregate
market value of CNS's outstanding common stock (on a
fully diluted basis) plus the aggregate market value
of CNS's other outstanding equity securities. The
aggregate market value of CNS's common stock shall be
determined by multiplying the number of shares of CNS
common stock (on a fully diluted basis) outstanding
on the date of the execution and delivery of a
definitive agreement ("Transaction Date") with
respect to the sale or disposition by CNS of all or
substantially all of CNS's assets by the average
closing price for CNS's common stock for the ten
trading days immediately preceding the Transaction
Date. The aggregate market value of any other equity
securities of CNS shall be determined in a manner
similar to that prescribed in the immediately
preceding sentence for determining the aggregate
market value of CNS's common stock or by such other
method as the Board of Directors of CNS shall
determine is
<PAGE>
Executive Employment Agreement
Page 6
appropriate; and Employee agrees that, subject to the
terms and conditions of this Agreement, in the event
of a Change in Control of CNS occurring after the
date hereof, Employee will remain in the employ of
CNS for a period of 30 days from the occurrence of
such Change in Control.
b. Applicability. In the event of a Change in Control, the terms
of this subparagraph 8.b shall be effective for a period of 24
months following the Change in Control. At the expiration of
such 24 month period this Agreement in its entirety shall be
terminated and be of no further effect. Employee shall be
entitled to receive the benefits set forth in subparagraph 8.f
if, within 24 months of such Change in Control, his employment
is terminated by CNS or its successor without Good Cause (as
defined in paragraph 7.a above), or by Employee for Good
Reason (as defined in subparagraph 8.b.i, below). Employee
shall, in return for the benefits provided under subparagraph
8.f., sign a standard release agreement with CNS, in which he
agrees to release any and all claims and causes of action
which he might have against CNS and in which he affirms and
acknowledges his obligations under paragraphs 9, 10, 11 and 12
of this Agreement.
i. Termination for Good Reason shall be effective
immediately upon written notice from the Employee to
the President. Good Reason shall exist if CNS has
materially breached any of the terms of this
Agreement; Employee is assigned duties which are
materially inconsistent with his position, duties,
responsibilities and status as President & COO; his
compensation, including any incentive compensation or
bonus plan, is reduced; or relocation of CNS would
require him to relocate his principal residence
outside reasonable commuting distance of the Twin
Cities Metropolitan area.
ii. Termination without Good Cause shall be effective
upon 30 days' advance notice by CNS to the Employee.
For purposes of this paragraph 8, Good Cause shall be
defined as in subparagraph 7.b.
c. Notice of Termination. Any purported termination of employment
under this paragraph 8 and also under paragraphs 6 and 7 shall
be communicated by written Notice of Termination to the other
party hereto in accordance with paragraph 20 hereunder. For
purposes of this Agreement, a "Notice of Termination" shall
mean a notice which indicates the specific termination
provision in this Agreement relied upon and which sets forth
the facts and circumstances claimed to provide a basis for
termination of Employee's employment.
<PAGE>
Executive Employment Agreement
Page 7
d. Date of Termination. For purposes of this paragraph 8 and also
paragraphs 6 and 7 of this Agreement, "Date of Termination"
shall mean:
i. if Employee's employment is terminated for
Disability, as defined in paragraph 7.c. hereunder,
30 days after Notice of Termination is given
(provided that Employee shall not have returned to
the full-time performance of Employee's duties during
such 30 day period); and
ii. if Employee's employment is terminated pursuant to a
provision contained in paragraph 6, 7 or 8 herein or
for any other reason (other than Disability), the
date specified in the Notice of Termination,
consistent with the provisions in said paragraphs.
e. Dispute of Termination. If, within ten days after any Notice
of Termination is given under this paragraph 8, the party
receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties,
or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or the time
for appeal therefrom having expired and no appeal having been
perfected); provided, that the Date of Termination shall be
extended by a notice of dispute only if such notice is given
in good faith and the party giving such notice pursues the
resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, CNS shall
continue to pay Employee full compensation in effect when the
notice giving rise to the dispute was given (including, but
not limited to, base salary) and continue Employee as a
participant in all compensation, benefit and insurance plans
in which Employee was participating when the notice giving
rise to the dispute was given, to the extent permissible under
the terms of the applicable group plans and state and federal
law, until the dispute is finally resolved in accordance with
this subparagraph. Amounts paid under this subsection are in
addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts under
this Agreement.
<PAGE>
Executive Employment Agreement
Page 8
f. Compensation Upon Termination. Following a Change in Control,
as defined in subparagraph 8.a. above, to the extent provided
in subparagraph 8.b. above, Employee shall be entitled to the
following benefits in lieu of any benefits which would
otherwise be available to him upon termination under
paragraphs 6 or 7 hereunder:
i. CNS shall pay Employee through the Date of
Termination Employee's base salary at the rate in
effect at the time the Notice of Termination is given
and any other form or type of other compensation
otherwise payable for such period, including any
applicable incentive bonus, commensurate with his
performance and the performance of CNS.
ii. In lieu of any further salary payments for periods
subsequent to the Date of Termination, CNS shall pay
a severance payment (the "Severance Payment") equal
to 24 months of Employee's Compensation as defined
below based on the average monthly Compensation paid
to Employee during the 24 month period ending
immediately prior to the Date of Termination (without
giving effect to any reduction in such Compensation
which would constitute a breach of this Agreement).
If the Employee has not been employed by CNS for 24
months as of the Date of Termination, average monthly
Compensation shall be the Employee's average monthly
Compensation for the number of months during which
the Employee has been employed at CNS. For purposes
of this subparagraph, Compensation shall mean and
include every type and form of compensation paid to
Employee by CNS (or any corporation ("Affiliate")
affiliated with CNS within the meaning of Section
1504 of the Internal Revenue Code of 1986, as may be
amended from time to time (the "Code")) and included
in Employee's gross income for federal income tax
purposes, but excluding compensation income arising
from (1) hiring bonuses and (2) compensation income
recognized as a result of the exercise of stock
options or sale of the stock so acquired. All of
Employee's contributions to any qualified plan
pursuant to Section 401(k) of the Code or any
flexible benefit plan pursuant to Section 125 of the
Code shall be deemed to be included in gross income
for federal tax purposes for purposes of this
subparagraph. The Severance Payment shall be made in
a single lump sum within 60 days after the Date of
Termination.
iii. For 18 months following the Employee's Date of
Termination, CNS shall arrange to provide, at its
sole expense, Employee with group medical, dental and
life plan benefits substantially similar to those
which Employee was receiving or entitled to receive
immediately prior to the Notice of Termination. The
cost of providing such benefits shall be in addition
to (and shall not reduce) the Severance Payment.
Benefits otherwise
<PAGE>
Executive Employment Agreement
Page 9
receivable by Employee pursuant to this paragraph
(iii) shall be reduced to the extent comparable
benefits are actually received by Employee during
such period from any third party, and any such
benefits actually received by Employee shall be
reported to CNS.
iv. CNS shall also pay to Employee all legal fees and
expenses incurred by Employee as a result of such
termination (including all such fees and expenses, if
any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any
right or benefit provided by this paragraph).
v. The Severance Payment shall be reduced and offset by
the amount of any other payment received or to be
received by Employee in connection with his
termination of employment pursuant to any policies of
CNS.
vi. If a determination is made by legislation,
regulations, rulings directed to CNS or Employee, or
court decision that the aggregate amount of any
payment made to Employee hereunder, or pursuant to
any plan, program or policy of CNS in connection
with, on account of, or as a result of, a Change of
Control constitutes an "excess parachute payment" as
defined in Section 280G of the Code subject to the
excise tax provisions of Section 4999 of the Code, or
any successor sections thereof, Employee shall be
entitled to receive from CNS, in addition to any
other amounts payable hereunder, an amount which
shall be equal to such excise tax, plus, on a net
after-tax basis, an amount equal to the aggregate
amount of any interest, penalties, fines or additions
to any tax, including income tax, which are imposed
in connection with the imposition of such excise tax.
Such amount shall be payable to Employee as soon as
may be practicable after such final determination is
made. Employee and CNS shall mutually and reasonably
determine whether or not such determination has
occurred or whether any appeal to such determination
should be made.
vii. Employee shall be entitled to receive all benefits
payable to Employee under the CNS, Inc. Profit
Sharing Plan and Trust or any successor of such Plan
and Trust and any other plan or agreement relating to
retirement benefits, and, in addition, if Employee is
not fully vested in his account balance under such
Plan, a single lump sum payment in cash from CNS
representing the nonvested portion of his account,
which shall be in addition to, and not reduced by,
any other amounts payable to Employee under this
paragraph 8.
viii. Employee shall not be required to mitigate the amount
of any payment provided for in this paragraph 8 by
seeking other employment or
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Executive Employment Agreement
Page 10
otherwise, nor shall the amount of any payment or
benefit provided for in this paragraph 8 be reduced
by any compensation earned by Employee as the result
of employment by another employer or by retirement
benefits after the Date of Termination, or otherwise
except as specifically provided in this paragraph 8.
ix. In order to assure the performance of CNS or its
successor of its obligations under this paragraph,
CNS may deposit in trust an amount equal to the
maximum payment that will be due Employee under the
terms hereof. Under a written trust instrument, the
Trustee shall be instructed to pay to Employee (or
Employee's legal representative, as the case may be)
the amount to which Employee shall be entitled under
the terms hereof, and the balance, if any, of the
trust not so paid or reserved for payment shall be
repaid to CNS. If CNS deposits funds in trust,
payment shall be made no later than the occurrence of
a Change in Control. If and to the extent there are
not amounts in trust sufficient to pay Employee under
this Agreement, CNS shall remain liable for any and
all payments due to Employee. In accordance with the
terms of such trust, at all times during the term of
this Agreement, Employee shall have no rights, other
than as an unsecured general creditor of CNS, to any
amounts held in trust and all trust assets shall be
general assets of CNS and subject to the claims of
creditors of CNS. Failure of CNS to establish or
fully fund such trust shall not be deemed a
revocation or termination of this Agreement by CNS.
x. As a condition of receiving the Severance Payment and
other benefits provided in this subparagraph 8.f and
in subparagraph 8.g, Employee shall be required to
sign a standard release agreement with CNS in which
he agrees to release any and all claims and causes of
action which he might have against CNS and in which
he affirms and acknowledges his obligations under
paragraphs 9, 10, 11 and 12 of this Agreement.
g. Stock Options. Employee shall, immediately upon a Change in
Control, vest in all stock options which have been granted to
him and he shall be entitled to exercise all rights and to
receive all benefits accruing to him under any and all CNS
stock purchase and stock option plans or programs, including
the CNS, Inc. 1994 Amended Stock Plan, or any successor to any
such plan or program, which shall be in addition to and not
reduced by any other amounts payable to Employee under this
paragraph 8.
9. Confidential Information. All knowledge and information not already
available to the public which Employee may acquire or has acquired with
respect to product development, improvements, modifications,
discoveries, designs, methods, systems, computer software, programs,
codes and documentation, research, designs, formulas, instructions,
methods,
<PAGE>
Executive Employment Agreement
Page 11
inventions, trade secrets, services or other private or confidential
matters of CNS (such as those concerning sales, costs, profits,
organizations, customer lists, pricing methods, etc.), or of any third
party which CNS is obligated to keep confidential, shall be regarded by
Employee as strictly confidential and shall not be used by Employee
directly or indirectly or disclosed to any persons, corporations or
firms. All of the foregoing knowledge and information are collectively
termed "Confidential Information" herein. Employee's obligations under
this paragraph will not apply to any information which (a) is or
becomes known to the general public under circumstances involving no
breach by Employee of the terms of this paragraph, (b) is generally
disclosed to third parties by CNS as a continuing practice without
restriction on such third parties, (c) is approved for release by
written authorization of CNS's Board, or (d) Employee is obligated by
law to disclose.
10. Disclosure and Transfer of Product Developments, etc.
a. Employee will make full and prompt disclosure to CNS or all
product developments, improvements, modifications,
discoveries, computer software, programs, codes and
documentation, research, designs, formulas, configurations,
instructions, methods and inventions (all of which are
collectively termed "Developments" herein), whether patentable
or not, made, discovered, conceived or first reduced to
practice by Employee or under his direction during his
employment, alone or with others, whether or not made or
conceived during normal working hours or on the premises of
CNS which relate in any material way to the business or to
research or development work of CNS. Employee confirms by his
acceptance of this Agreement that CNS owns and shall own all
of the Developments.
b. Employee also agrees on behalf of himself and his heirs and
legal representatives that he will promptly communicate,
disclose and transfer to CNS, free of encumbrances and
restrictions, all of his right, title and interest in the
Developments covered by subparagraph 10.a. and any patents or
patent applications covering such Developments and to execute
and deliver such assignments, patents and applications, and
any other documents as CNS may direct, and to cooperate fully
with CNS to enable it to secure any patents or otherwise
protect such Developments in any and all countries. Employee
shall assign to CNS any and all copyrights and reproduction
rights to all material prepared by Employee in connection with
his employment.
c. Notwithstanding subparagraphs 10.a. and b., however, this
paragraph 10 shall not apply to Developments for which no
equipment, supplies, facility or trade secret information of
CNS was used and which was developed entirely on the
Employee's own time, and (1) which do not relate (a) directly
to the business of CNS or (b) to CNS's actual or demonstrably
anticipated research or development, or (2) which does not
result from any work performed by Employee for CNS.
<PAGE>
Executive Employment Agreement
Page 12
This will confirm that Employee's obligations to CNS under paragraphs
9, 10 and 11 will continue after the termination of Employee's
employment.
11. Non-Competition. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly engage in, enter into or participate in the business of CNS
or in any business or commercial activity which does or is reasonably
likely to compete with or adversely affect the Business or products of
CNS, either as an individual for Employee's own account, as a partner
or a joint venturer, or as an officer, director, consultant or holder
of more than five percent (5%) of the entity interest in, any other
person, firm, partnership or corporation, or an employee, agent or
salesman for any person. In addition, during such period Employee shall
not: avail himself of any advantages or acquaintances he has made with
any person who has, within the twelve (12) month period ended on the
date of termination of his employment, been a customer of CNS or its
affiliates, and which would, directly or indirectly, materially divert
business from or materially and adversely affect the Business of CNS;
interfere with the contractual relations between CNS and any of its
employees; or employ or cause to be employed in any capacity or retain
or cause to be retained as a consultant any person who was employed in
any capacity by CNS during the twelve (12) month period ended on the
date of termination of Employee's employment.
For purposes of this Agreement, the "Business of CNS" or "Business"
means and includes the business of the manufacture, production, sale,
marketing and distribution of the Breathe Right strip and any other
products currently offered or currently under development by CNS or
offered or currently under development by CNS during one (1) year prior
to the date of termination of Employee's employment.
Inasmuch as the activities of CNS are conducted on an international
basis, the restrictions of this paragraph 11 shall apply throughout the
United States, Canada, Japan and Europe.
12. Non-Solicitation. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly solicit any current or prospective CNS customer, broker,
vendor or distributor for the purpose of providing products or services
for or on behalf of said customer, broker, vendor or distributor which
are competitive with the products or services being provided by CNS,
which are in the development stages of being competitive with the
products or services being provided by CNS, or which would in any way
cause said customer, broker, vendor or distributor to discontinue or
reduce its business relationship with CNS. Current CNS customers,
brokers, vendors or distributors include those customer, brokers,
vendors or distributors with whom CNS has had a business relationship
at any time within one year immediately preceding Employee's
termination date. Prospective CNS customers, brokers, vendors and
distributors include those with whom (a) a CNS representative has been
in direct personal contact and (b) CNS has a reasonable opportunity of
entering into a business
<PAGE>
Executive Employment Agreement
Page 13
relationship within six months following Employee's termination date.
Employee also agrees that during his employment in the one year period
following his employment, he will not directly or indirectly solicit
any CNS employees to terminate his or her employment with CNS. This
Employee non-solicitation obligation applies to Employees of CNS during
Employee's employment and as of his termination date.
13. Remedies. Employee acknowledges that the restrictions set forth in
paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect
legitimate business interests of CNS. It is understood that if Employee
violates his obligations under any of these paragraphs, CNS would
suffer irreparable harm for which a recovery of money damages would be
an incomplete and inadequate remedy. It is therefore agreed that CNS,
in addition to any remedies at law, shall be entitled, as a matter of
right, in any court of competent jurisdiction, to a mandatory
injunction restraining Employee pending litigation, as well as upon
final determination thereof, from violating this Agreement. In
addition, CNS will discontinue payment to Employee of any Severance or
Salary Continuation Payments, benefits or bonus which he may be
entitled to receive or is receiving under paragraphs 6, 7 or 8
hereunder or otherwise, in the event of his violation of any of his
obligations under this Agreement. In the event of cessation of payments
and benefits, Employee's release of his claims against CNS shall remain
valid and fully enforceable in consideration of the benefits which
Employee received prior to set breach.
14. Severability. The parties intend that the covenants and agreements
contained herein shall be deemed to be a series of separate covenants
and agreements, one for each and every state of the United States and
political subdivision outside the United States where the business
described is conducted. If, in any judicial proceeding, a court shall
refuse to enforce any of the separate covenants deemed included in such
action, then such unenforceable covenants shall be deemed eliminated
from the provisions of this Agreement for the purpose of such
proceeding to the extent necessary to permit the remaining covenants to
be enforced in such proceeding. Further, in the event that any
provision is held to be overbroad as written, such provision shall be
deemed amended to narrow its application to the extent necessary to
make the provision enforceable according to applicable law and enforced
as amended.
15. Binding Effect.
<PAGE>
Executive Employment Agreement
Page 14
a. CNS will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets as defined in
subparagraph 8.a of CNS to expressly assume and agree to
perform this Agreement in the same manner and to the same
extent that CNS would be required to perform it if no such
succession had taken place, in which case, the term "CNS" as
used in this Agreement shall instead refer to CNS' successor.
Failure of CNS to obtain such assumption and agreement prior
to the effectiveness of any such succession shall be a breach
of this Agreement and shall entitle Employee to compensation
from CNS in the same amount and on the same terms as he would
be entitled hereunder if he terminated his employment for Good
Reason following a Change in Control, except that for purposes
of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of
Termination.
b. This Agreement shall inure to the benefit of and be
enforceable by Employee's personal or legal representatives,
successors, heirs, and designated beneficiaries. If Employee
should die while any amount would still be payable to Employee
hereunder if Employee had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to Employee's designated
beneficiaries, or, if there is no such designated beneficiary,
to Employee's estate.
16. Entire Agreement. From and after the date of this Agreement the terms
and provisions of this Agreement constitute the entire agreement
between the parties and this Agreement supersedes any previous oral or
written communications, representations, or agreements with respect to
any subject, including the subject matter of compensation, bonus,
participation and profit sharing and termination compensation.
17. Waiver and Interpretation. The waiver by either party of a breach of
any provision of this Agreement by the other party shall not operate or
be construed as a waiver of any subsequent breach by the breaching
party. No waiver shall be valid unless in writing and signed by the
party providing such waiver. If any provision of this Agreement is held
by any court to be unenforceable, then such provision shall be deemed
to be eliminated from the Agreement to permit enforceability of the
remaining provisions. If any provision is held to be overbroad, such
provision shall be amended to narrow its application to the extent
necessary for enforceability. For purposes of the release agreement
which Employee shall be required to execute as a condition of receiving
any payments and benefits hereunder, "CNS", as referred to in this
Agreement, shall include CNS and all its affiliates, shareholders,
officers, directors, employees, agents, attorneys, insurers and
indemnitors.
<PAGE>
Executive Employment Agreement
Page 15
18. Applicable Law. All questions pertaining to the validity, construction,
execution and performance of this Agreement shall be construed and
governed in accordance with the laws of the State of Minnesota. The
parties consent to the personal jurisdiction of the State of Minnesota,
waive any argument that such a forum is not convenient, and agree that
any litigation relating to this Agreement shall be venued in
Minneapolis, Minnesota.
19. Tax Withholding. CNS may withhold from any payment of benefits under
this Agreement (and forward to the appropriate taxing authority) any
taxes required to be withheld under applicable law.
20. Notice. Any notice required or desired to be given under this Agreement
shall be deemed given if in writing sent by certified mail to his
residence in the case of Employee, or to its principal office in the
case of CNS.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first set forth above.
CNS, INC.
By /s/ Daniel Cohen
-----------------------------------------
Its Chairman & CEO
-------------------------------------
EMPLOYEE
/s/ Marti Morfitt
--------------------------------------------
Marti Morfitt
15
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
EXHIBIT A
NAME: Marti Morfitt
DATE: February 12, 1999
POSITION: President & COO
DEPARTMENT: Corporate Administration
BASE SALARY: $245,000
CAR ALLOWANCE: (INCLUDE ONLY IF APPLICABLE) $500.00/month
MANAGEMENT INCENTIVE PLAN LEVEL: 25 at Threshold
50 at Plan
100 at Maximum
EXHIBIT 10.11
EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is made as of February 12, 1999 (the "Effective Date") between
CNS, INC. a Delaware corporation ("CNS") and Kirk Hodgdon ("Employee").
WHEREAS, CNS considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of CNS
and its shareholders; and
WHEREAS, Employee has made and is expected to continue to make, due to his
experience and knowledge, a significant contribution to the profitability,
growth and financial strength of CNS; and
WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of
a change in control may exist and that such possibility and the uncertainty and
questions which it may raise among management may result in the departure or
distraction of the performance of Employee's duties to the detriment of CNS and
its shareholders; and
WHEREAS, Employee is willing to continue his employment with CNS upon the
understanding that CNS will provide income security if Employee's employment is
terminated under certain terms and conditions;
WHEREAS, it is in the best interests of CNS and its stockholders to employ
Employee and to reinforce and encourage his continued attention and dedication
to his assigned duties without distraction and to ensure his continued
availability to CNS in the event of a Change in Control; and
WHEREAS, it is further in CNS's best interests to receive certain assurances
from Employee regarding CNS's confidentiality, competition and other proprietary
business concerns;
THEREFORE, in consideration of the foregoing and of this agreement, certain
change in control protection, continued employment and other benefits hereunder,
as well as other mutual covenants and obligations hereinafter set forth, CNS and
Employee agree as follows:
1. Employment. CNS agrees to continue to employ Employee as its VP,
Business Development under the terms, conditions and benefits set forth
herein and Employee accepts continued employment with CNS on said
terms, conditions and benefits.
2. Term. The term of Employee's employment shall continue until terminated
pursuant to paragraph 6, 7, or 8 herein.
3. Duties. In his position as VP, Business Development, Employee will
continue to faithfully and diligently perform such executive management
responsibilities as may be assigned to him from time to time by the
Chief Executive Officer, President or Chairman
<PAGE>
Executive Employment Agreement
Page 2
of the Board of Directors of CNS (the "Board"); devote his full time,
energy and skill to CNS's business, as is reasonably necessary to
execute fully his duties hereunder, except for vacations, absences made
necessary because of illness, and service on other corporate, civic, or
charitable boards or committees not significantly interfering with his
duties hereunder; and promote CNS's best interests. The principal place
of employment and the location of Employee's principal office and
normal place of work shall be in the Minneapolis, Minnesota
metropolitan area. Employee will be expected to travel to other
locations, as necessary, in the performance of his duties during the
term of this Agreement. Employee shall notify the President of any
other paid position which he is considering accepting, including but
not limited to a board of directors position, a position as an employee
or an independent consultant, or any position, whether or not for pay,
which could constitute a conflict of interest with CNS. The Employee
agrees not to accept any such position without the President of CNS's
prior approval.
4. Compensation. For all services rendered by Employee, CNS shall pay
Employee the compensation described in Exhibit A, payable at such times
as salaried employees of CNS are customarily paid. The President of CNS
shall, from time to time during Employee's employment, review his
annual salary in connection with possible increases, giving
consideration to inflation factors, performance of Employee and CNS,
salaries paid for positions of similar responsibility for other
companies, and other relevant factors, and shall provide for such
increases when deemed appropriate. Employee shall in addition be
eligible to participate in the annual management incentive bonus
program, as approved by the Board of Directors. In the event of
termination of this Agreement by CNS without Good Cause, as defined in
paragraph 7 herein, the Board may, in good faith and in its sole
discretion, determine and cause to be paid a partial bonus based on
Employee's performance through the date of termination, and such
determination shall be final and binding.
5. Benefits. Employee shall be entitled to Paid Time Off consistent with
CNS policy and such insurance, 401(k) program and other benefits
available to all salaried employees of CNS, subject to any limitations
on such benefits to officers, directors or highly paid employees in
order that such benefit programs qualify under federal or state law for
favored tax or other treatment. Such benefit programs may be changed
from time to time by the Board. Employee shall also be entitled to
reimbursement of his reasonable and necessary expenses incurred in
connection with the performance of his duties hereunder.
6. Termination by Employee. Employee may resign his employment with CNS
effective upon 30 days' advance written notice to the President. If
Employee resigns under this paragraph, the President retains the right
to terminate his employment, effective upon written notice to Employee,
at any time during the 30-day notice period, provided, however, that
base salary and the employer portion of his health insurance premiums
will continue to be paid by CNS for the duration of the 30-day notice
period. In connection
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Executive Employment Agreement
Page 3
with his termination, Employee will receive any accrued unused Paid
Time Off to which he is entitled.
7. Termination by CNS. CNS shall have the right to terminate Employee's
employment in any of the following ways:
a. CNS may, by written notice to Employee, terminate his
employment without Good Cause, in which event Employee will be
paid his base salary up to the date of termination. Employee
is also entitled to receive Salary Continuation for one year
from his termination date. "Salary Continuation" shall mean
payment by CNS of the Employee's base salary as of his
termination date, payable to Employee on the same schedule and
in the same amount as the payment of base salary prior to
termination of his employment, until such time as the full
Salary Continuation obligation shall be discharged, as
provided in this paragraph 7. During the period when Salary
Continuation is payable to Employee, CNS will also continue to
provide to Employee all group medical, dental and life plan
benefits provided to its other senior executives. Employee
shall also receive any accrued unused Paid Time Off to which
he is entitled. Receipt of Salary Continuation is subject to
Employee's compliance with his obligations under paragraphs 9,
10, 11 and 12 of this Agreement and his execution of a
standard release agreement which includes, in addition to
release of claims against CNS and related releasees, an
obligation not to speak negatively about or harm CNS,
confidentiality with respect to the termination process, and
cooperation with the transition of responsibilities. Payment
of the employer portion of Employee's group medical, dental
and life plan premiums under this paragraph and under
paragraphs 6 and 8 herein shall cease as of the date on which
Employee is covered under other such group plans if such
coverage occurs prior to termination of any salary
continuation periods set forth in said paragraphs.
b. CNS, by written notice to Employee, may terminate his
employment for Good Cause, as defined below. In the event of
termination under this subparagraph 7.b., Employee shall be
paid his base salary up to the date of termination. "Good
Cause" for the purpose of this Agreement shall mean one or
more of the following: (i) willful and premeditated failure or
refusal of Employee to render services to CNS in accordance
with his obligations under paragraph 3; (ii) the commission by
Employee of an act of fraud or embezzlement against CNS; (iii)
the commission by Employee of any other willful or reckless
act which injures CNS in a substantial or material way (it
being understood that mere negligence in performance of duties
is not Good Cause under this Agreement); (iv) the breach by
Employee of any provision of this Agreement; or (v) the
commission of a substantial act of moral turpitude by Employee
which is deemed by CNS's Board to have a material adverse
effect on CNS; or (vi) unsatisfactory performance after
<PAGE>
Executive Employment Agreement
Page 4
specific notice of performance deficiencies, description of
expectations and opportunity to cure.
c. CNS, by written notice to Employee, may terminate Employee's
employment under this Agreement if he becomes physically or
mentally disabled during the term so that he has not been able
to substantially perform, for a period of 120 consecutive
days, with reasonable accommodation, the usual duties assigned
to him hereunder ("Disability"). Upon such determination, CNS
shall pay to Employee his base salary up to the date of such
termination to the extent not covered by any disability plan.
d. This Agreement shall terminate upon the Employee's death
during its term, except that CNS shall pay to the legal
representative of Employee's estate all base salary due him up
to the date of his death.
8. Termination Following a Change in Control.
DEFINITION.
a. For purposes of this Agreement, "Change in Control" shall mean
the occurrence of one of the following events:
i. ACQUISITION OF 25% OF STOCK IN CNS
any "person" [as such term is used in Section 13(d)
and 4(d) of the Securities Exchange Act of 1934, as
amended ("Exchange Act")], other than a trustee or
other fiduciary holding securities under an employee
benefit plan of CNS is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly of securities
representing 25% or more of the combined voting power
of CNS's then outstanding securities;
ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT
APPROVED BY BOARD
during any period of two consecutive years (not
including any period ending prior to the effective
date of this Agreement), individuals who at the
beginning of such period constitute the Board of
Directors of CNS, and any new director [other than a
director designated by a person who has entered into
agreement with CNS to effect a transaction permitted
by Section 6(a)(I), (iii) or (iv)] whose election by
the Board of Directors of CNS or nomination for
election by CNS's stockholders was approved by vote
of at least two-thirds of the directors then still in
office who either were directors at the beginning of
the period or whose election or nomination for
election was previously so approved ("Continuing
Directors"), cease for any reason to constitute at
least a majority of the
<PAGE>
Executive Employment Agreement
Page 5
Board of Directors of CNS;
iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN
LESS THAN 50% OF SURVIVING COMPANY'S STOCK
the stockholders of CNS approve a merger or
consolidation of CNS with any other corporation,
other than (A) a merger or consolidation which would
result in the voting securities of CNS outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being
converted into voting securities of the merged or
consolidated entity) 50% or more of the combined
voting power of the voting securities of CNS or such
merged or consolidated entity outstanding immediately
after such merger or consolidation, or (B) a merger
or consolidation effected to implement a
recapitalization of CNS or similar transaction in
which no "person" acquires more than 25% of the
combined voting power of CNS's then outstanding
securities;
iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF
CNS STOCK MARKET VALUE
the stockholders of CNS approve a plan of complete
liquidation or a sale or disposition by CNS of all or
substantially all of CNS's assets. "The sale or
disposition by CNS of all or substantially all of
CNS's assets" shall mean a sale or other disposition
transaction or series of related transactions
involving assets of CNS or of any direct or indirect
subsidiary of CNS (including the stock of any direct
or indirect subsidiary of CNS) in which the value of
the assets or stock being sold or otherwise disposed
of (as measured by the purchase price being paid
therefor or by such other method as the Board of
Directors of CNS determines is appropriate in a case
where there is no readily ascertainable purchase
price) constitutes more than 50% of the fair market
value of CNS. For purposes of the preceding sentence,
the "fair market value of CNS" shall be the aggregate
market value of CNS's outstanding common stock (on a
fully diluted basis) plus the aggregate market value
of CNS's other outstanding equity securities. The
aggregate market value of CNS's common stock shall be
determined by multiplying the number of shares of CNS
common stock (on a fully diluted basis) outstanding
on the date of the execution and delivery of a
definitive agreement ("Transaction Date") with
respect to the sale or disposition by CNS of all or
substantially all of CNS's assets by the average
closing price for CNS's common stock for the ten
trading days immediately preceding the Transaction
Date. The aggregate market value of any other equity
securities of CNS shall be determined in a manner
similar to that prescribed in the immediately
preceding sentence for determining the aggregate
market value of CNS's common stock or by such other
method as the Board of Directors of CNS shall
determine is
<PAGE>
Executive Employment Agreement
Page 6
appropriate; and Employee agrees that, subject to the
terms and conditions of this Agreement, in the event
of a Change in Control of CNS occurring after the
date hereof, Employee will remain in the employ of
CNS for a period of 30 days from the occurrence of
such Change in Control.
b. Applicability. In the event of a Change in Control, the terms
of this subparagraph 8.b shall be effective for a period of 24
months following the Change in Control. At the expiration of
such 24 month period this Agreement in its entirety shall be
terminated and be of no further effect. Employee shall be
entitled to receive the benefits set forth in subparagraph 8.f
if, within 24 months of such Change in Control, his employment
is terminated by CNS or its successor without Good Cause (as
defined in paragraph 7.a above), or by Employee for Good
Reason (as defined in subparagraph 8.b.i, below). Employee
shall, in return for the benefits provided under subparagraph
8.f., sign a standard release agreement with CNS, in which he
agrees to release any and all claims and causes of action
which he might have against CNS and in which he affirms and
acknowledges his obligations under paragraphs 9, 10, 11 and 12
of this Agreement.
i. Termination for Good Reason shall be effective
immediately upon written notice from the Employee to
the President. Good Reason shall exist if CNS has
materially breached any of the terms of this
Agreement; Employee is assigned duties which are
materially inconsistent with his position, duties,
responsibilities and status as VP, Business
Development; his compensation, including any
incentive compensation or bonus plan, is reduced; or
relocation of CNS would require him to relocate his
principal residence outside reasonable commuting
distance of the Twin Cities Metropolitan area.
ii. Termination without Good Cause shall be effective
upon 30 days' advance notice by CNS to the Employee.
For purposes of this paragraph 8, Good Cause shall be
defined as in subparagraph 7.b.
c. Notice of Termination. Any purported termination of employment
under this paragraph 8 and also under paragraphs 6 and 7 shall
be communicated by written Notice of Termination to the other
party hereto in accordance with paragraph 20 hereunder. For
purposes of this Agreement, a "Notice of Termination" shall
mean a notice which indicates the specific termination
provision in this Agreement relied upon and which sets forth
the facts and circumstances claimed to provide a basis for
termination of Employee's employment.
<PAGE>
Executive Employment Agreement
Page 7
d. Date of Termination. For purposes of this paragraph 8 and also
paragraphs 6 and 7 of this Agreement, "Date of Termination"
shall mean:
i. if Employee's employment is terminated for
Disability, as defined in paragraph 7.c. hereunder,
30 days after Notice of Termination is given
(provided that Employee shall not have returned to
the full-time performance of Employee's duties during
such 30 day period); and
ii. if Employee's employment is terminated pursuant to a
provision contained in paragraph 6, 7 or 8 herein or
for any other reason (other than Disability), the
date specified in the Notice of Termination,
consistent with the provisions in said paragraphs.
e. Dispute of Termination. If, within ten days after any Notice
of Termination is given under this paragraph 8, the party
receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties,
or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or the time
for appeal therefrom having expired and no appeal having been
perfected); provided, that the Date of Termination shall be
extended by a notice of dispute only if such notice is given
in good faith and the party giving such notice pursues the
resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, CNS shall
continue to pay Employee full compensation in effect when the
notice giving rise to the dispute was given (including, but
not limited to, base salary) and continue Employee as a
participant in all compensation, benefit and insurance plans
in which Employee was participating when the notice giving
rise to the dispute was given, to the extent permissible under
the terms of the applicable group plans and state and federal
law, until the dispute is finally resolved in accordance with
this subparagraph. Amounts paid under this subsection are in
addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts under
this Agreement.
<PAGE>
Executive Employment Agreement
Page 8
f. Compensation Upon Termination. Following a Change in Control,
as defined in subparagraph 8.a. above, to the extent provided
in subparagraph 8.b. above, Employee shall be entitled to the
following benefits in lieu of any benefits which would
otherwise be available to him upon termination under
paragraphs 6 or 7 hereunder:
i. CNS shall pay Employee through the Date of
Termination Employee's base salary at the rate in
effect at the time the Notice of Termination is given
and any other form or type of other compensation
otherwise payable for such period, including any
applicable incentive bonus, commensurate with his
performance and the performance of CNS.
ii. In lieu of any further salary payments for periods
subsequent to the Date of Termination, CNS shall pay
a severance payment (the "Severance Payment") equal
to 24 months of Employee's Compensation as defined
below based on the average monthly Compensation paid
to Employee during the 24 month period ending
immediately prior to the Date of Termination (without
giving effect to any reduction in such Compensation
which would constitute a breach of this Agreement).
If the Employee has not been employed by CNS for 24
months as of the Date of Termination, average monthly
Compensation shall be the Employee's average monthly
Compensation for the number of months during which
the Employee has been employed at CNS. For purposes
of this subparagraph, Compensation shall mean and
include every type and form of compensation paid to
Employee by CNS (or any corporation ("Affiliate")
affiliated with CNS within the meaning of Section
1504 of the Internal Revenue Code of 1986, as may be
amended from time to time (the "Code")) and included
in Employee's gross income for federal income tax
purposes, but excluding compensation income arising
from (1) hiring bonuses and (2) compensation income
recognized as a result of the exercise of stock
options or sale of the stock so acquired. All of
Employee's contributions to any qualified plan
pursuant to Section 401(k) of the Code or any
flexible benefit plan pursuant to Section 125 of the
Code shall be deemed to be included in gross income
for federal tax purposes for purposes of this
subparagraph. The Severance Payment shall be made in
a single lump sum within 60 days after the Date of
Termination.
iii. For 18 months following the Employee's Date of
Termination, CNS shall arrange to provide, at its
sole expense, Employee with group medical, dental and
life plan benefits substantially similar to those
which Employee was receiving or entitled to receive
immediately prior to the Notice of Termination. The
cost of providing such benefits shall be in addition
to (and shall not reduce) the Severance Payment.
Benefits otherwise
<PAGE>
Executive Employment Agreement
Page 9
receivable by Employee pursuant to this paragraph
(iii) shall be reduced to the extent comparable
benefits are actually received by Employee during
such period from any third party, and any such
benefits actually received by Employee shall be
reported to CNS.
iv. CNS shall also pay to Employee all legal fees and
expenses incurred by Employee as a result of such
termination (including all such fees and expenses, if
any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any
right or benefit provided by this paragraph).
v. The Severance Payment shall be reduced and offset by
the amount of any other payment received or to be
received by Employee in connection with his
termination of employment pursuant to any policies of
CNS.
vi. If a determination is made by legislation,
regulations, rulings directed to CNS or Employee, or
court decision that the aggregate amount of any
payment made to Employee hereunder, or pursuant to
any plan, program or policy of CNS in connection
with, on account of, or as a result of, a Change of
Control constitutes an "excess parachute payment" as
defined in Section 280G of the Code subject to the
excise tax provisions of Section 4999 of the Code, or
any successor sections thereof, Employee shall be
entitled to receive from CNS, in addition to any
other amounts payable hereunder, an amount which
shall be equal to such excise tax, plus, on a net
after-tax basis, an amount equal to the aggregate
amount of any interest, penalties, fines or additions
to any tax, including income tax, which are imposed
in connection with the imposition of such excise tax.
Such amount shall be payable to Employee as soon as
may be practicable after such final determination is
made. Employee and CNS shall mutually and reasonably
determine whether or not such determination has
occurred or whether any appeal to such determination
should be made.
vii. Employee shall be entitled to receive all benefits
payable to Employee under the CNS, Inc. Profit
Sharing Plan and Trust or any successor of such Plan
and Trust and any other plan or agreement relating to
retirement benefits, and, in addition, if Employee is
not fully vested in his account balance under such
Plan, a single lump sum payment in cash from CNS
representing the nonvested portion of his account,
which shall be in addition to, and not reduced by,
any other amounts payable to Employee under this
paragraph 8.
viii. Employee shall not be required to mitigate the amount
of any payment provided for in this paragraph 8 by
seeking other employment or
<PAGE>
Executive Employment Agreement
Page 10
otherwise, nor shall the amount of any payment or
benefit provided for in this paragraph 8 be reduced
by any compensation earned by Employee as the result
of employment by another employer or by retirement
benefits after the Date of Termination, or otherwise
except as specifically provided in this paragraph 8.
ix. In order to assure the performance of CNS or its
successor of its obligations under this paragraph,
CNS may deposit in trust an amount equal to the
maximum payment that will be due Employee under the
terms hereof. Under a written trust instrument, the
Trustee shall be instructed to pay to Employee (or
Employee's legal representative, as the case may be)
the amount to which Employee shall be entitled under
the terms hereof, and the balance, if any, of the
trust not so paid or reserved for payment shall be
repaid to CNS. If CNS deposits funds in trust,
payment shall be made no later than the occurrence of
a Change in Control. If and to the extent there are
not amounts in trust sufficient to pay Employee under
this Agreement, CNS shall remain liable for any and
all payments due to Employee. In accordance with the
terms of such trust, at all times during the term of
this Agreement, Employee shall have no rights, other
than as an unsecured general creditor of CNS, to any
amounts held in trust and all trust assets shall be
general assets of CNS and subject to the claims of
creditors of CNS. Failure of CNS to establish or
fully fund such trust shall not be deemed a
revocation or termination of this Agreement by CNS.
x. As a condition of receiving the Severance Payment and
other benefits provided in this subparagraph 8.f and
in subparagraph 8.g, Employee shall be required to
sign a standard release agreement with CNS in which
he agrees to release any and all claims and causes of
action which he might have against CNS and in which
he affirms and acknowledges his obligations under
paragraphs 9, 10, 11 and 12 of this Agreement.
g. Stock Options. Employee shall, immediately upon a Change in
Control, vest in all stock options which have been granted to
him and he shall be entitled to exercise all rights and to
receive all benefits accruing to him under any and all CNS
stock purchase and stock option plans or programs, including
the CNS, Inc. 1994 Amended Stock Plan, or any successor to any
such plan or program, which shall be in addition to and not
reduced by any other amounts payable to Employee under this
paragraph 8.
9. Confidential Information. All knowledge and information not already
available to the public which Employee may acquire or has acquired with
respect to product development, improvements, modifications,
discoveries, designs, methods, systems, computer software, programs,
codes and documentation, research, designs, formulas, instructions,
methods,
<PAGE>
Executive Employment Agreement
Page 11
inventions, trade secrets, services or other private or confidential
matters of CNS (such as those concerning sales, costs, profits,
organizations, customer lists, pricing methods, etc.), or of any third
party which CNS is obligated to keep confidential, shall be regarded by
Employee as strictly confidential and shall not be used by Employee
directly or indirectly or disclosed to any persons, corporations or
firms. All of the foregoing knowledge and information are collectively
termed "Confidential Information" herein. Employee's obligations under
this paragraph will not apply to any information which (a) is or
becomes known to the general public under circumstances involving no
breach by Employee of the terms of this paragraph, (b) is generally
disclosed to third parties by CNS as a continuing practice without
restriction on such third parties, (c) is approved for release by
written authorization of CNS's Board, or (d) Employee is obligated by
law to disclose.
10. Disclosure and Transfer of Product Developments, etc.
a. Employee will make full and prompt disclosure to CNS or all
product developments, improvements, modifications,
discoveries, computer software, programs, codes and
documentation, research, designs, formulas, configurations,
instructions, methods and inventions (all of which are
collectively termed "Developments" herein), whether patentable
or not, made, discovered, conceived or first reduced to
practice by Employee or under his direction during his
employment, alone or with others, whether or not made or
conceived during normal working hours or on the premises of
CNS which relate in any material way to the business or to
research or development work of CNS. Employee confirms by his
acceptance of this Agreement that CNS owns and shall own all
of the Developments.
b. Employee also agrees on behalf of himself and his heirs and
legal representatives that he will promptly communicate,
disclose and transfer to CNS, free of encumbrances and
restrictions, all of his right, title and interest in the
Developments covered by subparagraph 10.a. and any patents or
patent applications covering such Developments and to execute
and deliver such assignments, patents and applications, and
any other documents as CNS may direct, and to cooperate fully
with CNS to enable it to secure any patents or otherwise
protect such Developments in any and all countries. Employee
shall assign to CNS any and all copyrights and reproduction
rights to all material prepared by Employee in connection with
his employment.
c. Notwithstanding subparagraphs 10.a. and b., however, this
paragraph 10 shall not apply to Developments for which no
equipment, supplies, facility or trade secret information of
CNS was used and which was developed entirely on the
Employee's own time, and (1) which do not relate (a) directly
to the business of CNS or (b) to CNS's actual or demonstrably
anticipated research or development, or (2) which does not
result from any work performed by Employee for CNS.
<PAGE>
Executive Employment Agreement
Page 12
This will confirm that Employee's obligations to CNS under paragraphs
9, 10 and 11 will continue after the termination of Employee's
employment.
11. Non-Competition. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly engage in, enter into or participate in the business of CNS
or in any business or commercial activity which does or is reasonably
likely to compete with or adversely affect the Business or products of
CNS, either as an individual for Employee's own account, as a partner
or a joint venturer, or as an officer, director, consultant or holder
of more than five percent (5%) of the entity interest in, any other
person, firm, partnership or corporation, or an employee, agent or
salesman for any person. In addition, during such period Employee shall
not: avail himself of any advantages or acquaintances he has made with
any person who has, within the twelve (12) month period ended on the
date of termination of his employment, been a customer of CNS or its
affiliates, and which would, directly or indirectly, materially divert
business from or materially and adversely affect the Business of CNS;
interfere with the contractual relations between CNS and any of its
employees; or employ or cause to be employed in any capacity or retain
or cause to be retained as a consultant any person who was employed in
any capacity by CNS during the twelve (12) month period ended on the
date of termination of Employee's employment.
For purposes of this Agreement, the "Business of CNS" or "Business"
means and includes the business of the manufacture, production, sale,
marketing and distribution of the Breathe Right strip and any other
products currently offered or currently under development by CNS or
offered or currently under development by CNS during one (1) year prior
to the date of termination of Employee's employment.
Inasmuch as the activities of CNS are conducted on an international
basis, the restrictions of this paragraph 11 shall apply throughout the
United States, Canada, Japan and Europe.
12. Non-Solicitation. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly solicit any current or prospective CNS customer, broker,
vendor or distributor for the purpose of providing products or services
for or on behalf of said customer, broker, vendor or distributor which
are competitive with the products or services being provided by CNS,
which are in the development stages of being competitive with the
products or services being provided by CNS, or which would in any way
cause said customer, broker, vendor or distributor to discontinue or
reduce its business relationship with CNS. Current CNS customers,
brokers, vendors or distributors include those customer, brokers,
vendors or distributors with whom CNS has had a business relationship
at any time within one year immediately preceding Employee's
termination date. Prospective CNS customers, brokers, vendors and
distributors include those with whom (a) a CNS representative has been
in direct personal contact and (b) CNS has a reasonable opportunity of
entering into a business
<PAGE>
Executive Employment Agreement
Page 13
relationship within six months following Employee's termination date.
Employee also agrees that during his employment in the one year period
following his employment, he will not directly or indirectly solicit
any CNS employees to terminate his or her employment with CNS. This
Employee non-solicitation obligation applies to Employees of CNS during
Employee's employment and as of his termination date.
13. Remedies. Employee acknowledges that the restrictions set forth in
paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect
legitimate business interests of CNS. It is understood that if Employee
violates his obligations under any of these paragraphs, CNS would
suffer irreparable harm for which a recovery of money damages would be
an incomplete and inadequate remedy. It is therefore agreed that CNS,
in addition to any remedies at law, shall be entitled, as a matter of
right, in any court of competent jurisdiction, to a mandatory
injunction restraining Employee pending litigation, as well as upon
final determination thereof, from violating this Agreement. In
addition, CNS will discontinue payment to Employee of any Severance or
Salary Continuation Payments, benefits or bonus which he may be
entitled to receive or is receiving under paragraphs 6, 7 or 8
hereunder or otherwise, in the event of his violation of any of his
obligations under this Agreement. In the event of cessation of payments
and benefits, Employee's release of his claims against CNS shall remain
valid and fully enforceable in consideration of the benefits which
Employee received prior to set breach.
14. Severability. The parties intend that the covenants and agreements
contained herein shall be deemed to be a series of separate covenants
and agreements, one for each and every state of the United States and
political subdivision outside the United States where the business
described is conducted. If, in any judicial proceeding, a court shall
refuse to enforce any of the separate covenants deemed included in such
action, then such unenforceable covenants shall be deemed eliminated
from the provisions of this Agreement for the purpose of such
proceeding to the extent necessary to permit the remaining covenants to
be enforced in such proceeding. Further, in the event that any
provision is held to be overbroad as written, such provision shall be
deemed amended to narrow its application to the extent necessary to
make the provision enforceable according to applicable law and enforced
as amended.
15. Binding Effect.
<PAGE>
Executive Employment Agreement
Page 14
a. CNS will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets as defined in
subparagraph 8.a of CNS to expressly assume and agree to
perform this Agreement in the same manner and to the same
extent that CNS would be required to perform it if no such
succession had taken place, in which case, the term "CNS" as
used in this Agreement shall instead refer to CNS' successor.
Failure of CNS to obtain such assumption and agreement prior
to the effectiveness of any such succession shall be a breach
of this Agreement and shall entitle Employee to compensation
from CNS in the same amount and on the same terms as he would
be entitled hereunder if he terminated his employment for Good
Reason following a Change in Control, except that for purposes
of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of
Termination.
b. This Agreement shall inure to the benefit of and be
enforceable by Employee's personal or legal representatives,
successors, heirs, and designated beneficiaries. If Employee
should die while any amount would still be payable to Employee
hereunder if Employee had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to Employee's designated
beneficiaries, or, if there is no such designated beneficiary,
to Employee's estate.
16. Entire Agreement. From and after the date of this Agreement the terms
and provisions of this Agreement constitute the entire agreement
between the parties and this Agreement supersedes any previous oral or
written communications, representations, or agreements with respect to
any subject, including the subject matter of compensation, bonus,
participation and profit sharing and termination compensation.
17. Waiver and Interpretation. The waiver by either party of a breach of
any provision of this Agreement by the other party shall not operate or
be construed as a waiver of any subsequent breach by the breaching
party. No waiver shall be valid unless in writing and signed by the
party providing such waiver. If any provision of this Agreement is held
by any court to be unenforceable, then such provision shall be deemed
to be eliminated from the Agreement to permit enforceability of the
remaining provisions. If any provision is held to be overbroad, such
provision shall be amended to narrow its application to the extent
necessary for enforceability. For purposes of the release agreement
which Employee shall be required to execute as a condition of receiving
any payments and benefits hereunder, "CNS", as referred to in this
Agreement, shall include CNS and all its affiliates, shareholders,
officers, directors, employees, agents, attorneys, insurers and
indemnitors.
<PAGE>
Executive Employment Agreement
Page 15
18. Applicable Law. All questions pertaining to the validity, construction,
execution and performance of this Agreement shall be construed and
governed in accordance with the laws of the State of Minnesota. The
parties consent to the personal jurisdiction of the State of Minnesota,
waive any argument that such a forum is not convenient, and agree that
any litigation relating to this Agreement shall be venued in
Minneapolis, Minnesota.
19. Tax Withholding. CNS may withhold from any payment of benefits under
this Agreement (and forward to the appropriate taxing authority) any
taxes required to be withheld under applicable law.
20. Notice. Any notice required or desired to be given under this Agreement
shall be deemed given if in writing sent by certified mail to his
residence in the case of Employee, or to its principal office in the
case of CNS.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first set forth above.
CNS, INC.
By /s/ Marti Morfitt
-----------------------------------------
Its President & COO
-------------------------------------
EMPLOYEE
/s/ Kirk Hodgdon
--------------------------------------------
Kirk Hodgdon
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
EXHIBIT A
NAME: Kirk Hodgdon
DATE: February 12, 1999
POSITION: VP, Business Development
DEPARTMENT:
BASE SALARY: $145,950
CAR ALLOWANCE: (INCLUDE ONLY IF APPLICABLE) $500.00/month
MANAGEMENT INCENTIVE PLAN LEVEL: 15 at Threshold
30 at Plan
60 at Maximum
EXHIBIT 10.12
EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is made as of February 12, 1999 (the "Effective Date") between
CNS, INC. a Delaware corporation ("CNS") and David Byrd ("Employee").
WHEREAS, CNS considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of CNS
and its shareholders; and
WHEREAS, Employee has made and is expected to continue to make, due to his
experience and knowledge, a significant contribution to the profitability,
growth and financial strength of CNS; and
WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of
a change in control may exist and that such possibility and the uncertainty and
questions which it may raise among management may result in the departure or
distraction of the performance of Employee's duties to the detriment of CNS and
its shareholders; and
WHEREAS, Employee is willing to continue his employment with CNS upon the
understanding that CNS will provide income security if Employee's employment is
terminated under certain terms and conditions;
WHEREAS, it is in the best interests of CNS and its stockholders to employ
Employee and to reinforce and encourage his continued attention and dedication
to his assigned duties without distraction and to ensure his continued
availability to CNS in the event of a Change in Control; and
WHEREAS, it is further in CNS's best interests to receive certain assurances
from Employee regarding CNS's confidentiality, competition and other proprietary
business concerns;
THEREFORE, in consideration of the foregoing and of this agreement, certain
change in control protection, continued employment and other benefits hereunder,
as well as other mutual covenants and obligations hereinafter set forth, CNS and
Employee agree as follows:
1. Employment. CNS agrees to continue to employ Employee as its VP
Finance, CFO, and Treasurer under the terms, conditions and benefits
set forth herein and Employee accepts continued employment with CNS on
said terms, conditions and benefits.
2. Term. The term of Employee's employment shall continue until terminated
pursuant to paragraph 6, 7, or 8 herein.
3. Duties. In his position as VP Finance, CFO, and Treasurer, Employee
will continue to faithfully and diligently perform such executive
management responsibilities as may be assigned to him from time to time
by the Chief Executive Officer, President or
<PAGE>
Executive Employment Agreement
Page 2
Chairman of the Board of Directors of CNS (the "Board"); devote his
full time, energy and skill to CNS's business, as is reasonably
necessary to execute fully his duties hereunder, except for vacations,
absences made necessary because of illness, and service on other
corporate, civic, or charitable boards or committees not significantly
interfering with his duties hereunder; and promote CNS's best
interests. The principal place of employment and the location of
Employee's principal office and normal place of work shall be in the
Minneapolis, Minnesota metropolitan area. Employee will be expected to
travel to other locations, as necessary, in the performance of his
duties during the term of this Agreement. Employee shall notify the
President of any other paid position which he is considering accepting,
including but not limited to a board of directors position, a position
as an employee or an independent consultant, or any position, whether
or not for pay, which could constitute a conflict of interest with CNS.
The Employee agrees not to accept any such position without the
President of CNS's prior approval.
4. Compensation. For all services rendered by Employee, CNS shall pay
Employee the compensation described in Exhibit A, payable at such times
as salaried employees of CNS are customarily paid. The President of CNS
shall, from time to time during Employee's employment, review his
annual salary in connection with possible increases, giving
consideration to inflation factors, performance of Employee and CNS,
salaries paid for positions of similar responsibility for other
companies, and other relevant factors, and shall provide for such
increases when deemed appropriate. Employee shall in addition be
eligible to participate in the annual management incentive bonus
program, as approved by the Board of Directors. In the event of
termination of this Agreement by CNS without Good Cause, as defined in
paragraph 7 herein, the Board may, in good faith and in its sole
discretion, determine and cause to be paid a partial bonus based on
Employee's performance through the date of termination, and such
determination shall be final and binding.
5. Benefits. Employee shall be entitled to Paid Time Off consistent with
CNS policy and such insurance, 401(k) program and other benefits
available to all salaried employees of CNS, subject to any limitations
on such benefits to officers, directors or highly paid employees in
order that such benefit programs qualify under federal or state law for
favored tax or other treatment. Such benefit programs may be changed
from time to time by the Board. Employee shall also be entitled to
reimbursement of his reasonable and necessary expenses incurred in
connection with the performance of his duties hereunder.
6. Termination by Employee. Employee may resign his employment with CNS
effective upon 30 days' advance written notice to the President. If
Employee resigns under this paragraph, the President retains the right
to terminate his employment, effective upon written notice to Employee,
at any time during the 30-day notice period, provided, however, that
base salary and the employer portion of his health insurance premiums
will continue to be paid by CNS for the duration of the 30-day notice
period. In connection
<PAGE>
Executive Employment Agreement
Page 3
with his termination, Employee will receive any accrued unused Paid
Time Off to which he is entitled.
7. Termination by CNS. CNS shall have the right to terminate Employee's
employment in any of the following ways:
a. CNS may, by written notice to Employee, terminate his
employment without Good Cause, in which event Employee will be
paid his base salary up to the date of termination. Employee
is also entitled to receive Salary Continuation for one year
from his termination date. "Salary Continuation" shall mean
payment by CNS of the Employee's base salary as of his
termination date, payable to Employee on the same schedule and
in the same amount as the payment of base salary prior to
termination of his employment, until such time as the full
Salary Continuation obligation shall be discharged, as
provided in this paragraph 7. During the period when Salary
Continuation is payable to Employee, CNS will also continue to
provide to Employee all group medical, dental and life plan
benefits provided to its other senior executives. Employee
shall also receive any accrued unused Paid Time Off to which
he is entitled. Receipt of Salary Continuation is subject to
Employee's compliance with his obligations under paragraphs 9,
10, 11 and 12 of this Agreement and his execution of a
standard release agreement which includes, in addition to
release of claims against CNS and related releasees, an
obligation not to speak negatively about or harm CNS,
confidentiality with respect to the termination process, and
cooperation with the transition of responsibilities. Payment
of the employer portion of Employee's group medical, dental
and life plan premiums under this paragraph and under
paragraphs 6 and 8 herein shall cease as of the date on which
Employee is covered under other such group plans if such
coverage occurs prior to termination of any salary
continuation periods set forth in said paragraphs.
b. CNS, by written notice to Employee, may terminate his
employment for Good Cause, as defined below. In the event of
termination under this subparagraph 7.b., Employee shall be
paid his base salary up to the date of termination. "Good
Cause" for the purpose of this Agreement shall mean one or
more of the following: (i) willful and premeditated failure or
refusal of Employee to render services to CNS in accordance
with his obligations under paragraph 3; (ii) the commission by
Employee of an act of fraud or embezzlement against CNS; (iii)
the commission by Employee of any other willful or reckless
act which injures CNS in a substantial or material way (it
being understood that mere negligence in performance of duties
is not Good Cause under this Agreement); (iv) the breach by
Employee of any provision of this Agreement; or (v) the
commission of a substantial act of moral turpitude by Employee
which is deemed by CNS's Board to have a material adverse
effect on CNS; or (vi) unsatisfactory performance after
<PAGE>
Executive Employment Agreement
Page 4
specific notice of performance deficiencies, description of
expectations and opportunity to cure.
c. CNS, by written notice to Employee, may terminate Employee's
employment under this Agreement if he becomes physically or
mentally disabled during the term so that he has not been able
to substantially perform, for a period of 120 consecutive
days, with reasonable accommodation, the usual duties assigned
to him hereunder ("Disability"). Upon such determination, CNS
shall pay to Employee his base salary up to the date of such
termination to the extent not covered by any disability plan.
d. This Agreement shall terminate upon the Employee's death
during its term, except that CNS shall pay to the legal
representative of Employee's estate all base salary due him up
to the date of his death.
8. Termination Following a Change in Control.
DEFINITION.
a. For purposes of this Agreement, "Change in Control" shall mean
the occurrence of one of the following events:
i. ACQUISITION OF 25% OF STOCK IN CNS
any "person" [as such term is used in Section 13(d)
and 4(d) of the Securities Exchange Act of 1934, as
amended ("Exchange Act")], other than a trustee or
other fiduciary holding securities under an employee
benefit plan of CNS is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly of securities
representing 25% or more of the combined voting power
of CNS's then outstanding securities;
ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT
APPROVED BY BOARD
during any period of two consecutive years (not
including any period ending prior to the effective
date of this Agreement), individuals who at the
beginning of such period constitute the Board of
Directors of CNS, and any new director [other than a
director designated by a person who has entered into
agreement with CNS to effect a transaction permitted
by Section 6(a)(I), (iii) or (iv)] whose election by
the Board of Directors of CNS or nomination for
election by CNS's stockholders was approved by vote
of at least two-thirds of the directors then still in
office who either were directors at the beginning of
the period or whose election or nomination for
election was previously so approved ("Continuing
Directors"), cease for any reason to constitute at
least a majority of the
<PAGE>
Executive Employment Agreement
Page 5
Board of Directors of CNS;
iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN
LESS THAN 50% OF SURVIVING COMPANY'S STOCK
the stockholders of CNS approve a merger or
consolidation of CNS with any other corporation,
other than (A) a merger or consolidation which would
result in the voting securities of CNS outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being
converted into voting securities of the merged or
consolidated entity) 50% or more of the combined
voting power of the voting securities of CNS or such
merged or consolidated entity outstanding immediately
after such merger or consolidation, or (B) a merger
or consolidation effected to implement a
recapitalization of CNS or similar transaction in
which no "person" acquires more than 25% of the
combined voting power of CNS's then outstanding
securities;
iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF
CNS STOCK MARKET VALUE
the stockholders of CNS approve a plan of complete
liquidation or a sale or disposition by CNS of all or
substantially all of CNS's assets. "The sale or
disposition by CNS of all or substantially all of
CNS's assets" shall mean a sale or other disposition
transaction or series of related transactions
involving assets of CNS or of any direct or indirect
subsidiary of CNS (including the stock of any direct
or indirect subsidiary of CNS) in which the value of
the assets or stock being sold or otherwise disposed
of (as measured by the purchase price being paid
therefor or by such other method as the Board of
Directors of CNS determines is appropriate in a case
where there is no readily ascertainable purchase
price) constitutes more than 50% of the fair market
value of CNS. For purposes of the preceding sentence,
the "fair market value of CNS" shall be the aggregate
market value of CNS's outstanding common stock (on a
fully diluted basis) plus the aggregate market value
of CNS's other outstanding equity securities. The
aggregate market value of CNS's common stock shall be
determined by multiplying the number of shares of CNS
common stock (on a fully diluted basis) outstanding
on the date of the execution and delivery of a
definitive agreement ("Transaction Date") with
respect to the sale or disposition by CNS of all or
substantially all of CNS's assets by the average
closing price for CNS's common stock for the ten
trading days immediately preceding the Transaction
Date. The aggregate market value of any other equity
securities of CNS shall be determined in a manner
similar to that prescribed in the immediately
preceding sentence for determining the aggregate
market value of CNS's common stock or by such other
method as the Board of Directors of CNS shall
determine is
<PAGE>
Executive Employment Agreement
Page 6
appropriate; and Employee agrees that, subject to the
terms and conditions of this Agreement, in the event
of a Change in Control of CNS occurring after the
date hereof, Employee will remain in the employ of
CNS for a period of 30 days from the occurrence of
such Change in Control.
b. Applicability. In the event of a Change in Control, the terms
of this subparagraph 8.b shall be effective for a period of 24
months following the Change in Control. At the expiration of
such 24 month period this Agreement in its entirety shall be
terminated and be of no further effect. Employee shall be
entitled to receive the benefits set forth in subparagraph 8.f
if, within 24 months of such Change in Control, his employment
is terminated by CNS or its successor without Good Cause (as
defined in paragraph 7.a above), or by Employee for Good
Reason (as defined in subparagraph 8.b.i, below). Employee
shall, in return for the benefits provided under subparagraph
8.f., sign a standard release agreement with CNS, in which he
agrees to release any and all claims and causes of action
which he might have against CNS and in which he affirms and
acknowledges his obligations under paragraphs 9, 10, 11 and 12
of this Agreement.
i. Termination for Good Reason shall be effective
immediately upon written notice from the Employee to
the President. Good Reason shall exist if CNS has
materially breached any of the terms of this
Agreement; Employee is assigned duties which are
materially inconsistent with his position, duties,
responsibilities and status as VP Finance, CFO, and
Treasurer; his compensation, including any incentive
compensation or bonus plan, is reduced; or relocation
of CNS would require him to relocate his principal
residence outside reasonable commuting distance of
the Twin Cities Metropolitan area.
ii. Termination without Good Cause shall be effective
upon 30 days' advance notice by CNS to the Employee.
For purposes of this paragraph 8, Good Cause shall be
defined as in subparagraph 7.b.
c. Notice of Termination. Any purported termination of employment
under this paragraph 8 and also under paragraphs 6 and 7 shall
be communicated by written Notice of Termination to the other
party hereto in accordance with paragraph 20 hereunder. For
purposes of this Agreement, a "Notice of Termination" shall
mean a notice which indicates the specific termination
provision in this Agreement relied upon and which sets forth
the facts and circumstances claimed to provide a basis for
termination of Employee's employment.
<PAGE>
Executive Employment Agreement
Page 7
d. Date of Termination. For purposes of this paragraph 8 and also
paragraphs 6 and 7 of this Agreement, "Date of Termination"
shall mean:
i. if Employee's employment is terminated for
Disability, as defined in paragraph 7.c. hereunder,
30 days after Notice of Termination is given
(provided that Employee shall not have returned to
the full-time performance of Employee's duties during
such 30 day period); and
ii. if Employee's employment is terminated pursuant to a
provision contained in paragraph 6, 7 or 8 herein or
for any other reason (other than Disability), the
date specified in the Notice of Termination,
consistent with the provisions in said paragraphs.
e. Dispute of Termination. If, within ten days after any Notice
of Termination is given under this paragraph 8, the party
receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties,
or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or the time
for appeal therefrom having expired and no appeal having been
perfected); provided, that the Date of Termination shall be
extended by a notice of dispute only if such notice is given
in good faith and the party giving such notice pursues the
resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, CNS shall
continue to pay Employee full compensation in effect when the
notice giving rise to the dispute was given (including, but
not limited to, base salary) and continue Employee as a
participant in all compensation, benefit and insurance plans
in which Employee was participating when the notice giving
rise to the dispute was given, to the extent permissible under
the terms of the applicable group plans and state and federal
law, until the dispute is finally resolved in accordance with
this subparagraph. Amounts paid under this subsection are in
addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts under
this Agreement.
<PAGE>
Executive Employment Agreement
Page 8
f. Compensation Upon Termination. Following a Change in Control,
as defined in subparagraph 8.a. above, to the extent provided
in subparagraph 8.b. above, Employee shall be entitled to the
following benefits in lieu of any benefits which would
otherwise be available to him upon termination under
paragraphs 6 or 7 hereunder:
i. CNS shall pay Employee through the Date of
Termination Employee's base salary at the rate in
effect at the time the Notice of Termination is given
and any other form or type of other compensation
otherwise payable for such period, including any
applicable incentive bonus, commensurate with his
performance and the performance of CNS.
ii. In lieu of any further salary payments for periods
subsequent to the Date of Termination, CNS shall pay
a severance payment (the "Severance Payment") equal
to 24 months of Employee's Compensation as defined
below based on the average monthly Compensation paid
to Employee during the 24 month period ending
immediately prior to the Date of Termination (without
giving effect to any reduction in such Compensation
which would constitute a breach of this Agreement).
If the Employee has not been employed by CNS for 24
months as of the Date of Termination, average monthly
Compensation shall be the Employee's average monthly
Compensation for the number of months during which
the Employee has been employed at CNS. For purposes
of this subparagraph, Compensation shall mean and
include every type and form of compensation paid to
Employee by CNS (or any corporation ("Affiliate")
affiliated with CNS within the meaning of Section
1504 of the Internal Revenue Code of 1986, as may be
amended from time to time (the "Code")) and included
in Employee's gross income for federal income tax
purposes, but excluding compensation income arising
from (1) hiring bonuses and (2) compensation income
recognized as a result of the exercise of stock
options or sale of the stock so acquired. All of
Employee's contributions to any qualified plan
pursuant to Section 401(k) of the Code or any
flexible benefit plan pursuant to Section 125 of the
Code shall be deemed to be included in gross income
for federal tax purposes for purposes of this
subparagraph. The Severance Payment shall be made in
a single lump sum within 60 days after the Date of
Termination.
iii. For 18 months following the Employee's Date of
Termination, CNS shall arrange to provide, at its
sole expense, Employee with group medical, dental and
life plan benefits substantially similar to those
which Employee was receiving or entitled to receive
immediately prior to the Notice of Termination. The
cost of providing such benefits shall be in addition
to (and shall not reduce) the Severance Payment.
Benefits otherwise
<PAGE>
Executive Employment Agreement
Page 9
receivable by Employee pursuant to this paragraph
(iii) shall be reduced to the extent comparable
benefits are actually received by Employee during
such period from any third party, and any such
benefits actually received by Employee shall be
reported to CNS.
iv. CNS shall also pay to Employee all legal fees and
expenses incurred by Employee as a result of such
termination (including all such fees and expenses, if
any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any
right or benefit provided by this paragraph).
v. The Severance Payment shall be reduced and offset by
the amount of any other payment received or to be
received by Employee in connection with his
termination of employment pursuant to any policies of
CNS.
vi. If a determination is made by legislation,
regulations, rulings directed to CNS or Employee, or
court decision that the aggregate amount of any
payment made to Employee hereunder, or pursuant to
any plan, program or policy of CNS in connection
with, on account of, or as a result of, a Change of
Control constitutes an "excess parachute payment" as
defined in Section 280G of the Code subject to the
excise tax provisions of Section 4999 of the Code, or
any successor sections thereof, Employee shall be
entitled to receive from CNS, in addition to any
other amounts payable hereunder, an amount which
shall be equal to such excise tax, plus, on a net
after-tax basis, an amount equal to the aggregate
amount of any interest, penalties, fines or additions
to any tax, including income tax, which are imposed
in connection with the imposition of such excise tax.
Such amount shall be payable to Employee as soon as
may be practicable after such final determination is
made. Employee and CNS shall mutually and reasonably
determine whether or not such determination has
occurred or whether any appeal to such determination
should be made.
vii. Employee shall be entitled to receive all benefits
payable to Employee under the CNS, Inc. Profit
Sharing Plan and Trust or any successor of such Plan
and Trust and any other plan or agreement relating to
retirement benefits, and, in addition, if Employee is
not fully vested in his account balance under such
Plan, a single lump sum payment in cash from CNS
representing the nonvested portion of his account,
which shall be in addition to, and not reduced by,
any other amounts payable to Employee under this
paragraph 8.
viii. Employee shall not be required to mitigate the amount
of any payment provided for in this paragraph 8 by
seeking other employment or
<PAGE>
Executive Employment Agreement
Page 10
otherwise, nor shall the amount of any payment or
benefit provided for in this paragraph 8 be reduced
by any compensation earned by Employee as the result
of employment by another employer or by retirement
benefits after the Date of Termination, or otherwise
except as specifically provided in this paragraph 8.
ix. In order to assure the performance of CNS or its
successor of its obligations under this paragraph,
CNS may deposit in trust an amount equal to the
maximum payment that will be due Employee under the
terms hereof. Under a written trust instrument, the
Trustee shall be instructed to pay to Employee (or
Employee's legal representative, as the case may be)
the amount to which Employee shall be entitled under
the terms hereof, and the balance, if any, of the
trust not so paid or reserved for payment shall be
repaid to CNS. If CNS deposits funds in trust,
payment shall be made no later than the occurrence of
a Change in Control. If and to the extent there are
not amounts in trust sufficient to pay Employee under
this Agreement, CNS shall remain liable for any and
all payments due to Employee. In accordance with the
terms of such trust, at all times during the term of
this Agreement, Employee shall have no rights, other
than as an unsecured general creditor of CNS, to any
amounts held in trust and all trust assets shall be
general assets of CNS and subject to the claims of
creditors of CNS. Failure of CNS to establish or
fully fund such trust shall not be deemed a
revocation or termination of this Agreement by CNS.
x. As a condition of receiving the Severance Payment and
other benefits provided in this subparagraph 8.f and
in subparagraph 8.g, Employee shall be required to
sign a standard release agreement with CNS in which
he agrees to release any and all claims and causes of
action which he might have against CNS and in which
he affirms and acknowledges his obligations under
paragraphs 9, 10, 11 and 12 of this Agreement.
g. Stock Options. Employee shall, immediately upon a Change in
Control, vest in all stock options which have been granted to
him and he shall be entitled to exercise all rights and to
receive all benefits accruing to him under any and all CNS
stock purchase and stock option plans or programs, including
the CNS, Inc. 1994 Amended Stock Plan, or any successor to any
such plan or program, which shall be in addition to and not
reduced by any other amounts payable to Employee under this
paragraph 8.
9. Confidential Information. All knowledge and information not already
available to the public which Employee may acquire or has acquired with
respect to product development, improvements, modifications,
discoveries, designs, methods, systems, computer software, programs,
codes and documentation, research, designs, formulas, instructions,
methods,
<PAGE>
Executive Employment Agreement
Page 11
inventions, trade secrets, services or other private or confidential
matters of CNS (such as those concerning sales, costs, profits,
organizations, customer lists, pricing methods, etc.), or of any third
party which CNS is obligated to keep confidential, shall be regarded by
Employee as strictly confidential and shall not be used by Employee
directly or indirectly or disclosed to any persons, corporations or
firms. All of the foregoing knowledge and information are collectively
termed "Confidential Information" herein. Employee's obligations under
this paragraph will not apply to any information which (a) is or
becomes known to the general public under circumstances involving no
breach by Employee of the terms of this paragraph, (b) is generally
disclosed to third parties by CNS as a continuing practice without
restriction on such third parties, (c) is approved for release by
written authorization of CNS's Board, or (d) Employee is obligated by
law to disclose.
10. Disclosure and Transfer of Product Developments, etc.
a. Employee will make full and prompt disclosure to CNS or all
product developments, improvements, modifications,
discoveries, computer software, programs, codes and
documentation, research, designs, formulas, configurations,
instructions, methods and inventions (all of which are
collectively termed "Developments" herein), whether patentable
or not, made, discovered, conceived or first reduced to
practice by Employee or under his direction during his
employment, alone or with others, whether or not made or
conceived during normal working hours or on the premises of
CNS which relate in any material way to the business or to
research or development work of CNS. Employee confirms by his
acceptance of this Agreement that CNS owns and shall own all
of the Developments.
b. Employee also agrees on behalf of himself and his heirs and
legal representatives that he will promptly communicate,
disclose and transfer to CNS, free of encumbrances and
restrictions, all of his right, title and interest in the
Developments covered by subparagraph 10.a. and any patents or
patent applications covering such Developments and to execute
and deliver such assignments, patents and applications, and
any other documents as CNS may direct, and to cooperate fully
with CNS to enable it to secure any patents or otherwise
protect such Developments in any and all countries. Employee
shall assign to CNS any and all copyrights and reproduction
rights to all material prepared by Employee in connection with
his employment.
c. Notwithstanding subparagraphs 10.a. and b., however, this
paragraph 10 shall not apply to Developments for which no
equipment, supplies, facility or trade secret information of
CNS was used and which was developed entirely on the
Employee's own time, and (1) which do not relate (a) directly
to the business of CNS or (b) to CNS's actual or demonstrably
anticipated research or development, or (2) which does not
result from any work performed by Employee for CNS.
<PAGE>
Executive Employment Agreement
Page 12
This will confirm that Employee's obligations to CNS under paragraphs
9, 10 and 11 will continue after the termination of Employee's
employment.
11. Non-Competition. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly engage in, enter into or participate in the business of CNS
or in any business or commercial activity which does or is reasonably
likely to compete with or adversely affect the Business or products of
CNS, either as an individual for Employee's own account, as a partner
or a joint venturer, or as an officer, director, consultant or holder
of more than five percent (5%) of the entity interest in, any other
person, firm, partnership or corporation, or an employee, agent or
salesman for any person. In addition, during such period Employee shall
not: avail himself of any advantages or acquaintances he has made with
any person who has, within the twelve (12) month period ended on the
date of termination of his employment, been a customer of CNS or its
affiliates, and which would, directly or indirectly, materially divert
business from or materially and adversely affect the Business of CNS;
interfere with the contractual relations between CNS and any of its
employees; or employ or cause to be employed in any capacity or retain
or cause to be retained as a consultant any person who was employed in
any capacity by CNS during the twelve (12) month period ended on the
date of termination of Employee's employment.
For purposes of this Agreement, the "Business of CNS" or "Business"
means and includes the business of the manufacture, production, sale,
marketing and distribution of the Breathe Right strip and any other
products currently offered or currently under development by CNS or
offered or currently under development by CNS during one (1) year prior
to the date of termination of Employee's employment.
Inasmuch as the activities of CNS are conducted on an international
basis, the restrictions of this paragraph 11 shall apply throughout the
United States, Canada, Japan and Europe.
12. Non-Solicitation. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly solicit any current or prospective CNS customer, broker,
vendor or distributor for the purpose of providing products or services
for or on behalf of said customer, broker, vendor or distributor which
are competitive with the products or services being provided by CNS,
which are in the development stages of being competitive with the
products or services being provided by CNS, or which would in any way
cause said customer, broker, vendor or distributor to discontinue or
reduce its business relationship with CNS. Current CNS customers,
brokers, vendors or distributors include those customer, brokers,
vendors or distributors with whom CNS has had a business relationship
at any time within one year immediately preceding Employee's
termination date. Prospective CNS customers, brokers, vendors and
distributors include those with whom (a) a CNS representative has been
in direct personal contact and (b) CNS has a reasonable opportunity of
entering into a business
<PAGE>
Executive Employment Agreement
Page 13
relationship within six months following Employee's termination date.
Employee also agrees that during his employment in the one year period
following his employment, he will not directly or indirectly solicit
any CNS employees to terminate his or her employment with CNS. This
Employee non-solicitation obligation applies to Employees of CNS during
Employee's employment and as of his termination date.
13. Remedies. Employee acknowledges that the restrictions set forth in
paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect
legitimate business interests of CNS. It is understood that if Employee
violates his obligations under any of these paragraphs, CNS would
suffer irreparable harm for which a recovery of money damages would be
an incomplete and inadequate remedy. It is therefore agreed that CNS,
in addition to any remedies at law, shall be entitled, as a matter of
right, in any court of competent jurisdiction, to a mandatory
injunction restraining Employee pending litigation, as well as upon
final determination thereof, from violating this Agreement. In
addition, CNS will discontinue payment to Employee of any Severance or
Salary Continuation Payments, benefits or bonus which he may be
entitled to receive or is receiving under paragraphs 6, 7 or 8
hereunder or otherwise, in the event of his violation of any of his
obligations under this Agreement. In the event of cessation of payments
and benefits, Employee's release of his claims against CNS shall remain
valid and fully enforceable in consideration of the benefits which
Employee received prior to set breach.
14. Severability. The parties intend that the covenants and agreements
contained herein shall be deemed to be a series of separate covenants
and agreements, one for each and every state of the United States and
political subdivision outside the United States where the business
described is conducted. If, in any judicial proceeding, a court shall
refuse to enforce any of the separate covenants deemed included in such
action, then such unenforceable covenants shall be deemed eliminated
from the provisions of this Agreement for the purpose of such
proceeding to the extent necessary to permit the remaining covenants to
be enforced in such proceeding. Further, in the event that any
provision is held to be overbroad as written, such provision shall be
deemed amended to narrow its application to the extent necessary to
make the provision enforceable according to applicable law and enforced
as amended.
15. Binding Effect.
<PAGE>
Executive Employment Agreement
Page 14
a. CNS will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets as defined in
subparagraph 8.a of CNS to expressly assume and agree to
perform this Agreement in the same manner and to the same
extent that CNS would be required to perform it if no such
succession had taken place, in which case, the term "CNS" as
used in this Agreement shall instead refer to CNS' successor.
Failure of CNS to obtain such assumption and agreement prior
to the effectiveness of any such succession shall be a breach
of this Agreement and shall entitle Employee to compensation
from CNS in the same amount and on the same terms as he would
be entitled hereunder if he terminated his employment for Good
Reason following a Change in Control, except that for purposes
of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of
Termination.
b. This Agreement shall inure to the benefit of and be
enforceable by Employee's personal or legal representatives,
successors, heirs, and designated beneficiaries. If Employee
should die while any amount would still be payable to Employee
hereunder if Employee had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to Employee's designated
beneficiaries, or, if there is no such designated beneficiary,
to Employee's estate.
16. Entire Agreement. From and after the date of this Agreement the terms
and provisions of this Agreement constitute the entire agreement
between the parties and this Agreement supersedes any previous oral or
written communications, representations, or agreements with respect to
any subject, including the subject matter of compensation, bonus,
participation and profit sharing and termination compensation.
17. Waiver and Interpretation. The waiver by either party of a breach of
any provision of this Agreement by the other party shall not operate or
be construed as a waiver of any subsequent breach by the breaching
party. No waiver shall be valid unless in writing and signed by the
party providing such waiver. If any provision of this Agreement is held
by any court to be unenforceable, then such provision shall be deemed
to be eliminated from the Agreement to permit enforceability of the
remaining provisions. If any provision is held to be overbroad, such
provision shall be amended to narrow its application to the extent
necessary for enforceability. For purposes of the release agreement
which Employee shall be required to execute as a condition of receiving
any payments and benefits hereunder, "CNS", as referred to in this
Agreement, shall include CNS and all its affiliates, shareholders,
officers, directors, employees, agents, attorneys, insurers and
indemnitors.
<PAGE>
Executive Employment Agreement
Page 15
18. Applicable Law. All questions pertaining to the validity, construction,
execution and performance of this Agreement shall be construed and
governed in accordance with the laws of the State of Minnesota. The
parties consent to the personal jurisdiction of the State of Minnesota,
waive any argument that such a forum is not convenient, and agree that
any litigation relating to this Agreement shall be venued in
Minneapolis, Minnesota.
19. Tax Withholding. CNS may withhold from any payment of benefits under
this Agreement (and forward to the appropriate taxing authority) any
taxes required to be withheld under applicable law.
20. Notice. Any notice required or desired to be given under this Agreement
shall be deemed given if in writing sent by certified mail to his
residence in the case of Employee, or to its principal office in the
case of CNS.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first set forth above.
CNS, INC.
By /s/ Marti Morfitt
-----------------------------------------
Its President & COO
-------------------------------------
EMPLOYEE
/s/ David Byrd
--------------------------------------------
David Byrd
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
EXHIBIT A
NAME: David Byrd
DATE: February 12, 1999
POSITION: VP, Finance, CFO and Treasurer
DEPARTMENT: Finance
BASE SALARY: $144,900
CAR ALLOWANCE: (INCLUDE ONLY IF APPLICABLE)
MANAGEMENT INCENTIVE PLAN LEVEL: 15 at Threshold
30 at Plan
60 at Maximum
EXHIBIT 10.13
EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is made as of February 12, 1999 (the "Effective Date") between
CNS, INC. a Delaware corporation ("CNS") and John Keppeler ("Employee").
WHEREAS, CNS considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of CNS
and its shareholders; and
WHEREAS, Employee has made and is expected to continue to make, due to his
experience and knowledge, a significant contribution to the profitability,
growth and financial strength of CNS; and
WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of
a change in control may exist and that such possibility and the uncertainty and
questions which it may raise among management may result in the departure or
distraction of the performance of Employee's duties to the detriment of CNS and
its shareholders; and
WHEREAS, Employee is willing to continue his employment with CNS upon the
understanding that CNS will provide income security if Employee's employment is
terminated under certain terms and conditions;
WHEREAS, it is in the best interests of CNS and its stockholders to employ
Employee and to reinforce and encourage his continued attention and dedication
to his assigned duties without distraction and to ensure his continued
availability to CNS in the event of a Change in Control; and
WHEREAS, it is further in CNS's best interests to receive certain assurances
from Employee regarding CNS's confidentiality, competition and other proprietary
business concerns;
THEREFORE, in consideration of the foregoing and of this agreement, certain
change in control protection, continued employment and other benefits hereunder,
as well as other mutual covenants and obligations hereinafter set forth, CNS and
Employee agree as follows:
1. Employment. CNS agrees to continue to employ Employee as its VP, Sales
under the terms, conditions and benefits set forth herein and Employee
accepts continued employment with CNS on said terms, conditions and
benefits.
2. Term. The term of Employee's employment shall continue until terminated
pursuant to paragraph 6, 7, or 8 herein.
3. Duties. In his position as VP, Sales, Employee will continue to
faithfully and diligently perform such executive management
responsibilities as may be assigned to him from time to time by the
Chief Executive Officer, President or Chairman of the Board of
<PAGE>
Executive Employment Agreement
Page 2
Directors of CNS (the "Board"); devote his full time, energy and skill
to CNS's business, as is reasonably necessary to execute fully his
duties hereunder, except for vacations, absences made necessary because
of illness, and service on other corporate, civic, or charitable boards
or committees not significantly interfering with his duties hereunder;
and promote CNS's best interests. The principal place of employment and
the location of Employee's principal office and normal place of work
shall be in the Minneapolis, Minnesota metropolitan area. Employee will
be expected to travel to other locations, as necessary, in the
performance of his duties during the term of this Agreement. Employee
shall notify the President of any other paid position which he is
considering accepting, including but not limited to a board of
directors position, a position as an employee or an independent
consultant, or any position, whether or not for pay, which could
constitute a conflict of interest with CNS. The Employee agrees not to
accept any such position without the President of CNS's prior approval.
4. Compensation. For all services rendered by Employee, CNS shall pay
Employee the compensation described in Exhibit A, payable at such times
as salaried employees of CNS are customarily paid. The President of CNS
shall, from time to time during Employee's employment, review his
annual salary in connection with possible increases, giving
consideration to inflation factors, performance of Employee and CNS,
salaries paid for positions of similar responsibility for other
companies, and other relevant factors, and shall provide for such
increases when deemed appropriate. Employee shall in addition be
eligible to participate in the annual management incentive bonus
program, as approved by the Board of Directors. In the event of
termination of this Agreement by CNS without Good Cause, as defined in
paragraph 7 herein, the Board may, in good faith and in its sole
discretion, determine and cause to be paid a partial bonus based on
Employee's performance through the date of termination, and such
determination shall be final and binding.
5. Benefits. Employee shall be entitled to Paid Time Off consistent with
CNS policy and such insurance, 401(k) program and other benefits
available to all salaried employees of CNS, subject to any limitations
on such benefits to officers, directors or highly paid employees in
order that such benefit programs qualify under federal or state law for
favored tax or other treatment. Such benefit programs may be changed
from time to time by the Board. Employee shall also be entitled to
reimbursement of his reasonable and necessary expenses incurred in
connection with the performance of his duties hereunder.
6. Termination by Employee. Employee may resign his employment with CNS
effective upon 30 days' advance written notice to the President. If
Employee resigns under this paragraph, the President retains the right
to terminate his employment, effective upon written notice to Employee,
at any time during the 30-day notice period, provided, however, that
base salary and the employer portion of his health insurance premiums
will continue to be paid by CNS for the duration of the 30-day notice
period. In connection
<PAGE>
Executive Employment Agreement
Page 3
with his termination, Employee will receive any accrued unused Paid
Time Off to which he is entitled.
7. Termination by CNS. CNS shall have the right to terminate Employee's
employment in any of the following ways:
a. CNS may, by written notice to Employee, terminate his
employment without Good Cause, in which event Employee will be
paid his base salary up to the date of termination. Employee
is also entitled to receive Salary Continuation for one year
from his termination date. "Salary Continuation" shall mean
payment by CNS of the Employee's base salary as of his
termination date, payable to Employee on the same schedule and
in the same amount as the payment of base salary prior to
termination of his employment, until such time as the full
Salary Continuation obligation shall be discharged, as
provided in this paragraph 7. During the period when Salary
Continuation is payable to Employee, CNS will also continue to
provide to Employee all group medical, dental and life plan
benefits provided to its other senior executives. Employee
shall also receive any accrued unused Paid Time Off to which
he is entitled. Receipt of Salary Continuation is subject to
Employee's compliance with his obligations under paragraphs 9,
10, 11 and 12 of this Agreement and his execution of a
standard release agreement which includes, in addition to
release of claims against CNS and related releasees, an
obligation not to speak negatively about or harm CNS,
confidentiality with respect to the termination process, and
cooperation with the transition of responsibilities. Payment
of the employer portion of Employee's group medical, dental
and life plan premiums under this paragraph and under
paragraphs 6 and 8 herein shall cease as of the date on which
Employee is covered under other such group plans if such
coverage occurs prior to termination of any salary
continuation periods set forth in said paragraphs.
b. CNS, by written notice to Employee, may terminate his
employment for Good Cause, as defined below. In the event of
termination under this subparagraph 7.b., Employee shall be
paid his base salary up to the date of termination. "Good
Cause" for the purpose of this Agreement shall mean one or
more of the following: (i) willful and premeditated failure or
refusal of Employee to render services to CNS in accordance
with his obligations under paragraph 3; (ii) the commission by
Employee of an act of fraud or embezzlement against CNS; (iii)
the commission by Employee of any other willful or reckless
act which injures CNS in a substantial or material way (it
being understood that mere negligence in performance of duties
is not Good Cause under this Agreement); (iv) the breach by
Employee of any provision of this Agreement; or (v) the
commission of a substantial act of moral turpitude by Employee
which is deemed by CNS's Board to have a material adverse
effect on CNS; or (vi) unsatisfactory performance after
<PAGE>
Executive Employment Agreement
Page 4
specific notice of performance deficiencies, description of
expectations and opportunity to cure.
c. CNS, by written notice to Employee, may terminate Employee's
employment under this Agreement if he becomes physically or
mentally disabled during the term so that he has not been able
to substantially perform, for a period of 120 consecutive
days, with reasonable accommodation, the usual duties assigned
to him hereunder ("Disability"). Upon such determination, CNS
shall pay to Employee his base salary up to the date of such
termination to the extent not covered by any disability plan.
d. This Agreement shall terminate upon the Employee's death
during its term, except that CNS shall pay to the legal
representative of Employee's estate all base salary due him up
to the date of his death.
8. Termination Following a Change in Control.
DEFINITION.
a. For purposes of this Agreement, "Change in Control" shall mean
the occurrence of one of the following events:
i. ACQUISITION OF 25% OF STOCK IN CNS
any "person" [as such term is used in Section 13(d)
and 4(d) of the Securities Exchange Act of 1934, as
amended ("Exchange Act")], other than a trustee or
other fiduciary holding securities under an employee
benefit plan of CNS is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly of securities
representing 25% or more of the combined voting power
of CNS's then outstanding securities;
ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT
APPROVED BY BOARD
during any period of two consecutive years (not
including any period ending prior to the effective
date of this Agreement), individuals who at the
beginning of such period constitute the Board of
Directors of CNS, and any new director [other than a
director designated by a person who has entered into
agreement with CNS to effect a transaction permitted
by Section 6(a)(I), (iii) or (iv)] whose election by
the Board of Directors of CNS or nomination for
election by CNS's stockholders was approved by vote
of at least two-thirds of the directors then still in
office who either were directors at the beginning of
the period or whose election or nomination for
election was previously so approved ("Continuing
Directors"), cease for any reason to constitute at
least a majority of the
<PAGE>
Executive Employment Agreement
Page 5
Board of Directors of CNS;
iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN
LESS THAN 50% OF SURVIVING COMPANY'S STOCK
the stockholders of CNS approve a merger or
consolidation of CNS with any other corporation,
other than (A) a merger or consolidation which would
result in the voting securities of CNS outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being
converted into voting securities of the merged or
consolidated entity) 50% or more of the combined
voting power of the voting securities of CNS or such
merged or consolidated entity outstanding immediately
after such merger or consolidation, or (B) a merger
or consolidation effected to implement a
recapitalization of CNS or similar transaction in
which no "person" acquires more than 25% of the
combined voting power of CNS's then outstanding
securities;
iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF
CNS STOCK MARKET VALUE
the stockholders of CNS approve a plan of complete
liquidation or a sale or disposition by CNS of all or
substantially all of CNS's assets. "The sale or
disposition by CNS of all or substantially all of
CNS's assets" shall mean a sale or other disposition
transaction or series of related transactions
involving assets of CNS or of any direct or indirect
subsidiary of CNS (including the stock of any direct
or indirect subsidiary of CNS) in which the value of
the assets or stock being sold or otherwise disposed
of (as measured by the purchase price being paid
therefor or by such other method as the Board of
Directors of CNS determines is appropriate in a case
where there is no readily ascertainable purchase
price) constitutes more than 50% of the fair market
value of CNS. For purposes of the preceding sentence,
the "fair market value of CNS" shall be the aggregate
market value of CNS's outstanding common stock (on a
fully diluted basis) plus the aggregate market value
of CNS's other outstanding equity securities. The
aggregate market value of CNS's common stock shall be
determined by multiplying the number of shares of CNS
common stock (on a fully diluted basis) outstanding
on the date of the execution and delivery of a
definitive agreement ("Transaction Date") with
respect to the sale or disposition by CNS of all or
substantially all of CNS's assets by the average
closing price for CNS's common stock for the ten
trading days immediately preceding the Transaction
Date. The aggregate market value of any other equity
securities of CNS shall be determined in a manner
similar to that prescribed in the immediately
preceding sentence for determining the aggregate
market value of CNS's common stock or by such other
method as the Board of Directors of CNS shall
determine is
<PAGE>
Executive Employment Agreement
Page 6
appropriate; and Employee agrees that, subject to the
terms and conditions of this Agreement, in the event
of a Change in Control of CNS occurring after the
date hereof, Employee will remain in the employ of
CNS for a period of 30 days from the occurrence of
such Change in Control.
b. Applicability. In the event of a Change in Control, the terms
of this subparagraph 8.b shall be effective for a period of 24
months following the Change in Control. At the expiration of
such 24 month period this Agreement in its entirety shall be
terminated and be of no further effect. Employee shall be
entitled to receive the benefits set forth in subparagraph 8.f
if, within 24 months of such Change in Control, his employment
is terminated by CNS or its successor without Good Cause (as
defined in paragraph 7.a above), or by Employee for Good
Reason (as defined in subparagraph 8.b.i, below). Employee
shall, in return for the benefits provided under subparagraph
8.f., sign a standard release agreement with CNS, in which he
agrees to release any and all claims and causes of action
which he might have against CNS and in which he affirms and
acknowledges his obligations under paragraphs 9, 10, 11 and 12
of this Agreement.
i. Termination for Good Reason shall be effective
immediately upon written notice from the Employee to
the President. Good Reason shall exist if CNS has
materially breached any of the terms of this
Agreement; Employee is assigned duties which are
materially inconsistent with his position, duties,
responsibilities and status as VP, Sales; his
compensation, including any incentive compensation or
bonus plan, is reduced; or relocation of CNS would
require him to relocate his principal residence
outside reasonable commuting distance of the Twin
Cities Metropolitan area.
ii. Termination without Good Cause shall be effective
upon 30 days' advance notice by CNS to the Employee.
For purposes of this paragraph 8, Good Cause shall be
defined as in subparagraph 7.b.
c. Notice of Termination. Any purported termination of employment
under this paragraph 8 and also under paragraphs 6 and 7 shall
be communicated by written Notice of Termination to the other
party hereto in accordance with paragraph 20 hereunder. For
purposes of this Agreement, a "Notice of Termination" shall
mean a notice which indicates the specific termination
provision in this Agreement relied upon and which sets forth
the facts and circumstances claimed to provide a basis for
termination of Employee's employment.
<PAGE>
Executive Employment Agreement
Page 7
d. Date of Termination. For purposes of this paragraph 8 and also
paragraphs 6 and 7 of this Agreement, "Date of Termination"
shall mean:
i. if Employee's employment is terminated for
Disability, as defined in paragraph 7.c. hereunder,
30 days after Notice of Termination is given
(provided that Employee shall not have returned to
the full-time performance of Employee's duties during
such 30 day period); and
ii. if Employee's employment is terminated pursuant to a
provision contained in paragraph 6, 7 or 8 herein or
for any other reason (other than Disability), the
date specified in the Notice of Termination,
consistent with the provisions in said paragraphs.
e. Dispute of Termination. If, within ten days after any Notice
of Termination is given under this paragraph 8, the party
receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties,
or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or the time
for appeal therefrom having expired and no appeal having been
perfected); provided, that the Date of Termination shall be
extended by a notice of dispute only if such notice is given
in good faith and the party giving such notice pursues the
resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, CNS shall
continue to pay Employee full compensation in effect when the
notice giving rise to the dispute was given (including, but
not limited to, base salary) and continue Employee as a
participant in all compensation, benefit and insurance plans
in which Employee was participating when the notice giving
rise to the dispute was given, to the extent permissible under
the terms of the applicable group plans and state and federal
law, until the dispute is finally resolved in accordance with
this subparagraph. Amounts paid under this subsection are in
addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts under
this Agreement.
<PAGE>
Executive Employment Agreement
Page 8
f. Compensation Upon Termination. Following a Change in Control,
as defined in subparagraph 8.a. above, to the extent provided
in subparagraph 8.b. above, Employee shall be entitled to the
following benefits in lieu of any benefits which would
otherwise be available to him upon termination under
paragraphs 6 or 7 hereunder:
i. CNS shall pay Employee through the Date of
Termination Employee's base salary at the rate in
effect at the time the Notice of Termination is given
and any other form or type of other compensation
otherwise payable for such period, including any
applicable incentive bonus, commensurate with his
performance and the performance of CNS.
ii. In lieu of any further salary payments for periods
subsequent to the Date of Termination, CNS shall pay
a severance payment (the "Severance Payment") equal
to 24 months of Employee's Compensation as defined
below based on the average monthly Compensation paid
to Employee during the 24 month period ending
immediately prior to the Date of Termination (without
giving effect to any reduction in such Compensation
which would constitute a breach of this Agreement).
If the Employee has not been employed by CNS for 24
months as of the Date of Termination, average monthly
Compensation shall be the Employee's average monthly
Compensation for the number of months during which
the Employee has been employed at CNS. For purposes
of this subparagraph, Compensation shall mean and
include every type and form of compensation paid to
Employee by CNS (or any corporation ("Affiliate")
affiliated with CNS within the meaning of Section
1504 of the Internal Revenue Code of 1986, as may be
amended from time to time (the "Code")) and included
in Employee's gross income for federal income tax
purposes, but excluding compensation income arising
from (1) hiring bonuses and (2) compensation income
recognized as a result of the exercise of stock
options or sale of the stock so acquired. All of
Employee's contributions to any qualified plan
pursuant to Section 401(k) of the Code or any
flexible benefit plan pursuant to Section 125 of the
Code shall be deemed to be included in gross income
for federal tax purposes for purposes of this
subparagraph. The Severance Payment shall be made in
a single lump sum within 60 days after the Date of
Termination.
iii. For 18 months following the Employee's Date of
Termination, CNS shall arrange to provide, at its
sole expense, Employee with group medical, dental and
life plan benefits substantially similar to those
which Employee was receiving or entitled to receive
immediately prior to the Notice of Termination. The
cost of providing such benefits shall be in addition
to (and shall not reduce) the Severance Payment.
Benefits otherwise
<PAGE>
Executive Employment Agreement
Page 9
receivable by Employee pursuant to this paragraph
(iii) shall be reduced to the extent comparable
benefits are actually received by Employee during
such period from any third party, and any such
benefits actually received by Employee shall be
reported to CNS.
iv. CNS shall also pay to Employee all legal fees and
expenses incurred by Employee as a result of such
termination (including all such fees and expenses, if
any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any
right or benefit provided by this paragraph).
v. The Severance Payment shall be reduced and offset by
the amount of any other payment received or to be
received by Employee in connection with his
termination of employment pursuant to any policies of
CNS.
vi. If a determination is made by legislation,
regulations, rulings directed to CNS or Employee, or
court decision that the aggregate amount of any
payment made to Employee hereunder, or pursuant to
any plan, program or policy of CNS in connection
with, on account of, or as a result of, a Change of
Control constitutes an "excess parachute payment" as
defined in Section 280G of the Code subject to the
excise tax provisions of Section 4999 of the Code, or
any successor sections thereof, Employee shall be
entitled to receive from CNS, in addition to any
other amounts payable hereunder, an amount which
shall be equal to such excise tax, plus, on a net
after-tax basis, an amount equal to the aggregate
amount of any interest, penalties, fines or additions
to any tax, including income tax, which are imposed
in connection with the imposition of such excise tax.
Such amount shall be payable to Employee as soon as
may be practicable after such final determination is
made. Employee and CNS shall mutually and reasonably
determine whether or not such determination has
occurred or whether any appeal to such determination
should be made.
vii. Employee shall be entitled to receive all benefits
payable to Employee under the CNS, Inc. Profit
Sharing Plan and Trust or any successor of such Plan
and Trust and any other plan or agreement relating to
retirement benefits, and, in addition, if Employee is
not fully vested in his account balance under such
Plan, a single lump sum payment in cash from CNS
representing the nonvested portion of his account,
which shall be in addition to, and not reduced by,
any other amounts payable to Employee under this
paragraph 8.
viii. Employee shall not be required to mitigate the amount
of any payment provided for in this paragraph 8 by
seeking other employment or
<PAGE>
Executive Employment Agreement
Page 10
otherwise, nor shall the amount of any payment or
benefit provided for in this paragraph 8 be reduced
by any compensation earned by Employee as the result
of employment by another employer or by retirement
benefits after the Date of Termination, or otherwise
except as specifically provided in this paragraph 8.
ix. In order to assure the performance of CNS or its
successor of its obligations under this paragraph,
CNS may deposit in trust an amount equal to the
maximum payment that will be due Employee under the
terms hereof. Under a written trust instrument, the
Trustee shall be instructed to pay to Employee (or
Employee's legal representative, as the case may be)
the amount to which Employee shall be entitled under
the terms hereof, and the balance, if any, of the
trust not so paid or reserved for payment shall be
repaid to CNS. If CNS deposits funds in trust,
payment shall be made no later than the occurrence of
a Change in Control. If and to the extent there are
not amounts in trust sufficient to pay Employee under
this Agreement, CNS shall remain liable for any and
all payments due to Employee. In accordance with the
terms of such trust, at all times during the term of
this Agreement, Employee shall have no rights, other
than as an unsecured general creditor of CNS, to any
amounts held in trust and all trust assets shall be
general assets of CNS and subject to the claims of
creditors of CNS. Failure of CNS to establish or
fully fund such trust shall not be deemed a
revocation or termination of this Agreement by CNS.
x. As a condition of receiving the Severance Payment and
other benefits provided in this subparagraph 8.f and
in subparagraph 8.g, Employee shall be required to
sign a standard release agreement with CNS in which
he agrees to release any and all claims and causes of
action which he might have against CNS and in which
he affirms and acknowledges his obligations under
paragraphs 9, 10, 11 and 12 of this Agreement.
g. Stock Options. Employee shall, immediately upon a Change in
Control, vest in all stock options which have been granted to
him and he shall be entitled to exercise all rights and to
receive all benefits accruing to him under any and all CNS
stock purchase and stock option plans or programs, including
the CNS, Inc. 1994 Amended Stock Plan, or any successor to any
such plan or program, which shall be in addition to and not
reduced by any other amounts payable to Employee under this
paragraph 8.
9. Confidential Information. All knowledge and information not already
available to the public which Employee may acquire or has acquired with
respect to product development, improvements, modifications,
discoveries, designs, methods, systems, computer software, programs,
codes and documentation, research, designs, formulas, instructions,
methods,
<PAGE>
Executive Employment Agreement
Page 11
inventions, trade secrets, services or other private or confidential
matters of CNS (such as those concerning sales, costs, profits,
organizations, customer lists, pricing methods, etc.), or of any third
party which CNS is obligated to keep confidential, shall be regarded by
Employee as strictly confidential and shall not be used by Employee
directly or indirectly or disclosed to any persons, corporations or
firms. All of the foregoing knowledge and information are collectively
termed "Confidential Information" herein. Employee's obligations under
this paragraph will not apply to any information which (a) is or
becomes known to the general public under circumstances involving no
breach by Employee of the terms of this paragraph, (b) is generally
disclosed to third parties by CNS as a continuing practice without
restriction on such third parties, (c) is approved for release by
written authorization of CNS's Board, or (d) Employee is obligated by
law to disclose.
10. Disclosure and Transfer of Product Developments, etc.
a. Employee will make full and prompt disclosure to CNS or all
product developments, improvements, modifications,
discoveries, computer software, programs, codes and
documentation, research, designs, formulas, configurations,
instructions, methods and inventions (all of which are
collectively termed "Developments" herein), whether patentable
or not, made, discovered, conceived or first reduced to
practice by Employee or under his direction during his
employment, alone or with others, whether or not made or
conceived during normal working hours or on the premises of
CNS which relate in any material way to the business or to
research or development work of CNS. Employee confirms by his
acceptance of this Agreement that CNS owns and shall own all
of the Developments.
b. Employee also agrees on behalf of himself and his heirs and
legal representatives that he will promptly communicate,
disclose and transfer to CNS, free of encumbrances and
restrictions, all of his right, title and interest in the
Developments covered by subparagraph 10.a. and any patents or
patent applications covering such Developments and to execute
and deliver such assignments, patents and applications, and
any other documents as CNS may direct, and to cooperate fully
with CNS to enable it to secure any patents or otherwise
protect such Developments in any and all countries. Employee
shall assign to CNS any and all copyrights and reproduction
rights to all material prepared by Employee in connection with
his employment.
c. Notwithstanding subparagraphs 10.a. and b., however, this
paragraph 10 shall not apply to Developments for which no
equipment, supplies, facility or trade secret information of
CNS was used and which was developed entirely on the
Employee's own time, and (1) which do not relate (a) directly
to the business of CNS or (b) to CNS's actual or demonstrably
anticipated research or development, or (2) which does not
result from any work performed by Employee for CNS.
<PAGE>
Executive Employment Agreement
Page 12
This will confirm that Employee's obligations to CNS under paragraphs
9, 10 and 11 will continue after the termination of Employee's
employment.
11. Non-Competition. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly engage in, enter into or participate in the business of CNS
or in any business or commercial activity which does or is reasonably
likely to compete with or adversely affect the Business or products of
CNS, either as an individual for Employee's own account, as a partner
or a joint venturer, or as an officer, director, consultant or holder
of more than five percent (5%) of the entity interest in, any other
person, firm, partnership or corporation, or an employee, agent or
salesman for any person. In addition, during such period Employee shall
not: avail himself of any advantages or acquaintances he has made with
any person who has, within the twelve (12) month period ended on the
date of termination of his employment, been a customer of CNS or its
affiliates, and which would, directly or indirectly, materially divert
business from or materially and adversely affect the Business of CNS;
interfere with the contractual relations between CNS and any of its
employees; or employ or cause to be employed in any capacity or retain
or cause to be retained as a consultant any person who was employed in
any capacity by CNS during the twelve (12) month period ended on the
date of termination of Employee's employment.
For purposes of this Agreement, the "Business of CNS" or "Business"
means and includes the business of the manufacture, production, sale,
marketing and distribution of the Breathe Right strip and any other
products currently offered or currently under development by CNS or
offered or currently under development by CNS during one (1) year prior
to the date of termination of Employee's employment.
Inasmuch as the activities of CNS are conducted on an international
basis, the restrictions of this paragraph 11 shall apply throughout the
United States, Canada, Japan and Europe.
12. Non-Solicitation. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly solicit any current or prospective CNS customer, broker,
vendor or distributor for the purpose of providing products or services
for or on behalf of said customer, broker, vendor or distributor which
are competitive with the products or services being provided by CNS,
which are in the development stages of being competitive with the
products or services being provided by CNS, or which would in any way
cause said customer, broker, vendor or distributor to discontinue or
reduce its business relationship with CNS. Current CNS customers,
brokers, vendors or distributors include those customer, brokers,
vendors or distributors with whom CNS has had a business relationship
at any time within one year immediately preceding Employee's
termination date. Prospective CNS customers, brokers, vendors and
distributors include those with whom (a) a CNS representative has been
in direct personal contact and (b) CNS has a reasonable opportunity of
entering into a business
<PAGE>
Executive Employment Agreement
Page 13
relationship within six months following Employee's termination date.
Employee also agrees that during his employment in the one year period
following his employment, he will not directly or indirectly solicit
any CNS employees to terminate his or her employment with CNS. This
Employee non-solicitation obligation applies to Employees of CNS during
Employee's employment and as of his termination date.
13. Remedies. Employee acknowledges that the restrictions set forth in
paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect
legitimate business interests of CNS. It is understood that if Employee
violates his obligations under any of these paragraphs, CNS would
suffer irreparable harm for which a recovery of money damages would be
an incomplete and inadequate remedy. It is therefore agreed that CNS,
in addition to any remedies at law, shall be entitled, as a matter of
right, in any court of competent jurisdiction, to a mandatory
injunction restraining Employee pending litigation, as well as upon
final determination thereof, from violating this Agreement. In
addition, CNS will discontinue payment to Employee of any Severance or
Salary Continuation Payments, benefits or bonus which he may be
entitled to receive or is receiving under paragraphs 6, 7 or 8
hereunder or otherwise, in the event of his violation of any of his
obligations under this Agreement. In the event of cessation of payments
and benefits, Employee's release of his claims against CNS shall remain
valid and fully enforceable in consideration of the benefits which
Employee received prior to set breach.
14. Severability. The parties intend that the covenants and agreements
contained herein shall be deemed to be a series of separate covenants
and agreements, one for each and every state of the United States and
political subdivision outside the United States where the business
described is conducted. If, in any judicial proceeding, a court shall
refuse to enforce any of the separate covenants deemed included in such
action, then such unenforceable covenants shall be deemed eliminated
from the provisions of this Agreement for the purpose of such
proceeding to the extent necessary to permit the remaining covenants to
be enforced in such proceeding. Further, in the event that any
provision is held to be overbroad as written, such provision shall be
deemed amended to narrow its application to the extent necessary to
make the provision enforceable according to applicable law and enforced
as amended.
15. Binding Effect.
<PAGE>
Executive Employment Agreement
Page 14
a. CNS will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets as defined in
subparagraph 8.a of CNS to expressly assume and agree to
perform this Agreement in the same manner and to the same
extent that CNS would be required to perform it if no such
succession had taken place, in which case, the term "CNS" as
used in this Agreement shall instead refer to CNS' successor.
Failure of CNS to obtain such assumption and agreement prior
to the effectiveness of any such succession shall be a breach
of this Agreement and shall entitle Employee to compensation
from CNS in the same amount and on the same terms as he would
be entitled hereunder if he terminated his employment for Good
Reason following a Change in Control, except that for purposes
of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of
Termination.
b. This Agreement shall inure to the benefit of and be
enforceable by Employee's personal or legal representatives,
successors, heirs, and designated beneficiaries. If Employee
should die while any amount would still be payable to Employee
hereunder if Employee had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to Employee's designated
beneficiaries, or, if there is no such designated beneficiary,
to Employee's estate.
16. Entire Agreement. From and after the date of this Agreement the terms
and provisions of this Agreement constitute the entire agreement
between the parties and this Agreement supersedes any previous oral or
written communications, representations, or agreements with respect to
any subject, including the subject matter of compensation, bonus,
participation and profit sharing and termination compensation.
17. Waiver and Interpretation. The waiver by either party of a breach of
any provision of this Agreement by the other party shall not operate or
be construed as a waiver of any subsequent breach by the breaching
party. No waiver shall be valid unless in writing and signed by the
party providing such waiver. If any provision of this Agreement is held
by any court to be unenforceable, then such provision shall be deemed
to be eliminated from the Agreement to permit enforceability of the
remaining provisions. If any provision is held to be overbroad, such
provision shall be amended to narrow its application to the extent
necessary for enforceability. For purposes of the release agreement
which Employee shall be required to execute as a condition of receiving
any payments and benefits hereunder, "CNS", as referred to in this
Agreement, shall include CNS and all its affiliates, shareholders,
officers, directors, employees, agents, attorneys, insurers and
indemnitors.
<PAGE>
Executive Employment Agreement
Page 15
18. Applicable Law. All questions pertaining to the validity, construction,
execution and performance of this Agreement shall be construed and
governed in accordance with the laws of the State of Minnesota. The
parties consent to the personal jurisdiction of the State of Minnesota,
waive any argument that such a forum is not convenient, and agree that
any litigation relating to this Agreement shall be venued in
Minneapolis, Minnesota.
19. Tax Withholding. CNS may withhold from any payment of benefits under
this Agreement (and forward to the appropriate taxing authority) any
taxes required to be withheld under applicable law.
20. Notice. Any notice required or desired to be given under this Agreement
shall be deemed given if in writing sent by certified mail to his
residence in the case of Employee, or to its principal office in the
case of CNS.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first set forth above.
CNS, INC.
By /s/ Marti Morfitt
------------------------------------------
Its President & COO
--------------------------------------
EMPLOYEE
/s/ John Keppeler
---------------------------------------------
John Keppeler
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
EXHIBIT A
NAME: John Keppeler
DATE: February 12, 1999
POSITION: VP, Sales
DEPARTMENT: Sales
BASE SALARY: $158,000
CAR ALLOWANCE: (INCLUDE ONLY IF APPLICABLE) $500.00/month
MANAGEMENT INCENTIVE PLAN LEVEL: 15 at Threshold
30 at Plan
60 at Maximum
EXHIBIT 10.14
EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is made as of February 12, 1999 (the "Effective Date") between
CNS, INC. a Delaware corporation ("CNS") and Teri Osgood ("Employee").
WHEREAS, CNS considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of CNS
and its shareholders; and
WHEREAS, Employee has made and is expected to continue to make, due to his
experience and knowledge, a significant contribution to the profitability,
growth and financial strength of CNS; and
WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of
a change in control may exist and that such possibility and the uncertainty and
questions which it may raise among management may result in the departure or
distraction of the performance of Employee's duties to the detriment of CNS and
its shareholders; and
WHEREAS, Employee is willing to continue his employment with CNS upon the
understanding that CNS will provide income security if Employee's employment is
terminated under certain terms and conditions;
WHEREAS, it is in the best interests of CNS and its stockholders to employ
Employee and to reinforce and encourage his continued attention and dedication
to his assigned duties without distraction and to ensure his continued
availability to CNS in the event of a Change in Control; and
WHEREAS, it is further in CNS's best interests to receive certain assurances
from Employee regarding CNS's confidentiality, competition and other proprietary
business concerns;
THEREFORE, in consideration of the foregoing and of this agreement, certain
change in control protection, continued employment and other benefits hereunder,
as well as other mutual covenants and obligations hereinafter set forth, CNS and
Employee agree as follows:
1. Employment. CNS agrees to continue to employ Employee as its VP, New
Business Commercialization under the terms, conditions and benefits set
forth herein and Employee accepts continued employment with CNS on said
terms, conditions and benefits.
2. Term. The term of Employee's employment shall continue until terminated
pursuant to paragraph 6, 7, or 8 herein.
3. Duties. In his position as VP, New Business Commercialization,
Employee will continue to faithfully and diligently perform such
executive management
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Executive Employment Agreement
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responsibilities as may be assigned to him from time to time by the
Chief Executive Officer, President or Chairman of the Board of
Directors of CNS (the "Board"); devote his full time, energy and skill
to CNS's business, as is reasonably necessary to execute fully his
duties hereunder, except for vacations, absences made necessary because
of illness, and service on other corporate, civic, or charitable boards
or committees not significantly interfering with his duties hereunder;
and promote CNS's best interests. The principal place of employment and
the location of Employee's principal office and normal place of work
shall be in the Minneapolis, Minnesota metropolitan area. Employee will
be expected to travel to other locations, as necessary, in the
performance of his duties during the term of this Agreement. Employee
shall notify the President of any other paid position which he is
considering accepting, including but not limited to a board of
directors position, a position as an employee or an independent
consultant, or any position, whether or not for pay, which could
constitute a conflict of interest with CNS. The Employee agrees not to
accept any such position without the President of CNS's prior approval.
4. Compensation. For all services rendered by Employee, CNS shall pay
Employee the compensation described in Exhibit A, payable at such times
as salaried employees of CNS are customarily paid. The President of CNS
shall, from time to time during Employee's employment, review his
annual salary in connection with possible increases, giving
consideration to inflation factors, performance of Employee and CNS,
salaries paid for positions of similar responsibility for other
companies, and other relevant factors, and shall provide for such
increases when deemed appropriate. Employee shall in addition be
eligible to participate in the annual management incentive bonus
program, as approved by the Board of Directors. In the event of
termination of this Agreement by CNS without Good Cause, as defined in
paragraph 7 herein, the Board may, in good faith and in its sole
discretion, determine and cause to be paid a partial bonus based on
Employee's performance through the date of termination, and such
determination shall be final and binding.
5. Benefits. Employee shall be entitled to Paid Time Off consistent with
CNS policy and such insurance, 401(k) program and other benefits
available to all salaried employees of CNS, subject to any limitations
on such benefits to officers, directors or highly paid employees in
order that such benefit programs qualify under federal or state law for
favored tax or other treatment. Such benefit programs may be changed
from time to time by the Board. Employee shall also be entitled to
reimbursement of his reasonable and necessary expenses incurred in
connection with the performance of his duties hereunder.
6. Termination by Employee. Employee may resign his employment with CNS
effective upon 30 days' advance written notice to the President. If
Employee resigns under this paragraph, the President retains the right
to terminate his employment, effective upon written notice to Employee,
at any time during the 30-day notice period, provided, however, that
base salary and the employer portion of his health insurance premiums
will
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Executive Employment Agreement
Page 3
continue to be paid by CNS for the duration of the 30-day notice
period. In connection with his termination, Employee will receive any
accrued unused Paid Time Off to which he is entitled.
7. Termination by CNS. CNS shall have the right to terminate Employee's
employment in any of the following ways:
a. CNS may, by written notice to Employee, terminate his
employment without Good Cause, in which event Employee will be
paid his base salary up to the date of termination. Employee
is also entitled to receive Salary Continuation for one year
from his termination date. "Salary Continuation" shall mean
payment by CNS of the Employee's base salary as of his
termination date, payable to Employee on the same schedule and
in the same amount as the payment of base salary prior to
termination of his employment, until such time as the full
Salary Continuation obligation shall be discharged, as
provided in this paragraph 7. During the period when Salary
Continuation is payable to Employee, CNS will also continue to
provide to Employee all group medical, dental and life plan
benefits provided to its other senior executives. Employee
shall also receive any accrued unused Paid Time Off to which
he is entitled. Receipt of Salary Continuation is subject to
Employee's compliance with his obligations under paragraphs 9,
10, 11 and 12 of this Agreement and his execution of a
standard release agreement which includes, in addition to
release of claims against CNS and related releasees, an
obligation not to speak negatively about or harm CNS,
confidentiality with respect to the termination process, and
cooperation with the transition of responsibilities. Payment
of the employer portion of Employee's group medical, dental
and life plan premiums under this paragraph and under
paragraphs 6 and 8 herein shall cease as of the date on which
Employee is covered under other such group plans if such
coverage occurs prior to termination of any salary
continuation periods set forth in said paragraphs.
b. CNS, by written notice to Employee, may terminate his
employment for Good Cause, as defined below. In the event of
termination under this subparagraph 7.b., Employee shall be
paid his base salary up to the date of termination. "Good
Cause" for the purpose of this Agreement shall mean one or
more of the following: (i) willful and premeditated failure or
refusal of Employee to render services to CNS in accordance
with his obligations under paragraph 3; (ii) the commission by
Employee of an act of fraud or embezzlement against CNS; (iii)
the commission by Employee of any other willful or reckless
act which injures CNS in a substantial or material way (it
being understood that mere negligence in performance of duties
is not Good Cause under this Agreement); (iv) the breach by
Employee of any provision of this Agreement; or (v) the
commission of a substantial act of moral turpitude by Employee
which is deemed by CNS's Board to have a material adverse
effect on CNS; or (vi) unsatisfactory performance after
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Executive Employment Agreement
Page 4
specific notice of performance deficiencies, description of
expectations and opportunity to cure.
c. CNS, by written notice to Employee, may terminate Employee's
employment under this Agreement if he becomes physically or
mentally disabled during the term so that he has not been able
to substantially perform, for a period of 120 consecutive
days, with reasonable accommodation, the usual duties assigned
to him hereunder ("Disability"). Upon such determination, CNS
shall pay to Employee his base salary up to the date of such
termination to the extent not covered by any disability plan.
d. This Agreement shall terminate upon the Employee's death
during its term, except that CNS shall pay to the legal
representative of Employee's estate all base salary due him up
to the date of his death.
8. Termination Following a Change in Control.
DEFINITION.
a. For purposes of this Agreement, "Change in Control" shall mean
the occurrence of one of the following events:
i. ACQUISITION OF 25% OF STOCK IN CNS
any "person" [as such term is used in Section 13(d)
and 4(d) of the Securities Exchange Act of 1934, as
amended ("Exchange Act")], other than a trustee or
other fiduciary holding securities under an employee
benefit plan of CNS is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly of securities
representing 25% or more of the combined voting power
of CNS's then outstanding securities;
ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT
APPROVED BY BOARD
during any period of two consecutive years (not
including any period ending prior to the effective
date of this Agreement), individuals who at the
beginning of such period constitute the Board of
Directors of CNS, and any new director [other than a
director designated by a person who has entered into
agreement with CNS to effect a transaction permitted
by Section 6(a)(I), (iii) or (iv)] whose election by
the Board of Directors of CNS or nomination for
election by CNS's stockholders was approved by vote
of at least two-thirds of the directors then still in
office who either were directors at the beginning of
the period or whose election or nomination for
election was previously so approved ("Continuing
Directors"), cease for any reason to constitute at
least a majority of the
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Executive Employment Agreement
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Board of Directors of CNS;
iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN
LESS THAN 50% OF SURVIVING COMPANY'S STOCK
the stockholders of CNS approve a merger or
consolidation of CNS with any other corporation,
other than (A) a merger or consolidation which would
result in the voting securities of CNS outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being
converted into voting securities of the merged or
consolidated entity) 50% or more of the combined
voting power of the voting securities of CNS or such
merged or consolidated entity outstanding immediately
after such merger or consolidation, or (B) a merger
or consolidation effected to implement a
recapitalization of CNS or similar transaction in
which no "person" acquires more than 25% of the
combined voting power of CNS's then outstanding
securities;
iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF
CNS STOCK MARKET VALUE
the stockholders of CNS approve a plan of complete
liquidation or a sale or disposition by CNS of all or
substantially all of CNS's assets. "The sale or
disposition by CNS of all or substantially all of
CNS's assets" shall mean a sale or other disposition
transaction or series of related transactions
involving assets of CNS or of any direct or indirect
subsidiary of CNS (including the stock of any direct
or indirect subsidiary of CNS) in which the value of
the assets or stock being sold or otherwise disposed
of (as measured by the purchase price being paid
therefor or by such other method as the Board of
Directors of CNS determines is appropriate in a case
where there is no readily ascertainable purchase
price) constitutes more than 50% of the fair market
value of CNS. For purposes of the preceding sentence,
the "fair market value of CNS" shall be the aggregate
market value of CNS's outstanding common stock (on a
fully diluted basis) plus the aggregate market value
of CNS's other outstanding equity securities. The
aggregate market value of CNS's common stock shall be
determined by multiplying the number of shares of CNS
common stock (on a fully diluted basis) outstanding
on the date of the execution and delivery of a
definitive agreement ("Transaction Date") with
respect to the sale or disposition by CNS of all or
substantially all of CNS's assets by the average
closing price for CNS's common stock for the ten
trading days immediately preceding the Transaction
Date. The aggregate market value of any other equity
securities of CNS shall be determined in a manner
similar to that prescribed in the immediately
preceding sentence for determining the aggregate
market value of CNS's common stock or by such other
method as the Board of Directors of CNS shall
determine is
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Executive Employment Agreement
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appropriate; and Employee agrees that, subject to the
terms and conditions of this Agreement, in the event
of a Change in Control of CNS occurring after the
date hereof, Employee will remain in the employ of
CNS for a period of 30 days from the occurrence of
such Change in Control.
b. Applicability. In the event of a Change in Control, the terms
of this subparagraph 8.b shall be effective for a period of 24
months following the Change in Control. At the expiration of
such 24 month period this Agreement in its entirety shall be
terminated and be of no further effect. Employee shall be
entitled to receive the benefits set forth in subparagraph 8.f
if, within 24 months of such Change in Control, his employment
is terminated by CNS or its successor without Good Cause (as
defined in paragraph 7.a above), or by Employee for Good
Reason (as defined in subparagraph 8.b.i, below). Employee
shall, in return for the benefits provided under subparagraph
8.f., sign a standard release agreement with CNS, in which he
agrees to release any and all claims and causes of action
which he might have against CNS and in which he affirms and
acknowledges his obligations under paragraphs 9, 10, 11 and 12
of this Agreement.
i. Termination for Good Reason shall be effective
immediately upon written notice from the Employee to
the President. Good Reason shall exist if CNS has
materially breached any of the terms of this
Agreement; Employee is assigned duties which are
materially inconsistent with his position, duties,
responsibilities and status as VP, New Business
Commercialization; his compensation, including any
incentive compensation or bonus plan, is reduced; or
relocation of CNS would require him to relocate his
principal residence outside reasonable commuting
distance of the Twin Cities Metropolitan area.
ii. Termination without Good Cause shall be effective
upon 30 days' advance notice by CNS to the Employee.
For purposes of this paragraph 8, Good Cause shall be
defined as in subparagraph 7.b.
c. Notice of Termination. Any purported termination of employment
under this paragraph 8 and also under paragraphs 6 and 7 shall
be communicated by written Notice of Termination to the other
party hereto in accordance with paragraph 20 hereunder. For
purposes of this Agreement, a "Notice of Termination" shall
mean a notice which indicates the specific termination
provision in this Agreement relied upon and which sets forth
the facts and circumstances claimed to provide a basis for
termination of Employee's employment.
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Executive Employment Agreement
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d. Date of Termination. For purposes of this paragraph 8 and also
paragraphs 6 and 7 of this Agreement, "Date of Termination"
shall mean:
i. if Employee's employment is terminated for
Disability, as defined in paragraph 7.c. hereunder,
30 days after Notice of Termination is given
(provided that Employee shall not have returned to
the full-time performance of Employee's duties during
such 30 day period); and
ii. if Employee's employment is terminated pursuant to a
provision contained in paragraph 6, 7 or 8 herein or
for any other reason (other than Disability), the
date specified in the Notice of Termination,
consistent with the provisions in said paragraphs.
e. Dispute of Termination. If, within ten days after any Notice
of Termination is given under this paragraph 8, the party
receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties,
or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or the time
for appeal therefrom having expired and no appeal having been
perfected); provided, that the Date of Termination shall be
extended by a notice of dispute only if such notice is given
in good faith and the party giving such notice pursues the
resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, CNS shall
continue to pay Employee full compensation in effect when the
notice giving rise to the dispute was given (including, but
not limited to, base salary) and continue Employee as a
participant in all compensation, benefit and insurance plans
in which Employee was participating when the notice giving
rise to the dispute was given, to the extent permissible under
the terms of the applicable group plans and state and federal
law, until the dispute is finally resolved in accordance with
this subparagraph. Amounts paid under this subsection are in
addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts under
this Agreement.
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Executive Employment Agreement
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f. Compensation Upon Termination. Following a Change in Control,
as defined in subparagraph 8.a. above, to the extent provided
in subparagraph 8.b. above, Employee shall be entitled to the
following benefits in lieu of any benefits which would
otherwise be available to him upon termination under
paragraphs 6 or 7 hereunder:
i. CNS shall pay Employee through the Date of
Termination Employee's base salary at the rate in
effect at the time the Notice of Termination is given
and any other form or type of other compensation
otherwise payable for such period, including any
applicable incentive bonus, commensurate with his
performance and the performance of CNS.
ii. In lieu of any further salary payments for periods
subsequent to the Date of Termination, CNS shall pay
a severance payment (the "Severance Payment") equal
to 24 months of Employee's Compensation as defined
below based on the average monthly Compensation paid
to Employee during the 24 month period ending
immediately prior to the Date of Termination (without
giving effect to any reduction in such Compensation
which would constitute a breach of this Agreement).
If the Employee has not been employed by CNS for 24
months as of the Date of Termination, average monthly
Compensation shall be the Employee's average monthly
Compensation for the number of months during which
the Employee has been employed at CNS. For purposes
of this subparagraph, Compensation shall mean and
include every type and form of compensation paid to
Employee by CNS (or any corporation ("Affiliate")
affiliated with CNS within the meaning of Section
1504 of the Internal Revenue Code of 1986, as may be
amended from time to time (the "Code")) and included
in Employee's gross income for federal income tax
purposes, but excluding compensation income arising
from (1) hiring bonuses and (2) compensation income
recognized as a result of the exercise of stock
options or sale of the stock so acquired. All of
Employee's contributions to any qualified plan
pursuant to Section 401(k) of the Code or any
flexible benefit plan pursuant to Section 125 of the
Code shall be deemed to be included in gross income
for federal tax purposes for purposes of this
subparagraph. The Severance Payment shall be made in
a single lump sum within 60 days after the Date of
Termination.
iii. For 18 months following the Employee's Date of
Termination, CNS shall arrange to provide, at its
sole expense, Employee with group medical, dental and
life plan benefits substantially similar to those
which Employee was receiving or entitled to receive
immediately prior to the Notice of Termination. The
cost of providing such benefits shall be in addition
to (and shall not reduce) the Severance Payment.
Benefits otherwise
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Executive Employment Agreement
Page 9
receivable by Employee pursuant to this paragraph
(iii) shall be reduced to the extent comparable
benefits are actually received by Employee during
such period from any third party, and any such
benefits actually received by Employee shall be
reported to CNS.
iv. CNS shall also pay to Employee all legal fees and
expenses incurred by Employee as a result of such
termination (including all such fees and expenses, if
any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any
right or benefit provided by this paragraph).
v. The Severance Payment shall be reduced and offset by
the amount of any other payment received or to be
received by Employee in connection with his
termination of employment pursuant to any policies of
CNS.
vi. If a determination is made by legislation,
regulations, rulings directed to CNS or Employee, or
court decision that the aggregate amount of any
payment made to Employee hereunder, or pursuant to
any plan, program or policy of CNS in connection
with, on account of, or as a result of, a Change of
Control constitutes an "excess parachute payment" as
defined in Section 280G of the Code subject to the
excise tax provisions of Section 4999 of the Code, or
any successor sections thereof, Employee shall be
entitled to receive from CNS, in addition to any
other amounts payable hereunder, an amount which
shall be equal to such excise tax, plus, on a net
after-tax basis, an amount equal to the aggregate
amount of any interest, penalties, fines or additions
to any tax, including income tax, which are imposed
in connection with the imposition of such excise tax.
Such amount shall be payable to Employee as soon as
may be practicable after such final determination is
made. Employee and CNS shall mutually and reasonably
determine whether or not such determination has
occurred or whether any appeal to such determination
should be made.
vii. Employee shall be entitled to receive all benefits
payable to Employee under the CNS, Inc. Profit
Sharing Plan and Trust or any successor of such Plan
and Trust and any other plan or agreement relating to
retirement benefits, and, in addition, if Employee is
not fully vested in his account balance under such
Plan, a single lump sum payment in cash from CNS
representing the nonvested portion of his account,
which shall be in addition to, and not reduced by,
any other amounts payable to Employee under this
paragraph 8.
viii. Employee shall not be required to mitigate the amount
of any payment provided for in this paragraph 8 by
seeking other employment or
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Executive Employment Agreement
Page 10
otherwise, nor shall the amount of any payment or
benefit provided for in this paragraph 8 be reduced
by any compensation earned by Employee as the result
of employment by another employer or by retirement
benefits after the Date of Termination, or otherwise
except as specifically provided in this paragraph 8.
ix. In order to assure the performance of CNS or its
successor of its obligations under this paragraph,
CNS may deposit in trust an amount equal to the
maximum payment that will be due Employee under the
terms hereof. Under a written trust instrument, the
Trustee shall be instructed to pay to Employee (or
Employee's legal representative, as the case may be)
the amount to which Employee shall be entitled under
the terms hereof, and the balance, if any, of the
trust not so paid or reserved for payment shall be
repaid to CNS. If CNS deposits funds in trust,
payment shall be made no later than the occurrence of
a Change in Control. If and to the extent there are
not amounts in trust sufficient to pay Employee under
this Agreement, CNS shall remain liable for any and
all payments due to Employee. In accordance with the
terms of such trust, at all times during the term of
this Agreement, Employee shall have no rights, other
than as an unsecured general creditor of CNS, to any
amounts held in trust and all trust assets shall be
general assets of CNS and subject to the claims of
creditors of CNS. Failure of CNS to establish or
fully fund such trust shall not be deemed a
revocation or termination of this Agreement by CNS.
x. As a condition of receiving the Severance Payment and
other benefits provided in this subparagraph 8.f and
in subparagraph 8.g, Employee shall be required to
sign a standard release agreement with CNS in which
he agrees to release any and all claims and causes of
action which he might have against CNS and in which
he affirms and acknowledges his obligations under
paragraphs 9, 10, 11 and 12 of this Agreement.
g. Stock Options. Employee shall, immediately upon a Change in
Control, vest in all stock options which have been granted to
him and he shall be entitled to exercise all rights and to
receive all benefits accruing to him under any and all CNS
stock purchase and stock option plans or programs, including
the CNS, Inc. 1994 Amended Stock Plan, or any successor to any
such plan or program, which shall be in addition to and not
reduced by any other amounts payable to Employee under this
paragraph 8.
9. Confidential Information. All knowledge and information not already
available to the public which Employee may acquire or has acquired with
respect to product development, improvements, modifications,
discoveries, designs, methods, systems, computer software, programs,
codes and documentation, research, designs, formulas, instructions,
methods,
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Executive Employment Agreement
Page 11
inventions, trade secrets, services or other private or confidential
matters of CNS (such as those concerning sales, costs, profits,
organizations, customer lists, pricing methods, etc.), or of any third
party which CNS is obligated to keep confidential, shall be regarded by
Employee as strictly confidential and shall not be used by Employee
directly or indirectly or disclosed to any persons, corporations or
firms. All of the foregoing knowledge and information are collectively
termed "Confidential Information" herein. Employee's obligations under
this paragraph will not apply to any information which (a) is or
becomes known to the general public under circumstances involving no
breach by Employee of the terms of this paragraph, (b) is generally
disclosed to third parties by CNS as a continuing practice without
restriction on such third parties, (c) is approved for release by
written authorization of CNS's Board, or (d) Employee is obligated by
law to disclose.
10. Disclosure and Transfer of Product Developments, etc.
a. Employee will make full and prompt disclosure to CNS or all
product developments, improvements, modifications,
discoveries, computer software, programs, codes and
documentation, research, designs, formulas, configurations,
instructions, methods and inventions (all of which are
collectively termed "Developments" herein), whether patentable
or not, made, discovered, conceived or first reduced to
practice by Employee or under his direction during his
employment, alone or with others, whether or not made or
conceived during normal working hours or on the premises of
CNS which relate in any material way to the business or to
research or development work of CNS. Employee confirms by his
acceptance of this Agreement that CNS owns and shall own all
of the Developments.
b. Employee also agrees on behalf of himself and his heirs and
legal representatives that he will promptly communicate,
disclose and transfer to CNS, free of encumbrances and
restrictions, all of his right, title and interest in the
Developments covered by subparagraph 10.a. and any patents or
patent applications covering such Developments and to execute
and deliver such assignments, patents and applications, and
any other documents as CNS may direct, and to cooperate fully
with CNS to enable it to secure any patents or otherwise
protect such Developments in any and all countries. Employee
shall assign to CNS any and all copyrights and reproduction
rights to all material prepared by Employee in connection with
his employment.
c. Notwithstanding subparagraphs 10.a. and b., however, this
paragraph 10 shall not apply to Developments for which no
equipment, supplies, facility or trade secret information of
CNS was used and which was developed entirely on the
Employee's own time, and (1) which do not relate (a) directly
to the business of CNS or (b) to CNS's actual or demonstrably
anticipated research or development, or (2) which does not
result from any work performed by Employee for CNS.
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This will confirm that Employee's obligations to CNS under paragraphs
9, 10 and 11 will continue after the termination of Employee's
employment.
11. Non-Competition. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly engage in, enter into or participate in the business of CNS
or in any business or commercial activity which does or is reasonably
likely to compete with or adversely affect the Business or products of
CNS, either as an individual for Employee's own account, as a partner
or a joint venturer, or as an officer, director, consultant or holder
of more than five percent (5%) of the entity interest in, any other
person, firm, partnership or corporation, or an employee, agent or
salesman for any person. In addition, during such period Employee shall
not: avail himself of any advantages or acquaintances he has made with
any person who has, within the twelve (12) month period ended on the
date of termination of his employment, been a customer of CNS or its
affiliates, and which would, directly or indirectly, materially divert
business from or materially and adversely affect the Business of CNS;
interfere with the contractual relations between CNS and any of its
employees; or employ or cause to be employed in any capacity or retain
or cause to be retained as a consultant any person who was employed in
any capacity by CNS during the twelve (12) month period ended on the
date of termination of Employee's employment.
For purposes of this Agreement, the "Business of CNS" or "Business"
means and includes the business of the manufacture, production, sale,
marketing and distribution of the Breathe Right strip and any other
products currently offered or currently under development by CNS or
offered or currently under development by CNS during one (1) year prior
to the date of termination of Employee's employment.
Inasmuch as the activities of CNS are conducted on an international
basis, the restrictions of this paragraph 11 shall apply throughout the
United States, Canada, Japan and Europe.
12. Non-Solicitation. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly solicit any current or prospective CNS customer, broker,
vendor or distributor for the purpose of providing products or services
for or on behalf of said customer, broker, vendor or distributor which
are competitive with the products or services being provided by CNS,
which are in the development stages of being competitive with the
products or services being provided by CNS, or which would in any way
cause said customer, broker, vendor or distributor to discontinue or
reduce its business relationship with CNS. Current CNS customers,
brokers, vendors or distributors include those customer, brokers,
vendors or distributors with whom CNS has had a business relationship
at any time within one year immediately preceding Employee's
termination date. Prospective CNS customers, brokers, vendors and
distributors include those with whom (a) a CNS representative has been
in direct personal contact and (b) CNS has a reasonable opportunity of
entering into a business
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Executive Employment Agreement
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relationship within six months following Employee's termination date.
Employee also agrees that during his employment in the one year period
following his employment, he will not directly or indirectly solicit
any CNS employees to terminate his or her employment with CNS. This
Employee non-solicitation obligation applies to Employees of CNS during
Employee's employment and as of his termination date.
13. Remedies. Employee acknowledges that the restrictions set forth in
paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect
legitimate business interests of CNS. It is understood that if Employee
violates his obligations under any of these paragraphs, CNS would
suffer irreparable harm for which a recovery of money damages would be
an incomplete and inadequate remedy. It is therefore agreed that CNS,
in addition to any remedies at law, shall be entitled, as a matter of
right, in any court of competent jurisdiction, to a mandatory
injunction restraining Employee pending litigation, as well as upon
final determination thereof, from violating this Agreement. In
addition, CNS will discontinue payment to Employee of any Severance or
Salary Continuation Payments, benefits or bonus which he may be
entitled to receive or is receiving under paragraphs 6, 7 or 8
hereunder or otherwise, in the event of his violation of any of his
obligations under this Agreement. In the event of cessation of payments
and benefits, Employee's release of his claims against CNS shall remain
valid and fully enforceable in consideration of the benefits which
Employee received prior to set breach.
14. Severability. The parties intend that the covenants and agreements
contained herein shall be deemed to be a series of separate covenants
and agreements, one for each and every state of the United States and
political subdivision outside the United States where the business
described is conducted. If, in any judicial proceeding, a court shall
refuse to enforce any of the separate covenants deemed included in such
action, then such unenforceable covenants shall be deemed eliminated
from the provisions of this Agreement for the purpose of such
proceeding to the extent necessary to permit the remaining covenants to
be enforced in such proceeding. Further, in the event that any
provision is held to be overbroad as written, such provision shall be
deemed amended to narrow its application to the extent necessary to
make the provision enforceable according to applicable law and enforced
as amended.
15. Binding Effect.
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Executive Employment Agreement
Page 14
a. CNS will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets as defined in
subparagraph 8.a of CNS to expressly assume and agree to
perform this Agreement in the same manner and to the same
extent that CNS would be required to perform it if no such
succession had taken place, in which case, the term "CNS" as
used in this Agreement shall instead refer to CNS' successor.
Failure of CNS to obtain such assumption and agreement prior
to the effectiveness of any such succession shall be a breach
of this Agreement and shall entitle Employee to compensation
from CNS in the same amount and on the same terms as he would
be entitled hereunder if he terminated his employment for Good
Reason following a Change in Control, except that for purposes
of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of
Termination.
b. This Agreement shall inure to the benefit of and be
enforceable by Employee's personal or legal representatives,
successors, heirs, and designated beneficiaries. If Employee
should die while any amount would still be payable to Employee
hereunder if Employee had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to Employee's designated
beneficiaries, or, if there is no such designated beneficiary,
to Employee's estate.
16. Entire Agreement. From and after the date of this Agreement the terms
and provisions of this Agreement constitute the entire agreement
between the parties and this Agreement supersedes any previous oral or
written communications, representations, or agreements with respect to
any subject, including the subject matter of compensation, bonus,
participation and profit sharing and termination compensation.
17. Waiver and Interpretation. The waiver by either party of a breach of
any provision of this Agreement by the other party shall not operate or
be construed as a waiver of any subsequent breach by the breaching
party. No waiver shall be valid unless in writing and signed by the
party providing such waiver. If any provision of this Agreement is held
by any court to be unenforceable, then such provision shall be deemed
to be eliminated from the Agreement to permit enforceability of the
remaining provisions. If any provision is held to be overbroad, such
provision shall be amended to narrow its application to the extent
necessary for enforceability. For purposes of the release agreement
which Employee shall be required to execute as a condition of receiving
any payments and benefits hereunder, "CNS", as referred to in this
Agreement, shall include CNS and all its affiliates, shareholders,
officers, directors, employees, agents, attorneys, insurers and
indemnitors.
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Executive Employment Agreement
Page 15
18. Applicable Law. All questions pertaining to the validity, construction,
execution and performance of this Agreement shall be construed and
governed in accordance with the laws of the State of Minnesota. The
parties consent to the personal jurisdiction of the State of Minnesota,
waive any argument that such a forum is not convenient, and agree that
any litigation relating to this Agreement shall be venued in
Minneapolis, Minnesota.
19. Tax Withholding. CNS may withhold from any payment of benefits under
this Agreement (and forward to the appropriate taxing authority) any
taxes required to be withheld under applicable law.
20. Notice. Any notice required or desired to be given under this Agreement
shall be deemed given if in writing sent by certified mail to his
residence in the case of Employee, or to its principal office in the
case of CNS.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first set forth above.
CNS, INC.
By /s/ Marti Morfitt
-----------------------------------------
Its President & COO
-------------------------------------
EMPLOYEE
/s/ Teri Osgood
--------------------------------------------
Teri Osgood
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
EXHIBIT A
NAME: Teri Osgood
DATE: February 12, 1999
POSITION: VP, New Business Commercialization
DEPARTMENT: New Business Commercialization
BASE SALARY: $155,000
CAR ALLOWANCE: (INCLUDE ONLY IF APPLICABLE) $500.00/month
MANAGEMENT INCENTIVE PLAN LEVEL: 15 at Threshold
30 at Plan
60 at Maximum
EXHIBIT 10.15
EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is made as of February 12, 1999 (the "Effective Date") between
CNS, INC. a Delaware corporation ("CNS") and Carol Watzke ("Employee").
WHEREAS, CNS considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of CNS
and its shareholders; and
WHEREAS, Employee has made and is expected to continue to make, due to his
experience and knowledge, a significant contribution to the profitability,
growth and financial strength of CNS; and
WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of
a change in control may exist and that such possibility and the uncertainty and
questions which it may raise among management may result in the departure or
distraction of the performance of Employee's duties to the detriment of CNS and
its shareholders; and
WHEREAS, Employee is willing to continue his employment with CNS upon the
understanding that CNS will provide income security if Employee's employment is
terminated under certain terms and conditions;
WHEREAS, it is in the best interests of CNS and its stockholders to employ
Employee and to reinforce and encourage his continued attention and dedication
to his assigned duties without distraction and to ensure his continued
availability to CNS in the event of a Change in Control; and
WHEREAS, it is further in CNS's best interests to receive certain assurances
from Employee regarding CNS's confidentiality, competition and other proprietary
business concerns;
THEREFORE, in consideration of the foregoing and of this agreement, certain
change in control protection, continued employment and other benefits hereunder,
as well as other mutual covenants and obligations hereinafter set forth, CNS and
Employee agree as follows:
1. Employment. CNS agrees to continue to employ Employee as its VP,
Consumer Strategy under the terms, conditions and benefits set forth
herein and Employee accepts continued employment with CNS on said
terms, conditions and benefits.
2. Term. The term of Employee's employment shall continue until terminated
pursuant to paragraph 6, 7, or 8 herein.
3. Duties. In his position as VP, Consumer Strategy, Employee will
continue to faithfully and diligently perform such executive management
responsibilities as may be assigned to him from time to time by the
Chief Executive Officer, President or Chairman
<PAGE>
Executive Employment Agreement
Page 2
of the Board of Directors of CNS (the "Board"); devote his full time,
energy and skill to CNS's business, as is reasonably necessary to
execute fully his duties hereunder, except for vacations, absences made
necessary because of illness, and service on other corporate, civic, or
charitable boards or committees not significantly interfering with his
duties hereunder; and promote CNS's best interests. The principal place
of employment and the location of Employee's principal office and
normal place of work shall be in the Minneapolis, Minnesota
metropolitan area. Employee will be expected to travel to other
locations, as necessary, in the performance of his duties during the
term of this Agreement. Employee shall notify the President of any
other paid position which he is considering accepting, including but
not limited to a board of directors position, a position as an employee
or an independent consultant, or any position, whether or not for pay,
which could constitute a conflict of interest with CNS. The Employee
agrees not to accept any such position without the President of CNS's
prior approval.
4. Compensation. For all services rendered by Employee, CNS shall pay
Employee the compensation described in Exhibit A, payable at such times
as salaried employees of CNS are customarily paid. The President of CNS
shall, from time to time during Employee's employment, review his
annual salary in connection with possible increases, giving
consideration to inflation factors, performance of Employee and CNS,
salaries paid for positions of similar responsibility for other
companies, and other relevant factors, and shall provide for such
increases when deemed appropriate. Employee shall in addition be
eligible to participate in the annual management incentive bonus
program, as approved by the Board of Directors. In the event of
termination of this Agreement by CNS without Good Cause, as defined in
paragraph 7 herein, the Board may, in good faith and in its sole
discretion, determine and cause to be paid a partial bonus based on
Employee's performance through the date of termination, and such
determination shall be final and binding.
5. Benefits. Employee shall be entitled to Paid Time Off consistent with
CNS policy and such insurance, 401(k) program and other benefits
available to all salaried employees of CNS, subject to any limitations
on such benefits to officers, directors or highly paid employees in
order that such benefit programs qualify under federal or state law for
favored tax or other treatment. Such benefit programs may be changed
from time to time by the Board. Employee shall also be entitled to
reimbursement of his reasonable and necessary expenses incurred in
connection with the performance of his duties hereunder.
6. Termination by Employee. Employee may resign his employment with CNS
effective upon 30 days' advance written notice to the President. If
Employee resigns under this paragraph, the President retains the right
to terminate his employment, effective upon written notice to Employee,
at any time during the 30-day notice period, provided, however, that
base salary and the employer portion of his health insurance premiums
will continue to be paid by CNS for the duration of the 30-day notice
period. In connection
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Executive Employment Agreement
Page 3
with his termination, Employee will receive any accrued unused Paid
Time Off to which he is entitled.
7. Termination by CNS. CNS shall have the right to terminate Employee's
employment in any of the following ways:
a. CNS may, by written notice to Employee, terminate his
employment without Good Cause, in which event Employee will be
paid his base salary up to the date of termination. Employee
is also entitled to receive Salary Continuation for one year
from his termination date. "Salary Continuation" shall mean
payment by CNS of the Employee's base salary as of his
termination date, payable to Employee on the same schedule and
in the same amount as the payment of base salary prior to
termination of his employment, until such time as the full
Salary Continuation obligation shall be discharged, as
provided in this paragraph 7. During the period when Salary
Continuation is payable to Employee, CNS will also continue to
provide to Employee all group medical, dental and life plan
benefits provided to its other senior executives. Employee
shall also receive any accrued unused Paid Time Off to which
he is entitled. Receipt of Salary Continuation is subject to
Employee's compliance with his obligations under paragraphs 9,
10, 11 and 12 of this Agreement and his execution of a
standard release agreement which includes, in addition to
release of claims against CNS and related releasees, an
obligation not to speak negatively about or harm CNS,
confidentiality with respect to the termination process, and
cooperation with the transition of responsibilities. Payment
of the employer portion of Employee's group medical, dental
and life plan premiums under this paragraph and under
paragraphs 6 and 8 herein shall cease as of the date on which
Employee is covered under other such group plans if such
coverage occurs prior to termination of any salary
continuation periods set forth in said paragraphs.
b. CNS, by written notice to Employee, may terminate his
employment for Good Cause, as defined below. In the event of
termination under this subparagraph 7.b., Employee shall be
paid his base salary up to the date of termination. "Good
Cause" for the purpose of this Agreement shall mean one or
more of the following: (i) willful and premeditated failure or
refusal of Employee to render services to CNS in accordance
with his obligations under paragraph 3; (ii) the commission by
Employee of an act of fraud or embezzlement against CNS; (iii)
the commission by Employee of any other willful or reckless
act which injures CNS in a substantial or material way (it
being understood that mere negligence in performance of duties
is not Good Cause under this Agreement); (iv) the breach by
Employee of any provision of this Agreement; or (v) the
commission of a substantial act of moral turpitude by Employee
which is deemed by CNS's Board to have a material adverse
effect on CNS; or (vi) unsatisfactory performance after
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Executive Employment Agreement
Page 4
specific notice of performance deficiencies, description of
expectations and opportunity to cure.
c. CNS, by written notice to Employee, may terminate Employee's
employment under this Agreement if he becomes physically or
mentally disabled during the term so that he has not been able
to substantially perform, for a period of 120 consecutive
days, with reasonable accommodation, the usual duties assigned
to him hereunder ("Disability"). Upon such determination, CNS
shall pay to Employee his base salary up to the date of such
termination to the extent not covered by any disability plan.
d. This Agreement shall terminate upon the Employee's death
during its term, except that CNS shall pay to the legal
representative of Employee's estate all base salary due him up
to the date of his death.
8. Termination Following a Change in Control.
DEFINITION.
a. For purposes of this Agreement, "Change in Control" shall mean
the occurrence of one of the following events:
i. ACQUISITION OF 25% OF STOCK IN CNS
any "person" [as such term is used in Section 13(d)
and 4(d) of the Securities Exchange Act of 1934, as
amended ("Exchange Act")], other than a trustee or
other fiduciary holding securities under an employee
benefit plan of CNS is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly of securities
representing 25% or more of the combined voting power
of CNS's then outstanding securities;
ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT APPROVED BY BOARD
during any period of two consecutive years (not
including any period ending prior to the effective
date of this Agreement), individuals who at the
beginning of such period constitute the Board of
Directors of CNS, and any new director [other than a
director designated by a person who has entered into
agreement with CNS to effect a transaction permitted
by Section 6(a)(I), (iii) or (iv)] whose election by
the Board of Directors of CNS or nomination for
election by CNS's stockholders was approved by vote
of at least two-thirds of the directors then still in
office who either were directors at the beginning of
the period or whose election or nomination for
election was previously so approved ("Continuing
Directors"), cease for any reason to constitute at
least a majority of the
<PAGE>
Executive Employment Agreement
Page 5
Board of Directors of CNS;
iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN
LESS THAN 50% OF SURVIVING COMPANY'S STOCK
the stockholders of CNS approve a merger or
consolidation of CNS with any other corporation,
other than (A) a merger or consolidation which would
result in the voting securities of CNS outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being
converted into voting securities of the merged or
consolidated entity) 50% or more of the combined
voting power of the voting securities of CNS or such
merged or consolidated entity outstanding immediately
after such merger or consolidation, or (B) a merger
or consolidation effected to implement a
recapitalization of CNS or similar transaction in
which no "person" acquires more than 25% of the
combined voting power of CNS's then outstanding
securities;
iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF
CNS STOCK MARKET VALUE
the stockholders of CNS approve a plan of complete
liquidation or a sale or disposition by CNS of all or
substantially all of CNS's assets. "The sale or
disposition by CNS of all or substantially all of
CNS's assets" shall mean a sale or other disposition
transaction or series of related transactions
involving assets of CNS or of any direct or indirect
subsidiary of CNS (including the stock of any direct
or indirect subsidiary of CNS) in which the value of
the assets or stock being sold or otherwise disposed
of (as measured by the purchase price being paid
therefor or by such other method as the Board of
Directors of CNS determines is appropriate in a case
where there is no readily ascertainable purchase
price) constitutes more than 50% of the fair market
value of CNS. For purposes of the preceding sentence,
the "fair market value of CNS" shall be the aggregate
market value of CNS's outstanding common stock (on a
fully diluted basis) plus the aggregate market value
of CNS's other outstanding equity securities. The
aggregate market value of CNS's common stock shall be
determined by multiplying the number of shares of CNS
common stock (on a fully diluted basis) outstanding
on the date of the execution and delivery of a
definitive agreement ("Transaction Date") with
respect to the sale or disposition by CNS of all or
substantially all of CNS's assets by the average
closing price for CNS's common stock for the ten
trading days immediately preceding the Transaction
Date. The aggregate market value of any other equity
securities of CNS shall be determined in a manner
similar to that prescribed in the immediately
preceding sentence for determining the aggregate
market value of CNS's common stock or by such other
method as the Board of Directors of CNS shall
determine is
<PAGE>
Executive Employment Agreement
Page 6
appropriate; and Employee agrees that, subject to the
terms and conditions of this Agreement, in the event
of a Change in Control of CNS occurring after the
date hereof, Employee will remain in the employ of
CNS for a period of 30 days from the occurrence of
such Change in Control.
b. Applicability. In the event of a Change in Control, the terms
of this subparagraph 8.b shall be effective for a period of 24
months following the Change in Control. At the expiration of
such 24 month period this Agreement in its entirety shall be
terminated and be of no further effect. Employee shall be
entitled to receive the benefits set forth in subparagraph 8.f
if, within 24 months of such Change in Control, his employment
is terminated by CNS or its successor without Good Cause (as
defined in paragraph 7.a above), or by Employee for Good
Reason (as defined in subparagraph 8.b.i, below). Employee
shall, in return for the benefits provided under subparagraph
8.f., sign a standard release agreement with CNS, in which he
agrees to release any and all claims and causes of action
which he might have against CNS and in which he affirms and
acknowledges his obligations under paragraphs 9, 10, 11 and 12
of this Agreement.
i. Termination for Good Reason shall be effective
immediately upon written notice from the Employee to
the President. Good Reason shall exist if CNS has
materially breached any of the terms of this
Agreement; Employee is assigned duties which are
materially inconsistent with his position, duties,
responsibilities and status as VP, Consumer Strategy;
his compensation, including any incentive
compensation or bonus plan, is reduced; or relocation
of CNS would require him to relocate his principal
residence outside reasonable commuting distance of
the Twin Cities Metropolitan area.
ii. Termination without Good Cause shall be effective
upon 30 days' advance notice by CNS to the Employee.
For purposes of this paragraph 8, Good Cause shall be
defined as in subparagraph 7.b.
c. Notice of Termination. Any purported termination of employment
under this paragraph 8 and also under paragraphs 6 and 7 shall
be communicated by written Notice of Termination to the other
party hereto in accordance with paragraph 20 hereunder. For
purposes of this Agreement, a "Notice of Termination" shall
mean a notice which indicates the specific termination
provision in this Agreement relied upon and which sets forth
the facts and circumstances claimed to provide a basis for
termination of Employee's employment.
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Executive Employment Agreement
Page 7
d. Date of Termination. For purposes of this paragraph 8 and also
paragraphs 6 and 7 of this Agreement, "Date of Termination"
shall mean:
i. if Employee's employment is terminated for
Disability, as defined in paragraph 7.c. hereunder,
30 days after Notice of Termination is given
(provided that Employee shall not have returned to
the full-time performance of Employee's duties during
such 30 day period); and
ii. if Employee's employment is terminated pursuant to a
provision contained in paragraph 6, 7 or 8 herein or
for any other reason (other than Disability), the
date specified in the Notice of Termination,
consistent with the provisions in said paragraphs.
e. Dispute of Termination. If, within ten days after any Notice
of Termination is given under this paragraph 8, the party
receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties,
or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or the time
for appeal therefrom having expired and no appeal having been
perfected); provided, that the Date of Termination shall be
extended by a notice of dispute only if such notice is given
in good faith and the party giving such notice pursues the
resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, CNS shall
continue to pay Employee full compensation in effect when the
notice giving rise to the dispute was given (including, but
not limited to, base salary) and continue Employee as a
participant in all compensation, benefit and insurance plans
in which Employee was participating when the notice giving
rise to the dispute was given, to the extent permissible under
the terms of the applicable group plans and state and federal
law, until the dispute is finally resolved in accordance with
this subparagraph. Amounts paid under this subsection are in
addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts under
this Agreement.
<PAGE>
Executive Employment Agreement
Page 8
f. Compensation Upon Termination. Following a Change in Control,
as defined in subparagraph 8.a. above, to the extent provided
in subparagraph 8.b. above, Employee shall be entitled to the
following benefits in lieu of any benefits which would
otherwise be available to him upon termination under
paragraphs 6 or 7 hereunder:
i. CNS shall pay Employee through the Date of
Termination Employee's base salary at the rate in
effect at the time the Notice of Termination is given
and any other form or type of other compensation
otherwise payable for such period, including any
applicable incentive bonus, commensurate with his
performance and the performance of CNS.
ii. In lieu of any further salary payments for periods
subsequent to the Date of Termination, CNS shall pay
a severance payment (the "Severance Payment") equal
to 24 months of Employee's Compensation as defined
below based on the average monthly Compensation paid
to Employee during the 24 month period ending
immediately prior to the Date of Termination (without
giving effect to any reduction in such Compensation
which would constitute a breach of this Agreement).
If the Employee has not been employed by CNS for 24
months as of the Date of Termination, average monthly
Compensation shall be the Employee's average monthly
Compensation for the number of months during which
the Employee has been employed at CNS. For purposes
of this subparagraph, Compensation shall mean and
include every type and form of compensation paid to
Employee by CNS (or any corporation ("Affiliate")
affiliated with CNS within the meaning of Section
1504 of the Internal Revenue Code of 1986, as may be
amended from time to time (the "Code")) and included
in Employee's gross income for federal income tax
purposes, but excluding compensation income arising
from (1) hiring bonuses and (2) compensation income
recognized as a result of the exercise of stock
options or sale of the stock so acquired. All of
Employee's contributions to any qualified plan
pursuant to Section 401(k) of the Code or any
flexible benefit plan pursuant to Section 125 of the
Code shall be deemed to be included in gross income
for federal tax purposes for purposes of this
subparagraph. The Severance Payment shall be made in
a single lump sum within 60 days after the Date of
Termination.
iii. For 18 months following the Employee's Date of
Termination, CNS shall arrange to provide, at its
sole expense, Employee with group medical, dental and
life plan benefits substantially similar to those
which Employee was receiving or entitled to receive
immediately prior to the Notice of Termination. The
cost of providing such benefits shall be in addition
to (and shall not reduce) the Severance Payment.
Benefits otherwise
<PAGE>
Executive Employment Agreement
Page 9
receivable by Employee pursuant to this paragraph
(iii) shall be reduced to the extent comparable
benefits are actually received by Employee during
such period from any third party, and any such
benefits actually received by Employee shall be
reported to CNS.
iv. CNS shall also pay to Employee all legal fees and
expenses incurred by Employee as a result of such
termination (including all such fees and expenses, if
any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any
right or benefit provided by this paragraph).
v. The Severance Payment shall be reduced and offset by
the amount of any other payment received or to be
received by Employee in connection with his
termination of employment pursuant to any policies of
CNS.
vi. If a determination is made by legislation,
regulations, rulings directed to CNS or Employee, or
court decision that the aggregate amount of any
payment made to Employee hereunder, or pursuant to
any plan, program or policy of CNS in connection
with, on account of, or as a result of, a Change of
Control constitutes an "excess parachute payment" as
defined in Section 280G of the Code subject to the
excise tax provisions of Section 4999 of the Code, or
any successor sections thereof, Employee shall be
entitled to receive from CNS, in addition to any
other amounts payable hereunder, an amount which
shall be equal to such excise tax, plus, on a net
after-tax basis, an amount equal to the aggregate
amount of any interest, penalties, fines or additions
to any tax, including income tax, which are imposed
in connection with the imposition of such excise tax.
Such amount shall be payable to Employee as soon as
may be practicable after such final determination is
made. Employee and CNS shall mutually and reasonably
determine whether or not such determination has
occurred or whether any appeal to such determination
should be made.
vii. Employee shall be entitled to receive all benefits
payable to Employee under the CNS, Inc. Profit
Sharing Plan and Trust or any successor of such Plan
and Trust and any other plan or agreement relating to
retirement benefits, and, in addition, if Employee is
not fully vested in his account balance under such
Plan, a single lump sum payment in cash from CNS
representing the nonvested portion of his account,
which shall be in addition to, and not reduced by,
any other amounts payable to Employee under this
paragraph 8.
viii. Employee shall not be required to mitigate the amount
of any payment provided for in this paragraph 8 by
seeking other employment or
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Executive Employment Agreement
Page 10
otherwise, nor shall the amount of any payment or
benefit provided for in this paragraph 8 be reduced
by any compensation earned by Employee as the result
of employment by another employer or by retirement
benefits after the Date of Termination, or otherwise
except as specifically provided in this paragraph 8.
ix. In order to assure the performance of CNS or its
successor of its obligations under this paragraph,
CNS may deposit in trust an amount equal to the
maximum payment that will be due Employee under the
terms hereof. Under a written trust instrument, the
Trustee shall be instructed to pay to Employee (or
Employee's legal representative, as the case may be)
the amount to which Employee shall be entitled under
the terms hereof, and the balance, if any, of the
trust not so paid or reserved for payment shall be
repaid to CNS. If CNS deposits funds in trust,
payment shall be made no later than the occurrence of
a Change in Control. If and to the extent there are
not amounts in trust sufficient to pay Employee under
this Agreement, CNS shall remain liable for any and
all payments due to Employee. In accordance with the
terms of such trust, at all times during the term of
this Agreement, Employee shall have no rights, other
than as an unsecured general creditor of CNS, to any
amounts held in trust and all trust assets shall be
general assets of CNS and subject to the claims of
creditors of CNS. Failure of CNS to establish or
fully fund such trust shall not be deemed a
revocation or termination of this Agreement by CNS.
x. As a condition of receiving the Severance Payment and
other benefits provided in this subparagraph 8.f and
in subparagraph 8.g, Employee shall be required to
sign a standard release agreement with CNS in which
he agrees to release any and all claims and causes of
action which he might have against CNS and in which
he affirms and acknowledges his obligations under
paragraphs 9, 10, 11 and 12 of this Agreement.
g. Stock Options. Employee shall, immediately upon a Change in
Control, vest in all stock options which have been granted to
him and he shall be entitled to exercise all rights and to
receive all benefits accruing to him under any and all CNS
stock purchase and stock option plans or programs, including
the CNS, Inc. 1994 Amended Stock Plan, or any successor to any
such plan or program, which shall be in addition to and not
reduced by any other amounts payable to Employee under this
paragraph 8.
9. Confidential Information. All knowledge and information not already
available to the public which Employee may acquire or has acquired with
respect to product development, improvements, modifications,
discoveries, designs, methods, systems, computer software, programs,
codes and documentation, research, designs, formulas, instructions,
methods,
<PAGE>
Executive Employment Agreement
Page 11
inventions, trade secrets, services or other private or confidential
matters of CNS (such as those concerning sales, costs, profits,
organizations, customer lists, pricing methods, etc.), or of any third
party which CNS is obligated to keep confidential, shall be regarded by
Employee as strictly confidential and shall not be used by Employee
directly or indirectly or disclosed to any persons, corporations or
firms. All of the foregoing knowledge and information are collectively
termed "Confidential Information" herein. Employee's obligations under
this paragraph will not apply to any information which (a) is or
becomes known to the general public under circumstances involving no
breach by Employee of the terms of this paragraph, (b) is generally
disclosed to third parties by CNS as a continuing practice without
restriction on such third parties, (c) is approved for release by
written authorization of CNS's Board, or (d) Employee is obligated by
law to disclose.
10. Disclosure and Transfer of Product Developments, etc.
a. Employee will make full and prompt disclosure to CNS or all
product developments, improvements, modifications,
discoveries, computer software, programs, codes and
documentation, research, designs, formulas, configurations,
instructions, methods and inventions (all of which are
collectively termed "Developments" herein), whether patentable
or not, made, discovered, conceived or first reduced to
practice by Employee or under his direction during his
employment, alone or with others, whether or not made or
conceived during normal working hours or on the premises of
CNS which relate in any material way to the business or to
research or development work of CNS. Employee confirms by his
acceptance of this Agreement that CNS owns and shall own all
of the Developments.
b. Employee also agrees on behalf of himself and his heirs and
legal representatives that he will promptly communicate,
disclose and transfer to CNS, free of encumbrances and
restrictions, all of his right, title and interest in the
Developments covered by subparagraph 10.a. and any patents or
patent applications covering such Developments and to execute
and deliver such assignments, patents and applications, and
any other documents as CNS may direct, and to cooperate fully
with CNS to enable it to secure any patents or otherwise
protect such Developments in any and all countries. Employee
shall assign to CNS any and all copyrights and reproduction
rights to all material prepared by Employee in connection with
his employment.
c. Notwithstanding subparagraphs 10.a. and b., however, this
paragraph 10 shall not apply to Developments for which no
equipment, supplies, facility or trade secret information of
CNS was used and which was developed entirely on the
Employee's own time, and (1) which do not relate (a) directly
to the business of CNS or (b) to CNS's actual or demonstrably
anticipated research or development, or (2) which does not
result from any work performed by Employee for CNS.
<PAGE>
Executive Employment Agreement
Page 12
This will confirm that Employee's obligations to CNS under paragraphs
9, 10 and 11 will continue after the termination of Employee's
employment.
11. Non-Competition. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly engage in, enter into or participate in the business of CNS
or in any business or commercial activity which does or is reasonably
likely to compete with or adversely affect the Business or products of
CNS, either as an individual for Employee's own account, as a partner
or a joint venturer, or as an officer, director, consultant or holder
of more than five percent (5%) of the entity interest in, any other
person, firm, partnership or corporation, or an employee, agent or
salesman for any person. In addition, during such period Employee shall
not: avail himself of any advantages or acquaintances he has made with
any person who has, within the twelve (12) month period ended on the
date of termination of his employment, been a customer of CNS or its
affiliates, and which would, directly or indirectly, materially divert
business from or materially and adversely affect the Business of CNS;
interfere with the contractual relations between CNS and any of its
employees; or employ or cause to be employed in any capacity or retain
or cause to be retained as a consultant any person who was employed in
any capacity by CNS during the twelve (12) month period ended on the
date of termination of Employee's employment.
For purposes of this Agreement, the "Business of CNS" or "Business"
means and includes the business of the manufacture, production, sale,
marketing and distribution of the Breathe Right strip and any other
products currently offered or currently under development by CNS or
offered or currently under development by CNS during one (1) year prior
to the date of termination of Employee's employment.
Inasmuch as the activities of CNS are conducted on an international
basis, the restrictions of this paragraph 11 shall apply throughout the
United States, Canada, Japan and Europe.
12. Non-Solicitation. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly solicit any current or prospective CNS customer, broker,
vendor or distributor for the purpose of providing products or services
for or on behalf of said customer, broker, vendor or distributor which
are competitive with the products or services being provided by CNS,
which are in the development stages of being competitive with the
products or services being provided by CNS, or which would in any way
cause said customer, broker, vendor or distributor to discontinue or
reduce its business relationship with CNS. Current CNS customers,
brokers, vendors or distributors include those customer, brokers,
vendors or distributors with whom CNS has had a business relationship
at any time within one year immediately preceding Employee's
termination date. Prospective CNS customers, brokers, vendors and
distributors include those with whom (a) a CNS representative has been
in direct personal contact and (b) CNS has a reasonable opportunity of
entering into a business
<PAGE>
Executive Employment Agreement
Page 13
relationship within six months following Employee's termination date.
Employee also agrees that during his employment in the one year period
following his employment, he will not directly or indirectly solicit
any CNS employees to terminate his or her employment with CNS. This
Employee non-solicitation obligation applies to Employees of CNS during
Employee's employment and as of his termination date.
13. Remedies. Employee acknowledges that the restrictions set forth in
paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect
legitimate business interests of CNS. It is understood that if Employee
violates his obligations under any of these paragraphs, CNS would
suffer irreparable harm for which a recovery of money damages would be
an incomplete and inadequate remedy. It is therefore agreed that CNS,
in addition to any remedies at law, shall be entitled, as a matter of
right, in any court of competent jurisdiction, to a mandatory
injunction restraining Employee pending litigation, as well as upon
final determination thereof, from violating this Agreement. In
addition, CNS will discontinue payment to Employee of any Severance or
Salary Continuation Payments, benefits or bonus which he may be
entitled to receive or is receiving under paragraphs 6, 7 or 8
hereunder or otherwise, in the event of his violation of any of his
obligations under this Agreement. In the event of cessation of payments
and benefits, Employee's release of his claims against CNS shall remain
valid and fully enforceable in consideration of the benefits which
Employee received prior to set breach.
14. Severability. The parties intend that the covenants and agreements
contained herein shall be deemed to be a series of separate covenants
and agreements, one for each and every state of the United States and
political subdivision outside the United States where the business
described is conducted. If, in any judicial proceeding, a court shall
refuse to enforce any of the separate covenants deemed included in such
action, then such unenforceable covenants shall be deemed eliminated
from the provisions of this Agreement for the purpose of such
proceeding to the extent necessary to permit the remaining covenants to
be enforced in such proceeding. Further, in the event that any
provision is held to be overbroad as written, such provision shall be
deemed amended to narrow its application to the extent necessary to
make the provision enforceable according to applicable law and enforced
as amended.
15. Binding Effect.
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Executive Employment Agreement
Page 14
a. CNS will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets as defined in
subparagraph 8.a of CNS to expressly assume and agree to
perform this Agreement in the same manner and to the same
extent that CNS would be required to perform it if no such
succession had taken place, in which case, the term "CNS" as
used in this Agreement shall instead refer to CNS' successor.
Failure of CNS to obtain such assumption and agreement prior
to the effectiveness of any such succession shall be a breach
of this Agreement and shall entitle Employee to compensation
from CNS in the same amount and on the same terms as he would
be entitled hereunder if he terminated his employment for Good
Reason following a Change in Control, except that for purposes
of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of
Termination.
b. This Agreement shall inure to the benefit of and be
enforceable by Employee's personal or legal representatives,
successors, heirs, and designated beneficiaries. If Employee
should die while any amount would still be payable to Employee
hereunder if Employee had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to Employee's designated
beneficiaries, or, if there is no such designated beneficiary,
to Employee's estate.
16. Entire Agreement. From and after the date of this Agreement the terms
and provisions of this Agreement constitute the entire agreement
between the parties and this Agreement supersedes any previous oral or
written communications, representations, or agreements with respect to
any subject, including the subject matter of compensation, bonus,
participation and profit sharing and termination compensation.
17. Waiver and Interpretation. The waiver by either party of a breach of
any provision of this Agreement by the other party shall not operate or
be construed as a waiver of any subsequent breach by the breaching
party. No waiver shall be valid unless in writing and signed by the
party providing such waiver. If any provision of this Agreement is held
by any court to be unenforceable, then such provision shall be deemed
to be eliminated from the Agreement to permit enforceability of the
remaining provisions. If any provision is held to be overbroad, such
provision shall be amended to narrow its application to the extent
necessary for enforceability. For purposes of the release agreement
which Employee shall be required to execute as a condition of receiving
any payments and benefits hereunder, "CNS", as referred to in this
Agreement, shall include CNS and all its affiliates, shareholders,
officers, directors, employees, agents, attorneys, insurers and
indemnitors.
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Executive Employment Agreement
Page 15
18. Applicable Law. All questions pertaining to the validity, construction,
execution and performance of this Agreement shall be construed and
governed in accordance with the laws of the State of Minnesota. The
parties consent to the personal jurisdiction of the State of Minnesota,
waive any argument that such a forum is not convenient, and agree that
any litigation relating to this Agreement shall be venued in
Minneapolis, Minnesota.
19. Tax Withholding. CNS may withhold from any payment of benefits under
this Agreement (and forward to the appropriate taxing authority) any
taxes required to be withheld under applicable law.
20. Notice. Any notice required or desired to be given under this Agreement
shall be deemed given if in writing sent by certified mail to his
residence in the case of Employee, or to its principal office in the
case of CNS.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first set forth above.
CNS, INC.
By /s/ Marti Morfitt
-----------------------------------------
Its President & COO
-------------------------------------
EMPLOYEE
/s/ Carol Watzke
---------------------------------------------
Carol Watzke
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
EXHIBIT A
NAME: Carol Watzke
DATE: February 12, 1999
POSITION: VP, Consumer Strategy
DEPARTMENT: Consumer Strategy
BASE SALARY: $150,000
CAR ALLOWANCE: (INCLUDE ONLY IF APPLICABLE)
MANAGEMENT INCENTIVE PLAN LEVEL: 15 at Threshold
30 at Plan
60 at Maximum
EXHIBIT 10.16
EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is made as of February 12, 1999 (the "Effective Date") between
CNS, INC. a Delaware corporation ("CNS") and Doug Austin ("Employee").
WHEREAS, CNS considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of CNS
and its shareholders; and
WHEREAS, Employee has made and is expected to continue to make, due to his
experience and knowledge, a significant contribution to the profitability,
growth and financial strength of CNS; and
WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of
a change in control may exist and that such possibility and the uncertainty and
questions which it may raise among management may result in the departure or
distraction of the performance of Employee's duties to the detriment of CNS and
its shareholders; and
WHEREAS, Employee is willing to continue his employment with CNS upon the
understanding that CNS will provide income security if Employee's employment is
terminated under certain terms and conditions;
WHEREAS, it is in the best interests of CNS and its stockholders to employ
Employee and to reinforce and encourage his continued attention and dedication
to his assigned duties without distraction and to ensure his continued
availability to CNS in the event of a Change in Control; and
WHEREAS, it is further in CNS's best interests to receive certain assurances
from Employee regarding CNS's confidentiality, competition and other proprietary
business concerns;
THEREFORE, in consideration of the foregoing and of this agreement, certain
change in control protection, continued employment and other benefits hereunder,
as well as other mutual covenants and obligations hereinafter set forth, CNS and
Employee agree as follows:
1. Employment. CNS agrees to continue to employ Employee as its VP,
Operations under the terms, conditions and benefits set forth herein
and Employee accepts continued employment with CNS on said terms,
conditions and benefits.
2. Term. The term of Employee's employment shall continue until terminated
pursuant to paragraph 6, 7, or 8 herein.
3. Duties. In his position as VP, Operations, Employee will continue to
faithfully and diligently perform such executive management
responsibilities as may be assigned to him from time to time by the
Chief Executive Officer, President or Chairman of the
<PAGE>
Executive Employment Agreement
Page 2
Board of Directors of CNS (the "Board"); devote his full time, energy
and skill to CNS's business, as is reasonably necessary to execute
fully his duties hereunder, except for vacations, absences made
necessary because of illness, and service on other corporate, civic, or
charitable boards or committees not significantly interfering with his
duties hereunder; and promote CNS's best interests. The principal place
of employment and the location of Employee's principal office and
normal place of work shall be in the Minneapolis, Minnesota
metropolitan area. Employee will be expected to travel to other
locations, as necessary, in the performance of his duties during the
term of this Agreement. Employee shall notify the President of any
other paid position which he is considering accepting, including but
not limited to a board of directors position, a position as an employee
or an independent consultant, or any position, whether or not for pay,
which could constitute a conflict of interest with CNS. The Employee
agrees not to accept any such position without the President of CNS's
prior approval.
4. Compensation. For all services rendered by Employee, CNS shall pay
Employee the compensation described in Exhibit A, payable at such times
as salaried employees of CNS are customarily paid. The President of CNS
shall, from time to time during Employee's employment, review his
annual salary in connection with possible increases, giving
consideration to inflation factors, performance of Employee and CNS,
salaries paid for positions of similar responsibility for other
companies, and other relevant factors, and shall provide for such
increases when deemed appropriate. Employee shall in addition be
eligible to participate in the annual management incentive bonus
program, as approved by the Board of Directors. In the event of
termination of this Agreement by CNS without Good Cause, as defined in
paragraph 7 herein, the Board may, in good faith and in its sole
discretion, determine and cause to be paid a partial bonus based on
Employee's performance through the date of termination, and such
determination shall be final and binding.
5. Benefits. Employee shall be entitled to Paid Time Off consistent with
CNS policy and such insurance, 401(k) program and other benefits
available to all salaried employees of CNS, subject to any limitations
on such benefits to officers, directors or highly paid employees in
order that such benefit programs qualify under federal or state law for
favored tax or other treatment. Such benefit programs may be changed
from time to time by the Board. Employee shall also be entitled to
reimbursement of his reasonable and necessary expenses incurred in
connection with the performance of his duties hereunder.
6. Termination by Employee. Employee may resign his employment with CNS
effective upon 30 days' advance written notice to the President. If
Employee resigns under this paragraph, the President retains the right
to terminate his employment, effective upon written notice to Employee,
at any time during the 30-day notice period, provided, however, that
base salary and the employer portion of his health insurance premiums
will continue to be paid by CNS for the duration of the 30-day notice
period. In connection
<PAGE>
Executive Employment Agreement
Page 3
with his termination, Employee will receive any accrued unused Paid
Time Off to which he is entitled.
7. Termination by CNS. CNS shall have the right to terminate Employee's
employment in any of the following ways:
a. CNS may, by written notice to Employee, terminate his
employment without Good Cause, in which event Employee will be
paid his base salary up to the date of termination. Employee
is also entitled to receive Salary Continuation for one year
from his termination date. "Salary Continuation" shall mean
payment by CNS of the Employee's base salary as of his
termination date, payable to Employee on the same schedule and
in the same amount as the payment of base salary prior to
termination of his employment, until such time as the full
Salary Continuation obligation shall be discharged, as
provided in this paragraph 7. During the period when Salary
Continuation is payable to Employee, CNS will also continue to
provide to Employee all group medical, dental and life plan
benefits provided to its other senior executives. Employee
shall also receive any accrued unused Paid Time Off to which
he is entitled. Receipt of Salary Continuation is subject to
Employee's compliance with his obligations under paragraphs 9,
10, 11 and 12 of this Agreement and his execution of a
standard release agreement which includes, in addition to
release of claims against CNS and related releasees, an
obligation not to speak negatively about or harm CNS,
confidentiality with respect to the termination process, and
cooperation with the transition of responsibilities. Payment
of the employer portion of Employee's group medical, dental
and life plan premiums under this paragraph and under
paragraphs 6 and 8 herein shall cease as of the date on which
Employee is covered under other such group plans if such
coverage occurs prior to termination of any salary
continuation periods set forth in said paragraphs.
b. CNS, by written notice to Employee, may terminate his
employment for Good Cause, as defined below. In the event of
termination under this subparagraph 7.b., Employee shall be
paid his base salary up to the date of termination. "Good
Cause" for the purpose of this Agreement shall mean one or
more of the following: (i) willful and premeditated failure or
refusal of Employee to render services to CNS in accordance
with his obligations under paragraph 3; (ii) the commission by
Employee of an act of fraud or embezzlement against CNS; (iii)
the commission by Employee of any other willful or reckless
act which injures CNS in a substantial or material way (it
being understood that mere negligence in performance of duties
is not Good Cause under this Agreement); (iv) the breach by
Employee of any provision of this Agreement; or (v) the
commission of a substantial act of moral turpitude by Employee
which is deemed by CNS's Board to have a material adverse
effect on CNS; or (vi) unsatisfactory performance after
<PAGE>
Executive Employment Agreement
Page 4
specific notice of performance deficiencies, description of
expectations and opportunity to cure.
c. CNS, by written notice to Employee, may terminate Employee's
employment under this Agreement if he becomes physically or
mentally disabled during the term so that he has not been able
to substantially perform, for a period of 120 consecutive
days, with reasonable accommodation, the usual duties assigned
to him hereunder ("Disability"). Upon such determination, CNS
shall pay to Employee his base salary up to the date of such
termination to the extent not covered by any disability plan.
d. This Agreement shall terminate upon the Employee's death
during its term, except that CNS shall pay to the legal
representative of Employee's estate all base salary due him up
to the date of his death.
8. Termination Following a Change in Control.
DEFINITION.
a. For purposes of this Agreement, "Change in Control" shall mean
the occurrence of one of the following events:
i. ACQUISITION OF 25% OF STOCK IN CNS
any "person" [as such term is used in Section 13(d)
and 4(d) of the Securities Exchange Act of 1934, as
amended ("Exchange Act")], other than a trustee or
other fiduciary holding securities under an employee
benefit plan of CNS is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly of securities
representing 25% or more of the combined voting power
of CNS's then outstanding securities;
ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT
APPROVED BY BOARD
during any period of two consecutive years (not
including any period ending prior to the effective
date of this Agreement), individuals who at the
beginning of such period constitute the Board of
Directors of CNS, and any new director [other than a
director designated by a person who has entered into
agreement with CNS to effect a transaction permitted
by Section 6(a)(I), (iii) or (iv)] whose election by
the Board of Directors of CNS or nomination for
election by CNS's stockholders was approved by vote
of at least two-thirds of the directors then still in
office who either were directors at the beginning of
the period or whose election or nomination for
election was previously so approved ("Continuing
Directors"), cease for any reason to constitute at
least a majority of the
<PAGE>
Executive Employment Agreement
Page 5
Board of Directors of CNS;
iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN
LESS THAN 50% OF SURVIVING COMPANY'S STOCK
the stockholders of CNS approve a merger or
consolidation of CNS with any other corporation,
other than (A) a merger or consolidation which would
result in the voting securities of CNS outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being
converted into voting securities of the merged or
consolidated entity) 50% or more of the combined
voting power of the voting securities of CNS or such
merged or consolidated entity outstanding immediately
after such merger or consolidation, or (B) a merger
or consolidation effected to implement a
recapitalization of CNS or similar transaction in
which no "person" acquires more than 25% of the
combined voting power of CNS's then outstanding
securities;
iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF
CNS STOCK MARKET VALUE
the stockholders of CNS approve a plan of complete
liquidation or a sale or disposition by CNS of all or
substantially all of CNS's assets. "The sale or
disposition by CNS of all or substantially all of
CNS's assets" shall mean a sale or other disposition
transaction or series of related transactions
involving assets of CNS or of any direct or indirect
subsidiary of CNS (including the stock of any direct
or indirect subsidiary of CNS) in which the value of
the assets or stock being sold or otherwise disposed
of (as measured by the purchase price being paid
therefor or by such other method as the Board of
Directors of CNS determines is appropriate in a case
where there is no readily ascertainable purchase
price) constitutes more than 50% of the fair market
value of CNS. For purposes of the preceding sentence,
the "fair market value of CNS" shall be the aggregate
market value of CNS's outstanding common stock (on a
fully diluted basis) plus the aggregate market value
of CNS's other outstanding equity securities. The
aggregate market value of CNS's common stock shall be
determined by multiplying the number of shares of CNS
common stock (on a fully diluted basis) outstanding
on the date of the execution and delivery of a
definitive agreement ("Transaction Date") with
respect to the sale or disposition by CNS of all or
substantially all of CNS's assets by the average
closing price for CNS's common stock for the ten
trading days immediately preceding the Transaction
Date. The aggregate market value of any other equity
securities of CNS shall be determined in a manner
similar to that prescribed in the immediately
preceding sentence for determining the aggregate
market value of CNS's common stock or by such other
method as the Board of Directors of CNS shall
determine is
<PAGE>
Executive Employment Agreement
Page 6
appropriate; and Employee agrees that, subject to the
terms and conditions of this Agreement, in the event
of a Change in Control of CNS occurring after the
date hereof, Employee will remain in the employ of
CNS for a period of 30 days from the occurrence of
such Change in Control.
b. Applicability. In the event of a Change in Control, the terms
of this subparagraph 8.b shall be effective for a period of 24
months following the Change in Control. At the expiration of
such 24 month period this Agreement in its entirety shall be
terminated and be of no further effect. Employee shall be
entitled to receive the benefits set forth in subparagraph 8.f
if, within 24 months of such Change in Control, his employment
is terminated by CNS or its successor without Good Cause (as
defined in paragraph 7.a above), or by Employee for Good
Reason (as defined in subparagraph 8.b.i, below). Employee
shall, in return for the benefits provided under subparagraph
8.f., sign a standard release agreement with CNS, in which he
agrees to release any and all claims and causes of action
which he might have against CNS and in which he affirms and
acknowledges his obligations under paragraphs 9, 10, 11 and 12
of this Agreement.
i. Termination for Good Reason shall be effective
immediately upon written notice from the Employee to
the President. Good Reason shall exist if CNS has
materially breached any of the terms of this
Agreement; Employee is assigned duties which are
materially inconsistent with his position, duties,
responsibilities and status as VP, Operations; his
compensation, including any incentive compensation or
bonus plan, is reduced; or relocation of CNS would
require him to relocate his principal residence
outside reasonable commuting distance of the Twin
Cities Metropolitan area.
ii. Termination without Good Cause shall be effective
upon 30 days' advance notice by CNS to the Employee.
For purposes of this paragraph 8, Good Cause shall be
defined as in subparagraph 7.b.
c. Notice of Termination. Any purported termination of employment
under this paragraph 8 and also under paragraphs 6 and 7 shall
be communicated by written Notice of Termination to the other
party hereto in accordance with paragraph 20 hereunder. For
purposes of this Agreement, a "Notice of Termination" shall
mean a notice which indicates the specific termination
provision in this Agreement relied upon and which sets forth
the facts and circumstances claimed to provide a basis for
termination of Employee's employment.
<PAGE>
Executive Employment Agreement
Page 7
d. Date of Termination. For purposes of this paragraph 8 and also
paragraphs 6 and 7 of this Agreement, "Date of Termination"
shall mean:
i. if Employee's employment is terminated for
Disability, as defined in paragraph 7.c. hereunder,
30 days after Notice of Termination is given
(provided that Employee shall not have returned to
the full-time performance of Employee's duties during
such 30 day period); and
ii. if Employee's employment is terminated pursuant to a
provision contained in paragraph 6, 7 or 8 herein or
for any other reason (other than Disability), the
date specified in the Notice of Termination,
consistent with the provisions in said paragraphs.
e. Dispute of Termination. If, within ten days after any Notice
of Termination is given under this paragraph 8, the party
receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties,
or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or the time
for appeal therefrom having expired and no appeal having been
perfected); provided, that the Date of Termination shall be
extended by a notice of dispute only if such notice is given
in good faith and the party giving such notice pursues the
resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, CNS shall
continue to pay Employee full compensation in effect when the
notice giving rise to the dispute was given (including, but
not limited to, base salary) and continue Employee as a
participant in all compensation, benefit and insurance plans
in which Employee was participating when the notice giving
rise to the dispute was given, to the extent permissible under
the terms of the applicable group plans and state and federal
law, until the dispute is finally resolved in accordance with
this subparagraph. Amounts paid under this subsection are in
addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts under
this Agreement.
<PAGE>
Executive Employment Agreement
Page 8
f. Compensation Upon Termination. Following a Change in Control,
as defined in subparagraph 8.a. above, to the extent provided
in subparagraph 8.b. above, Employee shall be entitled to the
following benefits in lieu of any benefits which would
otherwise be available to him upon termination under
paragraphs 6 or 7 hereunder:
i. CNS shall pay Employee through the Date of
Termination Employee's base salary at the rate in
effect at the time the Notice of Termination is given
and any other form or type of other compensation
otherwise payable for such period, including any
applicable incentive bonus, commensurate with his
performance and the performance of CNS.
ii. In lieu of any further salary payments for periods
subsequent to the Date of Termination, CNS shall pay
a severance payment (the "Severance Payment") equal
to 24 months of Employee's Compensation as defined
below based on the average monthly Compensation paid
to Employee during the 24 month period ending
immediately prior to the Date of Termination (without
giving effect to any reduction in such Compensation
which would constitute a breach of this Agreement).
If the Employee has not been employed by CNS for 24
months as of the Date of Termination, average monthly
Compensation shall be the Employee's average monthly
Compensation for the number of months during which
the Employee has been employed at CNS. For purposes
of this subparagraph, Compensation shall mean and
include every type and form of compensation paid to
Employee by CNS (or any corporation ("Affiliate")
affiliated with CNS within the meaning of Section
1504 of the Internal Revenue Code of 1986, as may be
amended from time to time (the "Code")) and included
in Employee's gross income for federal income tax
purposes, but excluding compensation income arising
from (1) hiring bonuses and (2) compensation income
recognized as a result of the exercise of stock
options or sale of the stock so acquired. All of
Employee's contributions to any qualified plan
pursuant to Section 401(k) of the Code or any
flexible benefit plan pursuant to Section 125 of the
Code shall be deemed to be included in gross income
for federal tax purposes for purposes of this
subparagraph. The Severance Payment shall be made in
a single lump sum within 60 days after the Date of
Termination.
iii. For 18 months following the Employee's Date of
Termination, CNS shall arrange to provide, at its
sole expense, Employee with group medical, dental and
life plan benefits substantially similar to those
which Employee was receiving or entitled to receive
immediately prior to the Notice of Termination. The
cost of providing such benefits shall be in addition
to (and shall not reduce) the Severance Payment.
Benefits otherwise
<PAGE>
Executive Employment Agreement
Page 9
receivable by Employee pursuant to this paragraph
(iii) shall be reduced to the extent comparable
benefits are actually received by Employee during
such period from any third party, and any such
benefits actually received by Employee shall be
reported to CNS.
iv. CNS shall also pay to Employee all legal fees and
expenses incurred by Employee as a result of such
termination (including all such fees and expenses, if
any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any
right or benefit provided by this paragraph).
v. The Severance Payment shall be reduced and offset by
the amount of any other payment received or to be
received by Employee in connection with his
termination of employment pursuant to any policies of
CNS.
vi. If a determination is made by legislation,
regulations, rulings directed to CNS or Employee, or
court decision that the aggregate amount of any
payment made to Employee hereunder, or pursuant to
any plan, program or policy of CNS in connection
with, on account of, or as a result of, a Change of
Control constitutes an "excess parachute payment" as
defined in Section 280G of the Code subject to the
excise tax provisions of Section 4999 of the Code, or
any successor sections thereof, Employee shall be
entitled to receive from CNS, in addition to any
other amounts payable hereunder, an amount which
shall be equal to such excise tax, plus, on a net
after-tax basis, an amount equal to the aggregate
amount of any interest, penalties, fines or additions
to any tax, including income tax, which are imposed
in connection with the imposition of such excise tax.
Such amount shall be payable to Employee as soon as
may be practicable after such final determination is
made. Employee and CNS shall mutually and reasonably
determine whether or not such determination has
occurred or whether any appeal to such determination
should be made.
vii. Employee shall be entitled to receive all benefits
payable to Employee under the CNS, Inc. Profit
Sharing Plan and Trust or any successor of such Plan
and Trust and any other plan or agreement relating to
retirement benefits, and, in addition, if Employee is
not fully vested in his account balance under such
Plan, a single lump sum payment in cash from CNS
representing the nonvested portion of his account,
which shall be in addition to, and not reduced by,
any other amounts payable to Employee under this
paragraph 8.
viii. Employee shall not be required to mitigate the amount
of any payment provided for in this paragraph 8 by
seeking other employment or
<PAGE>
Executive Employment Agreement
Page 10
otherwise, nor shall the amount of any payment or
benefit provided for in this paragraph 8 be reduced
by any compensation earned by Employee as the result
of employment by another employer or by retirement
benefits after the Date of Termination, or otherwise
except as specifically provided in this paragraph 8.
ix. In order to assure the performance of CNS or its
successor of its obligations under this paragraph,
CNS may deposit in trust an amount equal to the
maximum payment that will be due Employee under the
terms hereof. Under a written trust instrument, the
Trustee shall be instructed to pay to Employee (or
Employee's legal representative, as the case may be)
the amount to which Employee shall be entitled under
the terms hereof, and the balance, if any, of the
trust not so paid or reserved for payment shall be
repaid to CNS. If CNS deposits funds in trust,
payment shall be made no later than the occurrence of
a Change in Control. If and to the extent there are
not amounts in trust sufficient to pay Employee under
this Agreement, CNS shall remain liable for any and
all payments due to Employee. In accordance with the
terms of such trust, at all times during the term of
this Agreement, Employee shall have no rights, other
than as an unsecured general creditor of CNS, to any
amounts held in trust and all trust assets shall be
general assets of CNS and subject to the claims of
creditors of CNS. Failure of CNS to establish or
fully fund such trust shall not be deemed a
revocation or termination of this Agreement by CNS.
x. As a condition of receiving the Severance Payment and
other benefits provided in this subparagraph 8.f and
in subparagraph 8.g, Employee shall be required to
sign a standard release agreement with CNS in which
he agrees to release any and all claims and causes of
action which he might have against CNS and in which
he affirms and acknowledges his obligations under
paragraphs 9, 10, 11 and 12 of this Agreement.
g. Stock Options. Employee shall, immediately upon a Change in
Control, vest in all stock options which have been granted to
him and he shall be entitled to exercise all rights and to
receive all benefits accruing to him under any and all CNS
stock purchase and stock option plans or programs, including
the CNS, Inc. 1994 Amended Stock Plan, or any successor to any
such plan or program, which shall be in addition to and not
reduced by any other amounts payable to Employee under this
paragraph 8.
9. Confidential Information. All knowledge and information not already
available to the public which Employee may acquire or has acquired with
respect to product development, improvements, modifications,
discoveries, designs, methods, systems, computer software, programs,
codes and documentation, research, designs, formulas, instructions,
methods,
<PAGE>
Executive Employment Agreement
Page 11
inventions, trade secrets, services or other private or confidential
matters of CNS (such as those concerning sales, costs, profits,
organizations, customer lists, pricing methods, etc.), or of any third
party which CNS is obligated to keep confidential, shall be regarded by
Employee as strictly confidential and shall not be used by Employee
directly or indirectly or disclosed to any persons, corporations or
firms. All of the foregoing knowledge and information are collectively
termed "Confidential Information" herein. Employee's obligations under
this paragraph will not apply to any information which (a) is or
becomes known to the general public under circumstances involving no
breach by Employee of the terms of this paragraph, (b) is generally
disclosed to third parties by CNS as a continuing practice without
restriction on such third parties, (c) is approved for release by
written authorization of CNS's Board, or (d) Employee is obligated by
law to disclose.
10. Disclosure and Transfer of Product Developments, etc.
a. Employee will make full and prompt disclosure to CNS or all
product developments, improvements, modifications,
discoveries, computer software, programs, codes and
documentation, research, designs, formulas, configurations,
instructions, methods and inventions (all of which are
collectively termed "Developments" herein), whether patentable
or not, made, discovered, conceived or first reduced to
practice by Employee or under his direction during his
employment, alone or with others, whether or not made or
conceived during normal working hours or on the premises of
CNS which relate in any material way to the business or to
research or development work of CNS. Employee confirms by his
acceptance of this Agreement that CNS owns and shall own all
of the Developments.
b. Employee also agrees on behalf of himself and his heirs and
legal representatives that he will promptly communicate,
disclose and transfer to CNS, free of encumbrances and
restrictions, all of his right, title and interest in the
Developments covered by subparagraph 10.a. and any patents or
patent applications covering such Developments and to execute
and deliver such assignments, patents and applications, and
any other documents as CNS may direct, and to cooperate fully
with CNS to enable it to secure any patents or otherwise
protect such Developments in any and all countries. Employee
shall assign to CNS any and all copyrights and reproduction
rights to all material prepared by Employee in connection with
his employment.
c. Notwithstanding subparagraphs 10.a. and b., however, this
paragraph 10 shall not apply to Developments for which no
equipment, supplies, facility or trade secret information of
CNS was used and which was developed entirely on the
Employee's own time, and (1) which do not relate (a) directly
to the business of CNS or (b) to CNS's actual or demonstrably
anticipated research or development, or (2) which does not
result from any work performed by Employee for CNS.
<PAGE>
Executive Employment Agreement
Page 12
This will confirm that Employee's obligations to CNS under paragraphs
9, 10 and 11 will continue after the termination of Employee's
employment.
11. Non-Competition. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly engage in, enter into or participate in the business of CNS
or in any business or commercial activity which does or is reasonably
likely to compete with or adversely affect the Business or products of
CNS, either as an individual for Employee's own account, as a partner
or a joint venturer, or as an officer, director, consultant or holder
of more than five percent (5%) of the entity interest in, any other
person, firm, partnership or corporation, or an employee, agent or
salesman for any person. In addition, during such period Employee shall
not: avail himself of any advantages or acquaintances he has made with
any person who has, within the twelve (12) month period ended on the
date of termination of his employment, been a customer of CNS or its
affiliates, and which would, directly or indirectly, materially divert
business from or materially and adversely affect the Business of CNS;
interfere with the contractual relations between CNS and any of its
employees; or employ or cause to be employed in any capacity or retain
or cause to be retained as a consultant any person who was employed in
any capacity by CNS during the twelve (12) month period ended on the
date of termination of Employee's employment.
For purposes of this Agreement, the "Business of CNS" or "Business"
means and includes the business of the manufacture, production, sale,
marketing and distribution of the Breathe Right strip and any other
products currently offered or currently under development by CNS or
offered or currently under development by CNS during one (1) year prior
to the date of termination of Employee's employment.
Inasmuch as the activities of CNS are conducted on an international
basis, the restrictions of this paragraph 11 shall apply throughout the
United States, Canada, Japan and Europe.
12. Non-Solicitation. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly solicit any current or prospective CNS customer, broker,
vendor or distributor for the purpose of providing products or services
for or on behalf of said customer, broker, vendor or distributor which
are competitive with the products or services being provided by CNS,
which are in the development stages of being competitive with the
products or services being provided by CNS, or which would in any way
cause said customer, broker, vendor or distributor to discontinue or
reduce its business relationship with CNS. Current CNS customers,
brokers, vendors or distributors include those customer, brokers,
vendors or distributors with whom CNS has had a business relationship
at any time within one year immediately preceding Employee's
termination date. Prospective CNS customers, brokers, vendors and
distributors include those with whom (a) a CNS representative has been
in direct personal contact and (b) CNS has a reasonable opportunity of
entering into a business
<PAGE>
Executive Employment Agreement
Page 13
relationship within six months following Employee's termination date.
Employee also agrees that during his employment in the one year period
following his employment, he will not directly or indirectly solicit
any CNS employees to terminate his or her employment with CNS. This
Employee non-solicitation obligation applies to Employees of CNS during
Employee's employment and as of his termination date.
13. Remedies. Employee acknowledges that the restrictions set forth in
paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect
legitimate business interests of CNS. It is understood that if Employee
violates his obligations under any of these paragraphs, CNS would
suffer irreparable harm for which a recovery of money damages would be
an incomplete and inadequate remedy. It is therefore agreed that CNS,
in addition to any remedies at law, shall be entitled, as a matter of
right, in any court of competent jurisdiction, to a mandatory
injunction restraining Employee pending litigation, as well as upon
final determination thereof, from violating this Agreement. In
addition, CNS will discontinue payment to Employee of any Severance or
Salary Continuation Payments, benefits or bonus which he may be
entitled to receive or is receiving under paragraphs 6, 7 or 8
hereunder or otherwise, in the event of his violation of any of his
obligations under this Agreement. In the event of cessation of payments
and benefits, Employee's release of his claims against CNS shall remain
valid and fully enforceable in consideration of the benefits which
Employee received prior to set breach.
14. Severability. The parties intend that the covenants and agreements
contained herein shall be deemed to be a series of separate covenants
and agreements, one for each and every state of the United States and
political subdivision outside the United States where the business
described is conducted. If, in any judicial proceeding, a court shall
refuse to enforce any of the separate covenants deemed included in such
action, then such unenforceable covenants shall be deemed eliminated
from the provisions of this Agreement for the purpose of such
proceeding to the extent necessary to permit the remaining covenants to
be enforced in such proceeding. Further, in the event that any
provision is held to be overbroad as written, such provision shall be
deemed amended to narrow its application to the extent necessary to
make the provision enforceable according to applicable law and enforced
as amended.
15. Binding Effect.
<PAGE>
Executive Employment Agreement
Page 14
a. CNS will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets as defined in
subparagraph 8.a of CNS to expressly assume and agree to
perform this Agreement in the same manner and to the same
extent that CNS would be required to perform it if no such
succession had taken place, in which case, the term "CNS" as
used in this Agreement shall instead refer to CNS' successor.
Failure of CNS to obtain such assumption and agreement prior
to the effectiveness of any such succession shall be a breach
of this Agreement and shall entitle Employee to compensation
from CNS in the same amount and on the same terms as he would
be entitled hereunder if he terminated his employment for Good
Reason following a Change in Control, except that for purposes
of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of
Termination.
b. This Agreement shall inure to the benefit of and be
enforceable by Employee's personal or legal representatives,
successors, heirs, and designated beneficiaries. If Employee
should die while any amount would still be payable to Employee
hereunder if Employee had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to Employee's designated
beneficiaries, or, if there is no such designated beneficiary,
to Employee's estate.
16. Entire Agreement. From and after the date of this Agreement the terms
and provisions of this Agreement constitute the entire agreement
between the parties and this Agreement supersedes any previous oral or
written communications, representations, or agreements with respect to
any subject, including the subject matter of compensation, bonus,
participation and profit sharing and termination compensation.
17. Waiver and Interpretation. The waiver by either party of a breach of
any provision of this Agreement by the other party shall not operate or
be construed as a waiver of any subsequent breach by the breaching
party. No waiver shall be valid unless in writing and signed by the
party providing such waiver. If any provision of this Agreement is held
by any court to be unenforceable, then such provision shall be deemed
to be eliminated from the Agreement to permit enforceability of the
remaining provisions. If any provision is held to be overbroad, such
provision shall be amended to narrow its application to the extent
necessary for enforceability. For purposes of the release agreement
which Employee shall be required to execute as a condition of receiving
any payments and benefits hereunder, "CNS", as referred to in this
Agreement, shall include CNS and all its affiliates, shareholders,
officers, directors, employees, agents, attorneys, insurers and
indemnitors.
<PAGE>
Executive Employment Agreement
Page 15
18. Applicable Law. All questions pertaining to the validity, construction,
execution and performance of this Agreement shall be construed and
governed in accordance with the laws of the State of Minnesota. The
parties consent to the personal jurisdiction of the State of Minnesota,
waive any argument that such a forum is not convenient, and agree that
any litigation relating to this Agreement shall be venued in
Minneapolis, Minnesota.
19. Tax Withholding. CNS may withhold from any payment of benefits under
this Agreement (and forward to the appropriate taxing authority) any
taxes required to be withheld under applicable law.
20. Notice. Any notice required or desired to be given under this Agreement
shall be deemed given if in writing sent by certified mail to his
residence in the case of Employee, or to its principal office in the
case of CNS.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first set forth above.
CNS, INC.
By /s/ Marti Morfitt
-----------------------------------------
Its President & COO
--------------------------------------
EMPLOYEE
/s/ Doug Austin
--------------------------------------------
Doug Austin
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
EXHIBIT A
NAME: Doug Austin
DATE: February 12, 1999
POSITION: VP, Operations
DEPARTMENT: Operations
BASE SALARY: $138,000
CAR ALLOWANCE: (INCLUDE ONLY IF APPLICABLE)
MANAGEMENT INCENTIVE PLAN LEVEL: 15 at Threshold
30 at Plan
60 at Maximum
EXHIBIT 10.17
EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is made as of February 12, 1999 (the "Effective Date") between
CNS, INC. a Delaware corporation ("CNS") and Andy Anderson ("Employee").
WHEREAS, CNS considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of CNS
and its shareholders; and
WHEREAS, Employee has made and is expected to continue to make, due to his
experience and knowledge, a significant contribution to the profitability,
growth and financial strength of CNS; and
WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of
a change in control may exist and that such possibility and the uncertainty and
questions which it may raise among management may result in the departure or
distraction of the performance of Employee's duties to the detriment of CNS and
its shareholders; and
WHEREAS, Employee is willing to continue his employment with CNS upon the
understanding that CNS will provide income security if Employee's employment is
terminated under certain terms and conditions;
WHEREAS, it is in the best interests of CNS and its stockholders to employ
Employee and to reinforce and encourage his continued attention and dedication
to his assigned duties without distraction and to ensure his continued
availability to CNS in the event of a Change in Control; and
WHEREAS, it is further in CNS's best interests to receive certain assurances
from Employee regarding CNS's confidentiality, competition and other proprietary
business concerns;
THEREFORE, in consideration of the foregoing and of this agreement, certain
change in control protection, continued employment and other benefits hereunder,
as well as other mutual covenants and obligations hereinafter set forth, CNS and
Employee agree as follows:
1. Employment. CNS agrees to continue to employ Employee as its VP,
Product Development & Regulatory Affairs under the terms, conditions
and benefits set forth herein and Employee accepts continued employment
with CNS on said terms, conditions and benefits.
2. Term. The term of Employee's employment shall continue until terminated
pursuant to paragraph 6, 7, or 8 herein.
3. Duties. In his position as VP, Product Development & Regulatory
Affairs, Employee will continue to faithfully and diligently perform
such executive management
<PAGE>
Executive Employment Agreement
Page 2
responsibilities as may be assigned to him from time to time by the
Chief Executive Officer, President or Chairman of the Board of
Directors of CNS (the "Board"); devote his full time, energy and skill
to CNS's business, as is reasonably necessary to execute fully his
duties hereunder, except for vacations, absences made necessary because
of illness, and service on other corporate, civic, or charitable boards
or committees not significantly interfering with his duties hereunder;
and promote CNS's best interests. The principal place of employment and
the location of Employee's principal office and normal place of work
shall be in the Minneapolis, Minnesota metropolitan area. Employee will
be expected to travel to other locations, as necessary, in the
performance of his duties during the term of this Agreement. Employee
shall notify the President of any other paid position which he is
considering accepting, including but not limited to a board of
directors position, a position as an employee or an independent
consultant, or any position, whether or not for pay, which could
constitute a conflict of interest with CNS. The Employee agrees not to
accept any such position without the President of CNS's prior approval.
4. Compensation. For all services rendered by Employee, CNS shall pay
Employee the compensation described in Exhibit A, payable at such times
as salaried employees of CNS are customarily paid. The President of CNS
shall, from time to time during Employee's employment, review his
annual salary in connection with possible increases, giving
consideration to inflation factors, performance of Employee and CNS,
salaries paid for positions of similar responsibility for other
companies, and other relevant factors, and shall provide for such
increases when deemed appropriate. Employee shall in addition be
eligible to participate in the annual management incentive bonus
program, as approved by the Board of Directors. In the event of
termination of this Agreement by CNS without Good Cause, as defined in
paragraph 7 herein, the Board may, in good faith and in its sole
discretion, determine and cause to be paid a partial bonus based on
Employee's performance through the date of termination, and such
determination shall be final and binding.
5. Benefits. Employee shall be entitled to Paid Time Off consistent with
CNS policy and such insurance, 401(k) program and other benefits
available to all salaried employees of CNS, subject to any limitations
on such benefits to officers, directors or highly paid employees in
order that such benefit programs qualify under federal or state law for
favored tax or other treatment. Such benefit programs may be changed
from time to time by the Board. Employee shall also be entitled to
reimbursement of his reasonable and necessary expenses incurred in
connection with the performance of his duties hereunder.
6. Termination by Employee. Employee may resign his employment with CNS
effective upon 30 days' advance written notice to the President. If
Employee resigns under this paragraph, the President retains the right
to terminate his employment, effective upon written notice to Employee,
at any time during the 30-day notice period, provided, however, that
base salary and the employer portion of his health insurance premiums
will
<PAGE>
Executive Employment Agreement
Page 3
continue to be paid by CNS for the duration of the 30-day notice
period. In connection with his termination, Employee will receive any
accrued unused Paid Time Off to which he is entitled.
7. Termination by CNS. CNS shall have the right to terminate Employee's
employment in any of the following ways:
a. CNS may, by written notice to Employee, terminate his
employment without Good Cause, in which event Employee will be
paid his base salary up to the date of termination. Employee
is also entitled to receive Salary Continuation for one year
from his termination date. "Salary Continuation" shall mean
payment by CNS of the Employee's base salary as of his
termination date, payable to Employee on the same schedule and
in the same amount as the payment of base salary prior to
termination of his employment, until such time as the full
Salary Continuation obligation shall be discharged, as
provided in this paragraph 7. During the period when Salary
Continuation is payable to Employee, CNS will also continue to
provide to Employee all group medical, dental and life plan
benefits provided to its other senior executives. Employee
shall also receive any accrued unused Paid Time Off to which
he is entitled. Receipt of Salary Continuation is subject to
Employee's compliance with his obligations under paragraphs 9,
10, 11 and 12 of this Agreement and his execution of a
standard release agreement which includes, in addition to
release of claims against CNS and related releasees, an
obligation not to speak negatively about or harm CNS,
confidentiality with respect to the termination process, and
cooperation with the transition of responsibilities. Payment
of the employer portion of Employee's group medical, dental
and life plan premiums under this paragraph and under
paragraphs 6 and 8 herein shall cease as of the date on which
Employee is covered under other such group plans if such
coverage occurs prior to termination of any salary
continuation periods set forth in said paragraphs.
b. CNS, by written notice to Employee, may terminate his
employment for Good Cause, as defined below. In the event of
termination under this subparagraph 7.b., Employee shall be
paid his base salary up to the date of termination. "Good
Cause" for the purpose of this Agreement shall mean one or
more of the following: (i) willful and premeditated failure or
refusal of Employee to render services to CNS in accordance
with his obligations under paragraph 3; (ii) the commission by
Employee of an act of fraud or embezzlement against CNS; (iii)
the commission by Employee of any other willful or reckless
act which injures CNS in a substantial or material way (it
being understood that mere negligence in performance of duties
is not Good Cause under this Agreement); (iv) the breach by
Employee of any provision of this Agreement; or (v) the
commission of a substantial act of moral turpitude by Employee
which is deemed by CNS's Board to have a material adverse
effect on CNS; or (vi) unsatisfactory performance after
<PAGE>
Executive Employment Agreement
Page 4
specific notice of performance deficiencies, description of
expectations and opportunity to cure.
c. CNS, by written notice to Employee, may terminate Employee's
employment under this Agreement if he becomes physically or
mentally disabled during the term so that he has not been able
to substantially perform, for a period of 120 consecutive
days, with reasonable accommodation, the usual duties assigned
to him hereunder ("Disability"). Upon such determination, CNS
shall pay to Employee his base salary up to the date of such
termination to the extent not covered by any disability plan.
d. This Agreement shall terminate upon the Employee's death
during its term, except that CNS shall pay to the legal
representative of Employee's estate all base salary due him up
to the date of his death.
8. Termination Following a Change in Control.
DEFINITION.
a. For purposes of this Agreement, "Change in Control" shall mean
the occurrence of one of the following events:
i. ACQUISITION OF 25% OF STOCK IN CNS
any "person" [as such term is used in Section 13(d)
and 4(d) of the Securities Exchange Act of 1934, as
amended ("Exchange Act")], other than a trustee or
other fiduciary holding securities under an employee
benefit plan of CNS is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly of securities
representing 25% or more of the combined voting power
of CNS's then outstanding securities;
ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT
APPROVED BY BOARD
during any period of two consecutive years (not
including any period ending prior to the effective
date of this Agreement), individuals who at the
beginning of such period constitute the Board of
Directors of CNS, and any new director [other than a
director designated by a person who has entered into
agreement with CNS to effect a transaction permitted
by Section 6(a)(I), (iii) or (iv)] whose election by
the Board of Directors of CNS or nomination for
election by CNS's stockholders was approved by vote
of at least two-thirds of the directors then still in
office who either were directors at the beginning of
the period or whose election or nomination for
election was previously so approved ("Continuing
Directors"), cease for any reason to constitute at
least a majority of the
<PAGE>
Executive Employment Agreement
Page 5
Board of Directors of CNS;
iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN
LESS THAN 50% OF SURVIVING COMPANY'S STOCK
the stockholders of CNS approve a merger or
consolidation of CNS with any other corporation,
other than (A) a merger or consolidation which would
result in the voting securities of CNS outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being
converted into voting securities of the merged or
consolidated entity) 50% or more of the combined
voting power of the voting securities of CNS or such
merged or consolidated entity outstanding immediately
after such merger or consolidation, or (B) a merger
or consolidation effected to implement a
recapitalization of CNS or similar transaction in
which no "person" acquires more than 25% of the
combined voting power of CNS's then outstanding
securities;
iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF
CNS STOCK MARKET VALUE
the stockholders of CNS approve a plan of complete
liquidation or a sale or disposition by CNS of all or
substantially all of CNS's assets. "The sale or
disposition by CNS of all or substantially all of
CNS's assets" shall mean a sale or other disposition
transaction or series of related transactions
involving assets of CNS or of any direct or indirect
subsidiary of CNS (including the stock of any direct
or indirect subsidiary of CNS) in which the value of
the assets or stock being sold or otherwise disposed
of (as measured by the purchase price being paid
therefor or by such other method as the Board of
Directors of CNS determines is appropriate in a case
where there is no readily ascertainable purchase
price) constitutes more than 50% of the fair market
value of CNS. For purposes of the preceding sentence,
the "fair market value of CNS" shall be the aggregate
market value of CNS's outstanding common stock (on a
fully diluted basis) plus the aggregate market value
of CNS's other outstanding equity securities. The
aggregate market value of CNS's common stock shall be
determined by multiplying the number of shares of CNS
common stock (on a fully diluted basis) outstanding
on the date of the execution and delivery of a
definitive agreement ("Transaction Date") with
respect to the sale or disposition by CNS of all or
substantially all of CNS's assets by the average
closing price for CNS's common stock for the ten
trading days immediately preceding the Transaction
Date. The aggregate market value of any other equity
securities of CNS shall be determined in a manner
similar to that prescribed in the immediately
preceding sentence for determining the aggregate
market value of CNS's common stock or by such other
method as the Board of Directors of CNS shall
determine is
<PAGE>
Executive Employment Agreement
Page 6
appropriate; and Employee agrees that, subject to the
terms and conditions of this Agreement, in the event
of a Change in Control of CNS occurring after the
date hereof, Employee will remain in the employ of
CNS for a period of 30 days from the occurrence of
such Change in Control.
b. Applicability. In the event of a Change in Control, the terms
of this subparagraph 8.b shall be effective for a period of 24
months following the Change in Control. At the expiration of
such 24 month period this Agreement in its entirety shall be
terminated and be of no further effect. Employee shall be
entitled to receive the benefits set forth in subparagraph 8.f
if, within 24 months of such Change in Control, his employment
is terminated by CNS or its successor without Good Cause (as
defined in paragraph 7.a above), or by Employee for Good
Reason (as defined in subparagraph 8.b.i, below). Employee
shall, in return for the benefits provided under subparagraph
8.f., sign a standard release agreement with CNS, in which he
agrees to release any and all claims and causes of action
which he might have against CNS and in which he affirms and
acknowledges his obligations under paragraphs 9, 10, 11 and 12
of this Agreement.
i. Termination for Good Reason shall be effective
immediately upon written notice from the Employee to
the President. Good Reason shall exist if CNS has
materially breached any of the terms of this
Agreement; Employee is assigned duties which are
materially inconsistent with his position, duties,
responsibilities and status as VP, Product
Development & Regulatory Affairs; his compensation,
including any incentive compensation or bonus plan,
is reduced; or relocation of CNS would require him to
relocate his principal residence outside reasonable
commuting distance of the Twin Cities Metropolitan
area.
ii. Termination without Good Cause shall be effective
upon 30 days' advance notice by CNS to the Employee.
For purposes of this paragraph 8, Good Cause shall be
defined as in subparagraph 7.b.
c. Notice of Termination. Any purported termination of employment
under this paragraph 8 and also under paragraphs 6 and 7 shall
be communicated by written Notice of Termination to the other
party hereto in accordance with paragraph 20 hereunder. For
purposes of this Agreement, a "Notice of Termination" shall
mean a notice which indicates the specific termination
provision in this Agreement relied upon and which sets forth
the facts and circumstances claimed to provide a basis for
termination of Employee's employment.
<PAGE>
Executive Employment Agreement
Page 7
d. Date of Termination. For purposes of this paragraph 8 and also
paragraphs 6 and 7 of this Agreement, "Date of Termination"
shall mean:
i. if Employee's employment is terminated for
Disability, as defined in paragraph 7.c. hereunder,
30 days after Notice of Termination is given
(provided that Employee shall not have returned to
the full-time performance of Employee's duties during
such 30 day period); and
ii. if Employee's employment is terminated pursuant to a
provision contained in paragraph 6, 7 or 8 herein or
for any other reason (other than Disability), the
date specified in the Notice of Termination,
consistent with the provisions in said paragraphs.
e. Dispute of Termination. If, within ten days after any Notice
of Termination is given under this paragraph 8, the party
receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties,
or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or the time
for appeal therefrom having expired and no appeal having been
perfected); provided, that the Date of Termination shall be
extended by a notice of dispute only if such notice is given
in good faith and the party giving such notice pursues the
resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, CNS shall
continue to pay Employee full compensation in effect when the
notice giving rise to the dispute was given (including, but
not limited to, base salary) and continue Employee as a
participant in all compensation, benefit and insurance plans
in which Employee was participating when the notice giving
rise to the dispute was given, to the extent permissible under
the terms of the applicable group plans and state and federal
law, until the dispute is finally resolved in accordance with
this subparagraph. Amounts paid under this subsection are in
addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts under
this Agreement.
<PAGE>
Executive Employment Agreement
Page 8
f. Compensation Upon Termination. Following a Change in Control,
as defined in subparagraph 8.a. above, to the extent provided
in subparagraph 8.b. above, Employee shall be entitled to the
following benefits in lieu of any benefits which would
otherwise be available to him upon termination under
paragraphs 6 or 7 hereunder:
i. CNS shall pay Employee through the Date of
Termination Employee's base salary at the rate in
effect at the time the Notice of Termination is given
and any other form or type of other compensation
otherwise payable for such period, including any
applicable incentive bonus, commensurate with his
performance and the performance of CNS.
ii. In lieu of any further salary payments for periods
subsequent to the Date of Termination, CNS shall pay
a severance payment (the "Severance Payment") equal
to 24 months of Employee's Compensation as defined
below based on the average monthly Compensation paid
to Employee during the 24 month period ending
immediately prior to the Date of Termination (without
giving effect to any reduction in such Compensation
which would constitute a breach of this Agreement).
If the Employee has not been employed by CNS for 24
months as of the Date of Termination, average monthly
Compensation shall be the Employee's average monthly
Compensation for the number of months during which
the Employee has been employed at CNS. For purposes
of this subparagraph, Compensation shall mean and
include every type and form of compensation paid to
Employee by CNS (or any corporation ("Affiliate")
affiliated with CNS within the meaning of Section
1504 of the Internal Revenue Code of 1986, as may be
amended from time to time (the "Code")) and included
in Employee's gross income for federal income tax
purposes, but excluding compensation income arising
from (1) hiring bonuses and (2) compensation income
recognized as a result of the exercise of stock
options or sale of the stock so acquired. All of
Employee's contributions to any qualified plan
pursuant to Section 401(k) of the Code or any
flexible benefit plan pursuant to Section 125 of the
Code shall be deemed to be included in gross income
for federal tax purposes for purposes of this
subparagraph. The Severance Payment shall be made in
a single lump sum within 60 days after the Date of
Termination.
iii. For 18 months following the Employee's Date of
Termination, CNS shall arrange to provide, at its
sole expense, Employee with group medical, dental and
life plan benefits substantially similar to those
which Employee was receiving or entitled to receive
immediately prior to the Notice of Termination. The
cost of providing such benefits shall be in addition
to (and shall not reduce) the Severance Payment.
Benefits otherwise
<PAGE>
Executive Employment Agreement
Page 9
receivable by Employee pursuant to this paragraph
(iii) shall be reduced to the extent comparable
benefits are actually received by Employee during
such period from any third party, and any such
benefits actually received by Employee shall be
reported to CNS.
iv. CNS shall also pay to Employee all legal fees and
expenses incurred by Employee as a result of such
termination (including all such fees and expenses, if
any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any
right or benefit provided by this paragraph).
v. The Severance Payment shall be reduced and offset by
the amount of any other payment received or to be
received by Employee in connection with his
termination of employment pursuant to any policies of
CNS.
vi. If a determination is made by legislation,
regulations, rulings directed to CNS or Employee, or
court decision that the aggregate amount of any
payment made to Employee hereunder, or pursuant to
any plan, program or policy of CNS in connection
with, on account of, or as a result of, a Change of
Control constitutes an "excess parachute payment" as
defined in Section 280G of the Code subject to the
excise tax provisions of Section 4999 of the Code, or
any successor sections thereof, Employee shall be
entitled to receive from CNS, in addition to any
other amounts payable hereunder, an amount which
shall be equal to such excise tax, plus, on a net
after-tax basis, an amount equal to the aggregate
amount of any interest, penalties, fines or additions
to any tax, including income tax, which are imposed
in connection with the imposition of such excise tax.
Such amount shall be payable to Employee as soon as
may be practicable after such final determination is
made. Employee and CNS shall mutually and reasonably
determine whether or not such determination has
occurred or whether any appeal to such determination
should be made.
vii. Employee shall be entitled to receive all benefits
payable to Employee under the CNS, Inc. Profit
Sharing Plan and Trust or any successor of such Plan
and Trust and any other plan or agreement relating to
retirement benefits, and, in addition, if Employee is
not fully vested in his account balance under such
Plan, a single lump sum payment in cash from CNS
representing the nonvested portion of his account,
which shall be in addition to, and not reduced by,
any other amounts payable to Employee under this
paragraph 8.
viii. Employee shall not be required to mitigate the amount
of any payment provided for in this paragraph 8 by
seeking other employment or
<PAGE>
Executive Employment Agreement
Page 10
otherwise, nor shall the amount of any payment or
benefit provided for in this paragraph 8 be reduced
by any compensation earned by Employee as the result
of employment by another employer or by retirement
benefits after the Date of Termination, or otherwise
except as specifically provided in this paragraph 8.
ix. In order to assure the performance of CNS or its
successor of its obligations under this paragraph,
CNS may deposit in trust an amount equal to the
maximum payment that will be due Employee under the
terms hereof. Under a written trust instrument, the
Trustee shall be instructed to pay to Employee (or
Employee's legal representative, as the case may be)
the amount to which Employee shall be entitled under
the terms hereof, and the balance, if any, of the
trust not so paid or reserved for payment shall be
repaid to CNS. If CNS deposits funds in trust,
payment shall be made no later than the occurrence of
a Change in Control. If and to the extent there are
not amounts in trust sufficient to pay Employee under
this Agreement, CNS shall remain liable for any and
all payments due to Employee. In accordance with the
terms of such trust, at all times during the term of
this Agreement, Employee shall have no rights, other
than as an unsecured general creditor of CNS, to any
amounts held in trust and all trust assets shall be
general assets of CNS and subject to the claims of
creditors of CNS. Failure of CNS to establish or
fully fund such trust shall not be deemed a
revocation or termination of this Agreement by CNS.
x. As a condition of receiving the Severance Payment and
other benefits provided in this subparagraph 8.f and
in subparagraph 8.g, Employee shall be required to
sign a standard release agreement with CNS in which
he agrees to release any and all claims and causes of
action which he might have against CNS and in which
he affirms and acknowledges his obligations under
paragraphs 9, 10, 11 and 12 of this Agreement.
g. Stock Options. Employee shall, immediately upon a Change in
Control, vest in all stock options which have been granted to
him and he shall be entitled to exercise all rights and to
receive all benefits accruing to him under any and all CNS
stock purchase and stock option plans or programs, including
the CNS, Inc. 1994 Amended Stock Plan, or any successor to any
such plan or program, which shall be in addition to and not
reduced by any other amounts payable to Employee under this
paragraph 8.
9. Confidential Information. All knowledge and information not already
available to the public which Employee may acquire or has acquired with
respect to product development, improvements, modifications,
discoveries, designs, methods, systems, computer software, programs,
codes and documentation, research, designs, formulas, instructions,
methods,
<PAGE>
Executive Employment Agreement
Page 11
inventions, trade secrets, services or other private or confidential
matters of CNS (such as those concerning sales, costs, profits,
organizations, customer lists, pricing methods, etc.), or of any third
party which CNS is obligated to keep confidential, shall be regarded by
Employee as strictly confidential and shall not be used by Employee
directly or indirectly or disclosed to any persons, corporations or
firms. All of the foregoing knowledge and information are collectively
termed "Confidential Information" herein. Employee's obligations under
this paragraph will not apply to any information which (a) is or
becomes known to the general public under circumstances involving no
breach by Employee of the terms of this paragraph, (b) is generally
disclosed to third parties by CNS as a continuing practice without
restriction on such third parties, (c) is approved for release by
written authorization of CNS's Board, or (d) Employee is obligated by
law to disclose.
10. Disclosure and Transfer of Product Developments, etc.
a. Employee will make full and prompt disclosure to CNS or all
product developments, improvements, modifications,
discoveries, computer software, programs, codes and
documentation, research, designs, formulas, configurations,
instructions, methods and inventions (all of which are
collectively termed "Developments" herein), whether patentable
or not, made, discovered, conceived or first reduced to
practice by Employee or under his direction during his
employment, alone or with others, whether or not made or
conceived during normal working hours or on the premises of
CNS which relate in any material way to the business or to
research or development work of CNS. Employee confirms by his
acceptance of this Agreement that CNS owns and shall own all
of the Developments.
b. Employee also agrees on behalf of himself and his heirs and
legal representatives that he will promptly communicate,
disclose and transfer to CNS, free of encumbrances and
restrictions, all of his right, title and interest in the
Developments covered by subparagraph 10.a. and any patents or
patent applications covering such Developments and to execute
and deliver such assignments, patents and applications, and
any other documents as CNS may direct, and to cooperate fully
with CNS to enable it to secure any patents or otherwise
protect such Developments in any and all countries. Employee
shall assign to CNS any and all copyrights and reproduction
rights to all material prepared by Employee in connection with
his employment.
c. Notwithstanding subparagraphs 10.a. and b., however, this
paragraph 10 shall not apply to Developments for which no
equipment, supplies, facility or trade secret information of
CNS was used and which was developed entirely on the
Employee's own time, and (1) which do not relate (a) directly
to the business of CNS or (b) to CNS's actual or demonstrably
anticipated research or development, or (2) which does not
result from any work performed by Employee for CNS.
<PAGE>
Executive Employment Agreement
Page 12
This will confirm that Employee's obligations to CNS under
paragraphs 9, 10 and 11 will continue after the termination of
Employee's employment.
11. Non-Competition. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly engage in, enter into or participate in the business of CNS
or in any business or commercial activity which does or is reasonably
likely to compete with or adversely affect the Business or products of
CNS, either as an individual for Employee's own account, as a partner
or a joint venturer, or as an officer, director, consultant or holder
of more than five percent (5%) of the entity interest in, any other
person, firm, partnership or corporation, or an employee, agent or
salesman for any person. In addition, during such period Employee shall
not: avail himself of any advantages or acquaintances he has made with
any person who has, within the twelve (12) month period ended on the
date of termination of his employment, been a customer of CNS or its
affiliates, and which would, directly or indirectly, materially divert
business from or materially and adversely affect the Business of CNS;
interfere with the contractual relations between CNS and any of its
employees; or employ or cause to be employed in any capacity or retain
or cause to be retained as a consultant any person who was employed in
any capacity by CNS during the twelve (12) month period ended on the
date of termination of Employee's employment.
For purposes of this Agreement, the "Business of CNS" or "Business"
means and includes the business of the manufacture, production, sale,
marketing and distribution of the Breathe Right strip and any other
products currently offered or currently under development by CNS or
offered or currently under development by CNS during one (1) year prior
to the date of termination of Employee's employment.
Inasmuch as the activities of CNS are conducted on an international
basis, the restrictions of this paragraph 11 shall apply throughout the
United States, Canada, Japan and Europe.
12. Non-Solicitation. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly solicit any current or prospective CNS customer, broker,
vendor or distributor for the purpose of providing products or services
for or on behalf of said customer, broker, vendor or distributor which
are competitive with the products or services being provided by CNS,
which are in the development stages of being competitive with the
products or services being provided by CNS, or which would in any way
cause said customer, broker, vendor or distributor to discontinue or
reduce its business relationship with CNS. Current CNS customers,
brokers, vendors or distributors include those customer, brokers,
vendors or distributors with whom CNS has had a business relationship
at any time within one year immediately preceding Employee's
termination date. Prospective CNS customers, brokers, vendors and
distributors include those with whom (a) a CNS representative has been
in direct personal contact and (b) CNS has a reasonable opportunity of
entering into a business
<PAGE>
Executive Employment Agreement
Page 13
relationship within six months following Employee's termination date.
Employee also agrees that during his employment in the one year period
following his employment, he will not directly or indirectly solicit
any CNS employees to terminate his or her employment with CNS. This
Employee non-solicitation obligation applies to Employees of CNS during
Employee's employment and as of his termination date.
13. Remedies. Employee acknowledges that the restrictions set forth in
paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect
legitimate business interests of CNS. It is understood that if Employee
violates his obligations under any of these paragraphs, CNS would
suffer irreparable harm for which a recovery of money damages would be
an incomplete and inadequate remedy. It is therefore agreed that CNS,
in addition to any remedies at law, shall be entitled, as a matter of
right, in any court of competent jurisdiction, to a mandatory
injunction restraining Employee pending litigation, as well as upon
final determination thereof, from violating this Agreement. In
addition, CNS will discontinue payment to Employee of any Severance or
Salary Continuation Payments, benefits or bonus which he may be
entitled to receive or is receiving under paragraphs 6, 7 or 8
hereunder or otherwise, in the event of his violation of any of his
obligations under this Agreement. In the event of cessation of payments
and benefits, Employee's release of his claims against CNS shall remain
valid and fully enforceable in consideration of the benefits which
Employee received prior to set breach.
14. Severability. The parties intend that the covenants and agreements
contained herein shall be deemed to be a series of separate covenants
and agreements, one for each and every state of the United States and
political subdivision outside the United States where the business
described is conducted. If, in any judicial proceeding, a court shall
refuse to enforce any of the separate covenants deemed included in such
action, then such unenforceable covenants shall be deemed eliminated
from the provisions of this Agreement for the purpose of such
proceeding to the extent necessary to permit the remaining covenants to
be enforced in such proceeding. Further, in the event that any
provision is held to be overbroad as written, such provision shall be
deemed amended to narrow its application to the extent necessary to
make the provision enforceable according to applicable law and enforced
as amended.
15. Binding Effect.
<PAGE>
Executive Employment Agreement
Page 14
a. CNS will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets as defined in
subparagraph 8.a of CNS to expressly assume and agree to
perform this Agreement in the same manner and to the same
extent that CNS would be required to perform it if no such
succession had taken place, in which case, the term "CNS" as
used in this Agreement shall instead refer to CNS' successor.
Failure of CNS to obtain such assumption and agreement prior
to the effectiveness of any such succession shall be a breach
of this Agreement and shall entitle Employee to compensation
from CNS in the same amount and on the same terms as he would
be entitled hereunder if he terminated his employment for Good
Reason following a Change in Control, except that for purposes
of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of
Termination.
b. This Agreement shall inure to the benefit of and be
enforceable by Employee's personal or legal representatives,
successors, heirs, and designated beneficiaries. If Employee
should die while any amount would still be payable to Employee
hereunder if Employee had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to Employee's designated
beneficiaries, or, if there is no such designated beneficiary,
to Employee's estate.
16. Entire Agreement. From and after the date of this Agreement the terms
and provisions of this Agreement constitute the entire agreement
between the parties and this Agreement supersedes any previous oral or
written communications, representations, or agreements with respect to
any subject, including the subject matter of compensation, bonus,
participation and profit sharing and termination compensation.
17. Waiver and Interpretation. The waiver by either party of a breach of
any provision of this Agreement by the other party shall not operate or
be construed as a waiver of any subsequent breach by the breaching
party. No waiver shall be valid unless in writing and signed by the
party providing such waiver. If any provision of this Agreement is held
by any court to be unenforceable, then such provision shall be deemed
to be eliminated from the Agreement to permit enforceability of the
remaining provisions. If any provision is held to be overbroad, such
provision shall be amended to narrow its application to the extent
necessary for enforceability. For purposes of the release agreement
which Employee shall be required to execute as a condition of receiving
any payments and benefits hereunder, "CNS", as referred to in this
Agreement, shall include CNS and all its affiliates, shareholders,
officers, directors, employees, agents, attorneys, insurers and
indemnitors.
<PAGE>
Executive Employment Agreement
Page 15
18. Applicable Law. All questions pertaining to the validity, construction,
execution and performance of this Agreement shall be construed and
governed in accordance with the laws of the State of Minnesota. The
parties consent to the personal jurisdiction of the State of Minnesota,
waive any argument that such a forum is not convenient, and agree that
any litigation relating to this Agreement shall be venued in
Minneapolis, Minnesota.
19. Tax Withholding. CNS may withhold from any payment of benefits under
this Agreement (and forward to the appropriate taxing authority) any
taxes required to be withheld under applicable law.
20. Notice. Any notice required or desired to be given under this Agreement
shall be deemed given if in writing sent by certified mail to his
residence in the case of Employee, or to its principal office in the
case of CNS.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first set forth above.
CNS, INC.
By /s/ Marti Morfitt
-----------------------------------------
Its President & COO
-------------------------------------
EMPLOYEE
/s/ Andy Anderson
--------------------------------------------
Andy Anderson
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
EXHIBIT A
NAME: Andy Anderson
DATE: February 12, 1999
POSITION: VP, Product Development & Regulatory Affairs
DEPARTMENT: Product Development & Regulatory Affairs
BASE SALARY: $104,709
CAR ALLOWANCE: (INCLUDE ONLY IF APPLICABLE)
MANAGEMENT INCENTIVE PLAN LEVEL: 15 at Threshold
30 at Plan
60 at Maximum
EXHIBIT 13.1
FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of Operations(1)(2):
Net sales:
Domestic net sales ................... $ 51,855 $ 60,602 $ 60,098 $ 47,196 $ 2,798
International net sales .............. 1,768 6,355 25,768 1,435 0
----------------------------------------------------
Total net sales .................... 53,623 66,957 85,866 48,631 2,798
----------------------------------------------------
Gross profit ........................... 35,138 45,664 52,520 31,077 1,008
Operating income (loss) ................ 701 9,644 21,743 12,398 (2,758)
Income (loss) from continuing operations
before income taxes .................. 3,492 12,620 24,022 12,970 (2,558)
Income (loss) from continuing operations 3,492 8,770 15,522 13,311 (2,558)
Net income (loss) ...................... 2,982 8,770 15,522 14,076 (2,867)
Diluted net income (loss) per share:
From continuing operations ........... $ .16 $ .44 $ .78 $ .72 $ (.16)
From discontinued operations ......... .00 .00 .00 .04 (.02)
----------------------------------------------------
Diluted net income (loss) per share $ .16 $ .44 $ .78 $ .76 $ (.18)
====================================================
Weighted average number of common and
assumed conversion shares outstanding 18,249 19,802 19,807 18,376 15,755
DECEMBER 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
Financial Position(1):
Working capital ........................ $ 72,025 $ 76,919 $ 78,403 $ 25,855 $ 10,790
Total assets ........................... 84,963 88,495 89,409 32,341 11,613
Stockholders' equity ................... 75,866 80,645 79,775 26,885 11,207
</TABLE>
(1) Until June 1995, the Company manufactured and marketed diagnostic devices
for sleep disorders. This line of business was sold in June 1995 and is
reported as discontinued operations.
(2) Results of operations prior to 1996 included no income tax expense due to
net operating loss and credit carryforwards.
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
should be read in conjunction with the Company's audited financial statements
and notes thereto appearing elsewhere in this Annual Report. In the opinion of
the Company's management, the quarterly unaudited information set forth below
has been prepared on the same basis as the audited financial information, and
includes all adjustments (consisting only of normal, recurring adjustments)
necessary to present this information fairly when read in conjunction with the
Company's financial statements and notes thereto.
OVERVIEW
The Company was founded in 1982. From 1987 until 1995, the Company
designed, manufactured and marketed computer-based diagnostic devices for sleep
disorders. Since 1995, the Company has focused on the Breathe Right(R) nasal
strip and divested itself of the assets related to its sleep disorders business.
The Company's revenues are derived primarily from the manufacture and sale of
the Breathe Right nasal strip. Revenue from sales is recognized when earned, at
the time products are shipped.
The Company obtained the exclusive license to manufacture and sell the
Breathe Right nasal strip in 1992 and received FDA clearance in October 1993 to
market the Breathe Right nasal strip as a product that improves nasal breathing.
In September 1994, the Company launched its consumer marketing program which was
enhanced by broad media coverage of the use of Breathe Right nasal strips by
professional football players. At the same time, a number of radio and
television personalities provided unsolicited endorsements of the product on
national radio and television.
In August 1995, the Company signed an exclusive international distribution
agreement with the 3M Company ("3M") to market Breathe Right nasal strips
outside the U.S. and Canada. That agreement is currently being renegotiated. At
the end of 1995, Breathe Right nasal strips were available in most domestic drug
stores, mass merchants and warehouse clubs and a majority of grocery stores. In
November 1995, the Company received FDA clearance to market the Breathe Right
nasal strip for the reduction or elimination of snoring and began marketing
programs emphasizing the related snoring benefits of the product.
In February 1996, the Company received FDA clearance to market the Breathe
Right nasal strip for the temporary relief of nasal congestion and thereafter
launched a media program to increase consumer awareness of the benefits of the
product for this application. In June 1996, the Company received FDA clearance
to market the Breathe Right nasal strip for the temporary relief of breathing
difficulties due to a deviated nasal septum. In July 1996, U.S. Utility Patents
were issued covering the basic invention of the Breathe Right nasal strip and
additional elements incorporated in the product. During 1997, the Company became
aware of a foreign reference to a nasal dilator, not commercially available,
that the Company believed would result in narrower protection in the future from
the patents licensed for Breathe Right nasal strips.
During 1998, the Company strengthened its management team to add consumer
packaged goods and new products experience and organized into focused business
teams. The Company completed positioning research work to expand the Breathe
Right brand and developed a road map for new product development. These steps
have positioned the Company to invest aggressively during 1999 in marketing,
selling and product development expenses to build the Breathe Right brand and to
launch additional products.
8
<PAGE>
OPERATING RESULTS
The tables below set forth certain selected financial information of the Company
and the percentage of net sales represented by certain items included in the
Company's statements of income for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR THREE MONTHS ENDED YEAR
- ---------------------------------------------------------------------- ENDED ------------------------------------- ENDED
MAR 31, JUN 30, SEP 30, DEC 31, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31, DEC 31,
1998 1998 1998 1998 1998 1998 1998 1998 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic net sales ......... $13,354 $11,789 $12,581 $14,130 $51,855
International net sales .... 1,127 168 168 305 1,768
-------------------------------------------------------------------------------------------------
Net sales ................ 14,481 11,957 12,749 14,435 53,623 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ......... 4,470 4,454 4,242 5,320 18,485 30.9 37.2 33.3 36.9 34.5
-------------------------------------------------------------------------------------------------
Gross profit ............. 10,011 7,503 8,507 9,115 35,138 69.1 62.8 66.7 63.1 65.5
-------------------------------------------------------------------------------------------------
Operating expenses:
Marketing and selling .... 9,694 5,581 7,032 6,471 28,777 66.8 46.7 55.2 44.8 53.7
General and administrative 1,047 1,167 810 596 3,621 7.4 9.8 6.3 4.1 6.7
Product development ...... 395 589 540 515 2,039 2.7 4.9 4.2 3.6 3.8
-------------------------------------------------------------------------------------------------
Total operating expenses 11,136 7,337 8,382 7,582 34,437 76.9 61.4 65.7 52.5 64.2
-------------------------------------------------------------------------------------------------
Operating income (loss) . (1,125) 166 125 1,533 701 (7.8) 1.4 1.0 10.6 1.3
Interest income ............ 690 730 712 660 2,791 4.8 6.1 5.6 4.6 5.2
-------------------------------------------------------------------------------------------------
Income (loss) before
income taxes ............ $ (435) $ 896 $ 837 $ 2,193 $ 3,492 (3.0)% 7.5% 6.6% 15.2% 6.5%
=================================================================================================
<CAPTION>
THREE MONTHS ENDED YEAR THREE MONTHS ENDED YEAR
- ---------------------------------------------------------------------- ENDED ------------------------------------- ENDED
MAR 31, JUN 30, SEP 30, DEC 31, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31, DEC 31,
1997 1997 1997 1997 1997 1997 1997 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Domestic net sales ......... $16,909 $12,623 $12,352 $18,718 $60,602
International net sales .... 2,486 970 291 2,608 6,355
-------------------------------------------------------------------------------------------------
Net sales ................ 19,395 13,593 12,643 21,326 66,957 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ......... 6,245 4,456 3,897 6,695 21,293 32.2 32.8 30.8 31.4 31.8
-------------------------------------------------------------------------------------------------
Gross profit ............. 13,150 9,137 8,746 14,631 45,664 67.8 67.2 69.2 68.6 68.2
-------------------------------------------------------------------------------------------------
Operating expenses:
Marketing and selling .... 11,124 4,900 4,582 11,033 31,639 57.4 36.0 36.2 51.8 47.3
General and administrative 762 812 933 768 3,275 3.9 6.0 7.4 3.6 4.9
Product development ...... 202 289 246 369 1,106 1.0 2.1 2.0 1.7 1.6
-------------------------------------------------------------------------------------------------
Total operating expenses 12,088 6,001 5,761 12,170 36,020 62.3 44.1 45.6 57.1 53.8
-------------------------------------------------------------------------------------------------
Operating income ........ 1,062 3,136 2,985 2,461 9,644 5.5 23.1 23.6 11.5 14.4
Interest income ............ 710 777 773 716 2,976 3.6 5.7 6.1 3.4 4.4
-------------------------------------------------------------------------------------------------
Income before income taxes $ 1,772 $ 3,913 $ 3,758 $ 3,177 $12,620 9.1% 28.8% 29.7% 14.9% 18.8%
=================================================================================================
<CAPTION>
THREE MONTHS ENDED YEAR THREE MONTHS ENDED YEAR
- ---------------------------------------------------------------------- ENDED ------------------------------------- ENDED
MAR 31, JUN 30, SEP 30, DEC 31, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31, DEC 31,
1996 1996 1996 1996 1996 1996 1996 1996 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Domestic net sales ......... $17,986 $12,611 $11,582 $17,919 $60,098
International net sales .... 2,835 8,508 7,793 6,632 25,768
-------------------------------------------------------------------------------------------------
Net sales ................ 20,821 21,119 19,375 24,551 85,866 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ......... 7,652 9,147 8,000 8,548 33,347 36.7 43.3 41.3 34.8 38.8
-------------------------------------------------------------------------------------------------
Gross profit ............. 13,169 11,972 11,375 16,003 52,520 63.3 56.7 58.7 65.2 61.2
-------------------------------------------------------------------------------------------------
Operating expenses:
Marketing and selling .... 7,430 6,917 4,862 7,589 26,798 35.7 32.8 25.1 30.9 31.2
General and administrative 738 645 760 727 2,870 3.5 3.0 3.9 3.0 3.3
Product development ...... 157 340 336 275 1,109 .8 1.6 1.7 1.1 1.3
-------------------------------------------------------------------------------------------------
Total operating expenses 8,325 7,902 5,958 8,591 30,777 40.0 37.4 30.7 35.0 35.8
-------------------------------------------------------------------------------------------------
Operating income ........ 4,844 4,070 5,417 7,412 21,743 23.3 19.3 28.0 30.2 25.3
Interest income ............ 155 685 696 743 2,279 .7 3.2 3.6 3.0 2.7
-------------------------------------------------------------------------------------------------
Income before income taxes $ 4,999 $ 4,755 $ 6,113 $ 8,155 $24,022 24.0% 22.5% 31.6% 33.2% 28.0%
=================================================================================================
</TABLE>
9
<PAGE>
1998 COMPARED TO 1997
NET SALES Net sales were $53.6 million for 1998 compared to $67.0 million for
1997. For the year 1998, domestic sales decreased to $51.9 million from $60.6
million for 1997. The decrease was primarily due to the failure of marketing
efforts to generate the anticipated volume of new Breathe Right nasal strip
users in the first quarter of 1998, a planned reduction in advertising
expenditures during the fourth quarter of 1998 and the entry of a competitor at
the end of 1998.
The Company has experienced in the past, and expects that it will continue
to experience in the future, quarterly fluctuations in both domestic and
international sales and earnings. These fluctuations are due in part to
advertising levels and seasonality of sales as described below, as well as
increases and decreases in purchases by distributors and retailers in
anticipation of future demand by consumers.
International sales decreased to $1.8 million for 1998 from $6.4 million
for 1997. The lower level of international sales in 1998 reflects continued high
inventory levels at 3M. The Company believes a higher level of advertising and
promotion is needed in international markets and is working with 3M to amend the
distribution agreement to enable the Company to take a more active role in
advertising and promoting the Breathe Right nasal strip in the future.
GROSS PROFIT Gross profit was $35.1 million for 1998 compared to $45.7 million
for 1997. Gross profit as a percentage of net sales was 65.5% for 1998 compared
to 68.2% for 1997. The lower gross profit as a percentage of net sales in 1998
was due primarily to a write off of inventory in anticipation of the
introduction of new packaging, the inclusion of "20% More Free" Breathe Right
nasal strips in packages for part of the year and the introduction of new
products with lower gross profit margins.
MARKETING AND SELLING EXPENSES Marketing and selling expenses were $28.8 million
for 1998 compared to $31.6 million for 1997. This decrease resulted primarily
from a planned reduction in national television advertising during the fourth
quarter of 1998 and lower than expected coupon redemption. Marketing and selling
expenses as a percentage of net sales increased to 53.7% in 1998 from 47.3% in
1997, reflecting the lower level of sales in 1998.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were
$3.6 million for 1998 compared to $3.3 million for 1997. This increase resulted
primarily from personnel expenses, including costs associated with the change of
the Company's President, offset by a decrease in expenses from patent litigation
that was settled during 1998. General and administrative expenses as a
percentage of net sales increased to 6.7% in 1998 from 4.9% in 1997 primarily as
a result of the lower level of sales.
PRODUCT DEVELOPMENT EXPENSES Product development expenses were $2.0 million for
1998 compared to $1.1 million for 1997. This increase resulted primarily from
costs related to evaluation and testing of potential new products. Product
development expenses as a percentage of net sales increased to 3.8% in 1998 from
1.6% in 1997.
INTEREST INCOME Interest income was $2.8 million for 1998 compared to $3.0
million for 1997. This decrease resulted primarily from a higher level of
investment in tax exempt municipal bonds in 1998.
INCOME TAX EXPENSE Income tax expense for 1998 was $510,000 or 14.6% of income
before income taxes compared to $3.9 million or 30.5% for 1997. The lower
effective income tax rate was due primarily to the higher level of tax exempt
interest income as a percentage of income before income taxes.
1997 COMPARED TO 1996
NET SALES Net sales were $67.0 million for 1997 compared to $85.9 million for
1996. Breathe Right nasal strip sales decreased in 1997 as a result of a
decrease in international sales.
For the year 1997, domestic sales increased to $60.6 million from $60.1
million for 1996. While our domestic sales dollars were relatively flat in 1997
compared to 1996, both retail sell-through and our strip sales, measured in
units, increased by approximately ten percent. This is primarily due to a higher
percentage of sales in 30 and 24 count boxes compared to 10 count boxes.
International sales decreased to $6.4 million for 1997 from $25.8 million
for 1996. International sales in 1996 represented primarily initial inventory
purchases by 3M, the Company's international distributor, and initial stocking
of inventory at international retail outlets in certain countries. The lower
level of international sales in 1997 reflected continued high inventory levels
at 3M.
GROSS PROFIT Gross profit was $45.7 million for 1997 compared to $52.5 million
for 1996. Gross profit as a percentage of net sales was 68.2% for 1997 compared
to 61.2% for 1996. The higher gross profit as a percentage of net sales in 1997
was due to the lower level of international sales. The Company obtains lower
gross profit margins on international sales because the Company sells product to
3M at a price lower than its sales price in domestic markets. In connection with
these international sales, 3M is responsible for substantially all of the
operating expenses and a portion of the packaging costs. Domestic gross profit
as a percentage of domestic net sales for 1997 was approximately 1.5 percentage
points higher than 1996, due to a combination of lower manufacturing costs
obtained from subcontractors, an increase in the selling price of certain
products and changes in the mix of products sold.
10
<PAGE>
MARKETING AND SELLING EXPENSES Marketing and selling expenses were $31.6 million
for 1997 compared to $26.8 million for 1996. This increase resulted primarily
from heavier levels of advertising primarily associated with domestic national
television advertising. Marketing and selling expenses as a percentage of net
sales increased to 47.3% in 1997 from 31.2% in 1996 as a result of the increase
in expenses and lower level of international sales.
GENERAL AND ADMINISTRATIVE Expenses General and administrative expenses were
$3.3 million for 1997 compared to $2.9 million for 1996. This increase resulted
primarily from expenses associated with patent litigation. General and
administrative expenses as a percentage of net sales increased to 4.9% in 1997
from 3.3% in 1996 primarily as a result of the lower level of international
sales.
PRODUCT DEVELOPMENT EXPENSES Product development expenses were $1.1 million for
1997 and 1996. Product development expenses as a percentage of net sales
increased to 1.6% in 1997 from 1.3% in 1996 primarily as a result of the lower
level of international sales.
INTEREST INCOME Interest income was $3.0 million for 1997 compared to $2.3
million for 1996. This increase resulted primarily from investment of net
proceeds from the public offering of common stock completed in the second
quarter of 1996.
INCOME TAX EXPENSE Income tax expense for 1997 was $3.9 million or 30.5% of
income before income taxes compared to $8.5 million or 35.4% for 1996. The lower
effective income tax rate was due primarily to the higher level of tax exempt
interest income as a percentage of income before income taxes.
SEASONALITY
The Company believes that approximately 50% of Breathe Right nasal strip users
currently use the product for the temporary relief of nasal congestion or
congestion related snoring. Sales of nasal congestion remedies are higher during
the fall and winter seasons because of increased use during the cold season.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash, cash equivalents and marketable
securities of $60.4 million and working capital of $72.0 million.
OPERATING ACTIVITIES The Company generated cash from operations of approximately
$9.3 million in 1998, $8.0 million in 1997 and $16.4 million in 1996. The
increased cash flow in 1998 was primarily due to a change in operating assets
and liabilities offset by a decrease in net income. The higher level of cash
provided by operations in 1996 was primarily due to the higher level of net
income.
INVESTING ACTIVITIES The Company's purchases of marketable securities
equaled sales and maturities of marketable securities in 1998. Purchases of
marketable securities exceeded sales and maturities by $9.1 million in 1997.
Marketable securities purchased consisted of cash equivalents, corporate bonds,
U.S. Government obligations and municipal bonds.
The Company purchased $1.1 million of property and equipment in 1998,
primarily associated with the upgrade of management information systems,
compared to $1.2 million in 1997. Capitalized product rights were $229,000 in
1998 compared to $1.6 million in 1997.
FINANCING ACTIVITIES In 1998, the Company's Board of Directors authorized the
Company to purchase up to 2,250,000 shares of its common stock and the Company
purchased 1,907,600 shares for $8.3 million during the year. In 1997, the
Company's Board of Directors authorized and the Company purchased one million
shares of its common stock for $8.3 million. These treasury shares are to be
used to meet the Company's obligations under its employee stock ownership plan
and stock option plans, and for possible future acquisitions. The Company
received $239,000 in 1998 and $362,000 in 1997 from the exercise of stock
options.
In April 1996, the Company completed a public offering of 1,725,000 shares
of common stock. Of these shares, 1,525,000 shares were sold by the Company and
200,000 shares by selling shareholders. Net proceeds to the Company were $35.5
million. The Company also received $686,000 in 1996 from the exercise of stock
options.
The Company believes that its existing funds will be sufficient to support
its planned operations for the foreseeable future, including capital
expenditures noted above and possible future acquisitions of products that would
complement existing operations.
YEAR 2000
The Company is evaluating the potential impact of what is commonly referred to
as the Year 2000 issue, concerning the inability of certain information systems
to properly recognize and process dates containing the year 2000 and beyond. The
Company has established a Year 2000 team, and this team has worked with
management to commence the following steps: (i) implementing a Year 2000
assessment and testing plan for all internal information systems and other
systems that contain microcontrollers that may be affected by the Year 2000 date
change; (ii) communicating with third parties that supply product to the Company
to ensure they are addressing the Year 2000 issue; and (iii) contingency and
disaster recovery planning to ensure Year 2000 problem resolution.
The Company has identified and tested the systems it believes are critical,
and the test results indicate that these systems are Year 2000 compliant. The
Company expects to complete testing and establish compliance with respect to all
of its systems and products by June 30, 1999, subject to possible
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
equipment upgrades during 1999 and ongoing communications with third parties.
Regardless of the Year 2000 compliance of the Company's systems and products,
there can be no assurance that the Company will not be adversely affected by the
failure of others to become Year 2000 compliant.
The Company estimates that its direct costs for Year 2000 compliance will
consist primarily of costs related to the staff time devoted to Year 2000
compliance. The Company does not expect capital expenditures will be necessary
related to Year 2000 compliance. Costs and capital expenditures in these areas
have not been material for historical periods.
As noted below under "Forward-Looking Statements," statements in this
section that are not historical or current facts are forward-looking statements
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, including statements regarding the timetable for Year 2000
compliance, the Company's costs and capital expenditures, the success of the
Company's efforts and efforts of others to achieve compliance, and the effects
of the Year 2000 issue on the Company's future financial condition and results
of operations. These statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical results and
those presently anticipated or projected. The following important factors, among
others, could affect the accuracy of these statements: (i) the inherent
uncertainty of the costs and timing of achieving compliance on the wide variety
of systems used by the Company; (ii) the reliance on the efforts of vendors,
customers, government agencies and other third parties to achieve adequate
compliance and avoid disruption of the Company's business in early 2000; and
(iii) the uncertainty of the ultimate costs and consequences of any
unanticipated disruption in the Company's business resulting from the failure of
one of the Company's applications or of a third party's systems. The foregoing
list is not exhaustive, and the Company disclaims any obligation subsequently to
revise any forward-looking statements to reflect events or circumstances after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes new standards for recognizing all derivatives as either assets or
liabilities, and measuring those instruments at fair value. The Company plans to
adopt the new standard in 2000. The Company is in the process of evaluating SFAS
No. 133 and its potential impact.
In 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use. SOP 98-1 provides guidance on accounting for the
costs of computer software developed or obtained for internal use and does not
require additional disclosures. The Company intends to adopt SOP 98-1 in 1999.
Costs incurred prior to the initial application of the SOP will not be adjusted
to conform with SOP 98-1. The adoption is not expected to have a material impact
on the Company's financial position or results of operations.
FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report do not relate strictly to historical or
current facts but provide current expectations or forecasts of future events. As
such, they are considered "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995 and are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
presently anticipated or projected. Such forward-looking statements can be
identified by the use of terminology such as "may," "will," "expect," "plan,"
"intend," "anticipate," "estimate," or "continue" or similar words or
expressions. It is not possible to foresee or identify all factors affecting the
Company's forward looking statements and investors therefore should not consider
any list of factors to be an exhaustive statement of all risks, uncertainties or
potentially inaccurate assumptions. Factors that could cause actual results to
differ from the results discussed in the forward-looking statements include, but
are not limited to the following factors: (i) the Company's revenue and
profitability is primarily reliant on sales of a single product, Breathe Right
nasal strips; (ii) the Company's success will depend on its ability to
effectively market Breathe Right nasal strips and on the fact that it was the
first entrant into the nasal dilation market; (iii) the Company's competitive
position will, to some extent, be dependent on the enforceability and
comprehensiveness of the patents on the Breathe Right nasal strip technology
which have been, and in the future may be, the subject of litigation; (iv) the
Company operates in a highly competitive market where recent and potential
market entrants pose greater competitive challenges than those faced by the
Company in the past; (v) the Company has faced and will continue to face
challenges in successfully introducing new products; (vi) the Company is
currently dependent upon 3M for the international distribution of its products
under a contractual relationship which has produced less than anticipated
results and which the Company expects to modify or replace; and (vii) the risk
factors included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
12
<PAGE>
STATEMENTS OF INCOME CNS, INC.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales .......................................... $53,622,803 $66,957,134 $85,866,525
Cost of goods sold ................................. 18,484,608 21,292,995 33,346,878
------------------------------------------
Gross profit ..................................... 35,138,195 45,664,139 52,519,647
------------------------------------------
Operating expenses:
Marketing and selling ............................ 28,777,148 31,638,518 26,798,820
General and administrative ....................... 3,620,752 3,275,636 2,869,163
Product development .............................. 2,039,411 1,105,790 1,109,062
------------------------------------------
Total operating expenses ........................ 34,437,311 36,019,944 30,777,045
------------------------------------------
Operating income ................................ 700,884 9,644,195 21,742,602
Interest income .................................... 2,790,780 2,976,121 2,279,882
------------------------------------------
Income before income taxes ...................... 3,491,664 12,620,316 24,022,484
Income tax expense ................................. 510,000 3,850,000 8,500,000
------------------------------------------
Net income ...................................... $ 2,981,664 $ 8,770,316 $15,522,484
==========================================
Basic net income per share ......................... $ .16 $ .46 $ .83
==========================================
Weighted average number of common shares outstanding 18,079,000 19,119,000 18,704,000
==========================================
Diluted net income per share ....................... $ .16 $ .44 $ .78
==========================================
Weighted average number of common and
assumed conversion shares outstanding ............ 18,249,000 19,802,000 19,807,000
==========================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
13
<PAGE>
BALANCE SHEETS CNS, INC.
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 584,718 $ 229,647
Marketable securities ................................................... 59,796,952 59,458,236
Accounts receivable, net of allowance for doubtful accounts
of $210,000 in 1998 and 1997 ........................................... 7,790,952 11,392,001
Inventories ............................................................. 8,823,193 8,624,663
Prepaid expenses and other current assets ............................... 2,794,558 3,295,001
Deferred income taxes ................................................... 1,332,000 1,770,000
-------------------------------
Total current assets ................................................. 81,122,373 84,769,548
Property and equipment, net ............................................... 2,406,488 1,863,007
Product rights, net ....................................................... 1,434,566 1,502,520
Certificate of deposit, restricted ........................................ 0 359,898
-------------------------------
$ 84,963,427 $ 88,494,973
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 4,993,462 $ 3,130,660
Accrued expenses ........................................................ 3,419,187 3,561,279
Accrued income taxes .................................................... 684,937 1,158,533
-------------------------------
Total current liabilities ............................................. 9,097,586 7,850,472
-------------------------------
Stockholders' equity:
Preferred stock-- authorized 8,483,589 shares; none issued or outstanding 0 0
Common stock-- $.01 par value; authorized 50,000,000 shares;
issued and outstanding 19,294,570 shares in 1998 and 1997 .............. 192,946 192,946
Additional paid-in capital .............................................. 61,932,529 63,495,718
Treasury shares-- at cost; 2,692,144 in 1998 and 961,511 shares in 1997 . (14,670,128) (8,219,993)
Retained earnings ....................................................... 28,157,494 25,175,830
Accumulated other comprehensive income .................................. 253,000 0
-------------------------------
Total stockholders' equity ........................................... 75,865,841 80,644,501
Commitments (notes 8 and 9)
-------------------------------
$ 84,963,427 $ 88,494,973
===============================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
14
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY AND CNS, INC.
COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
-------------------- ADDITIONAL -------------------------
COMMON STOCK ADDITIONAL TREASURY SHARES
NUMBER PAR PAID-IN NUMBER
OF SHARES VALUE CAPITAL OF SHARES COST
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ....... 17,387,852 $173,878 $ 25,828,434 0 $ 0
Proceeds from public stock
offering less issuance costs
of $2,469,000 ................. 1,525,000 15,250 35,449,926 0 0
Stock issued in connection with
Employee Stock Purchase Plan .. 893 9 11,048 0 0
Stock options exercised ......... 231,700 2,317 683,531 0 0
Tax benefit from stock
options exercised ............. 0 0 1,205,000 0 0
Comprehensive income:
Net income for the year ....... 0 0 0 0 0
Total comprehensive income .
-------------------------------------------------------------------
Balance at December 31, 1996 ....... 19,145,445 191,454 63,177,939 0 0
Stock issued in connection with
Employee Stock Purchase Plan .. 927 10 7,180 (1,489) 8,464
Stock options exercised ......... 77,300 773 241,308 (37,000) 50,062
Tax benefit from stock
options exercised ............. 0 0 70,000 0 0
Warrants exercised .............. 70,898 709 (709) 0 0
Treasury shares purchased ....... 0 0 0 1,000,000 (8,278,519)
Comprehensive income:
Net income for the year ....... 0 0 0 0 0
Total comprehensive income .
-------------------------------------------------------------------
Balance at December 31, 1997 ....... 19,294,570 192,946 63,495,718 961,511 (8,219,993)
Stock issued in connection with
Employee Stock Purchase Plan .. 0 0 (25,349) (5,467) 43,141
Stock options exercised ......... 0 0 (1,537,840) (171,500) 1,776,871
Treasury shares purchased ....... 0 0 0 1,907,600 (8,270,147)
Comprehensive income:
Net income for the year ....... 0 0 0 0 0
Unrealized gains on marketable
securities net of income tax
effect of $154,000 ......... 0 0 0 0 0
Total comprehensive income .
-------------------------------------------------------------------
Balance at December 31, 1998 ....... 19,294,570 $192,946 $ 61,932,529 2,692,144 $(14,670,128)
===================================================================
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
RETAINED COMPREHENSIVE STOCKHOLDERS'
EARNINGS INCOME EQUITY
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 ....... $ 883,030 $ 0 $ 26,885,342
Proceeds from public stock
offering less issuance costs
of $2,469,000 ................. 0 0 35,465,176
Stock issued in connection with
Employee Stock Purchase Plan .. 0 0 11,057
Stock options exercised ......... 0 0 685,848
Tax benefit from stock
options exercised ............. 0 0 1,205,000
Comprehensive income:
Net income for the year ....... 15,522,484 0 15,522,484
------------
Total comprehensive income . 15,522,484
--------------------------------------
Balance at December 31, 1996 ....... 16,405,514 0 79,774,907
Stock issued in connection with
Employee Stock Purchase Plan .. 0 0 15,654
Stock options exercised ......... 0 0 292,143
Tax benefit from stock
options exercised ............. 0 0 70,000
Warrants exercised .............. 0 0 0
Treasury shares purchased ....... 0 0 (8,278,519)
Comprehensive income:
Net income for the year ....... 8,770,316 0 8,770,316
------------
Total comprehensive income . 8,770,316
--------------------------------------
Balance at December 31, 1997 ....... 25,175,830 0 80,644,501
Stock issued in connection with
Employee Stock Purchase Plan .. 0 0 17,792
Stock options exercised ......... 0 0 239,031
Treasury shares purchased ....... 0 0 (8,270,147)
Comprehensive income:
Net income for the year ....... 2,981,664 0 2,981,664
Unrealized gains on marketable
securities net of income tax
effect of $154,000 ......... 0 253,000 253,000
------------
Total comprehensive income . 3,234,664
--------------------------------------
Balance at December 31, 1998 ....... $28,157,494 $253,000 $ 75,865,841
======================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
15
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income .......................................................... $ 2,981,664 $ 8,770,316 $ 15,522,484
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................................... 854,702 460,044 259,822
Deferred income taxes ............................................. 284,000 (809,000) (58,000)
Changes in operating assets and liabilities:
Accounts receivable .............................................. 3,601,049 3,273,730 (6,834,938)
Inventories ...................................................... (198,530) (309,837) 2,786,083
Prepaid expenses and other current assets ........................ 500,443 (1,647,946) (649,381)
Accounts payable and accrued expenses ............................ 1,247,114 (1,783,688) 5,383,967
---------------------------------------------
Net cash provided by operating activities ....................... 9,270,442 7,953,619 16,410,037
---------------------------------------------
Investing activities:
Purchases of marketable securities .................................. (43,428,987) (99,045,360) (177,630,971)
Sales and maturities of marketable securities ....................... 43,497,271 89,926,317 135,200,938
Payments for purchases of property and equipment .................... (1,101,403) (1,239,918) (464,675)
Payments for product rights ......................................... (228,826) (1,553,605) (141,309)
Redemption (purchase) of certificate of deposit, restricted ......... 359,898 (19,834) (20,064)
---------------------------------------------
Net cash used in investing activities ........................... (902,047) (11,932,400) (43,056,081)
---------------------------------------------
Financing activities:
Net proceeds from public stock offering ............................. 0 0 35,465,176
Proceeds from the issuance of common stock
under Employee Stock Purchase Plan ................................. 17,792 15,654 11,057
Proceeds from the exercise of stock options ......................... 239,031 362,143 685,848
Purchase of treasury shares ......................................... (8,270,147) (8,278,519) 0
---------------------------------------------
Net cash (used in) provided by financing activities ............. (8,013,324) (7,900,722) 36,162,081
---------------------------------------------
Net increase (decrease) in cash and cash equivalents ............ 355,071 (11,879,503) 9,516,037
Cash and cash equivalents:
Beginning of year ................................................... 229,647 12,109,150 2,593,113
---------------------------------------------
End of year ......................................................... $ 584,718 $ 229,647 $ 12,109,150
=============================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest .............................. $ 0 $ 0 $ 0
Cash paid during the year for income taxes .......................... 700,000 4,750,000 6,541,467
=============================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS CNS, Inc. ("the Company"), designs, manufactures and markets consumer
products, primarily the Breathe Right(R) nasal strip. The Breathe Right nasal
strip is a nonprescription, single use, disposable device that can temporarily
relieve nasal congestion and reduce or eliminate snoring by improving nasal
breathing. The Breathe Right nasal strip is sold over-the-counter in retail
outlets, including drug, grocery, mass merchant and club stores. The Company has
an international distribution agreement with 3M Company to market Breathe Right
nasal strips outside the U.S. and Canada, which is currently in the process of
being renegotiated.
REVENUE RECOGNITION Revenue from sales is recognized at the time products are
shipped.
ACCOUNTING ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS All financial instruments are carried at
amounts that approximate fair value.
CASH EQUIVALENTS Cash equivalents consist primarily of money market funds.
MARKETABLE SECURITIES The Company classifies its marketable debt securities as
available-for-sale and records these securities at fair market value. Net
realized and unrealized gains and losses are determined on the specific
identification cost basis. Any unrealized gains and losses are reflected as a
separate component of stockholders' equity. A decline in the market value of any
available-for-sale security below cost that is deemed other than temporary,
results in a charge to operations resulting in the establishment of a new cost
basis for the security.
INVENTORIES Inventories are valued at the lower of cost (determined on a
first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Equipment is
depreciated using the straight-line method over five years. Leasehold
improvements are amortized over the lesser of the estimated useful life of the
improvement or the term of the lease.
PRODUCT RIGHTS Product rights, consisting of patents, trademarks and other
product rights, are stated at cost and are amortized over three to seven years
using the straight-line method.
STOCK BASED COMPENSATION The Company follows the disclosure requirements for
stock based compensation plans and, accordingly, no compensation expense has
been recognized.
FOREIGN SALES Foreign sales are made in U.S. dollars only. There are no currency
conversions.
ADVERTISING The Company expenses the production costs of advertising the first
time the advertising runs.
INCOME TAXES Deferred tax assets and liabilities and the resultant provision for
income taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
NET INCOME PER SHARE Basic net income per share has been computed based upon the
weighted average number of common shares outstanding during the year. Diluted
net income per share has been computed based upon the weighted average number of
common and assumed conversion shares outstanding during the year.
COMPREHENSIVE INCOME In 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, which
establishes standards for reporting and presentation of comprehensive income and
its components in a full set of financial statements. Comprehensive income
consists of the Company's net income and unrealized gains on marketable
securities and is presented in the statements of stockholders' equity and
comprehensive income. SFAS No. 130 only requires additional disclosures in the
financial statements; it does not affect the Company's financial position or
results of operations.
NEW ACCOUNTING STANDARDS In 1998, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 establishes new standards for recognizing all
derivatives as either assets or liabilities, and measuring those instruments at
fair value. The Company plans to adopt the new standard in 2000. The Company is
in the process of evaluating SFAS No. 133 and its potential impact.
In 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use. SOP 98-1 provides guidance on accounting for the
costs of computer software developed or obtained for internal use and does not
require additional disclosures. The Company intends to adopt SOP 98-1 in 1999.
Costs incurred prior to the initial application of the SOP will not be adjusted
to conform with SOP 98-1. The adoption is not expected to have a material impact
on the Company's financial position or results of operations.
17
<PAGE>
NOTE 2 MARKETABLE SECURITIES
Marketable securities, including estimated fair value based on quoted market
prices or valuation models, are summarized as follows (in thousands):
DECEMBER 31,
1998 1997
- -------------------------------------------------------------------------------
COST FAIR VALUE COST FAIR VALUE
------------------------------------------------------------------------------
Cash equivalents ................. $ 1,145 $ 1,145 $ 805 $ 805
Corporate bonds .................. 1,754 1,772 3,772 3,772
U.S. Government obligations ...... 1,309 1,316 3,994 3,994
Municipal bonds .................. 55,182 55,564 50,887 50,887
- -------------------------------------------------------------------------------
Total marketable securities ...... $59,390 $59,797 $59,458 $59,458
===============================================================================
Maturities of marketable securities at December 31, 1998 are as follows (in
thousands):
COST FAIR VALUE
- -------------------------------------------------------------------------------
Due within one year ....................... $21,692 $21,802
Due after one year through three years .... 37,698 37,995
- -------------------------------------------------------------------------------
Total marketable securities ............... $59,390 $59,797
===============================================================================
There were no realized gains or losses during 1998, 1997 or 1996.
NOTE 3 ADVERTISING
At December 31, 1998 and 1997, $445,000 and $1,337,000, respectively, of
advertising costs were reported as assets. Advertising expense was $15,783,000
in 1998, $21,160,000 in 1997, and $16,215,000 in 1996.
NOTE 4 DETAILS OF SELECTED BALANCE SHEET ACCOUNTS
Details of selected balance sheet accounts are as follows (in thousands):
1998 1997 1996
- -------------------------------------------------------------------------------
Allowance for doubtful accounts:
Balance beginning of year ................. $210 $210 $201
Plus provision for doubtful accounts ...... 43 5 123
Less charge offs .......................... 43 5 114
- -------------------------------------------------------------------------------
Balance end of year ...................... $210 $210 $210
===============================================================================
DECEMBER 31,
1998 1997
- -------------------------------------------------------------------------------
Inventories:
Finished goods ...................................... $6,364 $6,475
Work in process ..................................... 183 468
Raw materials and component parts ................... 2,276 1,682
- -------------------------------------------------------------------------------
Total inventories .................................. $8,823 $8,625
- -------------------------------------------------------------------------------
Property and equipment:
Production equipment ................................ $ 410 $ 395
Office equipment and information systems ............ 3,096 2,010
- -------------------------------------------------------------------------------
3,506 2,405
Less accumulated depreciation ....................... 1,100 542
- -------------------------------------------------------------------------------
Property and equipment, net ........................ $2,406 $1,863
- -------------------------------------------------------------------------------
Product rights:
Product rights ...................................... $2,148 $1,920
Less accumulated amortization ....................... 713 417
- -------------------------------------------------------------------------------
Product rights, net ................................ $1,435 $1,503
- -------------------------------------------------------------------------------
Accrued expenses:
Promotions and allowances ........................... $1,632 $1,926
Royalties and commissions ........................... 665 1,214
Salaries, incentives and paid time off .............. 1,016 273
Other ............................................... 106 148
- -------------------------------------------------------------------------------
Total accrued expenses ............................. $3,419 $3,561
===============================================================================
NOTE 5 STOCKHOLDERS' EQUITY
STOCK OPTIONS The Company's stock option plans allow for the grant of options to
officers, directors, and employees to purchase up to 2,950,000 shares of common
stock at exercise prices not less than 100% of fair market value on the dates of
grant. The term of the options may not exceed ten years and vest in increments
over 1 to 5 years from the grant date. The plans allow for the grant of shares
of restricted common stock. No shares of restricted common stock have been
granted under these plans as of December 31, 1998.
Stock option activity under these plans is summarized as follows:
WEIGHTED-AVERAGE SHARES
EXERCISE PRICE SHARES AVAILABLE
PER SHARE OUTSTANDING FOR GRANT
- ----------------------------------------------------------------------------
Balance at December 31, 1995 ... $ 3.85 1,508,300 242,052
Granted ...................... 17.61 175,000 (175,000)
Exercised .................... 2.96 (231,700) 0
- ----------------------------------------------------------------------------
Balance at December 31, 1996 ... 5.65 1,451,600 67,052
Granted ...................... 7.13 110,000 (110,000)
Exercised .................... 2.56 (114,300) 0
Canceled ..................... 16.79 (90,000) 90,000
Unused 1987 expired .......... -- 0 (31,702)
Amend 1994 Plan .............. -- 0 750,000
- ----------------------------------------------------------------------------
Balance at December 31, 1997 ... 5.29 1,357,300 765,350
Granted ...................... 4.92 634,700 (634,700)
Exercised .................... 1.39 (171,500) 0
Canceled ..................... 10.71 (240,000) 240,000
- ----------------------------------------------------------------------------
Balance at December 31, 1998 ... $ 4.74 1,580,500 370,650
===============================================================================
Information on outstanding and currently exercisable options by price range at
December 31, 1998, is summarized as follows:
WEIGHTED- WEIGHTED- WEIGHTED-
PRICE TOTAL AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE PER NUMBER OF REMAINING EXERCISE NUMBER OF EXERCISE
SHARE SHARES LIFE (YEARS) PRICE SHARES PRICE
- --------------------------------------------------------------------------------
$1.56 - 2.31 74,600 2.6 $ 1.93 74,600 $ 1.93
3.10 - 3.88 416,000 6.3 3.24 336,000 3.16
4.13 - 5.00 319,200 9.3 4.71 51,000 4.59
5.44 - 7.25 762,700 6.6 5.78 582,200 5.72
11.38 8,000 6.3 11.38 8,000 11.38
--------- ---------
1,580,500 1,051,800
========= =========
At December 31, 1998, the weighted-average remaining contractual life of
outstanding options was 6.9 years. At December 31, 1998, 1997 and 1996,
currently exercisable options aggregated 1,051,800, 958,100 and 775,700 shares
of common stock, respectively and the weighted-average exercise price of those
options was $4.62, $3.87 and $3.10, respectively.
The per share weighted-average fair value of stock options granted during
1998, 1997 and 1996 is estimated as $3.20, $2.38 and $11.00, respectively on the
date of grant using the Black-Scholes option pricing model with the following
assumptions: volatility of 65%; risk-free interest rate of 6.00% in 1998, 6.25%
in 1997 and 5.4% in 1996; and an expected life of 6 years.
18
<PAGE>
The Company applies APB No. 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its stock compensation plans.
Accordingly, no compensation expense has been recognized for its stock-based
compensation plans. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net income and diluted
earnings per share would have been reduced by approximately $1,300,000, or $.07
per share in 1998, $530,000, or $.03 per share in 1997 and $900,000, or $.05 per
share in 1996.
Pro forma net income reflects only options granted since 1995. Therefore,
the full impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro forma net income amounts presented because
compensation cost is reflected over the options' vesting period and compensation
cost for options granted prior to January 1, 1995 is not considered.
EMPLOYEE STOCK PURCHASE PLAN The Employee Stock Purchase Plan allows eligible
employees to purchase shares of the Company's common stock through payroll
deductions. The purchase price is the lower of 85% of the fair market value of
the stock on the first or last day of each six-month period during which an
employee participated in the plan. The Company has reserved 200,000 shares under
the plan of which 144,269 shares have been purchased by employees as of December
31, 1998.
WARRANTS During 1997 and 1995, warrants to purchase a total of 100,000 shares at
$2.75 were exercised. The warrants had been issued in connection with an
agreement to license a product to be marketed as the Breathe Right device.
In connection with an agreement to license a potential product, the
licenser was issued a warrant during 1997 to purchase 25,000 shares of the
Company's common stock exercisable at a price of $8.00 per share which expires
November 2002.
PREFERRED STOCK At December 31, 1998, the Company is authorized to issue
1,000,000 shares of Series A Junior Participating Preferred Stock upon a
triggering event under the Company's stockholders' rights plan and is authorized
to issue up to an additional 7,483,589 shares of undesignated preferred stock.
NOTE 6 INCOME TAXES
Income tax expense (benefit) for the three years ended December 31, 1998 is as
follows (in thousands):
CURRENT DEFERRED TOTAL
- -------------------------------------------------------------------------------
1998:
Federal ...................................... $ 128 $ 184 $ 312
State ........................................ 98 100 198
- -------------------------------------------------------------------------------
Income tax expense .......................... $ 226 $ 284 $ 510
- -------------------------------------------------------------------------------
1997:
Federal ...................................... $4,154 $ (728) $3,426
State ........................................ 505 (81) 424
- -------------------------------------------------------------------------------
Income tax expense (benefit) ................ $4,659 $ (809) $3,850
- -------------------------------------------------------------------------------
1996:
Federal ...................................... $8,164 $ (52) $8,112
State ........................................ 394 (6) 388
- -------------------------------------------------------------------------------
Income tax expense (benefit) ................ $8,558 $ (58) $8,500
===============================================================================
Income tax expense (benefit) differed from the amounts computed by applying the
U.S. federal income tax rate of 35% as a result of the following (in thousands):
1998 1997 1996
- --------------------------------------------------------------------------------
Computed tax expense ...................... $ 1,222 $ 4,417 $ 8,408
State taxes, net of federal benefit ....... 64 331 452
Tax exempt interest ....................... (789) (765) (185)
Benefit of foreign sales corporation ...... 0 (127) (417)
Other ..................................... 13 (6) 242
- --------------------------------------------------------------------------------
Actual tax expense ...................... $ 510 $ 3,850 $ 8,500
================================================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities for 1998 and 1997 are
presented below (in thousands):
DECEMBER 31,
1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets:
Inventory items ................................... $ 659 $ 363
Accounts receivable allowance ..................... 78 78
Product rights .................................... 113 55
Accrued expenses .................................. 710 1,328
- --------------------------------------------------------------------------------
1,560 1,824
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gains on marketable securities ......... (154) 0
Property and equipment ............................ (74) (54)
- --------------------------------------------------------------------------------
(228) (54)
- --------------------------------------------------------------------------------
Net deferred tax assets .......................... $ 1,332 $ 1,770
================================================================================
NOTE 7 SALES
The Company had one significant customer who accounted for approximately 20% of
total sales in 1998 and two significant customers, including 3M Company, who
accounted for approximately 28% of total sales in 1997 and 42% of total sales in
1996. Accounts receivable from these customers as of December 31, 1998 and 1997
were $1,013,000 and $5,082,000, respectively. Sales by geographic area are as
follows (in thousands):
1998 1997 1996
- --------------------------------------------------------------------------------
Domestic .................................... $51,855 $60,602 $60,098
Europe ...................................... 523 4,319 12,617
Japan ....................................... 0 0 9,963
Canada ...................................... 518 434 622
Other foreign ............................... 727 1,602 2,566
- --------------------------------------------------------------------------------
Total sales .............................. $53,623 $66,957 $85,866
================================================================================
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 8 LICENSE AGREEMENT
The Company has an agreement to exclusively license the Breathe Right nasal
strip. Royalties due under this agreement are 3% of net sales. To maintain the
Company's license, it must make minimum royalty payments of $450,000 each year
until patents for the product expire. Royalty expense was $1,509,000 in 1998,
$1,995,000 in 1997 and $2,647,000 in 1996.
NOTE 9 OPERATING LEASES
The Company leases equipment and office space under noncancelable operating
leases that expire over the next two years. Future minimum lease payments due in
accordance with these leases as of December 31, 1998 are as follows (in
thousands):
YEAR ENDING DECEMBER 31, AMOUNT
- -------------------------------------------------------------------------------
1999 ................................................................... $498
2000 ................................................................... 412
- -------------------------------------------------------------------------------
Future minimum lease payments ........................................ $910
================================================================================
Total rental expense for operating leases was $564,000 in 1998, $471,000 in
1997, and $473,000 in 1996.
NOTE 10 EARNINGS PER SHARE
A reconciliation of basic and diluted weighted average common shares outstanding
are as follows (in thousands):
1998 1997 1996
- -------------------------------------------------------------------------------
Weighted average common shares outstanding ...... 18,079 19,119 18,704
Assumed conversion of stock options ............. 170 682 1,028
Assumed conversion of warrants .................. 0 1 75
- -------------------------------------------------------------------------------
Average common and assumed conversion shares .... 18,249 19,802 19,807
================================================================================
Options and warrants to purchase 972,900 shares of common stock with a range of
exercise prices from $5.00 to $11.38 per share were outstanding during 1998 but
were not included in the computation of diluted earnings per share because the
exercise prices of the options were greater than the average market price of the
common shares. The options expire from 2000 to 2008.
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
CNS, INC.:
We have audited the accompanying balance sheets of CNS, Inc. as of December 31,
1998 and 1997 and the related statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNS, Inc. as of December 31,
1998 and 1997 and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
MINNEAPOLIS, MINNESOTA
JANUARY 20, 1999
COMMON STOCK INFORMATION
PRICE RANGE The Common Stock of the Company is traded under the symbol "CNXS" on
The Nasdaq Stock Market(R). The following table sets forth the high and low last
sale prices of the Company's stock for the periods indicated.
1998 HIGH LOW
- ---------------------------------------------------------------
First Quarter ...................... $ 7 3/4 $ 5 7/16
Second Quarter ..................... 5 9/16 3 29/32
Third Quarter ...................... 4 13/16 3 3/8
Fourth Quarter ..................... 5 1/16 3 13/32
1997 HIGH LOW
- ---------------------------------------------------------------
First Quarter ...................... $16 3/4 $ 8
Second Quarter ..................... 12 3/8 8 1/8
Third Quarter ...................... 9 1/2 6 5/8
Fourth Quarter ..................... 8 3/4 5 11/16
SHAREHOLDERS As of March 3, 1999, there were approximately 800 owners of record
of the Common Stock and an estimated 11,000 beneficial holders whose shares were
registered in the names of nominees.
DIVIDEND POLICY The Company has never paid any cash dividends on its Common
Stock. The Company currently intends to retain any earnings for use in its
operations and does not anticipate paying any cash dividends in the foreseeable
future.
20
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Name of Subsidiary Jurisdiction of Organization
- ------------------ ----------------------------
CNS FSC, Inc. Barbados
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
CNS, Inc.:
We consent to incorporation by reference in the registration statements Nos.
333-60017, 33-29454, 33-42971, and 33-59719 on Form S-8 of CNS, Inc. of our
report dated January 20, 1999, relating to the balance sheets of CNS, Inc. as of
December 31, 1998, and 1997, and the related statements of income, stockholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 1998, which report is incorporated by
reference in the December 31, 1998, annual report on Form 10-K of CNS, Inc.
/s/KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 584,718
<SECURITIES> 59,796,952
<RECEIVABLES> 7,790,952
<ALLOWANCES> 0
<INVENTORY> 8,823,193
<CURRENT-ASSETS> 81,122,373
<PP&E> 2,406,488
<DEPRECIATION> 0
<TOTAL-ASSETS> 84,963,427
<CURRENT-LIABILITIES> 9,097,586
<BONDS> 0
0
0
<COMMON> 192,946
<OTHER-SE> 75,672,895
<TOTAL-LIABILITY-AND-EQUITY> 84,963,427
<SALES> 53,622,803
<TOTAL-REVENUES> 53,622,803
<CGS> 18,484,608
<TOTAL-COSTS> 34,437,311
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,491,664
<INCOME-TAX> 510,000
<INCOME-CONTINUING> 2,981,664
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,981,664
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
